Simple, robust solutions are easier to find than robust people or firms willing to apply them.

Jason Russell²

Trend following is as much about observing and understanding human behavior as it is about moving averages, breakouts, and position sizing. Understanding human behavior and how it relates with markets is commonly referred to as behavioral economics or behavioral finance. It evolved from the contradiction between classical economic theory (EMT) and reality. The assumption people act rationally, have identical values and access to information, and use rational decision making is one preposterous assumption.

However, trend following strategies only work if price trends continue. But why should trends continue? If prices initially underreact to either good or bad news, trends tend to continue as prices slowly move to fully reflect changes in fundamental value. These trends have the potential to continue even further as investors herd (or chase trends). Herding can cause prices to overreact and move beyond fundamental value after the initial under-reaction. Naturally, all trends must eventually end, as deviation from fair value cannot continue infinitely.³

There is an old Hindhu saying: ‘The World is as we are’. Are you tired of seeing the condition of the world around you? Start by changing yourself. Be the change you want to see in world. Be what you want to attract more in your life. Being loving to yourself is the fastest way to enjoy a more fun and productive life.

Charles Poliquin

Said another way, people are irrational as hell and seldom make rational decisions even if they think they do. That’s not my one-man opinion either. I have had the good fortune to learn from and interview the top minds in the field of behavioral economics and finance, including Nobel Prize winners Daniel Kahneman and Vernon Smith, Dan Ariely, Colin Camerer, Christopher Chabris, Robert Cialdini, K. Anders Ericsson, Gerd Gigerenzer, Donald MacKenzie, Spyros Makridakis, Terrance Odean, Steven Pinker, Laurie Santos, Hersh Shefrin, Daniel Simons, Paul Slovic, Didier Sornette, Meir Statman, Brett Steenbarger, and Philip Tetlock to name a few of the best minds in the field. (You can find these interviews on my podcast at www.trendfollowing.com/behavior.)

You can see their contributions to the academic nomenclature: confirmation bias, sunk cost fallacy, availability heuristic, attentional bias, frequency illusion, anchoring, contrast effect, clustering illusion, insensitivity to sample size, neglect of probability, anecdotal fallacy, halo effect, in-group bias, curse of knowledge, illusion of transparency, and hindsight bias, to name a few of hundreds.

I believe you can also see their work and all of these assorted biases conceptualized inside systematic trend following strategy. I have yet to see another rules-based approach that tackles EMT’s deficiencies head on while giving credence to the behavioral school, and then tying it all together with irrefutable proof in the form of month-by-month track records—going back literally decades.

History does not repeat itself; people keep forgetting it. No matter how many stock market bubbles there have been, or will be, investors and their advisors always treat the current one as permanent, sometimes even calling it a new era. In the meantime, others, myself included, have abandoned all hope of people permanently remembering the lessons of history.⁴

Prospect Theory

Investment bubbles have always been a part of human market history. For example, seventeenth-century speculators in the Netherlands drove prices of tulip bulbs to such absurd levels some bulbs were priced more than houses. The inevitable crash followed. Since then, from the Great Depression to the Dot-com implosion to October 2008, investors can’t and will never steer clear of manias. They repeatedly make the same mistakes over and over.

To be a good trader, you need to trade with your eyes open, recognize real trends and turns, and not waste time or energy on regrets and wishful thinking.

Alexander Elder

Daniel Kahneman, who was the first psychologist to win the Nobel Prize in Economics (see my podcast episode #212), attributed market manias to investors’ illusion of control, calling the illusion prospect theory. He studied the intellectual underpinnings of investing—how traders estimate odds and calculate risks—to prove how often people act from the mistaken belief they know more than they do.

