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The One Character Trait That Predicts Trading Failure

Story At A Busy Pharmacy

imageI went to this hospital pharmacy to pick up some special prescription. There were many people there. The place was jam packed. I thought it would be a very long wait. I was planning in my mind immediately on how to better spend the next 30 minutes to an hour.

Should I get a coffee?

Maybe I could find a spot to sit down?

I passed by this huge machine for people to obtain a ticket to secure their places in the queue. I did not take a ticket because it was designed for people to wait for their turn to drop off their prescriptions. When the medications were ready, they would join the other queue for medication pick up afterwards.

By the time it was my turn to talk to the cashier, I provided the information voluntarily. The nice lady at the cashier knew me for years and we chitchatted a bit. She found the medications quickly as it was prepared some time ago. She asked me to wait for a pharmacist to confirm the order before I leave. I said yes and relented my place to the next person in line.

Note: Having a pharmacist to double check the drugs first is not something out of the ordinary, it is a safety measure to ensure the correct medication is dispensed.

The Start Of A Fuss

Right after I settled at a corner in the packed waiting area, I heard this man complaining loudly why some people skipped the "queue" and got to see a pharmacist to pick up their drugs quickly and leave. Specifically, he was not happy that some people did not grab a ticket for their proper position in the queue. He was looking for the others to agree with him and obviously seeking a way to stir up the complain. Majority of the people ignored him. Yet some others who waited for a long time started to talk to him. They complained to each other and started their conspiracy theories on the reason why some people are taken care of first.

From their conversations, it was obvious to me that this old gentleman was a self-righteous person. He probably took pride in his life in following rules squarely and expected the others to do the same. Those people like me who did not get a ticket from the machine were labelled bad people. When things did not happen the way he expected to be, he could not control himself with frustrations and anger.

What he, and those who agreed with his complains, did not understand that there was the existence of two queues, not one.

My Turn And The Start Of An Episode

As expected, my turn has arrived quickly for me to see one of the pharmacists to pick up the medications.

Then all hell broke loose.

This old guy walked towards the booth I went to and started a very vocal complain. He made a speech of at least five minutes long. My guess was that he must be very proud of his comprehension skills. Clearly he spent at least 10 minutes to construct the speech in his head. Surprising to him, a very frustrated and borderline angry man, at every turn and twist he stopped, expecting the pharmacist and I to argue, we provided no feedback at all.

The non-response to his carefully crafted speech pushed him to his limit. He could not handle the blank stares and silence he was treated with. He started shouting. Security immediately arrived at the scene. That stopped this man. After all, he was a person with a self-righteous mind. A fight with the security guard probably would cross the line in his mind.

Learning The Truth

The pharmacist asked this man one question, "What’s the name on the prescription?"

This man was too angry at this point he replied with his own name. Only after the pharmacist asked again if the prescription was for him, then he realized his mistake and provided his wife’s name. The pharmacist asked him to wait there while he went to check if the prescription was filled.

The pharmacist returned with the status, "You walk in an hour ago dropping off the prescription. There are 10 more prescriptions to be filled before your wife’s. As you can see we are very busy here. We processed at least 50 prescriptions while you are here. If you call in with the prescription several days ago, you can pick up the medications like this gentleman here too."

The man was speechless. He was embarrassed. But more importantly, he could not accept the fact that he was wrong all along. The pharmacist told him to calm down and wait for his turn. The man walked back to the waiting area silently.

Security guard figured it was alright to get back to his normal post so he signalled us and left.

After the pharmacist double checked the drugs, I took the medications I was waiting for and left.

I did not try to find out what happened afterwards. I do not need to know.

What you may want to know, however, is the reason why the pharmacists and I were so calm in front of that man.

It is because we have seen it before, many times. I have my fair share of this kind of experience at the pharmacy, although not every encounter was as dramatic as this one. My guess is that the pharmacists must have seen this many many times.

Sometimes Ignorance Is Not A Bliss

The combination of ignorance and self-righteousness is bad for many situations. It is extremely bad for trading.

Take the example of the man I met in the pharmacy. That very small issue of people not taking the ticket from the queue machine ticked him off. His self-righteous mind took over. He could not even think logically to understand why that was the case. If he were more observant, he would be able to deduce that there were two queues. But he couldn’t because he felt he was wronged.

If there were one character trait I have to name that definitely kill the chance for a person in becoming a successful trader, self-righteousness is the one.

Being self-righteous will make a person takes pride in their acts. Pride stops logical thinking. Pride induces slack in discipline against adverse scenarios.

