Trading is hard. But it’s not something we think about much at first, because many books and videos leave the impression that it can be quite easy. Like how hard can it be to buy MACD crossing or RSI below 30?! After trading for a while, hurdles start to appear. Not many have analyzed that these technical indicators may improve a 50/50 chance only to 55/45 in one’s favor. Then frustration starts to build up. Thoughts about giving up can come to mind. At least that has been my experience. But once you understand the game, there’s no going back. You’ll never be buying a stock again just for the sake of owning a share in the company.
True investing at its core is looking at businesses to evaluate their productivity and future potentials, then making a decision to become a shareholder to put capital to work. I believe pure investors don’t engage in daily conversations about the market, FED or buying the dips, that’s what speculators do. I don’t meet pure investors often, so for me all this charting, tweeting, forecasting go into one bucket and this is what the post is about, so expect a mixed terminology.
“Risk cannot be destroyed, only transformed.” (Corey Hoffstein)
People will naturally gear towards long-term investing after they get a beat in trading, but it won’t eliminate the risk of loss, only transforms it by changing the trade distribution. A loss can be realized or unrealized, but the current mark-to-market value shows how much that particular asset is worth at the time. The idea of holding on to see price recover in the future is only in the person’s mind and the market doesn’t care about this. The real value is what you see when logging in to a brokerage account, anything else is an illusion, be it a forecast or a valuation analysis.
A trader will experience short-term cycles frequently, whereas a cycle takes much more time to play out for a new investor to realize what this field is about. I may see a “cycle” on a 1 min chart play out in a few days, on a 60 min chart play out in a month and for a long-term investor it’ll play out in 10 years, but it will eventually play out. Higher trade frequency allows a short-term trader to learn the market dynamics quicker. The experience of getting beaten up by the market will be in every timeframe and investors piling up to longer time horizons will just postpone the suffer. No pain, no gain. The mind will get used to it through repetition, but for a very long-term style there may only be a few reps over the whole investing journey.
I’ve seen people say something like “I tried to time the market and failed.. Twice! Will never try again.”, so they learned in a few months that it’s hard to do. Or maybe “I was so happy to invest in startups until this happened, will never put my money in startups again.”, so they learned in a few years that it’s hard to do. Now, what do you think they’ll lean towards? Yeah, buy-and-hold cause it has never disappointed them, it must be so good and much easier to do. Well, what if there’s a market crash ten years later and they see all profits from the past decade get wiped out? Exactly. “Buy-and-hold sucks, I’ll never hold stocks for the long run ever again.” I’ve seen this from people who got a beat in 2000 or 2008. Because it’s hard to do. But new investors point to the 2009 low and say they’ll be buyers there. Funny, cause it never happens in real life while the market crisis is unfolding, otherwise there wouldn’t be a low if noone was actually selling. Everything in the markets looks so clear and easy to do after the fact in hindsight.
“Every trade makes you richer or wiser, but never both.” (Mark Yusko)
A real life example. Fellow citizens probably know about the failing car service company that has caused a lot of headache to many local investors. An investment can fail for whatever reason, which is not even important in this case. It just reminds me why risk taking is not for everyone. Greedy folks attracted to the high expected return be like:
1. Only invest money that you can lose
2. Investment fails
3. Somebody else has to take responsibility for me putting too much money in there
The topic has already received too much publicity. I wasn’t involved in this myself, but to me it’s just another “stop loss” event where the stop was at zero. No big deal, move on. But emotional people involved probably need to rethink their position sizing.
Human nature will never change
One of the reasons I like investing and trading is that it’s mentally challenging for the human brain, so it’s almost impossible to copycat someone else and expect the same long-term results, because an untrained mind will fail despite how good the strategy or thesis is. You won’t be able to pull money from the markets without confidence and conviction. This is why all the established traders are independent and entrepreneurial people doing the hard work, compared to someone looking for quick and easy money by following gurus, which is destined to fail. The psychological aspect of market speculation is something to remind myself from time to time, cause I’ve seen even veteran traders after 30-40 years of experience telling about a bad feeling in a drawdown, so emotions don’t go away. Some even seem to cut back risk a lot due to larger account and possibly fear of giving too much back after trading successfully for decades.
I continue to see how many biases we as humans can take into the markets from our everyday lives. I’ve been there myself, but it’s possible to train the mind, adopt better habits and overcome the psychological mistakes that have been wired into our brains with common beliefs about money, for example: “Don’t lose what you already have!” or “You need to be right in your decisions!”. The general belief system about money that we’ve aquired at home and school may serve us well in life, but not in market speculation, call it trading or investing.
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