Kahneman and his associate Amos Tversky found a typical person acts on what they christen the law of small numbers—basing broad predictions on narrow samples of data. For instance, if you buy a fund that’s beaten the market three years in a row, you become convinced it’s on a hot streak. People are unable to stop themselves from overgeneralizing the importance of a few supporting facts. Limited statistical evidence satisfies, no matter how inadequate the depiction of reality.⁵

They also determined people dislike losses so much they make irrational decisions to avoid them. This helps explain why some investors sell winning stocks too early, but hold on to losers too long. It is human nature to take the profit from a winner quickly on the assumption it won’t last for long, while sticking with a loser in the futile hope it will bounce back.⁶

Knowing others is wisdom;

Knowing the self is enlightenment.

Mastering others requires force;

Mastering self needs strength.

Lao Tsu⁷

Trend following by design knows if you don’t cut your losses, if you don’t exit with a small loss, loss will grow like a cancer. And the more you struggle with your small loss, unable to accept it, the larger it will become and the harder it will be to deal with it in the future—if you are still solvent by then. The problem with accepting a loss is it forces people to admit they are wrong. Human beings don’t like being wrong—ego rules decision making.

Accordingly, a discussion of why investors are their own worst enemies starts with sunk costs. A sunk cost is a cost that has already incurred that you can’t recoup. One you don’t get back. Thinking in sunk costs lets you see a loss for what it is—a loss. Although sunk costs should not influence present decisions, humans have a hard time letting go. An investor might buy more of a stock even though it is tanking because of their initial decision to buy it (“I am right!”). That investor archetype can then say proudly, “I bought on a discount!” Now, if the price of the stock never goes up again, as is so often the case, his theory implodes with the concrete lesson of a big loss.

“Take your small loss and go home” is the trend following pièce de résistance. However, too many market players are ambivalent when dealing with sunk costs. Although intellectually people know there is nothing they can do about money already spent and they should move on, emotionally people dwell and worry literally their whole lives.

An experiment with a $10 theater ticket demonstrates the irrationality of sunk costs. Kahneman told one group of students to imagine they have arrived at the theater only to discover they have lost their ticket. “Would you pay another $10 to buy another ticket?” A second group was told to imagine they are going to the play but haven’t bought a ticket in advance. When they arrive at the theater, they realize they have lost a $10 bill. Would they still buy a ticket? In both cases, the students were presented with essentially the same simple question: Would you want to spend $10 to see the play? Eighty-eight percent of the second group, which had lost the $10 bill, opted to buy the ticket. However, the first group, the ticket losers, focusing on sunk costs, tended to ask the question in a different way: Am I willing to spend $20 to see a $10 play? Only 46 percent said yes.⁸

Plenty of people are motivated by external factors such as a big salary or the status that comes from having an impressive title or being part of a prestigious company. By contrast, those with leadership potential are motivated by a deeply embedded desire to achieve for the sake of achievement.

Daniel Goleman⁹

This wide spectrum of market behaviors and biases that guarantee losses is endless. These behaviors, the antithesis of trend following, include:

• Lack of discipline: It takes an accumulation of knowledge and sharp focus to trade successfully. Many would rather listen to the advice of others than learn for themselves. They are lazy when it comes to the education needed for trading. To quote Fox Mulder’s office poster in The X-Files: “I Want to Believe!”
• Impatience: The human mind has an insatiable need for action. It might be the adrenaline rush or the “gambler’s high.” Proper trading, however, is about patience and objective decision making, not action addiction.
• No objectivity: The inability to disengage emotionally from the market kills investors—literally. Losers in the market “marry” positions. They have no prenuptial agreement with the market.
• Greed: The quick money types aim to pick tops or bottoms in the hope they’ll be able to “time” trades to guarantee profits. Their desire for quick profits blinds them to the real hard work for winning.
• Refusal to accept truth: Media types can’t believe truth is price action. As a result, they follow every other fundamental variable (an impossibility), setting the stage for inevitable losses.
• Impulsive behavior: Gamblers often jump into a market based on the morning paper’s lead. But by the time news has been published, markets have discounted it. Thinking if you act quickly, somehow you will beat everybody else in the great day-trading high frequency race, is the grand recipe for your failure.
• Inability to stay in the present: You can’t spend your time thinking about how you’re going to spend your profits. Trading because you have to have money is the state of mind that keeps you from ever finding the goal.
• False parallels: Just because the market behaved one way in 1995 or 2015 does not mean a similar pattern today will give the same result tomorrow.

