Rich Dad Stock Blog
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Monthly Archives: April 2012
Let go, embrace change and follow the stock market
In addition to death and taxes, change is guaranteed. Life changes and not too many generations ago, we couldn’t fly. In my own generation, I watched the internet boom as well as the days change from lugging our suitcases around to wheeling them easily through the airports. The stock market prices change daily but the market itself, being based on companies profit and rise and fall, changes often appear based on the perceptions and emotions of the people in the market.
When I was a Financial Adviser with Morgan Stanley, we told our clients to “buy and hold, we are in it for the long term.” This has been the same statement used by advisors across the globe for generations and still is prevalent today. The problem is, since the inception of the stock market, much has changed. Let’s look at the market over the past twenty years; it doesn’t play the same way the previous twenty years did. Where Corporate America was growing and the baby boomers were dumping tons of money into the market and pensions were flush, we were growing year after year. Long term gains overwrote short term losses. The internet boom in the 90′s was one caveat to the change in the market but there were others.
Let’s look at the facts: take a look at the SPX (Standard & Poors Index), you see the market went up and down but was overall moving upward for the first 12 years and this had continued mostly since the stock market crash of 1929.
Then some real life changes happened late in the 20th century moving forward:
- CORPORATE AMERICA was growing and at least for now, how big can Walmart grow? Certainly we can look at new companies that are up and coming from growth but in our current economy they are fewer and farther between compared to the mass industry expansion in the 20th century.
- BABY BOOMERS were the largest generation to date. We are fully aware that they are at that age of retirement and plan to conserve their wealth to live on. Because of preservation plans, they are pulling money out of the market month after month, as they shift to less risk, less reward in assets like bond’s and cd’s. These type of assets focus on wealth preservation but often do not keep up with inflation. The stock market needs money infusion to grow. For now, a large number of dollars are coming out of stocks and mutual funds filled with stocks, daily.
- OVER LEVERAGED AMERICA caused us living in “phantom wealth” until the bubble burst, causing the mortgage crisis, a loss of jobs, a financial meltdown causing America and affecting the globe creating less money in our pocket and less money spent in the companies that grow the stock market. Although we are coming out of the woods now, this is not a fast process and will take time to turn the “Titanic” around.
This all sounds so negative and to some it may be, but for those of us interested in following the market and learning the strategies necessary to capitalize on the movement of stocks in this economy, this is great news. Take another look at the above chart on SPX and what do you see? Up, down, up, down in larger movements. For those of us willing to let go of the past, embrace change and learn how to make money in the current environment, there is an opportunity to not only do well today and moving forward, but to excel financially. Happy trading!
Learn From Your Mistakes
Once we learn the strategies to trade options and stocks, have a proven system in place and feel we have a solid trading plan and some successes behind us…it is time to watch out. Humility is our friend and no matter how great we become as traders, we will always make mistakes.
There are three keys to remember as time and success builds:
- Be humble enough to admit we made a mistake
- Be coachable enough to learn from our mistakes
- Review your rules, reassess and apply as necessary
Typically with a good trading system in place, we will maintain consistency. For instance, maybe we are a 70% trader where 7 out of 10 trades are typically winners and three are losers. Certainly with our system we know when to ‘book’ our profits as wells as minimize our losses to keep us in a positive net trading profit. Even with a good set of rules in place keeping us in non-emotional trading, our egos like to sneak up on us and try to take control of our trading choices. for instance, let’s say we’re having an exceptionally good streak of trading wins and our egos start to think, ‘maybe I got it going on and got this trading thing down.’ ALERT: This is the time to beware and is often the time we give back much of our wins. It may even be a good time to take a break, stop trading, for a few days or weeks, to pull ourselves back together before trading again. Sometimes the best trade is the one that was never made.
A p
roven rules-based trading system is meant to keep us in the profit zone of larger gains than losses and away from the emotions of trading. It is like when we were kids swimming at the public pool. There was a shallow end and a deep end. They were separated by a rope with floaters to keep us in the ‘safe’ zone of shallow water and warn us when we were getting in too deep. A rules-based trading system serves a similar purpose. Regardless of how educated we get or how long we have been trading, we must, must, must stay within the boundaries of our rules to keep us in the profit zone. It is for our own good, for our safety profiting in all markets. The most successful traders are not the ones that have the highest IQ but instead are coachable enough to learn a rules-based system and stay within the boundaries of the system, month after month and year after year.
Discipline is the Name of the Game
To be a successful trader means you need to embrace a proven rules based system. Trading is naturally very emotional as you watch the value of your account go up and down. It is imperative to learn the strategies but equally as important to follow the rules. This is what keeps you in the boundary of consistent profits and on the road to financial freedom.
As educated traders, we learn that focus is on booking profits in our profit zone and minimizing our losses so our overall gain is consistent and highly profitable. Typically, I am out near the top and cut my losses before it hits the bottom of the trade. I am not looking for the “lottery ticket”, I am looking for the consistent profits. I don’t need to pat myself on the back with an over-sized ego so I can tell everyone that I “rode it all the way up” or “shorted it all the way down” as if I am some brilliant trader.
