The average investor would be totally discombobulated if they witnessed the effortless manner in which money sometimes just flows into the accounts of exceptional traders. The fact is that these consistently profitable investors are different from most people. The good news is that modern behavioral finance can tell us with certainty and specificity what the ideal investor/trader looks like. Behavioral finance also proves that it is possible to model particular behavioral and psychological attributes in order to actually incorporate these into one’s own style and enhance one’s own investment record. Don’t be intimidated by the fancy label the academics gave this study of the investor self which basically integrates cognitive psychology with investing. Its foundation is rooted on the premise that we make financial decisions based on a combination of facts and what we believe about those facts.
Emotions enter into the equation big time whether you are a novice, an advanced beginner, a competent, proficient or expert investor. Everyone falls into one of these 5 stages of investor growth, and without exception, all have emotional issues. The old school model assumed that you were either innately gifted with discipline, concentration and emotional control like a great investor, or you were not. Today, we know better. With the correct guidance, mental conditioning and practice, this investor greatness can indeed be replicated.
The famous Turtle Trading experiment held by Richard Dennis in 1983 proved that point. (Google it – it’s truly fascinating.) Before I proceed further, one caveat is appropriate. I am writing as an individual trader who is not managing other people’s money. For the most part, this would also be true for the thousands of investors I’ve taught over the past decades. The money manager and client relationship presents challenges and unique stresses that I neither study nor want to spend time understanding.
Having said that, I’ll share with you a key insight that I’ve gleaned over the years. I don’t even need to talk to an investor to assess their challenges. If I get all their historical trades and I look at their buying and selling patterns, I could tell you exactly what their strengths and weaknesses are. An objective third party can clearly see what a trader actually did, not what the trader thinks he or she did.
So knowing your problem is just the first step. But unlike most facilitators, I don’t advocate immediately jumping into modeling big name traders. My experience is that investors must first inventory their roadblocks and face up to those personal challenges standing in their way before they can start “copying the big guys”.
One of the most enlightening experiments I’ve done in my classes occurred some years ago. I conducted an anonymous survey of 80 investors, asking them to write down anything and everything they suspected was keeping them from becoming the very best investor they felt they could be. Not only were the results profoundly powerful with respect to my own trading but these “enemies within” fell clearly into four distinct categories:
- Planning roadblocks
- Knowledge and education deficiencies
- Personal psychological baggage and beliefs
- Execution barriers
I’ve written about each of these in other blogs, but my point here is that it’s crucial that you address these roadblocks before you venture out in search of your own “trader’s edge”.
This “trader’s edge” that most investors talk about is not singular in nature. It’s a collection of 10 attributes most exceptional traders possess. Behavioral finance has done a good job of identifying this crucial basket of skills:
- A persistent unquenchable motivation to compete and achieve personal stock market mastery
- A personally developed hands-on strategy in writing that fits your personality.
- The ability to be brutally honest and objective about your beliefs and weaknesses.
- An inner resiliency to weather all market storms with little emotional scar tissue.
- Well-defined risk management rules and an ability to accept responsibility for losses.
- Unassailable confidence in your system and yourself.
- Discipline to follow your methodology and act decisively.
- A strong ethic for working hard but also working smart.
- Patience and an ability to wait for high probability trades to materialize.
- A willingness to embrace change, to modify your thinking, to rewrite your methodology and transform yourself.
Aspiring investors need to be convinced that once they can overcome their personal roadblocks, then embracing these 10 attributes – working hard to weave them into the fabric of their own investing – will move them surprisingly far along the road to stock market mastery.
Trade well; trade with discipline!
-- Gatis Roze