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Should know Michel Pireu     | Business Day Tuesday, March 12, 2019
When it comes to trading the markets, the default assumption is that we all want to win. But as Ed Seykota points out in Market Wizards, thatís not always the case. He tells the story of a trader friend who consistently losses all he makes. ďHe just canít help himself,Ē says Seykota. ďI donít think he can do it any differently. He wouldnít want to. He gets a lot of excitement, he gets to be a martyr, he gets sympathy from his friends, and he gets to be the centre of attention. Also, possibly, he may be more comfortable relating to people if he is on their financial plane. On some level, I think he is really getting what he wants.Ē

Think thatís a little weird? Well, hereís something you should know: As long as you keep playing, itís because youíre getting what you want out of the game. So you need to ask yourself: Are you uncomfortable winning? Do you enjoy a lot of excitement? Would you prefer to have an interesting story to a boring but winning trade? Do you find it hard to go your own way, as opposed to following the herd and the news? If you have any psychological flaws (and yes, we all have them) the markets will draw them out and exploit them. That applies to your behavioural biases too. ďYou can read all the books you want,Ē says Ben Carlson at A Wealth of Common Sense, ďbut itís not going to help you in the moment. You canít suppress your natural human instincts.Ē

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You might feel confident, logical, and a good decision-maker, especially when it comes to investing but, unfortunately, this may just be part of a story you've developed about who you are, why you do what you do, and why you think what you think. It's undoubtedly a good story, and you believe it day-to-day, but itís likely mostly fiction. The reality is that we all have a deep desire to be right all of the time and a deeper desire to see ourselves in a positive light and can stretch our mind pretty far to achieve this. Yes, we are capable of logic and reason and rationality, but when we fall short of those ideals, we tend not to notice. We all have a tendency to create a narrative in which we see ourselves as the sort of person we want to be Ė rather than who we really are. Donít agree? Well, hereís something you should know: When our deepest convictions are challenged by contradictory evidence, our beliefs tend to get stronger.

Brendan Nyhan and Jason Reifler at The University of Michigan and Georgia State University have done repeated experiments that confirm that a correction tends to increase the strength of participantsí misconceptions when it contradicts their ideologies. ďOnce something is added to your collection of beliefs,Ē they say, ďyou protect it from harm. You do it instinctively and unconsciously when confronted with attitude-inconsistent information. Just as confirmation bias shields you when you actively seek information, the backfire effect defends you when the information blindsides you. Over time, it helps make you less sceptical of those things which allow you to continue seeing your beliefs as true and proper.Ē

Itís what makes it almost impossible to convince those investors who fervently believe they can beat the market that it canít be done.

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Only a few people are truly great at what they do Ė awesomely, amazingly, world-class excellent. And that applies to investing. Why is that? Why donít we all invest like Warren Buffett or George Soros? After all, some of us have been at it for a long time Ė twenty, thirty years. Why isnít that enough to make us great investors?

Unfortunately, research in a wide range of fields shows that most of us not only fail to become outstandingly good at what we do, we often donít even get better than when we started. Some of us even get worse with time.

When we look for an explanation, we generally come up with two answers. The first is hard work. We tell ourselves that if we work hard weíll be fine. This may be true. Weíll be fine Ö but, no more. Our second answer is the opposite of the first (which doesnít stop us from believing it); that the apparently super-human performers came into this world with a natural gift for doing what they end up doing.

But, hereís something you should know: There are no natural-born investors or traders - none. Instead, it comes from a drive, a perseverance usually formed early in life. A passion develops, rather than emerging suddenly and fully formed. Although we still canít fully explain why certain people put themselves through the years or decades of punishing, intensive work that eventually makes them world-class.

So, when you start to believe that you can beat the market, ask yourself: Is it because you fall into this very special class of people - or is it because you imagine you have a natural ability?

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As investors we want clear direction, not confusion. We want definitive, no-hedge answers, not choices. Thatís why we end up relying a great deal on market experts, media sources, investment advisors, and why these people have so much appeal. A market guru often sounds so compelling and so erudite and so convincing and so passionate that we forget that he also can be dead wrong. Every day things happen that dramatically illustrate that even when the news overwhelmingly and irrefutably points the market in one direction, it will fool everybody, and I mean everybody, and go in the opposite direction

Hereís something you should know: The market is confusing. Thinking otherwise creates unrealistic expectations.

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One of the big the attraction of an index fund is the possibility (some will tell you itís more than that, but it really isnít) of making a lot of money without having to know or care about anything. Will value stocks do better than growth stocks? I donít know, and I donít care ó my index fund owns both. Will health care stocks be the best bet for the next 20 years? I donít know, and I donít care ó my index fund owns them. Whatís the next Microsoft? I donít know, and I donít care ó as soon as itís big enough to own, my index fund will have it, and Iíll go along for the ride. But hereís something you should know: One functional definition of a bear market is that it is simply a period that separates the people who donít care from those who merely say they donít. The ones who thought they wouldnít care, and then find to their own surprise that they do, almost never survive a bear market.
 
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