Empathy Gap

One of my favorite movie quotes ever is from the movie Batman Begins: “It is not who you are underneath that defines you. It is what you do.” This quote describes perfectly the biggest obstacle for most investors and the main reason why there is a distance between desired and actual results. Empathy gap is the main cause behind most trading and investing mistakes. Empathy gap is the difference between how you believe you will act under certain circumstances and how you actually act when the time comes.

Do you think you will remain calm in the face of a 50% decline in one or several of your holdings and you will ride them back to new all-time highs? Think again. Most people will give up and sell in the face of such big losses. You have to plan for your inherent human weaknesses. You need to have a clear strategy that will your protect profits and confidence.

Maybe your goal should not be to find the Next Apple. Maybe your goal should not be to find stocks that will go up 2000% in 20 years. Warren Buffett likes to marry his stocks and ride them through good and bad till death do them apart. His approach is not for everyone. A much better approach for you might be to aim at stocks that could go up 100% to 500% in six to 24 months and sell them as they violate their uptrends.

Finding stocks that have the potential to be the next Apple is easy only in hindsight. The truth is that no one could know for sure. If you could go back in time and tell Steve Jobs and Tim Cook how successful Apple would become, they would probably think you were crazy. Even they had no idea in the early 2000s.

Very few of today’s leaders will turn into the next Apple. The few that do will have incredibly volatile paths along the way. Riding those trends through their inevitable > 50% drawdowns will make the holding part pretty much impossible for most people. The good news is that there will be thousands of mini-Apples in your life as an investor; thousands of stocks that will go up 100% to 500% in a year or two. Anyone could catch 10 or 20 of them.

Some trends last several months and others several years, but eventually they all end. This is not an opinion. It is a fact. The goal of investing is to keep your profits when the inevitable correction comes.

This is an excerpt from our latest book “The Next Apple”.