March 24, 2012

Why are pilots good at trading stocks?

When involved in the stock market, one thing to always remember is to leave your emotions at home. The best traders are actually pilots. A pilot is used to leave the emotions outside in case there is an emergency. The pilot has been trained to follow the emergency check-list no matter what. That's how you should operate as a trader. If something happens, follow the check-list you have in case of a market crash.

The easiest way to leave your emotions outside is to ignore the price of the stock. If you are a long-term investor, it doesn't really matter if the price of the stock moves from $100 to $80 - as long as nothing has happened with the long-term fundamentals of the company.

A common error you can make if you are new is that you may think that a stock with the price of $5 is cheaper compared to the stock with a price of $10. This is however not true since it's the market value that's important.

One way to leave to price of the stock outside is to calculate the annual earnings from a $1000 investment and annual dividends from a $1000 investment. Such as:

Source: Seeking Alpha

For example. The current stock price of GE is $20.13. This is the number you should ignore. To calculate the annual earnings from a $1000 investment, you take $1000 and divide it with $20.13 and end up with 49.677. This number tells you how many shares of GE you can buy with the $1000 investment. Now you take the number of shares you can buy and multiply it with earnings per share: 49.677 * $1.225 = $60.85 - to get the final number you need.

Source: Seeking Alpha