Updated: Aug 25, 2021
"Aim for the moon, Even when you miss, you'll land among the stars." - Les Brown
I really love this quote!
In stock trading, or trading in general, this can never be so darn wrong!
Sure, in many other area of life you can aim for the moon and land among the stars. When setting a financial goal for example, you should aim for the moon. When setting a KPI for your team, you should aim for the moon. In negotiation, you ask for the moon!
In stock trading however, we aim at the ground and shoot the fish in the barrel!
Remember when I was a new trader, I always set my take profit(TP) at 100% - 500% of the original price of the stock. In my mind, the stock I pick was so amazing, I think it'll go up 500% within a month. I don't know why, and I don't have any good financial data to support it, but I do believe it at the time.
Now that I think of it, it is mostly based on my feeling about the company.
I was really aiming for the moon when I first started trading.
What happens later is that the stock didn't really move much. Maybe it moved 3-4% up or down within a 1 month period.
After waiting for 2 months with -10% of profit, I decided to sell it, take the loss and move on to the next big thing I really like.
Just weeks after I sold my stock, it shoot up by 50% in just weeks, then 120% in a month. I blame myself for making stupid decisions like that, and tell myself to stick to 1 stock. I would never make mistakes like this!
Then again, just 2 months after the first mistake, I did exactly the same thing again.
I begin to doubt myself...
Maybe I wasn't made for stock trading. It's my personality, and I won't be a good trader even if I wanted to.
I don't know why, maybe it's the way I was raised, I always set a high goal.
I kept doing that for the next six years or so, losing much of my savings.
Everything changed when I found my first mentor.
When I told him I always set my goal high, just in case the stock rose more than my goal.
He said to me: "James, it is ok to be optimistic in many area of life, but in stock trading, we need to be realistic."
If you want to be mentored by me, here are a couple of secrets I want to share with you.
Don't ever aim for more than 15% profit each year.
At that time, I was really broke, and I needed to make money fast. So I ask my mentor. "15% is so little, why do we aim for such a small number?"
My mentor looked at me for a few second, then he begin to talk.
"James, 15% is indeed a small number in terms of investing profit, but have you achieved that in any of your investment?"
At the time I found my mentor, I was $60,000 in debt.
I bow my head in shame, and said: "no, mentor, I loss around $60k."
"How about start with 15% first?" he said.
I was not satisfied with my mentor's answer, so I ask him: "what happens next after I earn 15% a year?"
"Then you'll have no problem making 50% or 100% or 200% profit each year." He said it confidently.
"You see? the reason you are losing money because you're being too greedy. You don't see 15% as a worthwhile target, you aim for 100% or more."
"What you don't see is that, when you aim high, your greed is driving you to make poor decisions in order to achieve an unrealistic goals." he continued.
"Each year, I only aim at 20% growth, but very often, my results are 200-300% in growth. Because I am satisfy with my 20%, I often make great decisions to reduce the chance of loss, or just keep holding a profitable stock after it reached 20%, because anything more than 20% is a bonus to me." he said patiently.
Shocked by what he told me, I inquired: "Are you telling me that I am losing money because I set my goal too high?"
"Precisely" he said while typing an email.
I don't understand exactly what he meant at the time. It is months later, I begin to understood what he was really trying to tell me.
I bought a stock, it rose around 15% in a month. I said to myself: "great, now what?"
My thought at the time was: "I already made my 15%, anything afterward is bonus. Besides, looking at the financials of this company, it's fair value should be much higher. Let's just keep the stock and see how it do."
Three months later... the stock is now at 50% profit. I sold the stock, and pocket my first real profit at the time. It was $3,330.61.
It was a small number, but at the time, it represented a great triumph for me; Because now I begin to understand what it is like to make a profit, and what it is like to be able to think clearly when I wasn't blind by greed.
Shoot the fish in the barrel.
"This saying means to pick the easy target?" I ask my mentor thinking I have the right answer.
"Here is Apple Inc, a well known stock, prosperous, well managed, in the highly profitable mobile phone industry. On the other hand, we have a cloud computing and artificial intelligent data mining company ABC Tech Inc. They're both trading at a reasonably low price, and it's a obvious buy, which one would you choose?" He asked.
"ABC Tech!" I yelled! "Because Apple is too stable, it is so limited in growth, you'll never get anything more than 30% profit from a stock like that." Feeling smart.
"No" he said. "You totally forgot what I have told you."
"Sure, ABC Tech Inc have the potential of becoming the next big thing, maybe grow hundred times its current value! but it also has a huge potential to fail miserably." Rolling his eyes towards his foe head.
"You said it, you said we should pick the easy target. We know nothing about cloud computing and data mining or anything about it's future, isn't it stupid to pick a stock that MIGHT go up in price? Why don't we pick a stock that has a solid history, great record of profit, and honest management?"
After his eyes roll down from the back of his head.
"Why don't we just shoot the fish in the barrel? you want to shoot into the ocean and hope for a unlucky fish to run into your stray bullet?"
Refused to look stupid, I said: "Apple can fail too, what if that happen?"
"Imagine you are siting at apple's board meeting room, you own 20% of apple's shares; Would you be worried that it's stock price will stay down forever?" He said.
My mentor's question is for you to ponder.