The Business of Investing

Investing is a business. It does not have to be your only business. In fact most investors/traders have full-time jobs that require their time and attention when markets are open. But that does not suggest that investing should be considered as a hobby.

Assuming that your trade and investment decisions are designed to improve your financial situation, then they deserve serious consideration. Hobbies are fine things that promote our emotional health. But investing is not a hobby. It deserves your full attention for whatever amount of time you decide to allocate for this side business.

Newspaper reports during the 2008-9 market decline tell us that most investors ignored (more likely were afraid to open) their monthly or quarterly reports from their brokers or fund managers to avoid reading the bad news. That is no way to run a business.

Attitude and mindsets

    –Keep a level head

      –Do not lose interest when your investments are under-performing.

      –Do not get all excited when your investments are out-performing your expectations

    –Have a plan with details

      –Profit target per trade
      –Annual profit target
      –Risk-reducing risk management ideas. Plan to exit or reduce size when loss limits are met.
      –Consider risk-reducing adjustments instead of size reduction, if you have the time to find suitable trades

    –Know your underlying asset and be sure it is suitable for you

      –Be ready. Maintain a list of stocks that meet your criteria as a sound investment. Yes, this takes time.

      If you prefer to trade indexes (or ETFs), choose one that consists of the type of stocks you are comfortable tracking. That can be large caps (SPX), small caps (RUT), or mid-caps (MID). It can be specific ETFs that track certain market sectors, but do not trade leveraged ETFs (2x and 3x ETFs).

Time

If you have the time, plan to look at your portfolio every day, or at least every week. If your investment business gets less time than a weekly review, it is not really a business. And that’s fine for the long-term investor who is not going to be making frequent decisions. But it is not for anyone who owns option positions on a consistent basis. Those require monitoring – both to take profits and to manage losses.

The less frequently you can look at your holdings, the less risk you can afford to take. For example, if you write covered calls and only look at your portfolio on weekends, it is far safer to work with less volatile stocks. If you trade iron condors or credit spreads, be conservative when choosing position size. Be conservative when choosing strike prices because you will not be able to make timely adjustments. Thus, risk must be less when compared with traders who monitor positions frequently.

Treat your trading as a business and
–Do not hold bad inventory.
–Do not hold losing positions unless you honestly like the position in its underwater state
–Pay attention to profit targets and be ready to take profits when your goal is met
–Costs matter. Negotiate rates with your broker, or consider moving your account.
–Execution matters more. It is acceptable to pay higher rates when you believe your broker gets better fills. (Yes, this is difficult to judge.)

it is okay to have fun and enjoy trading. But it is not a hobby.

{{{gold}}}

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