A LOOK INTO PROPERLY STRUCTURING THE MARKET MIND
Long-term prosperity in the markets comes from a number of components that are, over time, refined, replaced and tuned to the point of perfect harmony. Those who get places are those who adapt, especially when it comes to the mental structure with which they approach the financial markets. It is in the mental game that good becomes great and great becomes legendary. The mental aspect of trading and investing will determine a majority of your success, yet it is overlooked time and again.
After closing my hedge fund in 2006, I was very active in the poker scene, both online and in live games. I would play strictly cash games, dedicating a great amount of time to studying the game intensively. During that time frame, I played well over one million hands of poker, often playing 4-6 tables at once online.
Upon reentering the financial markets in a serious capacity during 2009, I've completely stopped playing the game, all but once a month with a group of friends I have known for years. It is just too much of a time suck. I do, however, continue to study the game. I especially enjoy listening to interviews with some of the great, young poker minds that exist today. The interviews are purely a means of studying their thought process. The great players have a thought process that is both fascinating and extremely relevant to participants in the financial markets.
Here are three lessons I have learned from both playing and studying poker that have become ingrained within my own thought process:
1. Probability Rules: Successful poker is 100% about accurately determining your opponents range of hands and tweaking the probability with every new piece of information you receive. If you have been following my analysis for more than a few weeks, you will notice that I always speak in terms of probability. There isn't a point of analysis that I publish whether fundamental research reports or price analysis that isn't, at its core, framed in terms of probability.
Additionally, I won't sell an investment, make an addition to a position or buy into a new position without framing my decision in terms of probability. That is exactly why I put so much emphasis on price action, relative to others who invest in small-cap names over a long-term time frame. Truly understanding price is the means of determining probability. I like to think I understand price better than 99% of investors in the marketplace. It is my edge. And it is how I am able to determine the probability of success in buying, selling or adding to an investment at any given time.
2. Think Ahead: In addition to probability, the great poker players have the ability to think steps ahead of their opponent. Numerous scenarios are being played out in the mind based on a multitude of possibilities. Successful investing involves always knowing where you stand, regardless of the market environment. You should never be lost in a position. If there is any doubt as to where you stand, you get out. It is as simple as that.
You prevent being in a position of doubt by thinking well ahead. An investor with any long-term relevance will know exactly where they stand if ABC stock goes up 30% over the next week or down 20%. I can tell you, with great precision, what position the portfolios will be in should the Dow dive to 12,000 in the weeks ahead or rise to 14,000. You're not allowed to be caught flat footed....this isn't the D-League.
3. Push Statistical Edges: If your frame of mind is 100% based on probabilities and you have the advantage of thinking well ahead of your opponent, you will know when you have a statistical edge in any given hand. Pushing that edge is what turns good into great.
This is a big problem of mine with respect to professionals in the current market environment. As a result of a thousand lashes received at the hands of the market over the past several years, professional investors, especially, have lost the ability to push their edges. What they don't realize is that losing the coveted 1 and 20 pay structure comes just as quickly to those who are overly-conservative as it does to those who are overly-aggressive.
When you have the market by the balls, you had better squeeze until they start to dance around your feet. Winning positions cannot be allowed to get away cheaply. I add to certain winners aggressively when I know that I have a statistical edge. The greater the edge, the larger the position.
I've been reading books about the market since 1994. There are very few that will give you the type of edge that can truly get you through any of the numerous plateaus you will encounter. The edge you desire will often come from experiences in the markets and sometimes, experiences outside of the market as well. In my case, it was both that has brought me to the point I am at in my approach today.
Let the evolution continue............
