Importance of a Balanced View

One of the most important lessons to learn in trading is to always maintain a balanced view. In the development of a trader, I think it's ok to be "bullish" about certain equities, but one must always remember to ask "what could go wrong with this picture?". If you've noticed, whenever I express a positive opinion on a certain stock, I always try to also provide the downside scenario. If, as an investor or a trader, you cannot come up with at least a few downside risks to each long investment you make, you're probably being overly optimistic, and should your investment lose value, you're more likely to hold onto it instead of respecting stop losses and admitting defeat. There simply is no such thing as a "sure thing" in the stock market. Buyers and sellers exist for this exact reason. In fact, stocks are bought and sold whenever the buyer believes that there is no further downside, and the seller believes there is no further upside. That means that when you buy a stock, the individual who sold it to you has a completely opposite opinion!

In the early days of my trading career, it was very easy to become attracted to "hype" and "news". I can't tell you how many "hot" stocks have turned into major trading losses. Nowadays, I generally approach both hype and news with extreme caution. In fact I prefer to avoid trading names with recent news, as it tends to throw a wrench into the natural movement of a stock. Whenever "news" is out, it's important to objectively analyze its contents, and ask difficult questions. Skepticism is a necessary trait for successful investors. I think it's common for many to wake up to CNBC in the morning to find the big premarket gainers, usually due to an "analyst upgrade", "positive preannouncement", "successful clinical trial", "exciting new product/alliance". It's important to realize that such announcements are enticing new investors to trade stocks in which they have no prior experience, usually a recipe for disaster.

I believe it's important for traders to understand and participate in short selling. Although it is true that short selling has its own types of inherent risk (unlimited losses, brokers may force cover, etc.), a trader who is able sell short as well as buy long maintains a more balanced perspective. Permabulls (those who only initiate buy orders) are always disappointed when they miss a market rally, or whenever a stock moves higher without them. They find it hard to understand that markets can move down beyond their expectations. Permabears (short sellers only), the opposite. A true trader, who is able to employ both tactics, sees opportunity in all market trends. The market inherently moves up and down, but having a one sided bias leads to a great deal of confusion and inflexible behavior which is never good for any trading account. Many professional traders actually reverse directions completely in the course of a trade (after buying a stock, selling it for a profit and going short, and vice versa.) Always strive to maintain a balanced perspective.