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Trading Lessons: Learn to Doubt Yourself


Stay passionate about your vocation, not your biases.

I recently saw a bumper sticker that read "Don't always believe what you think."

Over the years, it's really pained me to see countless people falling in love with their own choices. It's easy to do; after all, the most important person in your life is yourself. (On that note, did you ever think about why Apple (AAPL) named their music device, iPod? How well would uPods have sold?)

A good trade in any name can make people believe that somehow they have a special bond with it. In declaring their love for the company, they abandon all rules and judgment and can see no wrong -- even in face of negative fundamental or technical action. Love justifies every negative. And soon, heartbreak ensues. Sadly, I've seen this happen over and over again -- only the faces have changed.

On a personal note, if there was any temptation to break the rules, it was with Apple in 2004, when I bought it $13. My friends often ask me if I feel any regret for not going all in on the company since I was a vehement and vocal "believer." My answer is always an emphatic, no. I'd done that earlier for the many high-fliers in the dot-com bubble and I wouldn't have any money left to invest in Apple if I had (I did establish a larger than normal position).

I've seen many smart people lose a lot -- even in brand-name companies like General Electric (GE), AIG (AIG), Intel (INTC), Cisco (CSCO), and others -- as they got sucked into the vortex of their own beliefs, analysis, and stocks and disregarded reality. (For newer Minyans, these trading lessons stem from my first year (1995) of full-time trading -- see It's Never Too Early for Thanksgiving for more.)

In real life, if someone's preparing to enjoy a nice summer day and it starts raining, you won't find her arguing with the rain! But in trading, most people will argue with reality rather than question their own beliefs.

We Have Met the Enemy… and He Is Us.

The way I redirected my focus away from individual stocks, was to concentrate primarily on my trading account! After all, even though I remember some phenomenal hits and misses, all trades are reflected in my account. Doing this really helps me stay in the now and overcome the "recency-bias." Using an objective, shorter-term lens also helps me focus on the long term. (More on that in The Agony of a Profitable Trade.)

I remain very passionate about my vocation, which is why I can't be staunchly passionate about individual companies, my trading beliefs, and my market biases. Those emotions -- though a necessity for making your dreams come true -- have to be restrained. The use of logic and a disciplined approach is the way to do it.

And in all honesty, it took me a long time to really understand what I'm saying so easily here. So, fellow Minyans -- please take your time to grasp the gravity of this thought.
No positions in stocks mentioned.

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