I spent the weekend with my friend Dan, a prison chaplain, who always seems to have unique and useful insights. This visit was no exception. Yes, understanding the parallels between prisoners and investors will put money in your pockets. Here is his insight on decision making amongst the two populations.
He observed that some of the first time prisoners he sees are people who make a poor choice or decision, end up in jail and are subsequently scared straight – meaning that they learn from their mistake and don’t make bad choices again. The repeat offenders, to the contrary, are people who continually make bad decisions and don’t seem to learn from their mistakes. It’s as if they’re driving down the highway of life and looking only at the car in front. Seemingly, they see each decision and event in life as independent, stand-alone occurrences when in fact all decisions inevitably have ramifications. Think of this in terms of drivers on a highway. Most reasonable drivers are looking four to five cars ahead so that if a sudden problem occurs, the red lights of car #5 ahead will issue an early warning before brake lights ripple down to car #4, #3, #2, #1 until finally demanding their car come to a stop. Repeat offenders in the prison system don’t seem able to grasp consequences of today’s actions because they aren’t looking ahead down the road of life, so to speak.
I’ve witnessed exactly the same behavior by some impulsive investors who also only see one car ahead. Successful investors, on the other hand, are looking way down the road, and as they consider executing today’s trade, they’re asking themselves questions like these:
1. How would this trade fit with my investing goals?
2. Would this follow my trading rules?
3. Does this trade allow me to carry out my methodology as it was intended?
4. If this is my first position, how will I ladder into subsequent positions?
5. What is my exit strategy? Where should I place my stop?
6. Would the reward-to-risk ratio on this trade be tolerable for me?
7. How would this trade impact my asset allocation?
A ‘repeat offender’ investor just buys the equity and fails to consider the consequences down the road of his or her actions today. Invest like you drive and stay out of jail!
Trade well; trade with discipline!
-- Gatis Roze