There is little doubt if you try to bridge the gap between the present and the future with your market predictions, you will be in a continual state of uncertainty whether you admit it or not. Scientists have investigated the impact of extended uncertainty. The conclusion: People react the same way to uncertainty that other animals do when faced with a threat—shifting into fight-or-flight mode. Some don’t like that fatalistic conclusion, as it leaves them feeling like cognitive cripples.

Yet unlike the animal’s environment, where the threat passes quickly one way or another, human lives are spent in constant stressful situations, many of which never go away or ever arrive. According to neuroscientist Robert Sapolsky, human beings, unlike other animals, can—and often do—experience stress by imagining stressful situations: “For 99 percent of the beasts on this planet, stressful situations include about three minutes of screaming terror, after which the threat is over or you are over. Humans turn on the exact same stress response thinking about 30-year mortgages. Yet, while thinking about a mortgage is not life threatening, the stress is probably going to last much longer than three minutes. The biggest public health problem in the developed world 50 years from now will be depression.”¹⁰

NLP is short for Neuro-Linguistic Programming. The name sounds high tech, yet it is purely descriptive. Neuro refers to neurology, our nervous system—the mental pathways our five senses take which allow us to see, hear, feel, taste, and smell. Linguistic refers to our language ability; how we put together words and phrases to express ourselves, as well as how our silent language of movement and gestures reveals our states, thinking styles and more. Programming, taken from computer science, refers to the idea that our thoughts, feelings and actions are like computer software programs. When we change those programs, just as when we change or upgrade software, we immediately get positive changes in our performance. We get immediate improvements in how we think, feel, act and live.

Charles Faulkner¹¹

Traders not prepared for the inevitability of loss will become depressed when they lose money. They will look everywhere except inside, blaming others or events to avoid taking responsibility for their actions. Instead of understanding their own emotional state, they chase easy bucks and holy grails to avoid real thinking. It’s a cat chasing its tail while running in circles.

You see, some want more money, but feel guilty about admitting those true feelings. A few have lots of money, but want even more and feel guilty. Take a moment to think through your motivations for trading. If you have any reason for trading other than to make money, find something else to do, get a dog, whatever, and avoid the stress. There is nothing good or bad about money. Money is a tool—nothing more, nothing less.

Ayn Rand articulates nonjudgmental and rational attitudes about money:

You think that money is the root of all evil? Have you ever asked what is the root of money? Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?¹²

Fat, drunk, and stupid is no way to go through life, son.

Dean Wormer Animal House¹³

Human behavior should reflect a rational approach to money. People are supposed to refuse to pay too much for a watch because of the social cachet of a label, but they still pay. They are supposed to make intelligent objective choices that maximize wealth and financial security, but they don’t.

Self-Knowledge Keys

1. Know what you want. Know who you are, not who you think you should be. Self-awareness gives you the power to pursue what really feeds your soul and the belief that you deserve it.
2. Know the cost of getting what you want. Realize the trade-offs of every choice. People often think if they are clever they can make choices without experiencing any downside. Any road you choose means there is a road you won’t experience.
3. Be willing to pay the cost. People often try to negotiate to win a choice without cost. Every choice involves a price; we get to decide what cost we want to pay.¹⁴

Then what is the motivation behind someone who runs up credit card debt at 25 percent interest, but would never think of dipping into savings to pay off that debt? What is the explanation for people who spend time researching a new car or designer kitchen, but when it comes time to invest, they refuse to learn and then trust some kid banker fresh out of college with their life savings? Cognitive dissonance is in play: Some problems run deeper, springing from limiting, unconscious beliefs. For instance, a trader who has labeled himself a one-for-trader, or who learned as a child the biblical story “it’s easier for a camel to pass through the eye of a needle than for a rich man to enter the kingdom of God,” may subconsciously sabotage his trading to respect his beliefs. They’re deeply ingrained in us . . . but if all ethical people think money is bad, “Who’s going to get the money?”¹⁵

It may readily be conceived that if men passionately bent upon physical gratifications desire greatly, they are also easily discouraged; as their ultimate object is to enjoy, the means to reach that object must be prompt and easy or the trouble of acquiring the gratification would be greater than the gratification itself. Their prevailing frame of mind, then, is at once ardent and relaxed, violent and enervated. Death is often less dreaded by them than perseverance in continuous efforts to one end.

