I’ve been told I’m a little unusual in that I rate my trades on a scale of 1 – 5 stars depending on my reaction time (RT). My reaction time rating is merely a measure of the quickness an investor responds to some sort of market stimulus. I rate it both on the buy side and on the sell side of my trades. No, I don’t get wired up like the Dutch physiologist, F. C. Donders, started doing back in 1865 when he began measuring human reaction, but I do have my system. Stop and think about it. Your RT plays a large part in your everyday life. Fast reaction times can produce big payoffs and slow RTs can result in serious negative consequences in a whole host of daily situations.
What does it take to succeed as an investor? That’s a broad question but nonetheless a supremely important one. Let’s stop, think about this for a minute and see if we can boil it down to a few core elements. First off, it takes genuine curiosity. It requires a thirst for knowledge, a willingness to continually seek out education and expand your intellectual capital. This is the learning part of the equation. I’m confident that you have this checkbox covered because you’re displaying that curiosity right now just by reading this blog. You’ve come here to satisfy that thirst for knowledge, hoping to learn something new or uncover something insightful. So what’s next?
This past February, John Elway, General Manager of the Denver Broncos, achieved the pinnacle of success when his team won the 2016 Super Bowl. When I was a graduate student in business school, I had the privilege and good fortune of watching Elway play football as the quarterback for Stanford and seeing him around campus in a multitude of different situations. I was struck by the fact that, even as an undergraduate student athlete, he stood out as exceptional. Whether in the weight room or in the library at midnight, he was cultivating prerequisites that would significantly increase the probability of his success both on the football field and in the future as a successful businessman. He was all about commitment, discipline, hard work and focus. The results speak for themselves. As I heard him say years later, “The secret of success is that there is no secret.”
To paraphrase Bill Murray from the movie “Aloha,” the future is not something that just happens. It’s a brutal force with a great sense of humor that will nickel and dime your investments until it’s totally steamrolled your portfolio if you aren’t watching.
I will concede that it’s a personal rant of sorts, as I have been on the receiving end of excessive charges and fees. As a market observer, I constantly bear witness to many creative examples of the “steamrolling” force so eloquently cited by Murray.
Highly educated people are, for the most part, trained to ask the question “Why?” Engineers, accountants, doctors, lawyers and the like invariably want to know all they can about why certain things happen. The assumption is, of course, that knowing why will help you do the right thing in your career domain and therefore get nicely rewarded for it.
While this strategy may work well in one’s particular profession, the stock market domain is completely different. In the financial arena, one is not necessarily going to be rewarded just because they understand the underlying reasons why something happened. To the contrary, pursing rational answers within a seemingly whacky market may generate an academically satisfying list of explanations but without financial rewards. An investor’s pursuit of “why” may waste precious time and energy when the focus instead should really be on identifying the “what” and then following up with the appropriate action.
Whether it’s life or investing, if you ignore the reality of correlations – be they positive or negative – you are literally engaged in paradigm shifting. This is the equivalent of trying to put the milk back into the cow.
We all witness examples of positive correlations in our daily lives. The more it rains, the more umbrella sales go up. The more miles you run on the treadmill, the more calories you burn. When one variable increases, the other variable increases as well.
Those are the easy examples. You could have guessed them intuitively. It’s the more complex correlations that are less intuitive – ones such as the positive correlation between the Russia Fund (RSX) and Light Crude Oil (#WTIC).
A week doesn’t go by without some investor asking me “which one single indicator do you recommend above all others?” When I answer this question, the indicator I speak of is never the one they expect. The most important indicator – the one that will determine the majority of your successes or failures – is you, the Investor Self. As my fellow trader Ed says, “Sine qua non” (without which there is nothing).
So how do we define this indicator? How do we learn to understand the Investor Self – to know what its strengths and weaknesses truly are? The answer lies within the one thing that is an investor’s best friend – his or her trading journal. Profitable behavior is based on good organizational routines, flexible thinking, consistent discipline and self-control. A trading journal is like an expensive custom racing bicycle that allows you to get there faster than the next rider.
In the automotive industry, a car designer begins his or her career as a automotive stylist. Over time, as their knowledge and experience grows, the most talented of the bunch are offered the chance to become a car designer. It can take many years to earn that title, and few actually do. You see, style is all about how things look. Design is all about how things work. To produce a truly successful car, both are needed.
Pursuing a ‘driverless strategy’ – be it automobiles, hedge funds or individual investing – is counterfactual thinking, in my opinion. The new BMW iVision car has knob-less gesture controls, 3D displays and an auto function that switches the car into driverless mode. Perhaps this will work on highways of the future, but don’t bring that sort of thinking to the stock market.
You’ll recall all those hedge funds that flamed out because they believed PhDs had uncovered new algorithms and derivatives that created virtual driverless portfolios. For all my years in the markets, I have yet to meet an investor who has ever made money for a significant period of time by pursuing a similar driverless strategy using some third party’s black box. Inevitably, investors doing that get sucker punched. I refer to these efforts as the pursuit of dark money. It’s always been with us, and it will continue to be with us. But successful investing is 180 degrees from there.
Make no mistake about it: these are internet days and news circles the globe at the speed of light. Couple that with the fact that Wall Street is the world’s most sophisticated disinformation machine ever devised and you’ll appreciate why I believe technical analysis is an individual investor’s primary defense against the dark arts of disinformation.
Okay...I’ll lighten up. How about a few clichés? The trend is your friend. Snooze and you lose. Both of these common sayings encourage you to be nimble and focus on reacting to changes promptly. It fosters the strategy of winning by not losing. Markets move fast, and you must be capable of pulling the trigger based on your technical signals despite a gaggle of possibly glowing fundamentals staring you in the face.