Having taught thousands of people around the world, as well as managed an Investment Fund and Private Portfolios, I have found these 4 categories to be the defining factors for success in the markets.
Let me discuss each of these with an understanding on how you can work them to your advantage in the markets.
First thing first. You will never know everything in the markets.
Just when you think youâ€™ve learnt it all, something will happen in the markets to teach you a lesson. Or it might just be that you are taught the same lesson again and again, so you actually didnâ€™t learn it the first (second or third) time.
There are two types of Knowledge seekers:
- The â€œKnow it Allâ€
- The â€œNo Ideaâ€
The â€œKnow it Allâ€ needs to know absolutely everything about the markets, strategy, fundamentals, technical, economics. They wonâ€™t get started in the markets until, in their minds; they know everything there is to know about the markets.
But thatâ€™s the thing. You will never know everything. The markets are more than just numbers, more than just companies and industries, more than just economies and international trade, more than just managers and employees. They are all of this and more.
The key is not to know everything, but to know enough about how the markets work, react and function. Know what strategy best suits your goals and objectives, and know how to implement that repetitively, and successfully. Accepting that you will never be able to predict the markets will allow you to focus your energy on understanding when to identify the right types of opportunity.
When the markets are steadily climbing over a long period of time (referred to as a Bull market), the â€œKnow it Allâ€™sâ€ think they have made money with wisdom and cunning. Fact is, everyone has made money â€“ even the â€œNo Ideasâ€. This builds a false sense of confidence, which leads to confusion when the market conditions change.
On the flip side, the â€œKnow it Allâ€™sâ€ take a very long time to actively participate in the markets because they need all the answers. Iâ€™ve seen people discuss the markets at length as if they are one of the worldâ€™s best investors, only to find out they have never placed a trade in their lives!
As for the â€œNo Ideasâ€ people, they participate in the markets without a clue in what they are doing. This explains, for the most part, investors who put their life savings into managed funds. And rightly so, because a professional manager should be able to do a better job. Right? Let me just say that Funds Managers donâ€™t always get it right, and can lose money just as easily as you can on your own. But thatâ€™s a topic for another article!
For the â€œNo Ideasâ€, actively trading is the worst thing they could do. They might be lucky and make some money, but inevitably they will lose out. When the markets get tough, they will be completely confused, like Deer in the headlights.
A university graduate might have top grades, but without experience, that degree means zip!
Theory and Practice are two very different things. For example, I could explain how a combustion engine works; the mixture of fuel, air and ignition combining to form a gas that pushes a piston that is then converted to power through the drive train to spin the wheels of a vehicle. But do you think I could strip an engine, replace parts or solve problems? Hell no! Even with Google, a mate to help, and a few tools, I might be dangerous, but Iâ€™m not likely to consider myself a mechanic.
As it is in managing your own trading/investing. You might be able to do a reasonable DIY job, but you will do a better job the longer you persist and the more experience you gain.
So many beginners think they can buy a course, attend a few seminars and all of a sudden they have enough knowledge (enough to be dangerous anyway), and expect they are going to be amazingly successful in the markets making a fortune straight away.
While Iâ€™ve seen some â€˜luckyâ€™ beginners make some phenomenal amounts of money in short periods of time, it has very little to do with their knowledge or experience. That is what we call â€˜beginners luckâ€™, and being in the right place at the right time. Most of those lucky beginners end up giving most of what they make back to the markets.
Experience is gained through actively participating, making mistakes, learning from those mistakes, picking yourself back up and dusting yourself off, honing your skills and continually working on strategy and mindset.
The point here is that while you need experience to successfully make money in the markets, and you need to go through your own journey in gaining experience, the difference between the professional side of gaining experience and the personal investor side of gaining experience, is that professionals have structure and support around them. Managers, checks and balances, larger accounts, and mentors.
Education courses can help provide some degree of experience. However, are you buying a course to help with your level of knowledge, or are you buying a course that promises you riches?
There is a real difference! You donâ€™t go to university to study economics with the promise you will become the Head of Economics at the World Bank! You go to University to gain the knowledge to start your career. The decisions you make along the way, the experience you gain with the knowledge base that you receive from working hard to get that degree, are what will make you successful.
This is where Mentorship, in my opinion, is the defining difference between education and experience. You can fast track your experience with the lessons you receive from a good mentor who provides guidance, encouragement, motivation, emotional support, and personal (professional) experience.
Of course, I might be a little biased seeing as I have been a Mentor to many!
Confidence, in all aspects of life, can be a defining factor in success. And itâ€™s not just confidence day in, day out. It is having the ability to find the confidence after you have been knocked down.
When the open outcry live trading floors were still dominant (before electronic trading took over), many floor traders were ex-professional footballers or basketball players. Now, these were guys (99% of floor traders were men), who had no idea about the markets, money, or strategy. But they were A-type personalities who had been trained in how to control their mindset during different times of adversity.
To take a massive hit, losing points against the opposition, only to have to pick yourself up and fight to win, is the type of attitude you need when it comes to trading or investing.
You show me an investor/trader who has never made a loss, and Iâ€™ll show you a 2-legged dog that rides a unicycle. It just wonâ€™t happen!
You will take a hit in a trade. You will have an investment that does not perform. You will lose money over a period of time.
Keeping your focus on your objectives, being rational about your abilities and the effectiveness of your strategy, and having the discipline to maintain your approach during various market conditions, requires a clear mindset and a confidence that what you are implementing works. Without it, you are doomed to fail!
Finally, one of the biggest influences on success for traders and investors is emotions.
Fear and Greed are the two biggest drivers of the markets. Greed pushes prices higher, while Fear causes prices to tank.
Without emotions, the markets just would not work. It would basically be accounting, where each quarter the company would report their actual numbers and the share price would be dictated by the company performance. In essence, this is really how it should be, but Greed and Fear drive prices up and down as investors hunger for gains or panic over losses.
Knowing this, there are 2 methods in how we can take advantage of market emotions:
- Controlling our emotional decisions
- Identifying when market emotions are running high
An emotional trader will lose. Plain and simple. While you might make some money being greedy, you will lose more when fear grips. Have you been in any of these scenarios?
- Holding a stock too long as it has fallen
- Adding to losing positions that never recover
- Wiping your account out on leveraged (margined) positions
- Buying at peaks
- Selling at Troughs/Long-term lows
Each of these scenarios is a decision driven by either Fear or Greed. They are very common traits that inexperienced and emotional investors/traders have found themselves in.
Now, Iâ€™m not saying that I donâ€™t jump for joy when I have a position surprisingly reach targets, or exceed them. Or that Iâ€™m not grumpy when I have a loss, or series of losses. But I donâ€™t make my decisions on buying or selling under emotional duress.
Simply put, every position I enter (trading or investing), I have a plan on how I will manage it. I know what action I will take no matter what situation. This comes from a combination of what we have already talked about: Knowledge, Experience, Mindset and Emotions.