There are many determinants of investing success – book smarts, long-term experience, strategic prowess and skill are all worthy attributes.
However, one stands out above all others, that of temperament.
This explains why no one has found the secret sauce of how to get rich by enrolling in as many courses or reading as many books or researching as many articles as possible.
But possessing temperamental qualities are absolutely crucial to successful investing – that of free-thinking, decisiveness, and the courage to back your own decisions.
2020 has already see many years of market volatility rolled into a few weeks.
This volatility naturally triggers emotional responses that lead to irrational choices, which lead to mistakes, which lead to investment losses.
However, the ones who succeed are those best equipped to handle these different triggers.
Unsurprisingly, this is true not just in trading and investing but in life also – as most things worth striving for, require a certain mental toughness to get through the obstacles that are certain to be in the way.
Lately, the markets can trick people into thinking that investing is outrageously simple.
Everyone has heard of “be fearful when others are greedy, and greedy when others are fearful”.
None more so in the last few weeks, when “risk-on” is well and truly back.
Another roaring bull market has created an illusion that you can earn easy returns without risk, and get rich quick.
But once the inevitable end to this current bull market occurs – the bear market that follows presents investing as a certain money loser.
It is when Mr Market is behaving at polar extremes, i.e. the major turning points in the market – where the right temperament is most needed but is in short supply. Think about it, how did you feel on March 23rd 2020? Did you buy?
Anyone can sit back and ride a bull market to its frothy peak – and then keep on riding until panic sets in.
But, in order to be successful – you must think and act against the crowd.
Because prices reflect the obvious – but not the obscure.
This is because if the crowd believes the bull market will continue, then it has already been priced in.
The corollary being, anything which can disrupt the trend, is not priced in.
But you can’t wait for the disruption to arise, because once the trend breaks, once the mainstream is aware of it, and when the selling starts, it’s already too late.
Therefore, it is imperative that you are willing to be early, to be able to sell when prices are rising and when the bull market seems endless.
Conversely, you must be willing to buy when prices are falling, while the bear market threatens to become much worse.
Both are extremely difficult, both require unbelievable amounts of willpower and both can make you look like a fool.
Although remember, if it were easy then everyone would do it. And if everyone did, the market would turn just sooner, until a new trend is formed.
And if that wasn’t enough, history has shown that betting against the crowd usually fails.
It’s only at the pivot points, is where betting against the crowd succeeds. Expect no one has an idea as to the exact date of those points.
So, staying in during the duration of a bull market can be very rewarding, but getting out whilst the profits are still rolling in, is undeniably hard.
Because exiting a bull market, and hence changing the conviction that it will end, is almost certainly going to be costly. And very few people are willing to stomach that.
That’s why the investing greats stand out. Because they are independent and decisive, and have the courage to appear wrong at the present time but then ultimately be proved right in the future.
It all comes back to temperament.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
