Trade The Journey

Trade The Journey

Think Part Two!

Top of the Morning. I hope that you and your loved ones are safe and healthy. Even with the vaccine approval and distribution, we still have to be careful. These last few weeks, I avoided the news similar to Barry Sanders avoiding a tackle.

New reports say congress has reached a deal. While we waited on Washington to negotiate a deal to help the American people, the market continued making new highs. Some say that the inexperienced retail trader rescued the market from a downfall. Others point to the minimum returns in bonds/treasury securities, forcing people to look for returns in riskier markets.

There’s very little doubt that people are naturally optimistic about the future. When we can return to normalcy, industries hit hard by this crisis will begin recovery. Profits will return for the larger companies but not the small businessman.

Some retailers are already experimenting with opening pick-up shops only. The orders for this pick-up shop will be placed online only.

Ordering online means I avoid human contact and pick-up my order when ready. Now, I have the option of having most items delivered. I’m sure I’m not the only person who has experienced terrible customer service at some of the major retailers.

Layoffs will continue.

The market is highly volatile at the moment, and I would advise everyone to be careful. This type of environment can produce overreactions in both directions. The market is making new highs, interest rates are low, high merger & acquisition deals, banks are allowed to resume stock buybacks, and retail traders venture into trading options in large amounts.

Not only is this mix unsustainable, but it is also disaster-prone, like the Great Depression. The Great Depression was a mixture of events that influenced a severe downturn in the economy. The market fell before the economy crashed due to high leverage, margin calls, and an over-exuberant crowd.

“History doesn’t repeat itself, but it often rhymes.”

In college, I met with a local billionaire in the city. I would liken him to one of the Koch brothers. We sat on the opposite side of each other on many issues. Luckily, I was smart enough not to focus on his opinions but on his wealth-building skills. He was adamant about saving money and living below your means.

Most wealthy people would advise the same. My current mentor has named this skill as his key to wealth building.

The billionaire also mentioned that he was a master of history. I took this message to heart. It still amazes me that financial instruments, albeit in different forms, existed as far back as the 17th century. Booms, busts, and failures will continue to occur because human nature hasn’t changed.

 


Think Part 2:

I wrote a post called Think part one at the beginning of the year. Critical thinking was the central message of the post. I often confuse having thoughts with critical thinking.

One involves effort; the other happens naturally. Critical thinking consists of forming creative thoughts aimed at solving a potential problem or creating a new solution. It’s some of the most challenging work known to man, which is why most avoid critical thinking.

Investing success is thinking critically successfully. No one knows the future outcome of a companies earnings or an economy’s production; we make educated guesses.

Investing will never be a sure thing, regardless of how much you know.

One of the traits I have that continually resurface is the need to analyze. I fall into the trap of needing to know more.

The market isn’t so much about knowledge as it is about risk management. The second level of trading lies in acknowledging what isn’t working. Facing the reality of being wrong is apart of the psychology of trading.

This second level of thinking means developing objectivity.

Objectivity is defined as:
(of a person or their judgment) not influenced by personal feelings or opinions in considering and representing facts.

When I heard Mark Douglass speak of trading as one of the best vehicles for self-improvement, I know it is true now. It’s hard to lie to yourself about progress when the results say otherwise.

Many times, the results of our decisions take time to appear, not so with the markets. Instantly, we can find ourselves in a scenario where our position turns against us and we have a choice about our results. We can acknowledge we are wrong or accept the fate the market has in store for us.

 

Meditation is often used as a medium for developing objectivity. The goal of mediation is to become aware of your thoughts through impartiality and to understand that our thoughts aren’t necessarily who we are.

Investing and trading require some bias. Without confidence in your bias, you won’t place the trade. The ability to adjust your thinking to adapt to the situation requires you to be impartial towards your bias. The better you get at this, the higher your returns will be over time.

It’s hard to do because these mental skills run counter to our hardwiring as humans. Perseverance and determination are highly valued in our society but not in trading and investing. These two attributes without adjustments will bankrupt your account.

I said all that to say the next level of thinking is to apply information flexibly and with impartiality.

I highly recommend reading Howard Mark’s book, “The Most Important Thing.” I formed my definition of second-level thinking based on his.


This week in Review:

I’m regaining my enthusiasm for saving a portion of all that I earn. My goal is to save at least 80% of what I earn to invest, save, and trade. It might seem extreme, but so did running five miles in under fifty minutes. I completed this feat recently.

This past week, I’d like to give myself a “B“.

Merry Christmas and Happy Holidays!

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