The theme of the 20th Annual Investment U Conference in Las Vegas last week was “How to Master the Art of Intelligent Speculation.”
As I promised Tuesday, here’s the rest of my take on the subject of “investing” versus “speculation.”
Secret No. 4: Successful Speculation Is 100% Psychology.
In Secret No. 3, I wrote that trading coach Van Tharp believes bet size accounts for 60% of your trading success, exits account for 30% and entries – or what you bet on – account for a mere 10%.
Tharp also writes that psychology accounts for 100% of your success as a speculator.
So how does Tharp reconcile this apparent contradiction?
The importance of your psychology is paramount because it doesn’t matter what rules for speculation you have developed if you don’t follow them.
That also explains why some people are better suited to speculation than others.
Just as 7-foot-tall basketball players have an advantage over their 5-foot-6 counterparts…
You’re much more likely to be a successful speculator if you have a particular personality type.
Specifically, Van Tharp’s Investment Psychology Inventory Profile of thousands of traders over 30 years shows that 45.6% of the successful ones are INTJs (Introverted, Intuitive, Thinking, Judging) on the Myers-Briggs personality type indicator.
Yet INTJs make up only 2% of the general population.
Physical attributes also play a role.
Studies indicate that if you get a high dose of testosterone in your mother’s womb, your ring finger will be longer than your index finger.
John Coates of Cambridge University has shown that that “not only did traders with long ring fingers make on average six times more money, they survived more years in a cut-throat world which weeded out the weak and unprofitable.”
(Just try teaching that bit of information at a top U.S. business school.)
Secret No. 5: Think Differently.
It pays to think against the herd.
Hedge fund great Michael Steinhardt talks of “variant perception” – a perception about a market that varies from the consensus.
Similar insights allowed Sir John Templeton to make $80 million by shorting internet stocks in 2000 just before the dot-com bubble burst.
Templeton called it “the easiest money I ever made.”
Secret No. 6: Successful Speculation Is a Mess – or a Masterpiece.
Successful speculation is chaotic.
As one of George Soros’ colleagues explains…
[Soros is] the first one to tell you that sometimes his actions… look like the most rookie, odd-lot, wrong way kind of thing, selling at the lows, and buying at the highs. But it’s much easier to understand in light of his avowed mission: to be able to come and fight another day. He says: “I don’t want to wake up broke.”
Bruce Kovner uses a more elegant metaphor of composing a piece of art…
This is a complex game we are in, and the edges are subtle. It’s not so much about being right all the time but rather about being able to adapt and find a strategy that works. I’m wrong a lot. While the analogy may be pushing it, you can think of a painter painting many brush strokes. He can be wrong a lot; no one stroke is right or wrong. We are constantly painting a picture.
Big profits come at the price of big ups and downs…
And the process ain’t pretty.
Secret No. 7: Market Analysis Is Irrelevant.
The last secret of successful speculation is the same as Secret No. 1.
Fans of Soros admire him for his prescient insights into global financial markets.
As Barton Biggs wrote when endorsing Soros’ book The Alchemy of Finance…
[This] is a seminal investment book… It should be read, underlined, and thought out page-by-page, concept-by-idea. He’s the best pure investor ever… probably the finest analyst of the world in our time.
Yet Soros’ own son Robert had a different view…
My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit, I mean, you know the reason he changes his position in the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it’s his early warning sign.
Soros’ secret is less his ability to forecast the market than his willingness to correct his mistakes.
So learn – and put into practice – these secrets of successful speculation…
And you’ll develop an edge few speculators can rival.