Trader’s Corner — Mark Twain’s Stock Trading Advice
In today’s Money Weekend… Wall Street wins… GameStop game over… know that you don’t know… you can succeed… and more…
It looks like the popular revolt against Wall Street has hit a snag. GameStop Corp [NYSE:GME] shares are down about 89% from the high of $483 hit last week. Ouch.
GameStop game over
I was livid last week when I heard about Robinhood forcing their clients out of positions and banning any further buying in the stock. Like many people, I read it as a favour to their hedge fund masters who pay them for order flow.
But in the end I discovered that there was a more mundane reason behind the events. The explosive moves were causing trouble at the clearing houses and Robinhood were forced to provide more and more collateral as their exposure to GameStop increased.
How to Limit Your Risks While Trading Volatile Stocks. Learn more.
Know that you don’t know
It shows you that what you believe to be true may not be true at all.
One of my favourite quotes from Mark Twain is that ‘It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.’
That is a fabulous quote to keep in mind as you try to navigate the stock markets.
I think we all end up thinking we know more than we do.
Whether you are a fundamental analyst who can pick apart a balance sheet at a hundred paces or a chartist who has been observing markets for decades, you still don’t know what’s around the corner.
I read broker reports all the time and they look incredibly impressive with their detailed P+L projections going forwards three years. But when you drill down into the numbers there are usually so many assumptions underlying the figures that the chance the future P+L corresponds to the numbers given is usually quite slim.
That doesn’t mean there is no value in the numbers given. It just means that you have to keep your wits about you. You must remain alert to the fact that any number of factors could relegate the information you make your decisions on to the dustbin.
It becomes more of an art than a science at the end of the day.
You can succeed
Hopefully that fills you with confidence rather than despair. With a bit of work, you have just as much ability as the next person to do well.
The key thing you need for success is a desire to learn at all times. That means you must accept your ignorance even as you gather more knowledge. Or what you believe to be knowledge.
Once you shut yourself off from receiving new information, you are in trouble.
It is hard not to become stubborn when you have bought a stock after much work. You are sure that the future is bright, so you ignore anything that tells you otherwise.
It’s usually once the stock is down 70–90% that you finally realise your error and by then it is too late.
So, you put the position in the bottom drawer and hope it comes good at some stage.
That is not the way to build wealth trading the markets.
When you remain aware of your ignorance you detach yourself from the outcome.
Whether you make money or not in that position is no longer a judgment on how clever you are. You know that you don’t know despite how much work you have done.
Therefore, getting stopped out of the position is no longer an ego-crushing event. You don’t need to second-guess yourself once the stop-loss is reached. You just hit the sell button and move on.
The trick is in working out where you are proven wrong. The best positions are the ones where you are proven wrong quickly.
If you know you only have to risk say 10% of the price of the stock before you are proven wrong, that puts you in a powerful position. You only need to make 20% to make twice as much as you are risking. You can also increase the size of the position you can put on based on the amount of dollars you are willing to risk on the position.
The other benefit of accepting your ignorance is that you become incredibly focused on risk management. You no longer have visions of the millions you are about to make, but instead worry about holding onto the capital you have.
Your behaviour becomes rational rather than haphazard. Sticking to your trading rules becomes easy because you know they are there to protect you.
Accepting your ignorance isn’t the same as trading the markets without any knowledge at all and hoping for the best. A trader with 20 years’ experience who accepts his ignorance is vastly different from a novice.
The difference between success and failure can come down to something as simple as a change in attitude.
For Money Weekend
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