More and more I am finding the market is about making hay whilst the shines, consistency is tough in a short sighted economy/world and you just have to take the coins when the market is handing them out, then fight it out to survive when it is not. Timing the market, not time in the market.
The ATAA has an interesting topic this week in Adelaide, snippet below :
7:00 pm: Charles Browne - The Discipline Myth
Traders and investors are constantly told that discipline is one of the keys to success in the markets. So why is it that those who are successful in their personal lives (doctors, lawyers, airline pilots etc.) are not able to apply the same discipline to the markets? Is it really logical to believe that those who have the "discipline" to run successful businesses, excel at university, build corporate careers suddenly become "undisciplined" when they trade the markets? In this presentation Charles will present a different perspective on discipline and will demonstrate that a focus on discipline is a recipe for failure in the financial markets.
I'd be really interested to listen to this speech. Many quotes and lines from the successful get thrown around here.... how meaningful are they really? is it because many are paid interviews? justifying their success? giving us something to cling to or put our hopes in? etc. I mean, we all need to have some sort of plan to a degree, but that plan needs to be able to change and adapt at the drop of the hat. The world is evolving rapidly, it's so hard to keep up - which means stepping outside of even the most meticulously prepared plan - how many of us account for that in our planning? how many are comfortable to have multiple strategies that vary vastly from one another? be willing to change and adapt quickly?
Looking back, I'm finding the bulk of my money over the last few years is made in only a few months of the year.... I haven't found a correlating pattern in those months, as they don't align. There is a theme there though. Then for me, it seems it's about surviving the rest of the year without giving back that money, dribs and drabs of profit throughout the remainder of the year after accounting for the losses, but nothing life changing though.
I don't like strategies set in stone or strategies that don't allow flexibility without making you feel like you have broken your own rules. We are all different and unique in our own ways.... If you can make money with no rules or no real strategy as such, why change? ok, maybe a slight exaggeration - but you know what I mean. I am very aware that discipline in certain areas plays a vital role in the success of a trader but I do feel the discipline can be overplayed at times too. Food for thought.
Nod, your thinking about discipline and sticking to rules is quite insightful.
There are a lot of supposed rules that get thrown around in trading that although can provide a foundation for learning, are eventually obstacles to success. Some of it comes across from gambling markets or hedge fund or institutional trading that may have relevance when you have respectively higher satistical certainty or very high volume low margin trades. But the predominantly private discretionary traders here need to develop approaches that are relevant to their type of trading.
Having "discipline" in trading is equivalent to a fat person trying to lose weight on a restrictive diet. They'll get short term gains but medium term will fail. They need a diet approach that is comfortable, integrated with their lifestyle and requires minimal displine or effort to implement and manage
Same with trading rules. If you can't stick to trading rules they're possibly wrong, or wrong for you. The whole point of trading is not the individual trade but the development or search for a trading methodolgy that is viable. You should have a trading plan, but you should be constantly testing it, breaking the rules, refining and developing until after 5, 10 or 20 years you end up with a solid proven approach that you can trade in a completely relaxed "undisciplined" manner.
@Nodferatu my guess is doctors lawyers etc don't do well with investing because they have a career for which they rely on their income & wealth, and when it comes to trading or investing it is a side-line or hobby & they don't treat it the same way they do their career. I know my own experience is just that - when I was working that's how I treated my trading - as a hobby. Now that I am doing this fulltime, process is everything imo (so I related to that post earlier about process-orientation).
That's not to say people can't be successful without rules if you have a good gut feel for the market and it works consistently I'd say those people are lucky to have that instinct, but most I think do not have that, so its hard work & discipline (like running any business) or go bust for most (just like running any business). Luck will only get you so far - eventually the market gets you if all you've been is lucky, imo.
To add to @Orwell 's comment I totally agree. In my own experience I can relate back to my career in manufacturing where the goal is to build a system of manufacturing processes that people can sustainably follow to ensure high quality, cost-efficiency, safety, etc. These systems are inevitably built over time and experience, although it is possible to adopt certain frameworks (LEAN manufacturing, Six Sigma, etc).
