Saturday, September 24, 2011

Pain, Acceptance and Reconciliation

Numbed by losses or jumping for joy?

As I mulled over the last 48 hours of market action, a striking thought flashed into my mind and refused to go away, distracting my train of thoughts until I gave it some good attention.

This flash was sparked off by a statement in a friend's blog, who is also a trader, one rather successful at it if I may say so. In her blog, she mentioned that she too was caught in the quick reversal after the FOMC announcement on Wednesday, which wiped out 5 days of gains in an afternoon. She further mentioned that the only happy people are shortists, and they are happy at others' misery.

Wow. Strong statement.

I love to long and short the market, using various means and methods, particularly options. So, to me, long or short does not matter...mimportant thing is that the market is moving and trending. Since 2008, there have been no less than 5 major market tanks of at least 5% and major rallies. Throughout this time I see a few occurrences which hint that there is a major underlying trend. Not one of the market, but a human psychological-behavioral trend.

These are the main observations:
1. In times of a rally, there will be many who are happy, and most will gladly talk about gains in this and that stock or fund.
2. The mainstream media would highlight individuals who have made a neat bundle taking a plunge to buy in when everything was plunging.
3. The bullish crowd would look at the uber- perm-bears and jibe them for being bearish, and all the doomsday talk.
4. In a severe market tank, the same bullish crowd would go really quiet. And if they ever say anything, it would be about
A. How stuck they are in the market and cannot get out now
B. How shortists are gloating at the misery of others
C. That the market would recover one day soon
5. Mainstream media highlights how badly the markets are performing and soon enough, reports on how people lost significant amounts.

The above set me on a thought that this pattern would recur again and again and again, only because as humans, many of us NEVER learn.

Now ask yourself which camp you belong to...
Did you mock those who spoke of a bear markets using you gains as proof that they were wrong? 
Or were you catching falling knives, eroding your profits and accumulating your losses? 
Or were you in neither camp because you had no idea what you were doing and still clueless on what to do now?

If you answered YES to any of the above three questions, you are in serious trouble. Serious trouble, I say again.
Allow me to hypothesize that you are now sitting on recent losses, still thinking that the markets would recover to their past glory some time soon. These recent losses probably wiped out the past year's gains and left a residual gains from investments made in 2009.
Otherwise, you are just nursing losses that you accumulated since 2010.

Painful, isn't it?

I am not gloating over your misery, but I need you to re-feel your pain. Re-feel it because many of us shut it out and suppress it, being numb to shield ourselves from the bloodshed in the markets. This is a very natural reaction. I have been through something similar and got out of it so I can tell you... Re-feel it. In fact, embrace it! Yes, embrace the pain as part of the whole game of investing/trading. It is like that, well... not so painful, but is because you have not been honest to yourself.

You never planned... enough.
You never accepted that you made mistakes.
You never learned what you needed to learn.
And you are doomed to repeat it all again, as you give yourself 101 excuses.

Before we talk about curing the pain, we need to talk about why there is pain in the first place. Pain, as we all know it, is... Painful. It is a emotion that many detest, and so we subconsciously built defences against it. These are in the forms of denial, excuse making, indifference, blame shifting, and rationalizing. Pain, is part of life, and an important part no less. It does you a very big favour by telling you in a very obvious way that something is not right. Without embracing this pain, we lack the acceptance required to bring about closure and move along unscarred. Yes, admitting your mistake and then making amends is the only way one can walk away from the train wreck unscarred. It is the only way we will learn, fortunately or not.

Now, that you can understand how and why there is pain, perhaps we can look into how you might be able to cure yourself...

1. Open your heart
Embrace your pain. Recognize that it is painful and that it is there... Understand that it is telling you that something was not right and you need to find out what that is (or those are). If you have no idea, speak to someone who can help.

2. Being aware
Think back how you got to this state, re-live your thoughts and actions in your mind from a 3rd person's perspective. This allows you a more neutral observation point of view. As you replay, take notes of what you did or did not do.

3. Plan for change
Now that you have a list of your issues, find ways to resolve or at least address them. Get help if you need... Ask, read, learn.

4. Start over.
You need to start anew... With yourself and possibly with your investments. You need to put accept the above 3 points, and move on so a good clean slate would be ideal, right? This is the most significant part of acceptance as it will be the most difficult. For example, if you are making losses, accepting the losses internally needs closure by external acceptance, which may mean realizing that loss. Few can do without these without lapsing back into the previous pattern, as most of us need the internal environment to be at peace with our external environment in order to function at our best.

5. Plan to succeed
Plan to succeed means that you are now executing your plans for change and improvements. This may mean taking a course, reading books, or instilling self-discipline as a means to improve yourself. Where investments/trades are concerned, learn more about why you want to invest/trade, how you are going to do it, under what (economic) conditions, and also the whole game plan including the exit strategies/conditions. Follow through your plans and review from many angles if you kept to your rules.

IF you find difficulties in the above, find someone who can help you... A teacher, and advisor, or a mentor. If you find it problematic to identify your mistakes, get someone to point it out for you. If you find that you prefer not to actively keep up with the markets, get a financial advisor. If you need someone to keep tabs with you, find a friend or a mentor to smack you when you need it.

With direct relation to investment/trading, once you have established a framework for yourself, another 3 golden rules can be applied. These rules were published in a recent article by Sam Evans and states:
Rule 1 - Learn to execute a Stop-out.
Always have a stop level before you start an investment/trade. Execute it when that level is breached regardless of outcome. Sticking to the rules is priority.
Rule 2 - Learn to Take Profit
Rule 1 helps you from killing your account, Rule 2 makes sure your account lives on successfully. Remember that the aim of investing/trading is to make profits, so realize it.
Rule 3 - Learn to execute your plan
This rule means that whenever something fits the conditions of your plan, execute! Procrastination leads you nowhere, planned action does.

The last point here is important, particularly to those living in Singapore. Learn to short, learn how to short, and learn when to short. This is very important as many of us have not come to terms with shorting (selling first and buying back to cover later) and are very comfortable with longing (buy first, sell later). The mechanism and conditions are similar... Pretty much inverting your charts or reversal of the process. The bias toward longs and not shorts come from the environment with rules and instruments at allow us only to go long. The culture that we grew up in also had instilled a sense of buying first to sell later. Get out of that box and life a full(er) life. Learn how to protect yourself and make the next downdraft does not kill your portfolio. 

Although I know that the 5 behavioural trends will still continue, I take comfort in that you, by reading this blogpost, would have a chance to make a change and not follow the crowd.

Take home message is that the global conditions are no longer similar to what we believe them to be and a time of great change is upon us. I would like to share this quote with you...

"The illiterate of tomorrow are not those who cannot read or write, but those who cannot unlearn, learn and relearn."

The MadScientist
24 September 2011

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