Perhaps it is better to be irresponsible and right, than to be responsible and wrong – WINSTON CHURCHILL
I don’t know about you but I think it’s pretty confusing out there right now. How are the government interventions to the financial crisis going to play out? Is the result going to be rampant inflation? Are we going to be crushed under the debt? Should I buy gold and silver or are they in a bubble? How am I supposed to figure all this out? How do I make money?
The truth is no one knows what’s going to happen. On the other hand, do we really need to know what is going to happen to make money? I don’t think so. What we need to do is focus on the things that matter and the things we can control.
Even though we are poorly calibrated in estimating probabilities, we just love to do it. We think we are smarter and have better information than we actually do. Unfortunately most of the information has been discounted in the market or just plain doesn’t matter.
Carl Richards from behaviorgap.com says, “Overconfidence is a huge problem when it comes to making investment decisions. In fact, it’s a huge problem when we’re dealing with any issue that has an unknown outcome. It’s clear that we’re very bad at dealing with unknown outcomes, but the biggest problem is that we actually think we’re good at it. We think that we can control much more than we can, and we can actually forecast the future. Often we point to what we view as clear evidence and wonder how anyone that doesn’t see it the same way can be so stupid. Focusing on the things that matter and the things we can control will go a long way to avoiding investor overconfidence.”
Good trading requires flexibility and since predictions have an inflexible outcome, they can change our focus. If we get attached to our predictions our focus will shift from being profitable to being right. Being profitable “matters”, being right does not matter. Also we have no control over what the future may bring, but we can control our risk. We need to stay focused on what matters and what we can control.
It’s practically impossible not to have opinions on the markets, but the trick is to bankroll the opportunity that may be there and not the need to be right. Usually the academic predictor won’t predefine his risk because it doesn’t cross his mind that it’s necessary. As Mark Douglas said in Trading in the zone “the only way he could believe it is not necessary (to define risk) is if he believes he knows what’s going to happen next. The reason he believes he knows what’s going to happen next is because he won’t get into a trade until he is convinced he is right. At the point where he’s convinced the trade will be a winner, it’s no longer necessary to define the risk (because if he’s right there is no risk).”
Try not to be a bull or a bear but an opportunist. The opportunity seeker is influenced by the same endless opinions that dominate the news, yet he doesn’t allow himself into an inflexible point of view. He explores various scenarios and designs low risk trades to exploit the possible outcomes. He focuses on things he can control.
In the end, making money is a different game than being right or wrong. I know a lot of smart guys who were right about a market’s outcome but still went broke because they were inflexible. In short, they got too invested in being right and lost focus of the real goal, which is to make money.
Vincent Ryan Ruggiero, in his book Critical Thinker, says that one way to avoid falling into a committed trap is to train ourselves to think in terms of exception. Once the “case” has been made, begin to run through your mind the exceptions that could upset the case.
One exercise that I use all the time is to think in reverse. Whenever I feel very strong about a scenario, and find myself assuming I’m right, I take the exact opposite posture to see if there is a case there. The more exceptions that I can find, the less impact the original case has, and therefore the more cautious I am about my position. I try and stay focused on making money and not being right about my scenario. I concentrate on what I actually do have control over.