The key to sustainability is to develop processes that workers can stick to, and the key to that is normally stepping through the workflow with them in consultation to see what works, what doesn't - with their input the result is normally something they take ownership of and stick to, as opposed to processes forced on them that they don't believe in - because most often, the operators/workers actually know most about what works and what doesn't because they do those processes every day.
It is for this reason that many companies in the old days who obtained ISO accreditation often find it ends up being a system that sits in the bottom drawer with a high non-compliance rate - because it was written by some process or quality engineering department without consulting the people who have to follow it.
Find what works, based on experience, and then simply document how you achieved it simply as a reference so it can be repeated. Then if you have some failures, look to whether you actually did what you did before to see whether it was process or something else. Its not rocket science and its not restrictive if its based on what you're done in the past to be successful.
I hope I didn't perceive my post to be a case of saying have no rules and rely on luck to get you by - that would be terrible advice and would almost warrant being banished from the STT thread.
I guess the basic point is, do people get bogged down and restrict themselves from pushing their own boundaries and discovering their own 'style' or 'niche' by trying to follow all these 'supposed rules' that a few successful traders have laid out for us, the general public? rhetorical questions.
Everyone needs to have discipline to survive, that's a given. Maybe a focus point or an area people can review and research to see if there are any areas of discipline that they could possibly review, relax, tweak their strategies to be more dynamic and flexible as the markets evolve.
I have some time off next week, so will try get to the ATAA meeting next week for a listen in - it's an area of interest for me. I've never liked having super strict rules and barriers around me, I find it hard to grow and believe it slows development. Sometimes failure is the fastest way of learning. The damage of failure needs to managed and minimised if we are to succeed though. Applies in many aspects of life, not just my trading. That doesn't mean I don't use rules though!
I've had some barriers knocked down with my brother-in-law (swiss economist) so I'm slowly but surely starting to tap into his brain about all things market and economy. He's starting to change the way I think and opening up all new thought processes around our discipline boundaries.
As stated, food for thought and definitely open to further discussion.
I read this article the other day which discusses improving processes by utilizing lean sigma principles. As usual these types of articles are general in nature but very much relate to trading.........
To Make Big Gains, Avoid Tiny Losses
By James Clear | Continuous Improvement, Minimalism, Self-Improvement
In many cases, improvement is not about doing more things right, but about doing less things wrong.
To understand what I mean, we need to take a trip to Japan. The Curious Case of Japanese Television Sets
In the decades that followed World War II, the manufacturing industry in America thrived. For years, American companies grew in size and profitability—even though they produced many products of average quality.
This gravy train began to slide off the tracks in the 1970s. Japanese firms implemented a series of surprising changes that helped them crush their American counterparts. As one New Yorker article put it… “Japanese firms emphasized what came to be known as “lean production,” relentlessly looking to remove waste of all kinds from the production process, down to redesigning workspaces, so workers didn’t have to waste time twisting and turning to reach their tools. The result was that Japanese factories were more efficient and Japanese products were more reliable than American ones. In 1974, service calls for American-made color televisions were five times as common as for Japanese televisions. By 1979, it took American workers three times as long to assemble their sets.”
Business buzzwords like Kaizen, Lean Production, and Process Improvement are so ubiquitous today that it can be easy to gloss over the subtlety of the Japanese strategy. The key insight I'd like to point out here is the difference between focusing on getting better vs. not getting worse.Japanese television makers did not seek out more intelligent workers or better materials, they simply said, “Let's build the same product, but make fewer mistakes.” Japanese companies improved by subtracting the things that didn't work, not by creating a bigger, better, or more expansive product.
This is an important distinction and it applies to habits, processes, and goals of all kinds, not just television sets.
Before we talk about how to get started, I wanted to let you know I researched and compiled science-backed ways to stick to good habits and stop procrastinating. Want to check out my insights? Download my free PDF guide “Transform Your Habits” here. Two Paths to Improvement
The distinction we are making here is between improvement by addition vs. improvement by subtraction. Improvement by addition is focused on doing more of what does work: producing a faster car, creating a more powerful speaker, building a stronger table. Improvement by subtraction is focused on doing less of what doesn't work: eliminating mistakes, reducing complexity, and stripping away the inessential.
