Let us not forget the responsibility we accept as traders and investors. Like taking care of ourselves, the decisions to get in physical shape cannot come as a whim or seasonal motivation. Trading is no different; it should become a routine in your daily life. It is a state of mind and a state of understanding. It is the confluence of attitude and aptitude. I believe this is where the ultimate edge is.
Many investors never see themselves as market participants. Instead, they detach from the decision-making process by relegating the responsibility to money managers. Others are mentally detached even though engaged. They cling to some newly acquired knowledge or literal interpretation of the market at the expense of acquiring the right attitude. The real essence of trading and investing is becoming part of it rather than seeing the market as some playing field that you step on and off at different times. I never see myself as in the game or out of the game, on the field or off the field. Even the institutions say, “we are on the sidelines.” This doesn’t make sense to me. Perhaps what they mean to say is that their money is on the sidelines. Are these institutions mentally on the sidelines as well? I think most people are. If this is true, then how would one know when to get back in the game? Your mind needs to be in the market everyday, not intrinsically, but through awareness.
I take vacations, but I am always thinking about market sentiment. It’s not work; it’s a way of seeing the environment around you. Trading and investing is more about being a student of people and your surroundings than it is about being a literal student of fundamentals or chart patterns. This does not mean that because you enjoyed the food at Olive Garden that you are going to immediately buy Darden Restaurants (DRI) stock, but it does mean you should pay attention to the environment. This is where real fundamentals exist.
When getting started in trading and investing, you need a method to apply to the market. This book is one good step, but don’t let yourself fall into a trap I see everyday. Don’t let your sights become so targeted to literal market ideas, such as stochastics, chart patterns, or the advise of others, that you ignore intuitive signs as well. Keep your mind open. New information will fall in, and it compliments what you read on the charts. Without the psychological perspective of what drives charts and patterns, they are simply squiggly lines on an LCD monitor and this misses the point.
What I am explaining does not always translate well into books since it is intangible, but you know what I am describing. It is the feeling of Zen, or insight that only comes with experience and mastery over time. You most likely have found it in other aspects of your life, perhaps by playing an instrument or a sport. Some who pursue them with passion find that their mind clicks over into another dimension where competence is no longer conscious. This is where I believe you need to be and where most money is made in the markets. When endeavors of any kind, especially complex endeavors with many variables, become the occupation of needing a manual, the outcome will likely be ill done. The market is like that. The variables are many and the complexity great. As you process information, such as Fed rate cuts, all those cogs and sprockets must be able to turn and process the information in almost automatic fashion, leading to immediate understanding. While it does not mean this understanding will bring actionable ideas, it does improve the likelihood. This only comes after thinking through and experiencing information many times over. In order for this to happen in the market, you must first survive. This will come if you make trading a part of your life. Perhaps the best step you can take is to read often. Read books, read research reports, and study things that interest you such as technology, pharmaceuticals, etc. Through this process, you will form opinions, but these opinions will be filtered through the technical approach you have now acquired. While the approach cannot be literally interpreted, time and experience will see to it that you find your own style. I have met few people who consistently make money in the market following some literal manual or system they have little or no part in developing. I have also met few people who make money trying to literally master someone else’s system. While you can start here to gain insights and understanding while learning from others, true understanding only occurs once you have found your own recipe for success. This is perhaps the hardest lesson of trading to learn.
The act of giving your money to others for management is akin to following fate and the reliance on hope and luck. This book should confirm what you already know—that the motivation of mutual funds, brokers, and traditional firms is not directly aligned with your interest. This does not mean they do not want to do well, since they do. But their methods and system of competing with other funds automatically force them into a poor mindset and method of trading. In reality, trading and investing has nothing to do with competing with the market (S&P 500). Trading and investing only relates to you. Funds charge fees and they get fees from capital. The more capital, the more fees. Therefore they compete for your money by measuring themselves against other funds. The truth is, if I manage $100,000 of my own money and make 25 percent per year on it, the fact that the market made or lost 35 percent that year has nothing to do with me. The only interest I am aligned with is making money, period. Once you give your money to someone else, you open the door to many variables that you cannot control, hence you are at the hands of fate.
The truth is, sound money management principals rely on mathematical and logical equations that give every willing participant an edge. Ignoring this responsibility is being untruthful to yourself. Luck is a lie. It persuades to believe that you have no hand in the equation or outcome. Luck is apathy and never wins over time. The truth of markets is revealed when responsibility for everything that happens to your money is at your hands, good or bad. The road to truth is in understanding the principles of risk management and the belief that one can influence outcomes, and fate does not. Once the skills are acquired to influence outcomes, the probabilities begin to work in your favor, and this takes time. Be patient and run the long race. Get rich slow.
If your life dictates that you cannot have a hand in trading and investing decisions due to time constraints, your next best approach is to become an expert, filtering the decisions of others before they commit your assets. Learn to manage the risk along the way. Regardless of whether one desires to individually manage their assets by becoming their own analyst or by overseeing the process of those who do it for you, every participant must understand the analysis and define the risk they expose their capital to. This responsibility and acquisition of knowledge will dramatically contribute to results while reducing risk.
In its most simple state, risk management means we maximize and influence the variables we can control while minimizing exposure to the variables we cannot. Time is the greatest nemesis to traders and investors. Market statisticians clearly use time as a shield to hide behind, calculating average annual returns that seem acceptable when smoothed with time. What they seem to ignore is the great volatility incurred by investors and the emotional impact it has on them. The emotional influences are what initiate fearful selling and greedy buying, both detrimental to results on any timeframe. If fund managers had it right, they would be paid strictly for performance and making money. They would forgo annual maintenance fees and be governed by “high water marks” each year as most hedge funds are. Performance would not be defined as beating the S&P 500 or some other benchmark. Performance would be defined as profitability. Most funds forget their customers may not have 20 years, and even if they do, their needs for their capital do not always mystically coincide with market cycles. Investors who need capital to send their children to college, or to enter retirement during the “tech wreck” starting in March 2000, can’t pay tuition with market statistics. Individuals who understands their unique needs and timing for money, along with a foundation of knowledge, can beat the historical averages. I believe historical averages and returns are market myths that have nothing to do with me. The information we really need is the information that is not readily available. If it were, the information would have no value. Information with value is processed by each participant because information means different things to different people. It has varying degrees of risk and is not readily transferable. If it were, it would either be extremely rare or illegal to have. Information is at a premium, yet the information we get isn’t what we need. A quote taken from one of my favorite books, Against The Gods by Peter L. Bernstein, states:
The information you have is not the information you want.
The information you want is not the information you need.
The information you need is not the information you can obtain.
The information you can obtain costs more than you want to pay.
Therefore, we must stop seeking information that will not appear. Instead, the information we need lives inside each of us in the form of our ability to relate and interpret human nature as represented on the charts. For more help and education beyond this reading, please visit us at www.marketwise.com.