Alexis de Tocqueville¹⁶

David Harding knows deep in his bones the need for proper risk thinking in all of life. At the University of Cambridge he created a professorship to help improve people’s understanding of the mathematics of risk. Questions requiring a scientific ability to assess the chances of something happening—or not happening—arise all the time. Here are some examples:

• Following the poisoning of the Russian ex-spy Alexander Litvinenko, traces of polonium-210 were found at various locations in London he had visited. Statistically, how probable is it that someone who visited the same locations at a later stage would contract radiation poisoning?
• An apparently healthy woman is judged to be at risk of breast cancer and is advised to undergo a mastectomy. Should she do so?
• A person has to cross a main road to reach a few shops. Should he walk straight across the road, or use an available footbridge instead?
• How sensible would it be for me to invest in the stock market today? Might delaying improve my prospects greatly?
• A 29-year-old man decides to marry his girlfriend of three years. What is the chance he will meet a more suitable partner at a later stage?

As these examples show, risks must considered in the most ordinary of situations and high-pressure environments alike. But always be careful to not torture the statistics as a form of confirmation bias.

Emotional Intelligence

People want to believe if they are able to discern patterns, count cycles, etc. they will win. As a result they are continually making connections and drawing parallels not there. They miss seeing the evidence staring back. Ironically, the real pattern they miss is the pattern of acting with complete confidence to make decisions, right or wrong, in the face of the unknown. The less personal confidence, the more frustrating and demoralizing experiences will be. The more you learn about the markets and yourself, the more confidence unfolds. The greater your confidence, the more effective you become as a trader.

Psychologist Daniel Goleman’s bestseller, Emotional Intelligence, is a powerful case for broadening the meaning of intelligence to include emotions. Drawing on brain and behavioral research, Goleman demonstrated why people with high IQs often flounder, while people with modest IQs often do extremely well. The factors that influence how well people do in life include self-awareness, self-discipline, intuition, empathy, and an ability to enter the flow of life—character traits most traders would not consider particularly useful for garnering profits from the markets.¹⁷

Being self-aware also means understanding what you want out of life. You know what your goals and values are and you are able to stick to them. For example, if you’re offered a high-paying job that doesn’t square with your values or your long-term goals, you can turn it down promptly and without regret. If an employee breaches corporate ethics, you deal with it instead of making a half-hearted response because you’re pretending it won’t happen again.¹⁸

However, Goleman is not saying you should repress your feelings of anxiety, fear, anger, or sadness. You must acknowledge and understand your emotions for what they are. Like animals, biological impulses drive emotions. There is no way to escape them, but you can learn to self- regulate your feelings and, in so doing, manage them. Self-regulation is the ongoing inner conversation emotionally intelligent engage in to be free from being prisoners of their feelings. If you are able to engage in such a conversation, you still feel bad moods and emotional impulses as everyone else does, but you can learn to control them and even to channel them in useful ways.¹⁹

You see, Dr. Stadler, people don’t want to think. And the deeper they get into trouble, the less they want to think. But by some sort of instinct, they feel that they ought to and it makes them feel guilty. So they’ll bless and follow anyone who gives them a justification for not thinking.

Ayn Rand²⁰

Over-familiarization with something—an idea, say or a method, or an object—is a trap. Creativity requires something new, a different interpretation, a break from the twin opiates of habit and cliché.