These concepts of addition and subtraction apply to many areas of life. Education
Addition: become more intelligent, increase your IQ.
Subtraction: avoid stupid mistakes, make fewer mental errors.
Investing
Addition: earn more money, seek growth opportunities.
Subtraction: never lose money, limit your risk.
Web Design
Addition: improve your call-to-action copy, boost conversions.
Subtraction: remove the on page elements that distract visitors.
Baseball
Addition: get more hits.
Subtraction: make fewer outs.
Exercise
Addition: make your workouts more intense.
Subtraction: miss fewer workouts.
Nutrition
Addition: follow a new diet of healthy foods.
Subtraction: eat fewer unhealthy foods.
Many of these approaches seem similar, but they are not the same. Take the nutrition example above. Eating healthy foods and avoiding unhealthy foods seems very similar. However, in the first case, your focus is on “how to eat better” whereas the second case is focused on “how to not eat worse.” In one scenario you are trying to chase the upside, in another you are focused on limiting the downside.
Improvement by Subtraction
Nearly every manager in the world wants to “do more great work”, but very few people want to “do less bad work.” We love peak performances. Every athlete wants to play an amazing game. Every business owner wants to land a blockbuster sale. Every writer wants to launch a best-selling book. Our desire for that next level of performance causes us to disproportionately focus on the front end of the curve.
Eliminating mistakes is an underappreciated way to improve. In the real world, it is often easier to improve your performance by cutting the downside rather than capturing the upside. Subtraction is more practical than addition. This is true for two reasons.
First, it is often easier to eliminate errors than it is to master peak performance. By simply writing down every step of a process, you can often identify a few areas that can be reduced or eliminated all together. The easiest improvements I have made to my website were a result of eliminating every inessential element.
Second, improvement by subtraction does not require you to achieve a new level of performance. This method is about doing what you are capable of doing more frequently. It is about reducing the likelihood that you'll perform below your ability.
One of the best ways to make big gains is to avoid tiny losses.
Brokers and platforms . Quite a bit in here to mull your way through in this weekends Lounge
Great article on confirmation bias and a real eye opener on how it can negatively impact your trading.
Confirmation Bias: Why You Should Seek Out Disconfirming Evidence
“What the human being is best at doing is
interpreting all new information
so that their prior conclusions remain intact.”
— Warren Buffett
*** The Basics
Confirmation bias is our tendency to cherry pick information which confirms pre-existing beliefs or ideas. This is also known as myside bias or confirmatory bias. Two people with opposing views on a topic can see the same evidence, and still come away both validated by it. Confirmation bias is pronounced in the case of ingrained, ideological, or emotionally charged views.
Failing to interpret information in an unbiased way can lead to serious misjudgements. By understanding this, we can learn to identify it in ourselves and others. We can be cautious of data which seems to immediately support our views.
When we feel as if others ‘cannot see sense’, a grasp of how confirmation bias works can enable us to understand why. Willard V Quine and J.S. Ullian described this bias in The Web of Belief as such:
The desire to be right and the desire to have been right are two desires, and the sooner we separate them the better off we are. The desire to be right is the thirst for truth. On all counts, both practical and theoretical, there is nothing but good to be said for it. The desire to have been right, on the other hand, is the pride that goeth before a fall. It stands in the way of our seeing we were wrong, and thus blocks the progress of our knowledge.
Experimentation beginning in the 1960s revealed our tendency to confirm existing beliefs, rather than questioning them or seeking new ones. Other research has revealed our single-minded need to enforce ideas.
Like many mental models, confirmation bias was first identified by the ancient Greeks. In The Peloponnesian War, Thucydides described this tendency as such:
For it is a habit of humanity to entrust to careless hope what they long for, and to use sovereign reason to thrust aside what they do not fancy.
Why we use this cognitive shortcut is understandable. Evaluating evidence (especially when it is complicated or unclear) requires a great deal of mental energy. Our brains prefer to take shortcuts. This saves the time needed to make decisions, in particular when under pressure. As many evolutionary scientists have pointed out, our minds are unequipped to handle the modern world. For most of human history, people experienced very little information during their lifetimes. Decisions tended to be survival based. Now, we are constantly receiving new information and have to make numerous complex choices each day. To stave off overwhelm, we have a natural tendency to take shortcuts.
