Friday, April 29, 2016

Why Investors and Traders Fail

It's fine to celebrate success but it is more important to heed the lessons of failure. 
Bill Gates
Those of you, like I, who have been around the markets for many years have seen seemingly good traders all of a sudden self-destruct. They normally buy 10 contracts (futures, options etc.) and today they bought 100 or they normally buy 100 shares and today it was 1,000. When asked why, they usually respond I don't know, I just did. I have personally seen it many times, an individual taking a position much larger than normal and not warranted under any circumstance. I call it "the big idea", the one that will finally set me free. What causes an otherwise good trader, to one day just violate all his rules and then repeat that same mistake time and again without ever learning? The root of the problem is almost always some form of self-deception and rationalization. 

"Under periods of inner stress…a person may become alienated from his real self. He will then shift the major part of his energies to the task of molding himself, by a rigid system of inner dictates, into a being of absolute perfection. For nothing short of godlike perfection can fulfill his idealized image of himself and satisfy his pride in the exalted attributes that he has, could have, or should have." Dr. Karen Horney (1885-1952) Neurosis and Human Growth).

The result is an ever-widening system of falsehood and evasions that take people further and further away from being able to identify and live with the truth. Therefore in the example above most often you will find they failed to ask themselves a vital question: what happens if I am wrong--very wrong? In other words, they badly misjudged or even failed to consider the risks inherent in their decisions.

People base their decisions on perceptions as well as facts. They interpret facts and put them in context. Those interpretations and contexts are based on the decision-makers' belief systems, and psychological attitudes. The best way of finding these things out is to ask a series of probing questions. When making decisions ask yourself are you: analytical and quantitative i.e. an engineer or scientist, for example? Or are you intuitive and qualitative i.e. philosophers or psychologists? Are you an optimist or pessimist? Are you a systematic thinker, always looking at the interactions of units, or more linear, following events in sequence? Do you have any political bias? Do you see lurking conspiracies or do you accept the logic of historical accidents? Do your own ambitions and biases blind you, or are you eager to learn? Are you susceptible to herd mentality? These kinds of questions help account for the idiosyncrasies of decision-makers and thus build the necessary foundations for developing good decision-making scenarios.

These subtleties often give rise to the gigantic illusion called false pride that hinders many traders. These concepts are so active in trading and in our society that understanding them will prove crucial in gaining self-awareness the first step in personal growth and change, especially for traders.

Friday, April 22, 2016

The Essence of Trading

Trading is very competitive and you have to
be able to handle getting your butt kicked. 
Paul Tudor Jones
To a large extent, the Prudent Trader web-site, like most others that deal with the markets, concentrate on the intellectual sphere: all the things we can know and understand with our mind. We concern ourselves with concrete, rational, and scientific ideas, the ideas of technical and fundamental analysis, economic principles, and trading strategies. For sure, these tools, and the mental ability to apply them intelligently are absolutely essential to success as a trader, investor, or a speculator. But success as a whole, as a human being, takes more than a good brain. It also takes character!

Webster's dictionary defines character as "the complex of mental and ethical traits marking a person." Ethics are evident in the code of values that guide a person's actions and choices. Do you choose honesty over lying, integrity rather than hypocrisy, productiveness over idleness? The process of making choices and decisions may be intuitive and hard to explain, but it always begins with your own personal sense of morality and ethics - your character.

Personality on the other hand, again from Webster's: "(1) the complex of characteristics that distinguishes an individual; (2) the totality of an individual's behavioral and emotional tendencies; (3) the organization of the individual's distinguishing character traits, attitudes or habits; (4) their disposition."

The reason trading is difficult, is that you cannot lie, hide, or rationalize failure. Reality is what it is. In most, if not all other profession's failure can be rationalized. A lawyer might say he had no case, a doctor might say he did all he could it was "in the hands of God", but in both cases they get paid. However at the end of a trader/investors report period, be it a day, a month, or a year he will either show plus or minus capital. There are no excuses, traders don't get paid for failure.

"The symbol of all relationships among (rational) men, the moral symbol of respect for
human beings, is the trader. We, who live by values, not by loot, are traders, both in matter and in spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws." Ayn Rand, The Ayn Rand Lexicon (New York: Meridian, 1988)

This is the essence of trading. Understand it, accept it, or pass on this profession!