Denise Shekerjian²¹

A trend follower’s ability to delay gratification, stifle his impulsiveness, and shake off the market’s inevitable setbacks and upsets, makes him not only a successful trader, but a leader. Goleman found effective leaders all have a high degree of emotional intelligence along with the relevant IQ and technical skills. While other threshold capabilities were entry-level requirements for executive positions, emotional intelligence was the sine qua non of leadership. Without emotional intelligence, someone can have superior training, an incisive and analytical mind, and infinite creativity, but still won’t be a great leader.²²

However, few people live or trade in a vacuum. That sense of being cut off from the world is a common consequence for modern man. This doesn’t necessarily mean you need a group of colleagues to hang out with around the water cooler, but objectivity comes from having a balanced life and that means making sure you don’t sit at your screen alone 24/7. Who needs or wants to sit there like that anyway?

Neuro-Linguistic Programming

One of the reasons Richard Dennis and Richard Donchian have been able to teach trend following is found in the field of Neuro-Linguistic Programming (NLP). Top NLP teacher Charles Faulkner sees how to gain the mental edge: “NLP’s techniques involve moving out negative mental beliefs and replacing them with positive ones. Think of an unpleasant trade as you do that, what happens if you take a breath and go ‘ah,’ push it out and then trade with it? Much better. People go through fifths of scotch trying to get that feeling. When you get agitated, go ‘whoosh’ and just step out of it that way and you’ll find it’s less. Do it again and you’ll be at zero real fast.”²³

When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once.

Gustave Le Bon²⁴

Walk into the college classroom, and you will hear your professors teaching your children that man can be certain of nothing; that his consciousness has no validity whatsoever; that he can learn no facts and no laws of existence; that he’s incapable of knowing an objective reality.

Ayn Rand²⁵

I model human excellence.

Charles Faulkner²⁶

I first met Faulkner at a trading seminar in 2001. He has the natural gift for explanation. He urges traders to take matters into their own hands and to believe, “I am competent to be confident. I know what’s going on in these markets. If I don’t know, I get out.”²⁷

I found Faulkner’s Swiss skiing example to be especially insightful. He noted until the 1950s, most thought skiing was a matter of natural talent you had or you didn’t have. Then films were made of some of Europe’s greatest skiers to identify the movements that characterized them. It was found that all had certain techniques in common. All kinds of people could learn to be good skiers if the movements that made a great skier and the essence of their skills, could be identified to be taught to others. This essence of skills was called a model, and the model, or set of basic principles, could be applied to any endeavor.²⁸

Trading Tribe

Ed Seykota has served as a teacher and mentor to hundreds of traders in his Trading Tribe, a global network of groups of traders who meet to work through challenges: “The trading tribe is an association of traders who commit to excellence, personal growth, and supporting and receiving support from other traders.”²⁹

Reason is the main resource of man in his struggle for survival.

Ludwig von Mises³⁰

What feels good is often the wrong thing to do.

William Eckhardt³¹

Seykota’s tribe works on the psychological and emotional issues crucial to successful trading—and life for that matter. Faulkner relays a story about his finely honed intuition: “I am reminded of an experience that Seykota shared with a group. He said when he looks at a market, that everyone else thinks has exhausted its up trend, that is often when he likes to get in. When I asked him how he made this determination, he said he put the chart on the other side of the room and if it looked like it was going up, then he would buy it . . . Of course this trade was seen through the eyes of someone with deep insight into the market behavior.”³²

Seykota doesn’t pretend to have all the answers, but he is extremely good at turning the mirror back on students so they focus on the self. His precision with language forces one to pay attention. One of his students broke down his teachings into breathing exercises—for me, an immediate connection to yoga and meditation: “The mind is a filter, letting only some information in . . . When you’re designing systems or setting stops, it’s an ever-present part of what you do. My goal is to get in touch with those subconscious processes. A lot of what Seykota does is a breathing technique to achieve an altered state of consciousness where you somehow relax your conscious filters. We did it both unstructured and in a structured way, with ideas to concentrate on, such as, ‘Why do I always do this when I’m trading?’”³³