In The Case for Motivated Reasoning, Ziva Kunda wrote “we give special weight to information that allows us to come to the conclusion we want to reach.” Accepting information which confirms our beliefs is easy and requires little mental energy. Yet contradicting information causes us to shy away, grasping for a reason to discard it.
In The Little Book of Stupidity, Sia Mohajer wrote:
The confirmation bias is so fundamental to your development and your reality that you might not even realize it is happening. We look for evidence that supports our beliefs and opinions about the world but excludes those that run contrary to our own… In an attempt to simplify the world and make it conform to our expectations, we have been blessed with the gift of cognitive biases. How Confirmation Bias Clouds our Judgement
“The human understanding when it has once adopted an opinion draws all things else to support and agree with it. And though there be a greater number and weight of instances to be found on the other side, yet these it either neglects and despises, or else by some distinction sets aside and rejects.”
— Francis Bacon
***
The complexity of confirmation bias partly arises from the fact that it is impossible to overcome it without an awareness of the concept. Even when shown evidence to contradict a biased view, we may still interpret it in a manner which reinforces our current perspective.
In one Stanford study, participants were chosen, half of whom were in favor of capital punishment. The other half were opposed to it. Both groups read details of the same two fictional studies. Half of the participants were told that one study supported the deterrent effect of capital punishment and the other opposed it. The other participants read the inverse information. At the conclusion of the study, the majority of participants stuck to their original views, pointing to the data which supported it and discarding that which did not.
Confirmation bias clouds our judgement. It gives us a skewed view of information, even straight numerical figures. Understanding this cannot fail to transform a person’s worldview. Or rather, our perspective on it. Lewis Carroll stated “we are what we believe we are”, but it seems that the world is also what we believe it to be.
A poem by Shannon L. Adler illustrates this concept:
Read it with sorrow and you will feel hate.
Read it with anger and you will feel vengeful.
Read it with paranoia and you will feel confusion.
Read it with empathy and you will feel compassion.
Read it with love and you will feel flattery.
Read it with hope and you will feel positive.
Read it with humor and you will feel joy.
Read it without bias and you will feel peace.
Do not read it at all and you will not feel a thing.
Confirmation bias is somewhat linked to our memories (similar to availability bias.) We have a penchant for recalling evidence which backs up our beliefs. However neutral the original information was, we fall prey to selective recall. As Leo Tolstoy wrote:
The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him. Why We Ignore Contradicting Evidence
“Beliefs can survive potent logical or empirical challenges. They can survive and even be bolstered by evidence that most uncommitted observers would agree logically demands some weakening of such beliefs. They can even survive the destruction of their original evidential bases.”
—Lee Ross and Craig Anderson
***
Why is it that we struggle to even acknowledge information which contradicts our views? When first learning about the existence of confirmation bias, many people deny they are affected. After all, most of us see ourselves as intelligent, rational people. So, how can our beliefs persevere even in the face of clear, empirical evidence? Even when something is proven untrue many entirely sane people continue to find ways to mitigate the subsequent cognitive dissonance.
Much of this is the result of our need for cognitive consistency. We are bombarded by information. It comes from other people, the media, our experience, and different sources. Our minds must find means of encoding, storing, and retrieving the data we are exposed to. One way we do this is by developing cognitive shortcuts and models. These can be useful, or unhelpful. Confirmation bias is one of the less helpful heuristics which exists as a result. The information which we interpret is influenced by existing beliefs, meaning we are more likely to recall it. As a consequence, we tend to see more evidence which enforces our worldview. Confirmatory data is taken seriously, while disconfirmatory data is treated with scepticism. Our general assimilation of information is subject to deep bias. To constantly evaluate our worldview would be exhausting, so we prefer to strengthen it. It can also be difficult to consider multiple ideas at once, making it simpler to focus on just one.
