Letting Go of Control

Trading is a very difficult job, not only because of the technical requirements but also because of the mental toughness and discipline it requires. In this article I'm going to talk about letting go of control. The modern day society we live in has implicitly taught us that we can control things if we work hard enough: get good marks in school and you'll be admitted to an Ivy League university; a good university leads to better employment. Generally speaking, many jobs have certain “rules” that – if not breached – keep you in control of your occupation and salary level. But is that the reality of things? You can be a great worker but many great workers have been unemployed in recent years. Companies downsize and that is out of our control. You can drive well, and go through defensive driving courses; but someone may not stop at a red light and hit you. It's not your fault, you had no control over the other person. In this article we will discuss the behavioural bias called “illusion of control” and what it's implications are when trading and investing.

1. On Certainty

The moment we are confronted with a choice (to buy, to sell, to hold, to fold, to walk away), our brains love certainty. But mother nature, life and the financial markets are not black & white. There are always exceptions; there are always situations that seem absolutely clear to you, only to find out later that you were ill-informed. In the markets, as in life, this assolves us from having to be right or wrong and give us the opportunity to be agile, practical, thoughtful – we can cut our loosers and ride our winners.

"There are no answers in this business. There's just a hell of a lot of questions." - George Russell Jr. of Frank Russell Co.

It's horrible to build your life around terms like “I don't know, maybe, up to a certain point, probably” but if you want to trade then there's no other way that I know of. So the average trader will smack some fancy lines on his chart, use oscillators he knows nothing about, use “guru” reccomendations trying to find that degree of certainty that he doesn't have. He will then believe any bit of nonsense that is said with convinction. And at the end, taken by fear, he'll decline all responsibility and will delegate the decision making to others. My contention here, is that you cannot look for certainty in the financial markets and thus you cannot control what the markets do. So we cannot allow ourselves to be frustrated when “the market went down when all indicators were pointing up” or “the market stopped me out and then reversed it's course” or “the market was so cheap that I was certain it was a value buy...but it just keeps going down!”. Do not try to bind the market to any set of rules. The market will break them all, and you will end up broke.

Most investors and traders spend too much time exposing themselves to all the informational noise that the internet allows you access too nowadays. Hence, unless they have a good filter in place which allows them to discern noise from news, information overload and analysis paralysis are always around the corner. Of course, having a good information filter is already a step in the right direction. But how many traders and investors actually realize whether they're getting sucked into the “more = better” illusion?

The investment or trading process should be easy, quick, and efficient. There are so many unknown unknowns out there that we cannot possibly approach this job thinking that by surrounding ourselves with twitter, IFR, Bloomberg, Reuters, bank reports, analyst predictions, “opening bell” commentaries and the ocasional horoscope forecast, we will be better off and more capable of selecting better stocks or better trades to get stuck into. More information might make us more confident...but it certainly doesn't make us more competent. Also, the noise-to-signal ratio has increased substantially with all the media and feeds available.

2. Knowledge vs. Wizdom

This huge increase in information available to investors has helped us increase our investment knowledge (facts or principles) and our confidence (faith or belief that we will act in a right, proper or effective way) about our actions, but not necessarily our investment wisdom (making sensible decisions and giving good advice because of the experience and knowledge that you have) or the ability to process that information. This is classic human behavior. Studies have shown that as we increase the amount of information available to us on a subject, our confidence increases. However, those same studies show that while confidence increases, competence does not. So we think we're making better decisions when in fact we're not.

Digging through all of this information and acting on "new information" (possibly over trading) as it arrives gives investors what behaviorists call, the "Illusion of Control”: the tendency for people to overestimate their ability to control events that they, in fact, have little or no control over. To quote from the book, The Art of Think ing Clearly, "focus on the few things of importance that you can really influence. For everything else: “che sarà, sarà."

"Wisdom is not a product of schooling but of the lifelong attempt to acquire it"-Albert Einstein

This might sound like a cliché, but there is no substitute for experience. Experience exposes you to all kinds of situations and gives you a chance to feel your emotional state and understand how you react to that and learn from it. It is one thing to read about how to manage a winner or encash partially on rallies and add to the position on dips, but doing it for real is of course much harder. What traders and investors alike try to do, by gathering so much "new" information as possible, is look for signs of changes in fundamentals or “news flashes” that are unknown to others. This would seem to explain the obsession – in equities - with things like "whisper earnings numbers," channel checking at retailers, networking with experts in the field to glean changes in sales trends or competitive balance or reactions to government economic figures.

In trading, as in investing, know that you cannot control the market and you cannot predict the future. So do not waste your time trying. Do not try to overlay indicators: the market does not respect them. Do not go through extensive country and/or company analysis: the fundamentals that matter will be mostly evident. Your decision making process should be simple, straightforward and effective. Don't get lost in the details.


To sum up: one of the main qualities a person should have, in order to overcome the difficulties of trading & investing, is faith in himself and the ability to let go of control. Seek to control yourself, seek to follow your plan and be disciplined. Seek efficiency (working smart as opposed to working hard) and keep it simple to stay profitable.

Good Luck!


REFERENCES

1. Seven Sins of Fund Management – James Montier 2005
2. The Art of Thinking Clearly – Rolf Dobelli
3. Trying Too Hard – Dean Williams 1981, Rockford College
4. Market Mind Games – Denise Shull