“My life has stopped, but I continue to age,” deadpans Karen Levine, a Wharton School MBA who has worked at General Mills (GIS), Unilever, Deloitte Consulting, Condé Nast, and Hearst. But in real terms, Levine made more in 1988 fresh out of Harvard College than she earns today. During her two years of battling unemployment, Levine has worked for $8 an hour at Pottery Barn and for $18 an hour as a temp for a Wall Street trading firm. “I can’t even afford a dog.”³⁴

I am nearly five years into my yoga practice. If you have never tried it, please do. In my experience it is my single best tool to de-clutter the mind. You may also enjoy my podcast episode with Andy Puddicombe (#261)—a mediation expert.

More bullet point insights from my conversations with Seykota (podcast episodes #208 and #355):

• One use of the Trading Tribe Process (TTP) is to locate and dissolve the feelings that stand between you and following your system.
• When you notice all things happen now, and when you take responsibility for your experience, you notice that even noise results from your intention. At that point, you can clarify your intention and remove the noise. The entire length of the chain of events exists in the ever-evolving moment of now—and at all points of now, you might choose to see your result equals your intention. Alternatively, you might choose to avoid responsibility, especially for the noise, and then try to find exogenous causes.
• Analysis leads to solving and fixing. TTP leads to dissolving and noticing things already work right. Incontrovertible solvers tend to use TTP as an analytical tool—until they happen to experience a desire to solve things.
• Take responsibility for your experience and see intentions equal result. Deny responsibility and a delta between intentions and results may appear.
• Your real trading system is the set of feelings you are unwilling to experience.
• In tracking your feelings and in tracking the markets, take whatever comes up and go with it. Trying to force a feeling is like trying to force a market. You might find some joy in the process of allowing feelings and markets to come and go as you experience them.

The illiterate of the twenty-first century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn.

Alvin Toffler

It might seem counterintuitive that a successful trader would spend significant time delving into feelings, but Seykota is blunt: “It is a dominant idea in Western society that we should separate emotion and rationality. Advances in science show that such a separation is not only impossible but also undesirable.”³⁵

Many legendary trend followers have known about these advances in science for 50 years. I wonder if they should have also been awarded Nobel Prizes for prospect theory because their track records are the single best market examples of the theory in action.

Curiosity, Not PhDs

Try and recall what it was like to experience simple childlike curiosity with no agenda other than to know. The curiosity I am talking about is open-ended and enthusiastic. Kids have wide-eyed wonderment when they take apart their first toy to figure out how it works.

Emotional issues aside, many traders remain fixated on academic intelligence as their only path to get to the top. William Eckhardt, co-father of the Turtles, knows their energies are misplaced: “I haven’t seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few are not. Many outstandingly intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.”³⁶

Human beings never think for themselves, they find it too uncomfortable. For the most part, members of our species simply repeat what they are told—and become upset if they are exposed to any different view. The characteristic human trait is not awareness but conformity . . . Other animals fight for territory or food; but, uniquely in the animal kingdom, human beings fight for their beliefs . . . The reason is that beliefs guide behavior, which has evolutionary importance among human beings. But at a time when our behavior may well lead us to extinction, I see no reason to assume we have any awareness at all. We are stubborn, self-destructive conformists. Any other view of our species is just a self-congratulatory delusion.

Michael Crichton³⁷

When it comes to being an outstanding trader, emotional intelligence (EQ) is as important as IQ—shoot, let’s face it, it’s way more important. When people are conditioned to appear book smart, they are afraid to be curious, afraid to fail. They think by asking questions they’ll be perceived as ignorant, although in truth, by not questioning the world, people get into even more trouble (i.e., lose money). Still, the issues for others might be more nuanced. They don’t fear the question, but fear the answer. Yet the answer might be the information that requires a legitimate integration into your life or it might prove you dead wrong. Open-ended curiosity lets you take a step back and see everything for what it is right now, in the moment of now.