I simply need to apply my knowledge consistently, making nice monthly profits, and compounding my profits to achieve all my financial goals. That is real wealth, accumulated over time, month after month, year after year. The rules keep me in the profit zone and out of emotional trouble holding on too long or jumping out too quick. Neither is an issue for a successful trader.
Three keys for your success to focus on this week:
- System: Will keep me in the profit zone
- Discipline: Will keep me on track
- Consistency: Will keep me from my own ego
Every morning or afternoon when you are applying Rich Dad’s trading system, creating the discipline needed to be a successful trader, remember it is the small things done consistently over time that will bring lasting results and lasting wealth for generations to come. You are the cycle breaker and financial pioneer for your family. Regardless of where in wealth you are right now, following the system, rules, and discipline needed will take you from wherever you are financially right now to the next level. Trust it, follow it, and embrace delayed gratification.
Steps to Financial Freedom
How do we become financially free trading stock and options? Am I capable of becoming a successful trader? What separates our success from failure? There are four foundational keys for success in any area of your life, in particular, trading stocks and options:
1. Mindset: “We need to believe we can do it”. Our ego’s do not like to be wrong and it will be a self fulfilling prophecy if we do not wrap our brains around not only the possibility but the probability we can learn a proven system of trading stock and options. Robert and Kim’s book and games focus on just this. They share their philosophies and stories of success opening our minds to believe we can do it and how it is done.
2. Education: “We need to learn how to do it”. Unless we learn the steps of successful traders, we will always have either limited success or failure. For instance, remember when you learned how to drive, you went to drivers ed class, then you got in a car with a mentor right next to you while you applied what you learned. Your mentor had his own steering wheel and brake to protect you if you made a mistake and helped you build confidence in the knowledge you attained in class. Now imagine that you didn’t take a class and your mentor didn’t ride next to you but instead gave you the keys and sent you on your way and told you to ‘figure it out as you go.’ Could you learn that way? Certainly, but the question is, how much failure, loss and emotional distress may you have caused yourself while learning. Could the horrible experience prevent you from driving again? Of course, you now have created a painful memory that will always be a block to your learning. This is the reason why learning proven systems from those who are successfully trading and trusting their guidance is imperative. Your education and mentor will give you the skills and confidence needed to build a successful trading career.
3. Passion: “Why are we doing it”? When we are looking to change something we do in life and and learn how to trade a proven system to take us on the fast track to wealth, there is a learning curve. Trading stocks and options is simple yet it is not easy. Much like a diet and exercise program, it requires commitment and an understanding of why you are making the change in order to thrive during the learning curve. If you do not understand why you are committing to learn something new, you will not be able to sustain the change and create the new habit in your life. For instance, let’s say you choose to start a running program. We all know if you run consistently you will see the results of better health, stronger mind and body and a self confidence in yourself that results in feeling great about yourself and the way you look and feel. If you did not know why you were committing to running such as to lose weight, live healthier, attain fitness goals, etc, what is going to get you off the couch several days a week and keep you running? You have to know why, the why will keep you focused and passionate about the results you are achieving while you just feel like staying in bed. The same is true for becoming a stock and options trader. As with anything worthwhile, the learning curve offers moments and days of frustration and unless you can know what is driving you to push through those days when you don’t feel like trading or when you make a mistake, I can guarantee you will want to quit. When you stay focused on the why, nothing will stop you. So what is your why? Is it to spend more time with your family, to travel the world, to have some super cool fun toys or big home? Is it to give back to charity or financially support an elderly family member that can not support themselves or that you have a passion to work a career that will never pay you enough to support your family but you would love the choice to work on your terms, simply because you love what you do instead of working to get a paycheck.
4. Action: “Just do it”. As Nike says “Just do it”. A great idea or dream is only fulfilled when immediate action is taken. All your wishes, hopes and dreams are just theory until the first step is taken. All things worth their weight will take belief, education and time but all require that first step, then the next step and so on. This is where the rubber hits the road. It is all well and good if you decide to become a trader, believe you can do it, get educated to do it, understand why you are doing it but put it off When a raindrop hits the water, it creates ripples that seemingly go on forever. That one single raindrop shapes the water and all things in it moving forward and each continual drop creates consistent change and movement. You need to learn then put into action what you have learned. How many times have you decided to start a diet or exercise program on Monday but when Monday came, you didn’t take action? What results did you get? None, not until you took that first step and disciplined yourself to continue taking steps.
These four keys will never work without each other. you can take action and figure it out on your own and with the pain and cost of failure, it has a high probability of keeping you from ever starting again. Knowing what trading will provide for you and your family is only possible with learning how and doing it. Believing you can do it and never taking the steps to actually put it into action will always be an unfulfilled dream and certainly learning how to become a trader then not trading will leave you with the knowledge but without results. In my experience having a mentor accomplishes two things; someone to help you be accountable to yourself and give you the confidence to apply what you are learning. anyone can become a successful stock and options trader but without these four keys, you are setting yourself up for failure.
Since I have been living these keys in all areas of my life, I have enjoyed the fruits of my labor. I learned through Rich Dad Poor Dad and Robert and Kim’s other books, that I could do it. Through Rich Dad Education, I learned the proven trading system that has me on track toward financial freedom, profiting month after month regardless of whether the market is up, down or sideways. Now that is security. No one can ever take that from me, free at last.
