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PESSIMISM-OPTIMISM

glass-half-fullPESSIMISM

Pessimism is defined as a tendency to stress the negative or unfavorable or take the gloomiest possible view.  Obviously, the successful trader is not pessimistic. If so, then he would never trade in the first place or if he did, he would only trade short; a “permabear” if you will.  A purely pessimistic trader would also doubt his edge, doubt any market direction, only trade after the move has happened, cut his winners short while allowing his losers to run, overtrade, under invest, etc etc.  In other words, a purely pessimistic trader would break all the rules.

OPTIMISM

Optimism is defined as the inclination to anticipate the best possible outcome while believing that most situations work out in the end for the best.  The unsuccessful trader, especially the beginning trader, is optimistic about getting rich in the stock market.  No matter what every trade will eventually make money he reasons.  The optimistic trader also loads up on a “sure thing”, seeks to justify every trade via confirmation bias, adds to losers, brags about winners while hiding losers, refuses to develop as a trader, etc etc. Just as with pessimism, the optimistic trader breaks the rules.

So can we find a happy medium? I believe so but only when we put the words and their meanings together.

Market Manipulation

Jesse Livermore learned the art of stock market manipulation, manipulating the prices of thinly traded stocks, in bucket shops.

On March 13, 1925, Arthur Cutten – one of his biggest rivals – accused Livermore of continuing his shady dealings – not in bucket shops – but, very seriously, on the Chicago Futures Exchange.

At the beginning of his career, Jesse Livermore had traded exclusively in bucket shops. He had prospered and built up his funds. Bucket shops weren’t set up to lose money, however, and soon they were refusing to deal with Livermore or worse, were cheating him. (more…)

5 Characteristics of less Successful Traders

1) The less successful traders are anticipating market movement and trading accordingly. The highly successful traders are identifying asset class mispricings and trading off those.

2) The less successful traders are trading particular instruments and pretty much stick to those. The highly successful traders recognize that any combination of trading instruments can be considered an asset class and appropriately priced (and gauged for mispricing).

3) The less successful traders think of their market as *the* market. The highly successful traders focus on interrelationships among markets that cut across nationalities and asset classes.
4) The highly successful traders place just as much emphasis on understanding markets as predicting them. The less successful traders don’t ask “why” questions.

5) The less successful traders are convinced they have proprietary information of value that they must not disclose to anyone. The highly successful traders use their proprietary information to selectively share with other highly successful participants, thereby gaining a large informational edge.

If I had to use one phrase to capture the essence of the highly successful traders, it would be analytical creativity. These traders are creative in their thinking about markets and rigorous in their pursuit of this creativity.

Our Favorite Non-Investing Books About Investing

A few people have asked me over the past couple of weeks to share some of my favorite books outside of finance that are applicable to investing. The majority of these books are based on psychology because it plays such an important role in making better investment decisions. Here’s my list:

Mindless Eating: Why We Eat More Than We Think by Brian Wansink
The analogy between your finances and losing weight has been used over and over again throughout the years. It’s a useful analogy because the decisions in both activities are mainly affected by people’s behavior (or a lack of behavioral change). A couple of my favorites stats from this book: (1) People make an average of over 200 food-related decisions each day and (2) It’s estimated that 95% of all people who lose weight on a diet gain it all back.

Influence: The Psychology of Persuasion by Robert Cialdini
This one has been recommended by Charlie Munger on a number of occasions so I finally read it this year. It’s one of the best psychology books I’ve ever read. This book really helps you step into the shoes of the mind of a marketer or sales-person trying to get you interested in their product. These people are masters at getting into people’s heads to get them to act. Cialdini also touches on the social proof theory, which states that most people look to see what others are doing to figure out acceptable behavior. (more…)

Anger & Revenge in Trading

  1. Anger: Anger generally comes when we do not get what we want. Choose carefully what you want and understand what you have to go through to get there.

  2. Revenge: Trading to get even with a stock or the market is the most destructive thing that a trader can do. This usually happens in the late stages of a new trader’s destruction as they trade bigger and more obsessively because they have to get back to even and prove something to the market and themselves. It is like a surfer getting mad at the ocean for a wave, the ocean doesn’t care about the surfer or even know that they exist. It is the same thing with the market, it is neutral you create your own results.