We ignore contradictory evidence because it is so unpalatable for our brains. According to research by Jennifer Lerner and Philip Tetlock, we are motivated to think in a critical manner only when held accountable by others. If we are expected to justify our beliefs, feelings, and behaviour to others, we are less likely to be biased towards confirmatory evidence. This is less out of a desire to be accurate, and more the result of wanting to avoid negative consequences or derision for being illogical. Ignoring evidence can be beneficial, such as when we side with the beliefs of others to avoid social alienation. Examples of Confirmation Bias in Action
Creationists vs Evolutionary Biologists
A prime example of confirmation bias can be seen in the clashes between creationists and evolutionary biologists. The latter use scientific evidence and experimentation to reveal the process of biological evolution over millions of years. The former see the bible as true in the literal sense, and think the world is only a few thousand years old. Creationists are skilled at mitigating the cognitive dissonance caused by factual evidence which disproves their ideas. Many consider the non-empirical ‘evidence’ for their beliefs (such as spiritual experiences and the existence of scripture) to be of greater value than the empirical evidence for evolution.
Evolutionary biologists have used fossil records to prove how the process of evolution has occurred over millions of years. Meanwhile, some creationists view the same fossils as planted by a god to test our beliefs. Others claim that fossils are proof of the global flood described in the bible. They ignore evidence to contradict these conspiratorial ideas, instead of using it to confirm what they already think. Doomsayers
Take a walk through London on a busy day and you are pretty much guaranteed to see a doomsayer on a street corner ranting about the upcoming apocalypse. Return a while later and you will find them still there, announcing that the end has been postponed.
Leon Festinger explained the phenomena:
Suppose an individual believes something with his whole heart, suppose further that he has a commitment to this belief that he has taken irrevocable actions because of it. Finally, suppose that he is presented with evidence, unequivocal, and undeniable evidence that his belief is wrong, what will happen? The individual will frequently emerge, not only unshaken but even more convinced of the truth of his beliefs than ever before. Indeed, he may even show a new fervor about convincing and converting people to his view Music
Confirmation bias in music is interesting because it is actually part of why we enjoy it so much. According to Daniel Levitin, author of This is Your Brain on Music:
As music unfolds, the brain constantly updates its estimates of when new beats will occur, and takes satisfaction in matching a mental beat with a real-in-the-world one.
Witness the way a group of teenagers will act when someone puts on Wonderwall by Oasis or Creep by Radiohead. Or how their parents react to Starman by Bowie or Alone by Heart. Or even their grandparents to The Way You Look Tonight by Sinatra or Je ne Regrette Rien by Edith Piaf. The ability to predict each successive beat or syllable is intrinsically pleasurable. This is a case of confirmation bias serving us well. We learn to understand musical patterns and conventions, enjoying seeing them play out. Homeopathy
The multi-billion dollar homeopathy industry is an example of mass confirmation bias.
Homeopathy was invented by Jacques Benveniste, a French researcher studying histamines. Benveniste became convinced that the effectiveness of histamines increased as a solution was diluted, due to what he termed ‘water memories.’ Test results were performed without blinding, leading to a placebo effect. Benveniste was so certain of his hypothesis that he found data to confirm it and ignored that which did not. Other researchers repeated his experiments with appropriate blinding and proved Benveniste’s results to have been false. Many of the people who worked with him withdrew from science as a result.
Yet homeopathy supporters have only grown in numbers. Supporters cling to any evidence to support homeopathy while ignoring that which does not. Scientific Experiments “One of the biggest problems with the world today is that we have large groups of people who will accept whatever they hear on the grapevine, just because it suits their worldview—not because it is actually true or because they have evidence to support it. The striking thing is that it would not take much effort to establish validity in most of these cases… but people prefer reassurance to research.”
— Neil deGrasse Tyson
In good scientific experiments, researchers should seek to falsify their hypotheses, not to confirm it. Unfortunately, this is not always the case (as shown by homeopathy.) There are many cases of scientists interpreting data in a biased manner, or repeating experiments until they achieve the desired result. Confirmation bias also comes into play when scientists peer review studies. They tend to give positive reviews of studies which confirm their views and those accepted by the scientific community.
This is problematic. Inadequate research programs can continue past the point where evidence points to a false hypothesis. Confirmation bias wastes a huge amount of time and funding. We must not take science at face value and be aware of the role of biased reporting. Conclusion
“The eye sees only what the mind is prepared to comprehend.”
