After having trained many investors to improve their skills in the sharemarket, I have tried to work out why some people succeed, and why others go onto become net losers.
I’ve seen people with superior intellect go onto decimate their superannuation funds completely.
On the other hand, some people who have not been so gifted with such grandiose intelligence achieve remarkable profits.
So, just how clever do you have to be in order to trade effectively?
I’ll always remember being approached by an extremely well groomed gentleman after an Expo seminar that I’d run.
He was wearing an impeccably pressed suit, and he had just the right amount of credibility inspiring grey hair at his temples.
When he spoke to me, it was clear that he had received a private education, and the benefits of a good upbringing.
However, the first words he said were: “For the life of me, I cannot work out how to trade effectively.
I’ve read over 100 books on trading, and for some reason, I’m still making losses”.
We chatted for a while and I eventually asked what he did with his life other than trading.
It turns out he was one of Australia’s top neurosurgeons.
He described his trading system to me.
When it became clear that I was going to require a degree in advanced mathematics to understand how he traded, I stopped him mid-sentence and said “Trading is meant to be quite simple. Maybe you’d better ‘dumb it down a little’.”
He looked at me in utter disbelief, shook his head and walked away.
Many successful professionals have established an enviable level of success in their corporate or academic roles.
Often they feel that the sharemarket should recognise that they are about to trade and roll out the red carpet of profits.
Some seem to have an unfailing belief that they are bulletproof.
The Halo Effect
There is a psychological phenomenon called the ‘halo effect’.
This effect is responsible for an oversimplification of events in the world, in order for your psyche to have an easier time getting through life.
The halo effect suggests that if someone has developed knowledge and skill in one area of life, then this should radiate to a totally unrelated area.
This is why Kieran Perkins advertises milk.
“Well… if he can swim like a champion, then he must know the best type of milk for me to drink!”
It also explains why Buzz Aldrin recommends fitness products and bikini-clad beauties sell spanners.
(“Well… if those girls recommend that I should buy that brand of spanner… maybe I will find that beautiful women will throw themselves at me as soon as I leave the hardware store…”) It is a simple leap of logic designed to line the pockets of clever marketers.
It is tempting to feel that if you have been successful in one area of your life, this should spell automatic success in the sharemarket.
This simply does not happen.
There are few similarities between the backgrounds of great traders.
Some terrific traders used to be garbage collectors, others doctors.
Your past profession has very little to do with your future as a trader.
In many ways, the highly paid corporate professionals who begin trading are at a psychological disadvantage.
Due to their above-average incomes, the losses they make can often be mitigated if they take on one extra patient or see one extra client.
Trading from this perspective negates the importance of discipline.
It’s far better to trade as if your very life depended on it, even if it doesn’t.
This is also one area where IQ does not guarantee your success.
Some of the dumbest people make great traders because they follow their trading rules without question.
But sometimes we can get in our own way though.
Sometimes our self-talk can get the better of us, and all we can hear is that nagging little voice of fear.
Effective trading relies on two central activities.
Firstly, you need to generate a trading plan that covers all of your entry, exit and position sizing requirements.
Secondly, you need to follow that plan.
The paradox is that you need a fairly high level of intellect to create an appropriate trading plan.
However, to follow a plan to the letter, it is far better to turn off the ‘thinking’ part of your brain, and just trade according to the rules.
Having a high level of intellect is an advantage in writing a plan, but it may not assist the day-to-day monotony of following the plan.
Often, more intelligent people struggle as they question, over-measure, and generally get caught up in their own trading results.
Some get carried away with the application of indicators that they keep adding to their charts until they almost buckle under the pressure.
It seems that more intelligent traders feel compelled to tinker with their plan, which is of no advantage to anyone.
People with a perceived lower level of intellect may struggle initially to write their plans, but when it comes time to trade, they are content to follow their plans to the letter.
They do not overanalyse, and they maintain loyalty to their trading system.
The ideal investor is clever enough to formulate a trading plan, but dumb enough to follow it without question.
So if you’re not a budding Einstein, you can still be an incredibly profitable investor in either the sharemarket or in property.
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