PERUSING THE LABYRINTH OF LEAKS THAT INVESTORS ENJOY
In the portfolios that I manage my concern, focus and energy is consistently on the equity curve that my strategy provides. A sloppy equity curve is a reflection of an inconsistent strategy. Think of it logically: The equity curve of your account reflects the sum total of your decisions as judged by the most accurate, unbiased judge of all....the financial markets. There is no identity in this dark pool of self-serving personalities who are chasing dreams in various stages of completion or degradation. The markets don't care about your skin color or hair color. They don't care if you walk like a monkey or stand upright. They aren't concerned with who you slept with last night or if you've never slept with another human being in 46 years.
The only concern of the financial markets, as expressed through the creation of monetary success, is if you have made the correct investment decision at the correct time. When both of those factors - investment decision and timing - manage to be in sync then truly wondrous, beautiful things can take place within an investment portfolio. BUT...the issue of investment decision and timing must be expressed with a consistent output. When it is not, then an erratic equity curve becomes the result. Something along the lines of what you see from a Richter Scale during a 7.1 earthquake off the coast of Indonesia.
Consistency in strategy, execution and mental state are the three factors that will result in a consistently upward slopping equity curve.
Anytime your strategy starts switching from A to B to R to Z then your equity curve will show the result. This is a leak in your game and your equity curve exposes it.
Anytime your execution begins to suffer as a result of indecisiveness built on the foundation of a lack of confidence then your equity curve will show the result. Another leak in your game that your equity curve will strip naked so that you can see all the lurid details of your inefficiencies.
Anytime your mental state moves from a place of peace to chaos your equity curve will show the result. Paul Tudor Jones recently said in an interview that if one of his traders is going through a divorce he will yank his money. Mental state matters perhaps more than anything else.
I recently visited with an old friend who was attending the Altegris Investment Conference in Carlsbad. He used to manage outside funds but now manages his own money exclusively. He told me that when he managed outside funds he would purposely employ buffers between him and his clients so that no clients would get to speak to him directly. The emotional influence of either a satisfied or dissatisfied client would have over his mental state was not something he was interested in risking.
My advice reiterated numerous times since I started this blog in early 2011 has been to watch your input. In other words, watch what you allow your mind to digest during the trading day. I rarely look at Twitter during the trading day. I don't read the news. I do not have 8 screens of quotes surrounding me as I attend to the markets. In fact, I have a real time app on my cell phone that I use to get real time quotes. That is all I use 95% of the time. I don't sit in front of screens all day worrying about each tick, news event, economic release and so on. At the end of the trading day I will review all the pertinent information relative to my strategy and once more before I go to bed. That is all it takes.
Allowing any and all forms of information to enter the mind on a continuous basis is a modern day malady that will not only degrade investment results but human results. The effects, of course, will end up transforming your equity curve into a work of abhorrent volatility that doesn't do anything but create commissions for your broker and rabbit ears for your pockets.
As investors, there is not a single on of us who can claim to have no leaks whatsoever. That is, after all, the attraction of this game we play on a weekly basis. The fact that it is a life work that is never completed and can never be perfected, only pursued. What can be done is to have a sense of consciousness, eliminating the most obvious causes of deficiencies in your strategy while constantly seeking improvement.
In the end, your equity curve will thank you.
