Think You’re a Market Genius? Why Small Gains Prove You’re Not (Yet)

Speculation in Play #336 | June 9-13, 2025

Investing discipline means sticking to a clear strategy, no matter how the market moves. It helps you avoid making choices based on fear or greed, which can derail your financial goals.

For example, during market downturns, discipline prevents panic selling, while in bull markets, it stops investors from chasing risky trends. By staying disciplined, investors can focus on long-term growth rather than short-term fluctuations, ensuring their portfolio aligns with their risk tolerance and timeline.

Investing is a blend of strategy, psychology, and patience, where discipline often separates successful investors from those who struggle. In this post, I explore why developing investing discipline is vital, with a particular focus on the importance of taking small profits, even when an investor believes an investment will continue to rise.

We’ll also examine how hubris, or overconfidence, can undermine discipline, potentially leading to significant losses. Drawing from recent research and expert insights, this analysis aims to provide a comprehensive understanding for both novice and experienced investors, emphasizing practical strategies for maintaining discipline in a volatile market environment.

The Importance of Taking Small Profits

Taking small profits, even when you think an investment will rise further, is about protecting what you’ve earned. Markets can be unpredictable, and holding on too long might turn gains into losses if the market turns.

For instance, selling early can free up capital for new opportunities and help rebalance your portfolio. While it might feel like leaving money on the table, it builds confidence and reinforces disciplined habits, making future decisions easier.

Why Hubris Can Undermine Discipline

Hubris, or overconfidence, can cloud your judgment, making you believe you can predict market moves better than you actually can. This often leads to holding investments too long, hoping for bigger gains, which can backfire if the market drops. Studies show overconfident investors trade more, take on excessive risks, and ignore warning signs, often underperforming compared to those who stay disciplined. Recognizing this bias is key to making rational choices.

Understanding Investing Discipline

Investing discipline refers to the consistent adherence to a predefined investment strategy, regardless of market conditions or emotional impulses. It involves making decisions based on logic, long-term goals, and risk tolerance rather than reacting to short-term market movements.

Research highlights several reasons why discipline is crucial:

• Emotional Control: Investing can trigger strong emotions, such as fear during downturns or greed during rallies. Discipline helps remove these emotions from decision-making, as noted in a 2021 article from Mission Wealth, which states, “Successful investment management requires discipline, which involves focusing on long-term fundamentals and removing emotions from the process.”

• Consistency and Long-Term Success: A disciplined approach ensures investors stick to their plan, whether it’s rebalancing portfolios or adhering to profit targets. A 2015 Forbes article, Six Rules to Disciplined Investing, emphasizes, “Discipline in investing is about forming good habits and then doing them consistently,” which is vital for achieving financial goals.

• Risk Management: Discipline helps maintain diversification and avoid chasing high-risk opportunities. For example, a 2020 piece from Motilal Oswal notes, “Discipline forms the cornerstone of your trading and investment strategy,” ensuring alignment with risk profiles.

The Temptation to Hold On: Why Investors Delay Selling

One common challenge is the temptation to hold onto winning investments, expecting further gains. This behavior often stems from fear of missing out (FOMO) or overconfidence in market predictions. For instance, investors might believe, “This stock will never stop going up,” and delay selling, only to see profits erode if the market turns.

This issue is particularly relevant in volatile markets, where holding on too long can turn gains into losses. An article from Investopedia, published in 2024, explains, “If an investor holds onto an underperforming stock or is lagging the overall market, it may be time to sell that stock and put the money toward another investment,” highlighting the opportunity cost of delayed selling.

The Dangers of Hubris in Investing

Hubris, or overconfidence, is a cognitive bias where investors overestimate their knowledge, skills, or ability to control outcomes. This can lead to poor investment decisions, such as holding investments too long or trading excessively.

Research from ScienceDirect, published in 2023, found that overconfidence leads to “excessive trading due to positive returns, causing inefficiencies in stock markets.” Similarly, a 2023 Investopedia article notes, “Overconfidence bias can negatively affect investment returns by leading people to overestimate their skill and knowledge, trade too frequently, incur higher costs, or ignore relevant information.”

