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The Investor’s Curse: “If It Ain’t Broke, We Fix It Until It Is”

FlyThis phrase is most often heard in reference to lawmakers and bureaucrats in Washington, DC, but I think it’s an appropriate reflection of what many investors struggle with as well.  As an investor, you’ll seldom be destroyed by outside forces.  If you falter and lose your assets, more often than not it will be because you ignored your own rules and disciplines, thereby destroying yourself from the inside. 

When my trading buddies ask me why I spend my free time teaching continuing education courses at a local college, I tell them that teaching investment classes is a two-way street.  In working with my students, I am exposed to specific weaknesses in other investors that I might not necessarily see within myself.  The lessons learned are always valuable.  Having just completed another semester – my twelfth year at Bellevue College – I was struck by two sizeable groups within this year’s class of 100 investors. 

One group consisted of those seasoned investors who’ve had years of experience in the market.  The sermon I preach to this group of investors is the title of this blog.  There is some persistent human trait that causes profitable investors to keep tampering with a successful system until it becomes more and more complex.  For some reason, they ignore the fact that their system is producing consistent predictable results – instead, they keep trying to tinker with it.  Is this due to boredom?  Or is it some misguided belief that the Holy Grail exists out there somewhere?  It’s as if winning is not enough for these investors.  They embellish their methodology with an ever more elaborate basket of indicators, or they complicate their trading by chasing after more intricate option strategies for no rational reason.  They may win the intellectual of the year award at the cocktail party, but they’ll die poor with their trophy. 

I’ve seen lots of very smart folks flame out as investors by pursuing this approach.  I like to call it the “Phoenix Syndrome” because much like Icarus who ignored his father’s advice, if you try to fly too close to the sun, you will fall back to earth.  Perhaps the meek shall inherit the earth after all, or at the very least, win the stock market game!

The other group in my class consisted of the novice investors that I call the “newbies”.  My sermon to these neophytes is a somewhat similar pitch for simplicity over complexity.  I tell them,  “you need to learn to walk before you can run.”  Or as my mother liked to say, “milk before solids”.  The biggest contribution I can make to their success as investors is to make sure they winnow down the universe of indicators to a basket of the essential few that focus on trend, volume and relative market performance.  Much like their more experienced brethren, these newbies too often charge ahead with the mistaken belief that “more is better”.  Their goal seems to be to assemble an indicator-heavy methodology as soon as possible – pursuing the misguided belief that a unique mosaic of many tools will yield profits.   Both groups need to heed Jim Rohn’s advice: “Discipline is the bridge between goals and profits.”

The discipline to exercise restraint as an investor is one of the true insiders secret ingredients for successful investing.  You must banish this “Phoenix Syndrome” and the accompanying expectations that complexity leads to the Valhalla of profits.  If you allow the intellectual aspects of trading to seduce you, succumbing to its many charms only leads to the graveyard of ambition.

It’s analogous to attending a car show.  If you are a car buff like myself, it’s a special pleasure to visit with so many gleaming automotive sculptures.  But at the end of the day, you must curb your impulses.  You only have so much garage space and you cannot bring home your entire wish list.  Life is about choices and exercising restraint – so is investing.


Trade well; trade with discipline!

-- Gatis Roze

 

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