OVERCONFIDENCE DOESN'T LAST

long in the markets. Cocky investors trade

,

and are usually

to take a loss. When the market is moving against them, it's overconfidence that keeps them holding and hoping and

, even when it's painfully clear that it's time to

.

There's a fine line between feeling confident and acting cocky. When I'm not at least a little concerned about a position, that's generally the best time to think about getting out. Stocks climb a wall of worry, and healthy doses of skepticism, doubt and fear are actually a positive sign. When I feel butterflies in my stomach, I'm usually on the right track.

Research and due diligence are a must, but when you get right down to it, the market doesn't know if you're a warehouse worker or a Harvard grad. Although a fancy degree might look terrific on a resume, it means nothing when it comes to knowing how to trade.

As we often point out, confidence is important, but investors also must be flexible. And in my experience, the more educated investors tend to be the most overconfident. Their knowledge is gleaned from a book, not from experience, and they tend to think in black and white rather than gray. It's that dogmatic approach from which often inaccurate quips like "don't fight the Fed" are born.

If you're bullish, be bullish. But when the trade goes 10 points against you and you're margined to the hilt, it's humility, not confidence, that will save your skin. Overconfident traders can't imagine a loss, and their profits are already spent. In their mind, they are just one trade away from a new car, wardrobe or plasma TV.

I'm from the school that says you hope for the best but plan for the worst. So while I've got confidence in my positions, I'm always the first one to admit there is no "sure thing." What gives me confidence is watching the market itself. Yet no matter how much I believe in XYZ, there's always a predefined point at which I'm ready, at least for the time being, to pull the plug and get out.

When you're overconfident, your ego can't tolerate the possibility of being wrong. You don't think straight. And although there are always plenty of good trades just waiting to be found, all of a sudden, you'd rather go broke than admit XYZ wasn't the incredible buy you thought it was. In the markets, you've got to be confident enough to take a position, but humble enough to take it off.

So while it's important to be confident, don't let your ego get in the way of your smarts. The best traders aren't cocky, but cautious aggressive in their positions but ready to cut them when the time comes. Because, as we've written before, trading is often simply about doing the right thing. A big ego is more than just obnoxious to your friends and neighbors it's also expensive to your bottom line.

Jonathan Hoenig is portfolio manager of Capitalistpig Hedge Fund LLC.