Very smart people are often very poor traders and investors.
They are used to being 'right' when they apply their brainpower to a task and don't understand the stock market doesn't use the same sort of reasoning they use.
How can this compelling logic that works for everything else not work in the market?
When it comes to investing and trading there really is only one thing that matters - return on capital. Everything else is secondary. Being right about what the economy might do, or whether Fed policy is incorrect, doesn't necessarily produce a financial reward. The only thing that produces a reward is effective navigation of the price action.
Many market players have a hard time recognizing this fact because they obtain most of their market information from the business media.
Yet financial journalism is not a meritocracy that rewards profitable insight. It doesn't reward those that produce the best returns. It rewards those that are the most provocative or sensationalistic. Financial journalism is primarily about attracting attention rather than producing returns, and many investors are confused by that and focus their efforts in the wrong direction.
They are taught to be 'correct' rather than profitable.
Trading and investing are very humbling pursuits. There simply is no way to buy and sell at the exact highs and lows. No matter how hard you try, you will suffer losses and lose money at times. There is a natural reluctance to share those inevitable losses and setbacks with others. We feel shame and are embarrassed that we aren't doing as well as all these other people that are bragging on social media platforms.
When we seek to create an illusion of perfection, it tends to be counterproductive. When we are more concerned about being right rather than making money, then we will do things that are not in our best interest, such as holding onto a stock that we hope will reverse and reaffirm our initial positive judgment.
One of the most frequent ways that ego hurts our trading and investing is the conceit that we can predict the future with our reasoning ability. We equate intelligence with the ability to know what is going to happen by evaluating large amounts of conflicting and vague information. Only really smart people can predict the future, so that is what we should be doing.
The far better approach is to let go of the belief that because you are smarter than others it means you have better insight into what will happen. Once you embrace the idea that we don't 'know' the future, we can better prepare ourselves to deal with the twists and turns as they occur. We don't have to struggle with the bias we created by making predictions. We are free to shift our approach without the baggage of our egos.
If you read all the current stock market commentary, nearly everyone will have some prediction about what the stock market is going to do in the future. They feel that is their job and they are rewarded for getting attention for making sensationalistic predictions.
I feel no shame in admitting that I have no idea where the market will be six months from now. I have absolutely no idea and I don't feel any compulsion to make that prediction. It doesn't impact my self-esteem one bit to say that I can't make a prediction of that sort. I do know that I can navigate the market fairly well and that is really all that matters.
This past week, there was much discussion about how the Fed was making a mistake with its very dovish policy. Maybe they are, but will it help you navigate the market and make money by arguing with them? What good does that do other than feed your ego? Being right about the Fed isn't going to make you money if the market doesn't agree.
Where ego really tends to trip us up in our trading and investing is when it comes to losses. Social media and many market pundits create an illusion that they seldom suffer losses, and even when they do, all the losses are 'small'. We tend to believe that not taking losses is an important pursuit, when the opposite is usually the case. Some of the best investors in the world will have a very low winning percentage, but when they do win, they win big.
Stanley Druckenmiller, who worked with George Soros and has a fantastic long-term record, was asked what lessons he has learned from Soros. His response:
"I've learned many things from him, but perhaps the most significant is that it's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong. The few times that Soros has ever criticized me was when I was really right on a market and didn't maximize the opportunity."
Being right or wrong is the thing that tends to impact our ego the most, but for Druckenmiller and Soros, that is secondary to taking advantage of a situation when you are right. They are not emotionally invested in being correct. They are emotionally invested in optimizing their strategy.
Want to be a better trader or investor? Focus on making money rather than being right.
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