We've Recognized the Investing Enemy - And it is Us!
When it comes to investing, especially active investing in turns out your biggest enemy is yourself. Our human emotions literally are the worst decision maker when it comes to financial matters.
Mitigating Yourself
The reality is a person can be smart, but people are dumb. When you think individually then logic can have a fighting chance, however once the herd mentality takes over you are basically done for.
Think about it - when everyone is freaking out and jumping ship, very often they look back and it turns out that was a great time to buy, not sell.
We get caught up in the hype. We get FOMO'd or scared and boom - we make a crap decision.
Probability Thinking
There is a very simple question we can always ask ourselves when weighing opportunities.
- What is the probability of this happening?
You can apply this question to anything...
Here are some examples:
When BTC ripped to 20k in the matter of months the question would be..
- What is the probability that BTC keep going straight up vs. is having a hard pullback as people book quick made profits?
We all found out the answer to that one and it was a bit obvious as nothing can go up in a straightline for an extended period.
With the U.S. Stock market one could ask..
- Will we continue to see new highs or after 8 straight years of gains will we see a pullback?
What side are you placing the probabilities on for this one? I know which side I'm betting.
And so on and so on..
Here is the thing. I really don't care if I am wrong because over the long run if I keep acting on what is the more obvious probabilistic outcome then thing will turn out rather okay. Less much of the drama.
Anyway, a simple question to ponder when faced with an investment decision.
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Big picture is about taking risk but never risking more than you can afford to lose.
At the same time, big picture is also about mean reversion. This is why I like using a metric like an RSI that will help you quantify and filter when something that might feel like an opportunity really isn’t.
As far as the risk goes, I always tell people to take the “Pillow Test.” If you can put your head down on that pillow and sleep at night, you’re probably taking the appropriate risk. If however you can’t sleep, time to reduce that exposure until you can.
I’d also add that it’s critical to identify the point at which the investment would no longer be compelling BEFORE YOU MAKE THE INVESTMENT.
That’s to say, if you already have an idea of what would be an exit point before you get into the position, it will make the whole process a lot less stressful and significantly increase your probability for overall success.
Too many out there make the mistake of only considering the price at which they initiate a position, without recognizing that the price at which they would exit (for a loss) is just as important, if not more important.
So if you want to talk psychology, that’s where I think the focus needs to be.
Best - JK 👊😎
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I have always found the side of behavioral finance fascinating and always great to read. You can become so self-aware of how emotion impacts your decision that you shy away from investing sometimes. I know I have gotten away from short term trading because of it. However, I know some people that are disciplined enough to do it and are successful. They particularly focus on making plans and objectives and following them strictly. Like I said, discipline is the most important factor!
Yeah, I basically found that when I stopped day trading and started swing trading (actively investing) my result were much better as I am more patient and less emotional in that setting.
The late great John Templeton shares your sentiment. His famous words on the matter:
“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
“If you want to have a better performance than the crowd, you must do things differently from the crowd.”
“Focus on value because most investors focus on outlooks and trends.”
Overall, I think the best trading and investing comes down to being able to recognize when there is a significant disconnect between price and value, and knowing how to take advantage of this disconnect.
From a technical analysis standpoint, using a simple oscillator like an RSI can be very powerful in helping to identify when that disconnect is truly deserving of attention.
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Great quotes for sure! And yes, on a technical aspect using some type of indicator to gauge disconnect is useful. When I am actively trading a use a 10 period moving average to keep me from chasing price and also to help me see when things have moved turn much to fast.
Cool. 10-Day SMA great for early indications of change, especially when crossing one of the longer-term SMAs for the first time in a long time.
Two other simple indicators that might be of help in this area are Average True Range “ATR” and Bollinger Bands.
ATR is fabulous, as it lets you know the average range for the instrument your trading based on the time frame you’re looking at. This is another way to immediately know when the market has traded outside of the norm.
I don’t use Bollinger Bands these days but this indicator runs lines two standard deviations above and below the current price, so you can see when the price is getting away from itself.
NOTE - The default for ATR is 14 periods and works well. The default setting for Bollinger Bands is 2 standard deviations. This one can be adjusted to 3 if you are looking for even more extended, less frequent deviations.
👊😎
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Yes indeed Sir. I was a full-time prop trader for 6 years and ATR and BB are great indicators to use. I use ATR especially in shorter-term trades to gauge potential profit targets.
Cool. Always interesting to see how people will use it differently. I tend to use it more for entry and will really only look at it on daily weekly monthly time frames. Don’t use it on shorter term stuff. So it’s amazing that we basically use it for the exact opposite things. There’s value in it for everyone and I totally get why you use it shorter term and for profit target. 👊😎
I had put out an inquiry in this reply stream re models that could work where service offered for time designated delegation. If you know of anything, please send through any info. Highly appreciated. Never hesitate to reach out. Best - JK
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Wish I had an opportunity for you (or knew of one). I may one day need to outsource some stuff.
Actually, You may want to check out @oracle-d. The project those guys have going actually sources people to provide service for the clients they procure. They are a good bunch, had the guys on my radio show a few weeks back.
Cheers. That’s good to know as one of the guys over there had reached out to me. I will follow up. Otherwise, might just put something together myself. Have a good one. Really nice corresponding with ya. Best - JK
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I’m just getting started on Steem and good to be here. I plan to offer a more active coverage of markets on a daily basis to help add value in this area. I’ve even hired a special team made up of famous digital assets to help break up the market coverage. Should be fun.
Does anyone know of any mechanisms set up on Steem that would allow services to be offered in return for a 1) minimum delegation, for a 2) fixed lock in period?
I think this could be a compelling use case as it benefits both parties and allows the service provider to offer services without actually taking any payment.
Arguably, it even adds value to the subscriber of the service in that it gets the person into a situation where they are committing to something without putting themselves in the position of moving their currency around like a chicken without a head. 🐔
Best - JK 👊😎
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This is something I've been forced to recognize lately. As a complete amateur, I felt very wise when I learned about it.
I'm into four very distinguished currencies/commodities and I'm finally understanding why something is happening and what I should do about it. It's making a lot of difference.
the psychology of investing is crazy. I agree it is a good principle to buy when others are selling, and sell when others are buying. Often, this is easier said than done. Sometimes we need to admit defeat, take a loss and move on. Think big picture.
Great article and food for thought. I battle with myself everyday in the markets, which is why a trading plan is crucial to one's success in trading.
Yesssir! Plan the trade and trade the plan.