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Psychotherapy for Traders in a Bull Market

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If you let the market tell you what to do, you have no process.

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You aren't as smart as you think you are.

Our emotions are our biggest enemy, at least when it comes to investing. We should all know this. If you don't, stop making your own investment decisions right now.

Our emotions lead us to do the opposite of what we should be doing. They lead us to buy high and sell low. They make us excited when we should be scared, and scared when we should be excited. They make us slaves to the stock market; they let the market become our master.

The market is there to serve us, and not the other way around. It's okay to have emotions; we're human, after all. But what we really need is an investment process. This is system of rules that we follow to keep emotion in check.

Now, I hate republishing old articles. But I will recycle (and improve upon) a few every now and then -- the ones that focus on the process. I wrote the following article in 2007; it's included in my book. I've shared it with readers in the past. And I even wrote the flip side of it in October 2008, addressing the psychological impact of a cyclical bear market.

I'm not offering it now to provide a hidden message that I think the current (cyclical) bull market is over. I don't know that. I just want to remind you (and me) that a rising market has an impact on our psyches, our analyses, and our decisions, and we need to be aware of that.

Psychotherapy for (Cyclical) Bull Markets


Lately I've been getting this powerful feeling that everything I touch turns to gold. Every time I buy a stock, it goes up. Did I finally figure out the stock market game? Did I find a secret way to follow Will Rogers' advice: Buy stocks that go up, and if they don't go up, don't buy them.

No, I didn't get much smarter -- and my stock-picking skills haven't improved that much over the past year. I was simply a willing participant in the latest (cyclical) bull market. A bull market makes you feel smarter than you are in the same way a bear market makes you feel dumber than you are.

Feeling smart makes you do the opposite of what you should be doing. The euphoria of the golden touch is a dangerous thing, because it can make us careless. We forget about risk (since we haven't seen it in a while) and focus only on rewards. You have to actively make yourself aware of the 4-letter word: R-I-S-K!

How do you do that? My favorite way is to remind myself how dumb I am. I pull out an annual return report of a company on which I lost a boatload of money and masochistically try to read it from cover to cover, reliving my errors.
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No positions in stocks mentioned.

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