Monday, May 3, 2010

Don't Time the Top

I see it in stock blogs all the time: Leave your bias at the door, find the trend, ride the trend and eventually get off. It's not worth trying to maximize your gains by picking the bottom or waiting to sell at exactly the right moment. Most of the money is made in the middle. At the extremes, the risks are too high.

I thought of this at work today, I'm not sure exactly what it was that prompted the reflection, but it's irrelevant. What matters is the realization, that not only in stocks, but in life, it's not about timing the top or picking the bottom.

It's about realizing the trends, riding them, and getting off. This means being observant. What trends in society, your customers, your peers, your community and your own personal life can you identify? This is trickier than it sounds, sometimes we find trends we desperately don't want to see. But don't deny yourself reality. This is the world we live in, so accept it for what it is. Check your bias at the door. Your original hypothesis might be wrong, swallow your pride and accept that. Your original hypothesis doesn't matter. Altering your hypothesis given what you observe however, is paramount.

Now that you've identified the trend and are exploiting it for all its worth - whether that be making a neat iPod cord management systems or investing in companies that clean up oil spills - try to stay objective. Don't fall in love with the trend. It's only a trend; as just a little more than a fad, it's destined to change. Set a target ahead of time, of what you're hoping to get out of the trend. Then stick to that target, or at the very least keep reflecting on it, to ensure you don't lose touch. Trends come into being slowly, but can go out of style quick. The important corollary, hidden in there then, is to always be on the lookout for new trends. Your cord management business might be going swell, but if wireless headphones are becoming the norm, you need to start working on a new product, to be ready for the next salvo of potential customers waiting to be served.

Identify, profit, get out. Repeat.

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