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In fact, average investors are far more likely to ‘gamble’ than traders are because they have no real parameters for their investment decisions. They simply buy, hold, and hope!

Professional traders do not buy, hold and hope. They have very specific and clear parameters for EVERY trade they take. A good trader will NEVER take a trade that doesn’t have a pre-determined ENTRY PRICE, PROTECTIVE STOP LOSS and TARGET. This means that the potential outcomes of the trade are already known BEFORE the trade is ever taken. How many investors genuinely know what their exit strategy is BEFORE they enter the investment? Virtually none. The reason this is such an issue is because they are basing their decisions purely on emotion. Sure, they might be using some form of fundamental analysisto decide if it’s a ‘good’ company; perhaps credit risk, company sales, P/E ratio, management team and overall growth, however, stocks do not always trade rationally. Where does this leave the fundamental, long term investor? They typically don’t know themselves!

I’ve spent time at a large bank on a Wall Street Institutional trading desk, and have had many conversations over the years with investment bankers, hedge fund managers and wealth managers; the one thing that stays consistent across the board is their LACK of an exit strategy.

Virtually all of the people I have dealt with and spoken to over the years had no idea when or where they would exit a position. It was usually a very ‘subjective’ decision making process. Those are the pro’s, so what does that say about the average Joe’s? They are even less prepared. A while back when I worked on Wall Street I had a conversation with a friend who was fairly heavily invested in Citibank stock for his retirement. I was genuinely curious about his long term view of the company and what his plans were for his investment. The conversation went something like this:

• Me: “Hi John, How’s that Citibank investment working out?”
• John: “Hey Jared, so far pretty good. I plan on holding it into retirement. It’s such a solid company.”
• Me: “Do you mind if I ask what your price target is?”
• John: “Oh I don’t know. I guess I don’t really have one. Higher. LOL. Like I said, it’s a long term investment that will boost my retirement in 20 years.”
• Me: “Ok, I guess I can appreciate that. Just one more thing, ‘what if’ things don’t go so well, and the investment starts to go south, what is your plan then?”
• John: “Keep in mind, this is a long term investment, so I’m fully prepared for ups and downs and a few bumps here and there. So a pullback wouldn’t concern me too much. It is Citibank, one of the largest banks in the world, I doubt anything really bad is go a happen. If so I’ll probably ride it out and maybe even add more cause it’s such a strong company.”
• Me: “So you’re ok with a pullback. What about something more serious, like a 50%-60% retracement, would you still hold through that?”
• John: “Yeah I’m ok with a pullback, and like I said, it’s Citibank, I’m not really worried about a 50%-60% pullback, it’s too solid of a company, and I don’t want to give up the long term potential.”
• Me: “So basically you’ll hold it no matter what.”
• John: “Pretty much, yes.”

What can we learn from this conversation with John? For me this conversation was not surprising at all, because the general consensus is that the markets can’t be beat and we should buy and hold forever, especially if it’s a large, ‘solid’ company with good fundamentals. Obviously that’s a slight exaggeration but this thought process is extremely common. ‘Buy and Hold’ is the way to go. The problem with this approach is that people don’t know what to do WHEN (not if) something bad happens.