While I plan to usually write about a compelling investment theme, this month I want to also discuss trading psychology. For those of you who already read this (the following paragraph) from our blog posting, there is more detail here.
We believe that trading psychology is the single greatest factor determining an investor’s (professional fund manager or individual investor) investment returns. One must possess the right trading psychology (mental and emotional composition) to position the fund or portfolio such that it has the opportunity to be successful and drive superior investment returns. Trading psychology means trading rules and ways of thinking. We are constantly refining internally established trading rules [read- refining not changing]. Trading rules facilitate risk control and determine return risk profile, position size, scaling positions (in and out), loss limits for long and short positions, price targets, trading around core positions, reasons and implementation for bracket orders and balance and prioritization of technical vs. fundamental analysis and event driven occurrences by position. Therefore Trading psychology is imperative for every aspect of portfolio management. In addition, in terms of ways of thinking, one must recognize greed and fear, regret, euphoria and panic, as well as over-trading and the worst of all, vengeance trading. Vengeance trading (aggressively trading without sufficient calculation, trading on impulse not on instinct, trying to make up for previous losses) is a fabulous way to self-destruct! Understanding ways of thinking is just as important as trading rules themselves. For example, to avoid unnecessary “blind spots,” it is important to understand that price action does not make a sound premise necessarily correct [think Tesla at $400 per share]. Constant application of trading psychology is required to deliver superior and of equal importance, consistent, investment returns. We are not inventors of the concept of trading psychology. In fact it has been written about for 177 years with the first book about this subject written in 1841 by Charles Mackay, called “Extraordinary Popular Delusions and the Madness of Crowds.” Beginning in the late 1980’s there were the first of several books, including the famous “Market Wizards” series of books by Jack Schwager and most recently, the popular TV series, “Billions.” However, most fund managers ignore application of trading psychology. We think it is paramount.