Five Mindsets to Enhance Your Investment Decision-Making!

Learning a skill usually involves two phases: the phase of "method,"  which requires constant learning, practice, and summarizing to form our own methodologies. The second phase, "philosophy," refines these methods and integrates them into our thinking, also known as our mental approach. 🤔

In investing, there are many different mental approaches, and different styles of investors have their own. Of course, some are particularly worth applying and reflecting upon in our investment transactions. The five tips I'm sharing today are a summary of Cici's experiences, and I hope they help you in your decision-making (for learning and discussion purposes).

"Trend-following" means objectively following market trends. Having principles means not following blindly; you know when to act and when not to. Blindly following the market can lead to overreacting to changes, like a headless fly. A principled approach follows major market shifts while intentionally ignoring minor disturbances. This balance is crucial. So, what constitutes a core market change? It's the central investment themes we discuss weekly.

Recognizing the broad direction doesn't guarantee successful investment or trading. Even value investors should understand how to profit from market swings. Especially in trading, focusing on "swings" is crucial. Nobody can predict the future strength or weakness, but swing strategies can adapt to most market conditions. In strong markets, trade broader swings, and in weak markets, tighten up take-profits and go for shorter swings. When using swing thinking, you don't miss out or oversell.

The market acts as a magnifying glass for investor emotions, which means there will always be numerous factors causing rapid changes. In such an environment, it's unrealistic to try to capture every opportunity. In fact, the desire for more can often hinder your ability to seize major opportunities. Snagging a few key chances during a good year is enough to lay a solid foundation for annual returns. So, learning to let go of certain chances can actually make trading easier because letting go means you're focusing on what truly matters.

Many people invest simply to make money, but controlling drawdowns is crucial. Before every trade, instead of calculating how much you could make, focus more on how much you could lose. By adopting a bottom-line mindset, you can effectively control drawdowns, which makes earning money easier. Methods to control drawdowns include diversifying your holdings, being strict with entry points (avoid chasing highs), tightly managing your exits (enforce stop losses and sell high), and not stubbornly holding against the trend.

Following these principles, you avoid major losses on single trades. Without big losses, you don’t need exceptionally strong stocks or markets – you can accumulate respectable returns through compounded swing earnings. Always remember, the heart of compounding is in controlling your drawdowns.

No matter what happens, maintain equanimity. See market fluctuations objectively and remind yourself to stay rational or write down your trading rationale to compare when deciding on trades. Don’t just go with the flow – in the market amplifier, things are often not as good or as bad as they seem. Stick to the principle of going with the broader trend and think contrarily about the details, following the main trend while playing the smaller ones inversely. In weak markets, big opportunities can often arise from black swans or moments of panic.

All images above are generated with AI.

Do you have other mental approaches in your trading? Feel free to share them in the comments section!🥰