The Root of All Bad Investing Decisions
- Jared Dillian
- The 10th Man
- February 23, 2023
I’m a trader, so take all this with a grain of salt.
I try to time entry and exit points perfectly. I try to sell the top tick and buy the bottom tick. The technical analysts of the world will tell you that this is a terrible idea. Because if you’re buying the bottom tick, that’s the point at which the technical signals are the worst.
They have terms for that, like catching a falling knife. You should only buy when the technicals improve and the moving averages turn up, so they say.
But by the time that happens, the stock could be 20% higher, and the 20% that you missed out on is the tax you paid for being a chicken and not trying to buy the bottom.
So, then you’re relying on the idea that the stock will continue to trend and will go up 40%, 60%, and 100%, and your patience will have been vindicated. Often, that isn’t the case.
Entry and Exit Points
One of the reasons I like to try the buy the bottom tick is because I don’t like to experience stress. If your entry point is perfect, then the market will have never moved against you, and you will have not experienced any psychological pain. And psychological pain is the root of all bad investing decisions.
You have a thesis, you have an idea, you have this long-term theory that is supposedly going to play out over weeks and months, and you have a bad entry point. Then you experience pain, and you liquidate the position, only to see the thesis play out in the long run. This happened to me recently.
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That’s why trading, as a discipline, requires you to be psychologically healthy. If you are nervous and neurotic, trading is not for you. But if you’re the type of person who can stick with a thesis when the world is collapsing around you, then you might have the emotional fitness to be an excellent trader.
More Information Isn’t Always Better
I was a very good trader at Lehman Brothers. I was consistently profitable. Sure, I made mistakes, but I kept my mistakes small and my winning trades big, which is exactly what you are supposed to do. But I was an emotional wreck.
I can’t even begin to describe how much emotional fitness plays a role in trading. Much bigger than you think. You will read about this in some of the trading books, talking about keeping your emotions under control.
People have all different tips and tricks for doing this. Mine is that I simply don’t spend as much time as I used to staring at screens, which is another way of saying that I try to reduce the frequency of my information. More information is not always good. You’re staring at the screen all day, and it raises your stress level with every tick.
I try to trade with as little information as possible. I’m traveling right now, and I check in on Bloomberg on my phone a couple of times a day. That’s basically it. That’s about 20 fewer times I won’t feel bad during the day, and it’s also 20 fewer times I won’t feel good during the day (which is also bad). You don’t want to feel anything.
Now, I interviewed legendary trader Mark Minervini last summer, and it was an incredible experience. The guy is a machine. He just doesn’t experience emotions—about stocks.
If a trade is working, he relentlessly adds to it. If it’s not, he remorselessly cuts it. All the cognitive biases that apply to other people simply do not apply to him. I don’t know if he was born this way or if he had to train himself, but it was incredible.
He was wearing a very expensive watch, which I’m sure was paid for with his trading profits. So, this idea of feeling nothing as a trader is the real deal.
Speaking of interviews, 40-year market veteran Keith Fitz-Gerald just sat down with Mauldin Economics Publisher Ed D’Agostino for an in-depth conversation, where they cover:
- Keith’s investing framework, including the tools he uses to weigh one opportunity vs. another.
- Why, among 600,000+ tradable securities worldwide, only 50 truly matter for most portfolios.
- Apple, Tesla, Microsoft, Peloton, Goldman Sachs, defense tech names, cybersecurity, AI, and more.
- Keith’s thoughts on position sizing, allocation, modern portfolio diversification, as well as how to improve your mental game when making portfolio decisions.
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3 Traits of Successful Traders
In a Daily Dirtnap issue from a few years back, I talked about the three traits of good traders:
- Emotional fitness
The last one being the most important. I meet people on the street, and I think to myself, You wouldn’t last a minute as a trader. I met people on Wall Street like that—they didn’t last.
If you take intelligence, experience, and emotional fitness and you add a killer instinct, then you have a David Tepper. Go for the jugular when the setup is perfect.