Why geeky outsiders often make better traders than cocky jocks
• Intense focus, objective analysis, self-discipline and humility are just some winning traits
he stock market is nothing if not a place of pure deception. Just when you think you have it figured out it changes course, leaving you scratching your head. Just when it seems to make sense it makes no sense whatsoever — which would appear to be the case most of the time.
Economics? You’ll be hard pressed to find a connection between economic data and reports and market behaviour. Earnings? If a company beats the consensus its stock must go up in price, right? Wrong. There’s simply no way of knowing how the market will react to an earnings report.
Analysts and the media will always have an answer – if the stock rises no explanation is needed, if the stock falls it’s because the market expected better – but it’s just repetition. Maybe true, maybe not.
Analysis? Even if your research does find “value”, it could be a very long time before the market recognises it – if ever. And just because a pattern or technical benchmark has been shown to work in the past doesn’t mean it will do so again.
So what’s a trader to do? Throw darts? Pull stocks from a hat? Thing is, good trading is a talent; a superior skill that only a few have, or are able to acquire.
There are those who’ll tell you otherwise — that it just takes this or that. That, with enough commitment, anyone can succeed in trading. But that’s not true. Anyone can trade the markets, but to succeed, really succeed, you need a special something — an edge — without which you’re more likely to end up forever muddling along.
On that score, Morgan House advises every investor to go to investment conferences, if only to meet all the other people who look like you, think like you, speak like you, work like you, went to the same school as you, and look at the same data as you
T— all of whom think they have an edge over everyone else in the room.
Then again, if Peter Lynch, George Soros and all those other market wizards can do it, why not you and me, right?
The quick answer is that they’re special and we’re not.
After Michael Burry (the former hedge-fund manager who predicted the US housing crisis) came to prominence he was praised for his contrarian approach, his patience and for acting on his conviction.
But Burry had another important advantage: as Winsor Hoang explains at Equities.com, “One of the reasons Michael stays so focused on investing and researching is his challenge with Asperger syndrome.
“Asperger can make interacting with others difficult and Michael did experience the downside, but for him it also has an upside. It allows him to stay highly focused and find details better than the average person.
“Asperger gave Michael a strong patience that is a considerable asset in the investment world. He could pore over information, reading news and researching meticulously in a manner that would have most people bored and zoning out from lack of focus. This allowed Michael to find details that others would miss.
“Another advantage Asperger gave him was the ability to be an outsider and develop his own ideas. Most people want to be in the crowd and tend to follow the ideas and movements of their peers and the general population, but when you have a syndrome that already makes you feel like you can never really fit in, you start to rely on your own ways of thinking and doing things. It gives you the chance to tread paths no one else wants to go or take risks no one else wants to take.
“Michael did exactly this when he predicted the housing market plunge. At the time of his prediction no one wanted to believe, but he decided to go against the majority and as a result came out as the victor.”
Burry is a great example of an investor with an edge. Research suggests that some personality traits predispose traders to success.
Mark Fenton-O’Creevy, professor of organisational behaviour at the Open University who studied 118 traders for several European investment banks, found that successful traders tend to be “emotionally stable introverts who are open to new experiences”.
The consultants at Market Psychology Consulting, a US firm that coaches traders, believe there are six characteristics that produce superior results:
Low emotional reactivity. Emotional stability is considered
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crucial, especially during periods of market turbulence. In one study Andrew Lo and Dmitry Repin measured traders’ heart rates, blood pressure and skin conductance while trading and found that more experienced traders had less physiological reactivity to surprises;
Low illusion of control and a belief in the occurrence of chance events. Winning traders do not feel they have control over market price action and they have a strong belief in the role of chance events in shaping market prices. Winning traders prepare for their trades with thorough research; before they enter a position, contingencies have been thought through and a plan is in place;
Low overconfidence. Overconfident traders tend to trade too frequently and ignore danger signs regarding their positions;
High self-discipline. Self-disciplined people are better able to control their impulses towards goals. Self-discipline is a facet of conscientiousness. Impulsive individuals, on the other hand, tend to overtrade without improving performance;
Self-awareness. “In the sense of an enhanced consciousness
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of one’s own physical and emotional state.” Additionally, self-aware individuals often have logical reasoning behind their choices. Selfawareness is also one of the key traits of individuals who have high emotional intelligence;
Decisiveness. This is essential for traders, regardless of the stressors they are facing on or off the trading floor.
“I discovered you can’t train people how to trade by just imparting knowledge,” says Jack Schwager. “The key to trading success is emotional discipline. Making money has nothing to do with intelligence. Think of all the bright people who choose careers on Wall Street. If intelligence were the key, there would be a lot more people making money trading.
“Also, the people who are really successful in trading are tremendously hard workers … a love of the game is another essential ingredient. Michael Jordan didn’t become a great basketball player because he wanted to do product endorsements. Van Gogh didn’t become a great painter because he dreamed that one day his paintings would sell for $50m.”
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