A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
The Trouble with 'Number' Goals
09/26/2012 6:00 am EST
If you hang around long enough in the trading or banking communities of New York or London, you’ll soon hear the infamous question: “What’s your number?”
The first time, you answer by rattling off your phone number; then you realize that the question has nothing to do with speaking on the phone. “Your number” is usually the number at which you have made enough money that you can safely retire and/or leave the business. Once you’ve reached “your number,” you have enough money for a place to live while earning a passive income that covers your expenses and funds a good lifestyle.
At first glance, it would seem that this is a brilliant concept for traders. After all, most people think that investing is all about “making money.” We can objectively measure the sums involved.
Having a clear financial goal to benchmark against is obviously part of this, so traders will embrace this as the next logical step. Moreover, having an overpowering financial motivation will probably prompt you to make more money. In reality, things are much more complicated than this.
I am all in favor of having goals in one’s trading, both financial and otherwise. They give us something to shoot for and measure against. They can motivate us tremendously to raise our game. Goals can program our brain to prepare for, expect and achieve success. We can derive a tremendous amount of motivation and satisfaction from a Big Hairy Audacious Goal (as Jim Collins calls it). In this respect, goals are necessary for our development and wonderful.
What bothers me about the concept of “the number” is not the goal itself, but rather the connotations that come with it. Ultimately, most happy and successful people derive satisfaction from doing the job itself, not just from the compensation. As the saying goes, “Do what you love and the money will follow.” If you want to be a successful trader, you must derive a great deal of enjoyment and satisfaction from the actual process of trading itself.
What you “get out of it” certainly varies by person—some enjoy the competition, others like thriving under pressure, while a group likes the intellectual challenge. It depends on what you get out of trading.
Nonetheless, if your enjoyment for the process of trading isn’t the number one reason that you’re doing it, then you’re in the wrong line of work. The most assured path to success, and to more money that you can imagine, is do it because you love it.
More importantly, knowing these other whys serve an even more useful purpose: they keep you focused on the fundamentals of your craft. Ultimately, your job as a trader is to make a series of smart risk/reward decisions, knowing that the profits will follow.
The information-processing and decision-making are the skill part— the money is a way of keeping score. You should trade because you enjoy making good risk/reward decisions and ultimately, your goals should be aligned with getting better at that process. Focus on trading well and the money will follow.
Don’t believe me? Let me pose a question: Imagine if a football team blocked, tackled, passed, and ran better than another football team. Do you think that the score of their games would ultimately reflect that?
As the famous football coach Vince Lombardi once said, “Some people try to find things in this game that don’t exist, but football is only two things—blocking and tackling”. Stay grounded in the basics.
Winning teams don’t obsess over the score—they focus on playing well and getting better at their craft every day. The score and their win/loss record will naturally reflect that they are the better team. And I can guarantee you one thing—winners certainly don’t think about getting to a certain number of points in a season and then quitting!
Next: Your approach to trading—and to winning at trading—should be similar|pagebreak|
Your approach to trading—and to winning at trading—should be similar. You play for the love of the game, and you set goals based on how you work each day. If you improve the nuts and bolts of decision making, then your results will get better and the money will follow.
On each trade, you want to take an appropriate amount of risk relative to potential return on each trade, consistent with some kind of well-researched decision making system. You want to stay vigilant in monitoring open positions. If you can do those, then you will stay in the game and the profits will follow.
Monetary goals can actually serve as a distraction to trading well. Imagine that you have your homework and preparation and are doing things correctly, but suffering a drawdown. It doesn’t mean that your system is broken, or that you’re useless, or that you’ll never reach your financial goals. Rather, it just means that the last few bets weren’t winning bets.
Stay focused on making good trading decisions and what you love about the craft of trading and you will find your way through the temporary slump. In such cases, you want to be motivated by aspects of trading not related to money, because profits seem so far away and you could get sidetracked by anxiety or depression about the fact that you were not making money, when in fact you were suffering a perfectly normal dry spell.
If you are always focused on a number, that could prevent you from making the good risk-reward decisions that any trader will necessarily make. For instance, say you have a net worth of $22 million and your goal is $25 million. Under such circumstances, you would be thinking exclusively of playing it safe, so as not to lose anything and thereby jeopardize your goal.
But nowhere in that thinking was there an evaluation of markets. What if there are plenty of opportunities, and your trading style could perform great—wouldn’t you want to make the right trade and take some risk in order to get to $30 million? Or if you don’t see any opportunities, then why not stay out of them entirely? That will no doubt protect your principal—because it’s the right decision to make.
The corollary is that if you really want to be a successful trader, then you should cultivate a love of everything that makes you better at your craft—learning more about yourself, various markets, trading styles, trading psychology, etc. By concentrating on these, you will both get better and enjoy the process of trading more—and greater profits will follow.
You want to be in the market because you are constantly learning, growing, and maturing as an investor in some way. A higher P&L should be a reflection of this internal growth. Moreover, if you are always looking for that mythical exit point by trying to get your account balance up to a certain point and no more, then your focus will be diverted away from making those investments in yourself.
To sum this up, let’s take the example of two of the great investors of our time, George Soros and Warren Buffett. They are obviously multi-billionaires, long ago having reached a “number” that would provide them with a luxurious and comfortable lifestyle. Both over 80, they are well past retirement age. Yet they are still actively involved in managing money. They both clearly love markets and making investment decisions.
Where they differ is their “why”—as Soros describes in his book Alchemy of Finance, he actually wanted to be a philosopher and is intellectually fascinated by the markets, especially applying his philosophical theories like reflexivity. Buffett is more fascinated by and interested in investing in operating businesses.
Nonetheless, both obviously have spent many years perfecting their craft because of some inherent fascination with markets, which prompted them to get better at making risk-reward decisions. Now they are each worth many billions of dollars as a result.
Shouldn’t we all aspire to do the same?
Related Articles on STRATEGIES
There was no shortage of reporting last week on the long-awaited verdict for the U.S. versus AT&...
There’s a somewhat unprecedented shake-up taking place within institutional investment portfol...
On balance, we are most enthusiastic at present about investment opportunities in the U.S., explains...