from streetdogs.co.za articles archive home
to be better Michel Pireu     | Business Day Tuesday, February 5, 2019
Know yourself. Work very hard to better understand how you, as an investor, react to both prosperity and adversity, and particularly to the market's manic swings, both euphoric and traumatic. If you don’t know who you are, the market is an expensive place to find out. While there's no psychological profile that guarantees investment success, there are a few that seem to presage failure. Impatience, stubbornness, and an inability to control your emotions are a problem. The key lies in recognizing your weaknesses.

Assume you are average. A good check on any investment decision is to ask – should this work on average? Are the odds in my favour? Allow for a margin of safety. Consider the extent to which you are relying on your own skill for a good outcome. The less so, the better.

Be sceptical. Plenty of high profile people are more than happy to share their views on the state of the market and give advice on the best course of action. But, much of the time what they say in public has little-to-no bearing on how they manage their own portfolio. Client letters, TV appearances, interviews and speeches tell you a lot about someone’s personal convictions but very little about the extent to which they are willing act on them. “It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind,” warned Jesse Livermore. “The public should beware of explanations that explain only what insiders wish the public to believe.”

Work hard. To quote Thomas Edison, the reason a lot of people do not recognize opportunity is because it usually goes around wearing overalls looking like hard work. “In many fields success depends on lots of action. Investment is quite different from that,” said John Bogle. “There's a bunch of hard work involved but it has nothing to do with market action; it has to do with understanding what something is worth now and judging how much it is likely to change - within a range - over longer time frames. That's hard to do well. It's knowing what you don't know. It's about owning sound assets, bought at fair or better prices, while minimizing frictional costs and mistakes.”

But, don’t work too hard. The stock market cannot be made to go your way by hard work. As Haruki Murakami pointed out, if you really work at something you can do it (succeed) up to a point. But anything more than that you can't. Anything more than that is luck.

Focus. “Hard work without focus leads to only a sinusoidal performance curve with lots of peaks and valleys. It doesn't yield a consistently improving performance,” warns Amit Airon. “Focus and dedication may be the key to success. Unfortunately most of us find it difficult to maintain it over a long period of time.”

Be disciplined. Discipline is the word most frequently mentioned in Jack Schwager’s book, Market Wizards. “The one thing I can think of that most affects both trading and investing has to be self-discipline,” says Joe Ross of Trading Educators Inc. “Being disciplined is fully fifty percent of the job of trading or investing. I don't care how good your system is, without the discipline needed to follow it through you don't have much chance of success. Discipline involves self-control. Self-control is all the more vital given that all our natural compulsions conspire to defeat us as traders.”

Be decisive. As George Lorimer tells his son in Letters from a Self-Made Merchant : “The man who can make up his mind quick, makes up other people’s minds for them. Decision is a sharp knife that cuts clear and straight and lays bare the fat and the lean; indecision is a dull one that hacks and tears and leaves ragged edges behind it.” Decisiveness is absolutely essential for traders, regardless of the stressors they are facing on or off the trading floor.

Be realistic. We tend to be more optimistic than realistic. On average, we expect things to turn out better than they do. We believe the future will be much better than the past. Such overly positive assumptions can lead to disastrous miscalculations.

Be afraid. Those who believe there’s nothing to fear from markets are kidding themselves.

Don’t fall prey to the overconfidence bias. The potential implications of overconfidence are significant and include overtrading, lack of diversification, a tendency to take positions with unfavourable odds , and ignoring danger signs – to name but a few.

“Although there is no perfect remedy for overconfident decision making,” says Joe Wiggins at behavioural Investment, “there are simple steps we can take to mitigate it: 1) Take the outside view. Taking the inside view relates to being reliant on your own individual experience and specific circumstance, whilst the outside view is based on evidence. Assuming you’re considering investing in an active manager. The inside view would be the great meeting you held with that manager, their impressive track record and the pedigree of the team. The outside view would be that only 10% of active managers in the asset class have outperformed over the past decade. 2) Think in probabilities. Although we seem to have an unescapable desire for spurious precision and aggressive singular forecasts, we should instead think in terms of probabilities. Ascribing probabilities to different potential outcomes reduces the chance that we become wedded to a particular view, prevents us ignoring low likelihood risks and, crucially, leaves us free to alter our perspective when new information arrives. Changing your position when you have made a strident, binary forecast is fraught with difficulty; adjusting probabilities is far easier. 3) Make your own decisions. Whilst there is an assumption that group decisions should be less impacted by overconfidence than solo decisions, this is not necessarily the case – a group comprised of similar individuals may be emboldened by the consistency of their views and display even greater overconfidence.

Go it alone. “I’m going to give you some advice that might be hard to take,” says Steve Wozniak. “That advice is: Work alone. Not on a committee. Not in a team.”

Find an edge. As Howard Marks says, to be better than average, your thinking has to be better than that of others. You must find an edge they don’t have. You must think of something they haven’t thought of, see the things they miss. You have to react and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others.

Don’t make excuses. As the saying goes, you can make excuses or you can make progress but you can’t do both.
 
contact us |  add to favourites
disclaimer
Michel Pireu & Associates cc, the owners of this website, are active stockmarket traders. The company disclaims all liability for any loss, damage, injury or expense however caused, arising from the use of, or reliance upon, in any manner, the information provided through this service and does not warrant the truth, accuracy or completeness of the information provided. The company's permission is required to reproduce the contents in any form including, capture into a database, website, intranet or extranet.