Overconfidence manifests in several ways:

• Illusion of Control and Knowledge: Investors may believe they can time the market or predict trends, leading to speculative decisions. A 2022 article from Corporate Finance Institute states, “Overconfidence tends to make us less than appropriately cautious in our investment decisions, often stemming from an illusion of knowledge and control.”

• Ignoring Negative Information: Overconfident investors may dismiss warning signs, delaying necessary actions like selling. A 2021 CNBC article, Overconfidence may be getting in the way of your investing performance, suggests, “Revisit your past gains and losses before making your next investment decision,” to combat blind spots caused by overconfidence.

This bias can be particularly damaging when investors hold onto investments too long, expecting further gains, only to face losses if the market declines.

Benefits of Taking Small Profits

Taking small profits, even when an investor believes an investment will rise further, is a disciplined strategy that offers several advantages:

• Locking in Gains: Selling early secures profits rather than risking them in a volatile market. A 2024 article from Investopedia defines profit-taking as “selling an investment to lock in the gains after it has risen appreciably,” emphasizing its protective role.

• Portfolio Rebalancing: Taking profits allows investors to rebalance their portfolio, ensuring alignment with risk tolerance and investment goals. For example, a 2024 piece from Steady Compounding suggests, “Taking profits can help you stay liquid in the market and have resources to latch on to trading opportunities as they come by.”

• Capital for New Opportunities: Freeing up capital by taking profits enables investors to seize new investment opportunities. A 2024 Moomoo article recommends, “When the stock price goes up and reaches a certain percentage, you sell to secure your gains, which will also boost your confidence in further investment.”

• Psychological Reinforcement: Successfully taking profits can boost confidence and reinforce disciplined behavior, making future decisions easier. This aligns with findings from Advisorkhoj, published in 2023, which states, “Discipline with which we align our life goals to take stock of what we need to save will ultimately help us achieve these goals.”

While taking small profits may feel counterintuitive, especially during bullish markets, it helps mitigate the risks of hubris and market volatility.

Strategies for Maintaining Discipline

Developing and maintaining investing discipline requires intentional effort and clear strategies. Here are some practical tips:

• Set Clear Goals: Define investment objectives, including risk tolerance, time horizon, and return expectations.

• Use Profit Targets and Stop-Loss Orders: Set predetermined levels for taking profits or cutting losses to remove emotion from decisions.

• Regularly Review Your Portfolio: Periodically assess investments to ensure alignment with your strategy, rebalancing as needed.

• Avoid Chasing Trends: Don’t let FOMO or market hype dictate decisions; stick to research and long-term plans.

• Educate Yourself: Understanding market dynamics and cognitive biases, such as overconfidence, can help mitigate their influence.

• Stay Informed but Not Obsessed: Keep up with market news, but avoid constant monitoring, which can lead to impulsive decisions.

Real-World Insights from Experienced Investors

I always say, “There are two actions an investor can take today: BUY or HOLD. You don’t have to buy, but any selling should have happened weeks ago. Never, EVER sell into a panic.” I reiterated that post on April 4 on X in the throes of the market crash. Here we are now, barely two months later, and the markets are back near all-time highs. Imagine if you had sold on April 4 even though the lows wouldn’t occur for a few more days? You would be kicking yourself now!

The recent crash and recovery highlights the discipline of not reacting emotionally to market panics, aligning with the strategy of taking profits early to avoid losses. Another X post of mine from March 15, 2025, emphasizes, “The trick to investing isn’t buying ‘at the lows.’ The trick is giving investments time to grow,” underscoring the importance of patience and long-term holding, which complements disciplined profit-taking.

Granted, getting a great price at the lows doesn’t hurt, either.

Investing discipline is the cornerstone of long-term financial success, enabling investors to navigate market volatility, avoid emotional pitfalls, and make decisions aligned with their goals. As the market continues to evolve - especially in the context of recent market volatility - maintaining discipline remains more important than ever.

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Read on to discover the week’s biggest winner and loser in the Speculation in Play portfolio as well as all the moves I made this week in addition to my future buying and selling price targets for the positions that saw changes over the week.

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