Countless traders thought that they understand the market fully and in total control of their trades. None of the traders whom I have met with this kind of mentality can survive beyond a few years of trading. Not only they lost enough money to stop them from trading, they are also broken mentally by the markets as they could not accept the fact that the markets were behaving in ways not agreeing with their beliefs.

Being self-righteous also induces anger and frustrations when things not happening in the way you think they should have. Negative emotions cloud one’s judgement. The more distress induced, the more likely mistakes would be made.

We all have our moment feeling being cheated by the markets. Countless times I stomped the ground (I was standing on the trading floor of the local exchange and trust me, only seniority gets you a spot to sit) and banged my screens. Maybe I am getting wiser. Maybe I just aged. Anyhow, I outgrew this phase long time ago.

Blaming the market for your losses would not help you get your money back. Learn to deal with the market and accept its probabilistic nature will.

Choose To Fail

The most interesting effect of self-righteous thinking is that it stops the traders from profiting in the markets because they cannot pull the trigger when the markets behaved in a way contradictory to their beliefs. I cannot remember how many times I have heard people saying the stock market should have crashed and the Fed should not push the market higher. It is a great conversion piece in a party but there is no room for such beliefs in one’s trading decisions.

When I questioned why, on one hand, they believe in the Fed is pushing the market higher; yet, on the other hand, they are not going long the stock market indices, I got back many interesting replies. Many do not have an answer to my question. For those who answered, some say it is wrong to do so. Some insist that staying short is the right thing to do. That is the sign of having self-righteous beliefs.

I don’t mind sharing my trading techniques and helping others to trade profitably. While trading, however, I have no problem taking money from people who place the comfort of feeling righteous on top of logical reasoning. They expressed their opinions and they chose to lose money.

Since I am trading to make money, I have no argument with them.

Summary

It is always the individual’s responsibility to learn to trade properly. In this case, however, the character weaknesses of some people stop them from applying common sense to trading. It is not possible to help them trade profitably until they realize their psychological issues.

Even if these individuals realize their beliefs are not good for trading, it will be a very difficult, if not impossible, journey to correct their minds. The reason lies in the fact that self-righteousness, by definition, means anyone suggesting self-righteousness is a problem is wrong. A barrier of this nature is not something that can be undone by simple interventional counselling or over-the-counter self-help materials.

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Essence of Trading: The Peculiar Practice Of Financial Analysis

imageFinancial analysts often make a big fuss with very detailed analysis of the financial data reported by the exchange listed corporations. And then as an after thought, a chart or two would be thrown in at the end of their report to provide a technical excuse that the price should go the way they claimed. This ill-practice can be seen everywhere in the financial world.

Even more interesting though, people loves this kind of analysis.

Why?

Financial Analysis Metrics Are Relative And Non-Scientific

No one can agree on what Price Earning Ratio (PE Ratio) is considered as cheap. No one can give you a number that can be considered as too high either. They are all relative.

Someone can say stock XYZ is cheap because its PE Ratio or whatever metric is lower than its peers in the same industry. The argument will then jump to the conclusion that it is a buy. Obviously the logical inference in use is that this company should eventually trade at a similar PE ratio like its peers. However, I never see these analysis properly justify their claims with statistics on such inference.

Is it 80% chance that this company will trade at a similar PE ratio in 2 years?

Or is it really just 50% chance?

My guess is that majority of those writers who produced their analysis do not even know what probability is.

Same low PE ratio condition is often used as an argument to justify selling the same stock because it is not performing. Again, scientific method is not employed to tell you how likely the stock will not perform based on historical performance on other companies under similar conditions.

There are many financial articles out there sharing the same argument with completely opposite conclusions. It is common sense that we cannot have both sides being correct at the same time. Since this kind of financial analysis has been flooding the media daily, we have to wonder how scientific the financial industry really is.

Is the financial industry really lagging behind or could there be something more to this phenomenon?

Real Purpose Of Financial Analysis From The Financial Industry

The main purpose of these analysis are not there to assist the market participants. They are created because the financial industry needs you. They need people to notice the existence of these stocks. It does not matter what you do with the stocks. As long as you do something about them, someone in the industry wins.

  • If you go ahead to trade them, someone from the industry make money from at least the commission angle
  • If you discuss these stocks with your peers, you spread the word to more potential targets
  • If you start to follow the analysts, they get to not being fired
  • If you like the work from a particular analyst so much, you open an account with the firm this person works for, the firm wins

It does not matter if you win or lose at the end with the particular stock. It only matters if you act on the information. That’s why they have to dump as much information onto you as possible. One of these hot tips will stir your interest. One of these bargain hunting picks will trigger your internal desire to beat the market.

Once you are hooked they win.

