Today, I plan to share the investment insights Benjamin Graham, Warren Buffet’s mentor, gleane...
Consistency Is Not a Game of Perfect
06/02/2015 6:00 am EST
When it comes to the quest for consistency, Bruce Bower of SMB Training Blog and HowOfTrading.com explains why—rather than trying to control something that can only be partially influenced—traders should shift approach and focus only on what can be controlled: the quality of individual input.
This is one of the most challenging and yet important topics for beginners and pros alike. At every stage of their journey in the markets, people want to be more consistent. They ask about it constantly. They want more consistent results; smooth and steady profits. They want to be more consistent in their emotional states. They want to know how to be more consistent in their effort and to stay more disciplined.
With this topic, it’s important to define terms. When people say that they want to be more consistent, what they are usually asking about is more consistent results; making a nice, steady 2% percent per month on their capital base without drawdowns. I can’t blame them- who wouldn’t want that? But what they also want is to know that their results are under their control. They want to know that they can envision a return target and hit it consistently. This is where people get a bit off track.
Consistency is not a game of perfect, but rather of better. By their nature, the markets are up and down. As a result, any strategy will see its results fluctuate. In the markets, there is always an element of random, of something that’s beyond our control. No investor or trader will win on every single position, because some will go against us. Some positions will turn into huge winners, while others will be losers. You can take some steps to flatten out some of the fluctuations, but ultimately there will still be fluctuations. No one will have an equity curve that’s straight up, free of any drawdowns.
As such, if you are targeting your results or thinking about your results, then you are trying to control something that you can only partially influence. Instead, you should shift your approach and focusing only on what you can control: the quality of your inputs.
Your main input is your preparation. As Benjamin Franklin famously quipped, “Failing to plan is planning to fail.” This is when you ask yourself some questions. Do you have a plan for what you will do in the markets? Do you have a preparation routine that you undertake every day or every month…or are you just kind of winging it? Do you review your work and the markets often or only when you have a tough run? If you do all of these, then you will be able to tackle the markets feeling prepared, confident, and capable. If you want great results, then you need to put in consistent, high quality effort.
NEXT PAGE: The Tingle of Trading Toothpaste|pagebreak|
But preparation work is arduous and difficult, which can make it difficult to do the kind of high quality prep work that we should do. The key is turn it into a habit, something that’s automatic and we do without even having to think about. Think of flossing your teeth. It’s not a pleasant activity, but you most likely do it every day without thinking about whether or not you need to do it. Rain or shine, good mood or bad mood, you floss your teeth.
In his book The Power of Habit, Charles Duhigg outlines how habits work and how to form new ones. Every habit has three steps: the cue; the habitual action itself; and the reward. Every habit has to have these three steps. Duhigg gives the example of brushing our teeth. The cue is going to bed; the action is brushing our teeth. And the reward? Yes, there’s a reward: the tingly sensation that toothpaste leaves you. While it’s almost insignificant in the grand scheme of things, it’s enough to motivate you to brush your teeth.
As human beings, a lot of our decisions are not rational or, at least, are influenced by irrational things. Our rational brains know that we need to brush our teeth so that they don’t rot and fall out in 30 years. But by itself, that isn’t tangible enough to get us to act consistently now. Instead, we need the immediate, tangible reward of a minty, tingling sensation.
The key is to build a habit out of our prep, including a short-term tangible reward. The cue is obvious: you start whenever you decide that you need to. The habitual action is your comprehensive preparation routine. Not the one you can complete in five minutes, but a really thorough preparation session. And then, give yourself a reward. You can decide to get a cup of coffee, go for a brisk walk, or just stand up at your desk and stretch. The reward should be immediate and something that you care about, because this is what gets you going.
By creating powerful habits that help you as an investor, you will be consistent in the things that you can control: your own effort. And preparation is what Duhigg calls a keystone habit, because it makes everything else so much easier and more effective. If you’ve done the necessary preparation, you are much more likely to have a plan and be able to execute on it, no matter what the market is doing. You are much more likely to have solid risk management, because you are anticipating, rather than reacting. And you will be able to review your performance more thoroughly, because you have more to work with at the start.
Related Articles on STRATEGIES
I spend a lot of time talking about block trades. These are the huge trades that show up on your opt...
I have been tracking a set-up for the SPDR Gold Trust ETF (GLD), which I analyze as a proxy for the ...
AllianzGI Equity & Convertible Income Fund (NIE), which yields 6.8%, invests in convertible equi...