However, like clockwork, many spend time listening to someone feed information or instruct them. They are judged on how well they can regurgitate information back to whomever offered it. When it comes time to take responsibility for decision making, too many are waiting for someone to lead them. Curiosity has been lobotomized from the masses. Government father figures provide comfort and safety—even if they are artificial and unreliable.

Having an education is one thing, being educated is another.

Lee Kuan Yew Former Prime Minister of Singapore³⁸

For example, in the book Memos from the Chairman, Ace Greenberg told his then-employees, “Our first desire is to promote from within. If somebody with an MBA degree applies for the job, we will certainly not hold it against them, but we are really looking for people with PSD [poor, smart, and a deep desire to be rich] degrees. They built this firm and there are plenty around because our competition seems to be restricting themselves to MBAs.”³⁹

Recall the 2008 Wall Street escapade. All of the so-called best and brightest traders, those armed with Ivy League educations and Goldman Sachs pedigrees, they imploded, only to be bailed out by the government. They played by the rules their whole life. They went to the right schools. They were at the right investment banks. They had fabulous CV’s back to first grade. They were rewarded for playing the role, but then 2008 hit. I am sure many went back to school for an MBA or PhD in the hope if they could learn more rules, and then it would be okay.

When teaching children, a good chess teacher devises ways to get students through the pain of losing, since they lose a lot when first learning the game. By learning how to handle defeat, the young students can learn how to win.⁴⁰ Anyone with average intelligence can learn to trade. This is not rocket science.

William Eckhardt

But ignoring opinions and contributions of others to be right is not particularly pleasing behavior as Charles Faulkner notes: “One doesn’t have to be a student to want to please people or want to be right. I would claim serious students (and professors) know there is much they don’t know, and are less interested in what is right. On the other hand, those that know little often feel the need to be in the right about it. People pleasing is an entirely different dimension, though people that need to be right are usually experienced at ignoring others, and therefore, failing to please them.”

Sigmund Freud goes to the heart of curiosity imbalances: “What a distressing contrast there is between the radiant intelligence of the child and the feeble mentality of the average adult.” As simplistic as it sounds, maintaining childlike wonder and enthusiasm keeps mental doors open for fresh insights. It is very possible to disengage your ego and think of yourself as still evolving, but there will be some heavy lifting on your end.

Never call on intuition. It calls on you.⁴¹

Commitment

You must be committed to winning. If you don’t want to win, and don’t have it deep in your gut, there’s a good chance you don’t have a snowball’s chance in hell to win. Commitment to trend following trading is the same commitment you would make to any new endeavor in life. If you’re committed to excellence, you will figure it all out one way or another. No commitment? Then you lose, pony up to the bar for a pint, and kvetch.

A top CEO recently spoke before a Harvard MBA class. After his presentation, the students asked questions. One of the questions was, “What should we do?” The CEO replied, “Take the rest of the money you have not spent on tuition and do something else.”

For example, if you’re trying to be a pro baseball player, you keep pushing. You never give up. By the time you get to the major leagues, it was years of work. However, the only reason you have that outcome is because you made the commitment at the outset to win. Everyone wants the big leagues and big money, but most are not committed to making it happen with relentless drive.

We delude ourselves that we proceed in a rational manner and weight all of the pros and cons of various alternatives. But this is seldom the case. Quite often, “I decided in favor of X” is no more than “I liked X” . . . We buy the cars we like, choose the jobs and houses we find attractive, and then justify these choices by various reasons.⁴²

Charles Faulkner, always seeking to tone me down, sees it differently: “I see it more as a matter of choosing between what is in accord with your nature or changing your nature to accord with your dreams. Most people don’t recognize this as a choice point. Few realize it is possible to hold dreams constant and vary behavior until they are good at what they need to be good at. And usually, there is a bit of both.”