— Robertson Davies
***
Five steps to work out if your penny dreadful is a complete dog
Nick Evans
Thursday, 13 April 2017 1:16PM
Now is a good time to take a close look at the speculative stocks cluttering up the back drawer of your investment portfolio.
Tax-loss selling time is looming, and junior resources and explorers, along with the speculative biotechnology and other stocks, are about to start releasing their quarterly activities and cash-flow statements.
That makes now a pretty good time to have a close look at which of your speculative punts aren’t performing, and think about where to put your money next.
While even dog stocks occasionally dig up a bone, and the nature of the industries makes it all but impossible to pick winners with any certainty, there are some relatively easy ways to winnow out those companies that will almost certainly never deliver on their promises. Where’s the money going?
Mining and petroleum explorers this month file a 5B quarterly cash-flow report for the March quarter. Other speculative stocks, such as biotech plays, file a 4C.
Both reports contain line items detailing where their cash has been spent for the quarter — including items for exploration and development, in the case of resource juniors, or research for technology stocks.
It also contains a line item for administrative and corporate spending.
Compare the two over the course of the last year — a full year gives a better guide as some types of activity, such as exploration drilling in the north of WA, is very much weather dependent.
As a general rule, alarm bells should start ringing if admin and corporate costs consistently make up more than a third of a company’s total spend. If it’s more than half, there would want to be a pretty good reason.
The classic example of seeing this done right is Sirius Resources. The discovery hole at Nova, now the stuff of legend, was drilled at a time when Sirius was nearly running empty on cash, with little to show for drilling in previous campaigns.
But the company’s quarterly results in the lead up to the 2012 discovery tell an important tale. In the year before striking it rich, Sirius spent $3.8 million on exploration, and $816,000 on admin.
There may well have been a spot of luck in the placement of the discovery hole but management gave themselves every chance of finding it by pumping the bulk of their cash into the ground. Are they actually making any progress?
Grab a recent corporate presentation. And one from a year ago. And one from two years ago.
Compare them.
Research takes time, and even the best run resource explorer drills some dust.
But you’d expect some progress to be made in two years, and if the presentations don’t show much difference, you’d want to be asking yourself what the money is really achieving. Where is the follow through?
It’s also worth comparing a couple of the quarterly activities statements. Most companies will give an outline of their plans for the upcoming period when they report.
Have a look back at the last couple of quarters — have they reported on all of the holes they said they planned to drill? If, at the end of the December quarter, management was talking about delivering a set of results in the March quarter, did it happen? If not, is there a reasonable explanation?
There are plenty of companies which, in January, will be happy to tell you that the “clinical trial is progressing well, and results of the study will be available by March”.
Then, in March, they will be “pleased to announce the results of the study will be available by June”.
And in June they will be saying that “minor changes to the scope of the project means the results should be available in the September quarter”.
And sometimes the odd activity simply vanishes from the corporate memory without trace.
Poor disclosure is habit- forming and if a board won’t disclose its problems early — even though bad luck can hit the best of companies — it’s worth considering whether you should continue to trust them as stewards of your investment. Avoid the ‘commodity of the month club’
Cobalt is flavour of the month right now, with a plethora of junior explorers suddenly discovering cobalt content in old assays.
Is your beloved junior a cobalt explorer now? Was it a lithium play this time last year, and looking for graphite in 2014, and rare earths in 2011, iron ore in 2010 and mineral sands in 2008?
And if that’s the case, do you really think management has a genuine long-term strategy? Or are they just chasing the kind of announcement that will get a short-term bounce on the market, and allow them to get the next equity raising away? Cash is king
If you’re still not sure, run one last check.
How much cash is left, compared with the average quarterly spend over the last year?
Companies with less than six months cash to burn are almost certainly going to need to come back to the market in the next quarter.
If you can’t bring yourself to finally offload that long-held penny dreadful for fear of missing out if something good finally happens, ask yourself this — do I really want to put more money in?
Cream bun and sausage roll for lunch . end collation May while stuffing away at it. June next .
