Invest Like a General

My uncle was a psychologist, and I remember him telling me many times, "Don't should on yourself today."

Basically, he was trying to explain why it wasn't good to go around beating myself up mentally. In other words, refrain from saying things like, "I should have done this," or, "I should have done that." It's that kind of talk that builds a subconscious reserve of shame and guilt that harms self-esteem and keeps you from acting with confidence.

For some, beating up on themselves is almost a hobby, but this type of unhealthy self-criticism can have many unintended and harmful consequences in all sorts of areas in a person's life -- from interpersonal relationships to investing . That's why avoiding this sort of behavior is critical if you're going to become a consistent money maker in the markets. My behavioral rule of detachment deals directly with this.

35% returns in a day!
Remember detachment? It was one of the four behavioral concepts I wrote about in an earlier article, and probably the toughest thing for me to learn. You don't know how many times I sabotaged myself by not having a detached attitude toward my investments or trades. It was only after a long period of pain and the loss of much money that I finally realized there would always be opportunities, so if I missed something or took a profit too soon, it was not necessary to agonize over it. More importantly, a cold, dispassionate attitude allowed me to cut a loss and stay in the game. Basically, detachment is a way of thinking and behaving that allows you to walk away.

I remember back in the 1990s when Warren Buffett stayed out of the tech boom. He was criticized and chided for that. Many said his investing genius had finally failed him. The fact that he wasn't able to see the emergence of the "New Economy" was proof that his old, fuddy-duddy style of value investing made him a money-management dinosaur.

A friend of mine went through a similar experience. He's a hugely successful fund manager with a line of mutual funds in his name. Once, he recounted to me that during the roaring tech market of the late nineties, he was embarrassed to go to the local gas station in his town because he got heckled and ridiculed by the station attendant. The kid pumping gas was making 35% per day on his investment portfolio, while my friend was "only" up 35% for the year.

In both cases, the race eventually went to the slow and steady: Buffett and my friend endured and saw their fortunes grow, while many of the short-term, fad-following investors who blindly ran into overpriced stocks, with less thought than the purchase of a $2,000 used car, lost their shirts and much, much more.

Master Commander
Buffett and my friend were able to stay out of the tech hype because they had detachment. It was their cold, dispassionate attitude that kept them from jumping in with the rest of the crowd. Alignment, another behavioral principle, also kept them playing their own game -- because it's what they understood. Detachment and alignment kept them on the road to success, even while all sorts of distractions were going on around them. They operated from a position of strength, like generals in total control on the battlefield, able to make adjustments with self-confidence when necessary.

Do you behave like a general in total command on the battlefield? Is your approach to investing cold and dispassionate, or fraught with emotional decisions? Can you steer clear of fads and stick to your game?

Here's a quiz:
The siren call to gold and silver today is no less compelling than the promises of the dot-coms of the nineties. Without a doubt, unless you've been in some kind of state of suspended animation, you've probably heard something about both those metals. (Throw in copper, too.) Perhaps you read that gold's at a 26-year high, or that the Chinese are buying, or that it's a hedge against inflation. Well, guess what? You have a lot of company. A Google news search using just the word "gold" from April 1 to April 15 turned up 9,630 hits. That same search from May 1 until now turns up 65,100 hits. Even if that's only a short-term read on sentiment, it still speaks volumes about the frothy nature of the gold market right now. (That goes for silver and copper, too.)

All that glitters.
If you got into gold a year ago, you've done well - there's no question about it. Some, like me, bought gold and gold stocks back in 2001 when it was at $265 per ounce. I have since gotten out, only to watch the price nearly double from where I made my exit. My attitude of detachment, however, keeps me from being upset with myself for having taken an early profit. (I didn't "should" on myself.) Since my exit from gold, I've been involved in other things that have also proven profitable.

But what if you're just considering gold now? Are you acting with detachment? Are you using alignment? Chances are you are not.

Investors who bought gold in 1980 did so amid similar, if not more intense, backdrops of inflation, dollar weakness, rising interest rates, and general instability (remember the Iranian hostage crisis?). However, those investors are just now getting their money back. So it was a terrible decision to buy gold then, particularly if one considers the opportunity cost of the dead money tied up in gold that could have been in stocks. It was also a terrible decision because it was emotional, and emotional decisions turn investing to gambling. You must decide: Do you want to invest, or do you want to gamble?

For all I know, gold could go to $3,000 per ounce from here, but I can assure you of one thing: I won't be in, because it's no longer my game. Furthermore, just as the sun rises and sets, I guarantee you there'll be something else I will find to make money in. And it'll be without the encumbrances of emotion.

The game of investing is a game of endurance, not speed. The race is won in a slow and steady fashion, not in a sprint. What happens in the short term rarely matters -- the long term defines your success. You should be happy that's true, because it makes life for investors really simple -- as long as you remain unemotional and play your game.

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Fool contributor Mike Norman is a founder and publisher of theEconomic Contrarian Updateand a Fox News Business contributor.


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