If you’re going to chase success, the basic principles, the basic psychological requirements are the same, no matter what you do in life. You still have to wake up every day with a deep desire to be successful. You have to be consistently focused every day, day after day. You can’t wake up and say, “I’m going to give a little bit of effort today and see what happens. If it doesn’t work out for me, I can say I tried and complain to my wife or girlfriend.” You can’t jump helter skelter because the newspaper or some journalism student posing as a market analyst blurts out, “Here’s the get-rich-quick scheme for today!”

That’s not the way real achievement works. Behave like that and you will fail. Consider simple trading do not’s from Amos Hostetter, the wise sage of famed trend following incubator Commodities Corporation:

Focus on the moment, not the monsters that may or may not be up ahead.

Ryan Holiday

• Don’t sacrifice your position for fluctuations.
• Don’t expect the market to end in a blaze of glory. Look out for warnings.
• Don’t expect the tape to be a lecturer. It’s enough to see that something is wrong.
• Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally.
• Don’t imagine that a market that has once sold at 150 must be cheap at 130.
• Don’t buck the market trend.
• Don’t look for the breaks. Look out for warnings.
• Don’t try to make an average from a losing game.
• Never keep goods that show a loss, and sell those that show a profit. Get out with the least loss, and sit tight for greater profits.

Hostetter also saw the dangers inherent in human nature:

• Fearful of profit and one acts too soon.
• Hope for a change in the forces against one.
• Lack of confidence in one’s own judgment.
• Never cease to do your own thinking.
• A man must not swear eternal allegiance to either the bear or bull side.
• An individual fails to stick to facts!
• People believe what it pleases them to believe.

  The strategies of human reason probably did not develop, in either evolution or any single individual, without the guiding force of the mechanisms of biological regulation, of which emotion and feeling are notable expressions. Moreover, even after reasoning strategies become established in the formative years, their effective deployment probably depends, to a considerable extent, on the continued ability to experience feelings.⁴³

Imagine those simple rules were handed out in January 2008 to every investor with their life savings in index funds, mutual funds, etc. Hostetter was telling you how to avoid October 2008 long before it ever happened. Interestingly, one of Commodities Corporation’s founders was Paul Samuelson, the Nobel Prize winner. In 1965, Samuelson published a version of the efficient markets hypothesis that described “a world in which all reliably predictable events are priced right, and only surprises would remain.”⁴⁴

“Only surprises would remain”?

That is the textbook definition of an elephant in the room. I wonder if Wikileaks has the secret documents with passive indexer proponents on record giving their creative rationalizations to bury Samuelson’s 1965 surprise insight. But Samuelson was no dummy. He had his 1970s, ’80s, and ’90s fortune in Commodities Corporation’s trend following system, the utilitarian-named TCS (“technical computer system”), and he made a bloody fortune from it. Samuelson gave credit where credit was due, to trend following: “[Amos] Hostetter was the most remarkable investor I ever knew.”⁴⁵

If you try to impose a rigid discipline while teaching a child or a chimp, you are working against the boundless curiosity and need for relaxed play that make learning possible in the first place . . . learning cannot be controlled; it is out of control by design. Learning emerges spontaneously, it proceeds in an individualistic and unpredictable way, and it achieves its goal in its own good time. Once triggered, learning will not stop—unless it is hijacked by conditioning.

Roger Fouts

Summary Food for Thought

• (Kaizen)
• Anfangen ist leicht, beharren eine Kunst.
• Grit: Love the grind.
• Sam Carpenter: “For too many of us, slowing down to examine things is not entertaining, and that’s too bad because it is mandatory that we understand the machinery of our lives if we are to modify that machinery to produce the results we want.”⁴⁶ Peter Thiel: “One of the things that’s striking about talking to people who are politically working in D.C. is, it’s so hard to tell what any of them actually do. It’s a sort of place where people measure input, not output. You have a 15-minute monologue describing a 15-page résumé, starting in seventh grade.”
• Winners take responsibility, losers place blame.
• “You tell everybody. Listen to me, Hatcher. You’ve got to tell them! Soylent Green is people! We’ve got to stop them somehow!”
• “Who is John Galt?”