Equity prices are volatile because the trust that forms the basis for liquidity can be fickle
Archives of “February 8, 2019” day
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A Book of Five Rings by Miyamoto Musashi
A Book of Five Rings (or Go Rin No Sho) was written by the samurai legend, Miyamoto Musashi, in 1645. I read this text several years ago and while the central theme is ‘strategy’, the lessons that left a lasting impression concerned ‘true understanding’ and the importance of practice; of practising one’s arts, one’s discipline, one’s techniques. Practising until third nature becomes second nature, becomes first nature. In this age, when knowledge is plentiful and experience lacking, I believe there is much to be learned from Musashi’s wisdom:
The Kendo student practises furiously, thousands of cuts morning and night, learning fierce techniques of horrible war, until eventually sword becomes “no sword”, intention becomes “no intention”, a spontaneous knowledge of every situation. The first elementary teaching becomes the highest knowledge, and the master still continues to practise this simple training, his everyday prayer.
Study this book; read a word then ponder on it. If you interpret the meaning loosely you will mistake the Way.
If you merely read this book you will not reach the Way of strategy. Absorb the things written in this book. Do not just read, memorise or imitate, but so that you realise the principle from within your own heart, study hard to absorb these things in to your body.
“To know the times” means to know the enemy’s disposition in battle. Is it flourishing or waning? By observing the spirit of the enemy’s men and getting the best position, you can work out the enemy’s disposition and move your men accordingly. You can win through the principle of strategy, fighting from a position of advantage.
…the way to understand is through experience.
You must bear this in mind.
Practise this well.
You must research this well.
You must appreciate this.
You must train constantly.
You must consider all this carefully.
Study this well.
You must train hard to understand it.
With detailed practice you should be able to understand it.
If you train well enough you will be able to strike accordingly.
You must train repetitively.
Learn this well.
Once You Own It, It Owns You
Dr. Richard Peterson, in a recent post, provided an excellent example of the endowment effect: how we lose our objectivity once we take ownership of an asset. He brought pens to a seminar, but only had enough for half the audience. He then asked the group that received the pens to indicate how much they’d be willing to sell them to those who did not receive them. He also asked the group without pens how much they’d be willing to spend for one of the pens. The audience members without pens were willing to spend an average of $1.35 for a pen (which is close to the pen’s intrinsic value), but the members who received pens insisted on a selling price averaging $8.80.
Once the audience members owned the pens and considered them their own, they systematically overvalued the pens’ worth. Similarly, once we take a position in the market, it becomes *our* position and we value it simply because we have made it our own. That makes it extremely difficult to take a loss on our position, even when that is what our trading plans call for.
It’s a bit like houses in the current weak housing market: many owners are unwilling to reduce the selling prices of their properties because they value their homes too much. Once we own the asset, it can own us by coloring our perceptions and actions. (more…)
Fact of Life
36 Steps To Becoming A Better Trader
1. We accumulate information – buying books, going to seminars and researching.
2. We begin to trade with our ‘new’ knowledge.
3. We consistently ‘donate’ and then realise we may need more knowledge or information.
4. We accumulate more information.
5. We switch the commodities we are currently following.
6. We go back into the market and trade with our ‘updated’ knowledge.
7. We get ‘beat up’ again and begin to lose some of our confidence. Fear starts setting in.
8. We start to listen to ‘outside news’ and to other traders.
9. We go back into the market and continue to ‘donate’.
10. We switch commodities again.
11. We search for more information.
12. We go back into the market and start to see a little progress.
13. We get ‘over-confident’ and the market humbles us.
14. We start to understand that trading successfully is going to take more time and more knowledge than we anticipated.
MOST PEOPLE WILL GIVE UP AT THIS POINT, AS THEY REALISE WORK IS INVOLVED.
15. We get serious and start concentrating on learning a ‘real’ methodology.
16. We trade our methodology with some success, but realise that something is missing.
17. We begin to understand the need for having rules to apply our methodology.
18. We take a sabbatical from trading to develop and research our trading rules.
19. We start trading again, this time with rules and find some success, but over all we still hesitate when we execute.
20. We add, subtract and modify rules as we see a need to be more proficient with our rules.
21. We feel we are very close to crossing that threshold of successful trading.
22. We start to take responsibility for our trading results as we understand that our success is in us, not the methodology.
23. We continue to trade and become more proficient with our methodology and our rules.
24. As we trade we still have a tendency to violate our rules and our results are still erratic.
25. We know we are close.
26. We go back and research our rules.
27. We build the confidence in our rules and go back into the market and trade.
28. Our trading results are getting better, but we are still hesitating in executing our rules.
29. We now see the importance of following our rules as we see the results of our trades when we don’t follow the rules.
30. We begin to see that our lack of success is within us (a lack of discipline in following the rules because of some kind of fear) and we begin to work on knowing ourselves better.
31. We continue to trade and the market teaches us more and more about ourselves.
32. We master our methodology and our trading rules.
33. We begin to consistently make money.
34. We get a little over-confident and the market humbles us.
35. We continue to learn our lessons.
36. We stop thinking and allow our rules to trade for us (trading becomes boring, but successful) and our trading account continues to grow as we increase our contract size.
A great quote
I’m sure every trader has run into some kind of negativity from know-it-all chodes who just don’t get what this subject is about – it goes something along the lines of “What good does it actually do? You are just stealing other peoples money?” blah blah *yawn* blah….
Here’s a great quote from a book I’m reading “Hedge Fund Edge” that demolishes their complaints:
“Principle 7: Develop a Love and Respect for Trading, Free Markets, and Individual Liberty and Initiative.
Profits are just the gravy. When they test a group of traders, one of the traits that almost all successful traders and investors share is a deep understanding of how trading and investing is part of the process that allows humankind to progress. Even day-traders provide critical liquidity that allows others to hedge, companies to raise capital, and investors to invest with limited risk. Stock selection allows investors to become second-level venture capital firms, with their demand helping provide access to financing in areas where the people need capital most. The more you understand the remarkable way in which freedom and free association work to produce economic gain and real progress for humankind from new innovations and technologies, the more likely you are to feel a strong sense of purpose at being a part of such an incredible system. And the stronger your sense that your efforts are creating something good that is bigger than yourself, the more committed, enriched, excited, and innovative you will become.”
… so put that in your pipe and smoke it.
3 Important contributors to lack of trading confidence
1) Not putting in the work – When we try to borrow ideas from others, we never really deeply understand those ideas. The process of independently generating an idea ensures that the idea makes sense to us. That gives us staying power during temporary periods of adverse price action;
2) Negative self-talk – When we focus on everything we could have done better and everything we did wrong, we create mini failure experiences for ourselves over time. Our self-talk reflects our relationship with ourselves. How can we feel confident in who we are and in what we do if we’re constantly tearing ourselves down?
3) Not playing to our strengths – Many traders attempt trading styles that don’t match their personality and cognitive strengths. Over time that generates frustration and erodes confidence. Trading frequently when we function best as big picture idea generators inevitably exposes us to noise and randomness.
The more you know, the more you know you don't know shit
P/E ratios of top 10 Nasdaq2000 v now
