Going for the "big win"......It's occasional, but pays well........

Many investors are mediocre players in the market struggling to fulfil "bread and butter" rates of returns on their investments. Many lament that the stock market is full of many "dangers" and "pitfalls" making winning consistently in the stock market an imagination too far to be reached. This is because many market participants fail to go for the "big win", and instead thrive on the many small winnings. When one big loss comes their way, it swallows up whatever small winnings they had in the past, so they end up breaking even or at most making only a meagre net return on their investments.

Why do many market participants fall into this trap of making only multiple small winnings only to find themselves run into the risk of losing back all their small winnings or even suffer a net loss on their capital when a big loss comes their way? It all boils down to the habit of thinking in making investment decisions. The thrill of immediate winning is more enjoyable than suffering immediate loss.

There are two general types of participants in the market, the short-term players who trade actively and long-term players who invest with a longer time horizon. No matter who is participating, all short-term and long-term players both face this problem of falling into the trap of making multiple small winnings only to suffer a bigger loss that trims off the winnings eventually.

For short-term players, the emotional side of the trader tends to disrupt the objective system of trading. It is known to many traders that it is important to stop loss with a small tolerance level (e.g. stop-loss around 10% or even lesser) and let trailing-stops work their way for a winning stock so as to maximise the returns. If the trader does not stick to such strict rule of the game which works on the principle of making a "big win" by using trailing-stops and promptly stopping any losses by strict "stop-loss" measure, then the "big win" effect cannot be realised.

For such emotional traders, it becomes the other way round, making the occasional "big loss" because they let a small loss snowball into a big loss, and making multiple small winnings since they are not able to resist the thought of not realising their immediate gains if any from their winnings. Their consolation after every small win is that, "What can go wrong with taking immediate profits off the table since I have the money in my pocket?". There is nothing wrong with taking profits. However, there is something wrong when taking multiple small profits cannot cover up a big loss eventually. So, to ensure consistency in making "big wins", work on maiximising returns from each winning using trailing-stops and ensure one is covered on the downside by using strict "stop-loss" measure. A simple illustration: if a trader aims for at least 30% returns on each single trade before realising the profits, this returns from that single trade can cover up for 3 losing trades with a "stop-loss" at 10% each. If the stop-loss is more stringent (e.g. stop-loss at 5%), then the cover up on the losing trades is even better with each winning trade. So, the old adage for traders, "let your winnings run and losses stop promptly" is very applicable for making the "big win" when it comes to playing the stock market on a shorter time frame.

For longer term market participants, when does one sell? Aim to sell at a returns of at least 100% on invested capital. Since one is going for a longer haul, it does not make sense to sell at a lower rate of returns. To achieve such returns is not an easy feat. How many market participants can resist the temptation of sitting on unrealised returns for long? Again, their consolation being human is all the same, "What can go wrong with taking immediate profits off the table since I have the money in my pocket?". There you go again. Same excuse, no matter so called long-term players or short-term players, all being humans fall into the tendency of emotional judgment when it comes to investment decisions.

So, no matter long term or short term market participants, there is always this tendency of realising profits too early and stopping losses too late. In doing so, they seems to work along the line of making multiple small winnings and big occasional losses such that their overall investment performance is mediocre at best.

If one has the patience and fortitude to hold the ground after selecting the right stocks at a suitable attractive valuation, only going for the "big win", just a 100% realised returns each year on one single stock in one's portfolio (provided one does not diversify to many stocks: maximum 7 stocks) for a few consecutive years and reinvested, can compound one's portfolio at an alarming rate of return.

So, always be patient to wait for right price to buy (during a bear market or major correction) and right price to sell (at least 100% returns on a single stock) to maximise the gains. Afterall, what is the purpose in investing if one only aims for a meagre returns from the stock market after taking on a bigger risk than other safer investments such as bank deposits? If one is fearful and impatient to wait for a larger magnitude of returns before realising profits and/or is adverse to loss taking which is sometimes necessary, then the stock market may not be suitable for such a person who may be better off putting his hard-earned money into safer investments that he can sleep soundly every night without worries.

A word of caution for readers: there are other considerations such as holding period, fundamentals of a stock and general market sentiments, so please take my sharing with a good dose of caution when going for the "big win".