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Ego Ballet


Ooh, ballet!

I was conversing with a student last night over a beer or two and the subject turned away from the business he's trying to create and to the stock market. He was sharing how hard it is to make money and how he's learned (via losses) that he is often is own worst enemy. I got on to the subject of ego and its relation to trading. He found it helpful, so I thought I'd share it with you.

Making money in the market is a ballet of ego.

The act of entering a position takes an enormous ego. I don't care if you are going long or short or constructing a derivative position betting the stock stays flat. It takes ego precisely because the person on the other side of the trade from you believes exactly the opposite.

When you buy a stock, you are making a bet it will go up in price. The person on the other side of the trade believes the stock he/she owns has peaked in price and will go down from here.

When you sell a stock, you believe the price has peaked and/or there are better places to put your money. The buyer of those shares believes the stock is going up and there are no better places to put his/her money.

Ego. You are right and they are wrong.

Once you own the stock, however, the ballet starts. The same ego that enabled you to enter the position is now your worst enemy. To be successful, you have to eliminate your ego - particularly its ability to create emotional attachments to prior decisions. Once you are in the trade, you must be the dispassionate observer - a robotic Jack Webb-ish "Just the facts, ma'am" character.

This ballet is essentially impossible for most people. It's why the ability to consistently beat the market is so rare.

So how do you perform this ballet without tripping over your own toe shoes? Good question. One place to start that has proven successful is to determine exactly why/when you will exit a position before you enter it. Another is to recognize that emotion is your enemy. A third is to seek out and understand the opposite side of every trade. If you are going to be in a battle of egos with someone, it helps to understand the battlefield first. Fourth, find someone (analyst, researcher, journalist, friend, etc.) who has learned the ego ballet better than you have and listen to them closely. Not follow them closely, necessarily, but listen to them. Finally, don't obsess about losses. Obsess about identifying the behavior that led to the loss. That's far more productive.
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No positions in stocks mentioned.

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