A successful self trader – Rule # 43
Whether you are trading or investing; the buck always stops with you. Once a decision is taken you need to take accountability for the same. You cannot pass on the blame to extraneous factors. It just doesn’t work that way. You need to answer 2 questions. Why do i want to buy at this price and why does someone else want to sell at this price. Once you grasp the other side, you can be fully answerable for your decisions.
Take accountability for your investment actions
I always remind my clients of a famous saying by George Bernard Shaw. I quote, “Don’t blame your circumstances. The men who get on in the world are the men who go out and look for the circumstances they want, and if they can’t find them; then make them.” In the financial markets, you just cannot pass on the buck. Once you accept this, the process becomes a lot simpler. Let me explain!
As a trader or an investor, you do not have the luxury of saying, “I tried my best, but ….” You need to do extensive homework before getting into a long or short position. Having entered into a particular position, it is also essential on your part to constantly monitor and continuously evaluate the sensitivity of your position to various changes, both within and outside your control. That’s the first step.
The second step is slightly more complex. The best way to take accountability for your decision is to look at the problem from the perspective of the other party. Let me elaborate. When you buy there is a seller. You need to understand why the other person wants to sell, when you are keen to buy. The converse holds true in case of a short position. This gives you greater confidence to take the onus.
THREE STEPS TO ACCEPTING THAT THE BUCK STOPS WITH YOU
Do your homework before taking the position
This is the first step to equip you. Read the balance sheet, study the ratios and understand the business model. What is the risk entailed and are you prepared to take that risk? What is the sensitivity of your position to external factors?
Monitor your position closely and carefully
Once you take a position in the market, you need to monitor it 24X7. There is no other choice. Monitor global politics, look at the company’s key sensitivities, try to simulate on Bloomberg or Reuters. You need to think beyond the mundane!
Put yourself in the shoes of the contrarian
This is probably the best way to take responsibility. Understand why someone is selling when you are convinced about the stock. Do the short term and long term prospects diverge? Can I get a better entry price? The list can go on.
“Actions have consequences and you are the only one who is responsible for your own actions” – Holly Lisle
6 REASONS WHY INVESTORS TEND TO PASS THE BUCK
- That was beyond my control, is a standard excuse of investors. Nothing could be farther from the truth. In investment, as in war, there will always be that element of surprise. A true general is one who makes the best of good times and bleeds the least in bad times. The same applies to your investment decisions.
- We have all grown up in the systematic / unsystematic divide. There are certain risks that are classified as applicable to the entire market. That is where most investors tend to blame the general market conditions. The question is what kind of armour did you build around your investment decision?
- Index benchmarks are both, simple and misleading. When the index is up 10% in a year, we are happy to beat that. When the index falls by 8%, we are ok if we fell by 6%. The benchmarking system focuses on the performance of the herd rather than on individual responsibility. That introduces mediocrity.
- You are ok as long as you can stand up among your peers. In the last one year nearly 85% of the equity funds have underperformed the index. So if you got index returns, you are still in the top 15% percentile. Now that is a rip-off. A focus on peer comparison, when most underperform the index, is outright weird.
- Too much focus on returns and too little on capital preservation. A fund manager or an investor should be judged both on risk and returns. Most investors tend to pass the buck when it comes to risk. Ask some sticky questions. Did you foresee this risk? What hedging strategies did you follow? What is your plan of action?
- More often than not, you fail to look at the other side of the story. Sounds simple, eh? If you are buying, why is another trader selling? Can a quality stock have so much supply? Are we missing out on some key aspects of the story? Once you try to evaluate these finer aspects of an investment decision, it becomes so much easier to understand your decision, and you hardly need to pass the buck.
PASSING THE BUCK IN PRACTISE
Most investors tend to assign a variety of reasons for their decisions going wrong. The execution of the broker was not up to the mark. Regulators acted in an impractical way. The government did not do enough to push the reforms agenda. The RBI governor did not cut rates. Competitors indulged in predatory pricing leading to shrinkage in margins. Sadly, an investor is expected to visualize the entire range of factors. That is how you separate the wheat from the chaff.
If you break down your investment process into 3 stages, you will get most of your answers. Firstly, there are inadequacies in your homework before getting into the position. Secondly, you may have fallen short in monitoring the position and have either underestimated or overestimated the implications. And lastly, you timed your exit wrong. It happens so often. We get into a great stock, get frustrated and exit early. Or we keep holding on to losers in the fond hope of a bounce back. You can’t pass the buck.
TAKEAWAYS FROM THE “PASSING THE BUCK” DEBATE
The legendary German reformer, Martin Luther, once said, “You are not only responsible for what you say, but for also what you don’t say”. That is the crux of the investment and trading game. You are accountable for what you do and for you don’t do. You are accountable for what you visualize and what you fail to visualize. You are responsible for the outcome of factors that may or may not be within your control. Once you appreciate this harsh reality, being accountable becomes a lot simpler in the markets.
As Jesse Livermore famously said, “In trading there is no long side and short side. There is only the right side and the wrong side” As an investor, you need to appreciate that the buck cannot stop everywhere and when you are the investor making the decision, the buck stops with you. You can prepare, visualize, affirm, assume, ratify and execute. That is where it stops.
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