The Twin Pillars of Failure: Stubbornness and Pride (March 1, 2009)

The Twin Pillars of Failure: Stubbornness and Pride

Friday was the last day of the month!  Depending on whether you are bearish or bearish, February ended with either a bang or a whimper.  We are agnostic here — we are neither bulls nor bears.  We are realistic traders who act in accordance with three principles:

1. We observe. 
2. We respect the market action — even if we believe it to be irrational or “wrong”! 
3. We respect our capital and seek to grow it, not destroy it. 

When you base trading decisions on a strong and confident bias that is devoid of flexibility, you bring two factors into your trading that will surely make the mightiest among us meek:  Stubbornness and Pride.  Neither work in trading.  Stubbornness and Pride will take you out of the game for the simple reason that the best traders (and professional money managers) are wrong a lot!  Actually, all traders are wrong a lot.  But the difference between the best and the worst (read: “broke” or “on the way to broke”) traders is the ability to admit being wrong, and to then take action on that admission. 

All traders expect to be right.  And they expect to get paid for being right!  However, upon taking action, the best traders immediately begin looking for evidence that they are wrong, while the worst traders sit back and wait to get paid.  When the best traders gather enough evidence that they are wrong, they choose the evidence over stubbornness and pride.  They choose “capital preservation” over “pride”; They choose “wrong” over “stubborn”.  And they will quickly take a small loss rather than stand pat and risk a large loss because they view a small loss as the equivalent of being right after you are proven wrong.  Over time, you can get paid quite nicely for being right after you are proven wrong — because changing your view in the face of new evidence is preferable to stubbornness and pride.  Flexibility trumps stubbornness and pride every time.  Flexibility is in accord with the three principles we follow.

Why am I making this point right here and right now?  Because I am tipping my hat to the ability of the market to run farther and faster than most believe possible…and to snap back with a ferocity that few anticipate.  Only liars and fools know with certainty which way the market will go from here.  The rest of us mere mortals strive for evidence-based flexibility rather than confident rigidity that derives from Stubbornness and Pride.

Here, we expect to be right; but we search incessantly for evidence that we are wrong.  And in recognizing that we are wrong, we are right…and over time, we will get paid for being right.

Think about it. 

—Dan