Adding Something Colourful Helps

Plain old good analysis of a company based on sound analytics of the financial strength of a company are useful in determining the health of the company. Unluckily that does not promote trading of the said company. If you want people to take actions, you need to get them excited. You need to exaggerate.

Good graphics can get the job done. You can turn a simple comparison of year to year earning improvement into a pretty picture with 3-D effects. People are more likely to look at the picture than what is written in the article anyway. Most important of all, majority of the readers of financial articles do not even understand half of the financial jargons used in them.

The content of these analysis does not matter. The readers will form their own opinions anyway.

Adding Price Charts Is Even Better

The problem with charts on fundamental data on a company is that it has limited ways to express them. It is very hard to promote sophistication with a simple chart even though it is good looking. Sense of sophistication often leads to blind following. It is a very useful tactic when the goal is just generating interest in a particular stock.

The price charts can drive home this goal.

Price charts can be formatted with stunning effects and graphics. Lines drawn on the chart promote sense of mystic and sophistications. Both means nothing when it comes down to proper analysis of a price chart. But it is pretty and can attract people to at least browse the subtitle of the chart.

Again, It does not matter if the authors of these articles make no sense at all in what they write about the charts. Majority of the readers do not understand price charts. The conclusion of the analysis does not even need to make any sense. A non-sense piece of analysis can still get the job done because the readers will make it a talking point with their friends. The words are spread and mission accomplished.

The Truth

People love these half baked financial analysis because they are not really studying them. They are just looking for ideas. The financial industry knows and happily supply their potential clients with lots of reading materials. The goal is to get these potential clients excited and act on the information. Any action taken by the potential clients will be beneficial to the industry.

So how do we tell the good analysis from the bad ones?

I find fundamental analysts who love to end their analysis with pretty price charts and random comments of the charts supporting their buy or sell ideas are likely the ones whose analysis are bad. A quick look at the end of a multi-page analysis to see if the author is wasting your time with nonsense on the price charts can help you identify the quality of the analysis quickly. Simply skip these bad ones and your time is saved.

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Essence of Trading: How I Kicked A Bad Habit

iStock_000013112749SmallI used to take seasonal allergy medicine religiously every year. At the beginning of spring, while people keep talking about how great the coming season will be, I would look allergy medication to stock up. It is not just a matter of inconvenience taking those medications, it is also a major annoyance in life as it will make you drowsy and tired all day long.

Several years ago I learned that those meds are not really helping me in fighting the allergy. They were making me sick and non-productive all summer long. Since these meds is not a cure to my sickness, trading one set of symptoms for another set does not make sense to me.

The logical conclusion is sensible – stop taking those meds.

The fear was that I have taken those meds for so long I would suffer way worst without them. It is like being hooked onto drugs.

It took a leap of faith one summer for me to stop taking those meds all together. Allergy meds do not work well if you do not start taking them consistently before the allergy season starts. Without the build up of the medication in your body they do not function well.

It was very bad at first. The itchiness in my eyes and the stuffed nose made that first summer completely unbearable. I could not breath. I could not sleep. Yet I survived. After the fact, the down time I spent sleeping and resting is no worse than the time I turned into a zombie while on the medications that even coffee cannot kick me into full alert.

Then year after year, the struggle continues. I stay the course and the allergy symptoms reduced back down to how I feel when I was a kid. It is bad but it is now bearable.

The decision to take the allergy medication was a convenience. It was not informed decision. Knowing the fact that these meds are very bad for my liver, however, does not translate automatically into a simple answer of saying no to these meds. It took years of suffering and determination to reverse the effects of these meds.

Kicking a habit, especially kicking a bad habit, is against our nature.

What is the point of telling this story?

What does it have to do with trading?

Trading is an activity where the minority of players win. Majority of players have to be on the wrong side of the game to facilitate the transfer of wealth. In another words, to come out ahead in trading, you have to be acting against human nature so that you will not fall into the group where the majority belongs.

The funny thing is that when you decided to stop doing something harmful to your trading, you would experience physical symptoms making you uncomfortable just like me stop taking the allergy meds. It is one of the things I learned from observing trader trainees. It happens all the time.

The urge to not follow the plan, to adjust the stop a bit further away, to add more to a position when you already maxed out your leverage, etc. is so great that I observed some of the trainees not able to control their bodies. They turned dead focus on the screen, clinching their fists, face turned pale, bodies uncontrolled swinging, etc.

The moment they violated their own plans and went back to their old routines, the physical symptoms disappeared.

But so did the money in their trading accounts.

It is not easy to kick the bad trading habits. We can probably kick many extremely stupid ones but some will always stay with us and haunt us again and again. At best, one can to learn to suppress these bad habits. The struggle will always continue because it is what trading does – pitting us against human nature.

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