Emotions are the single biggest enemy of any investor. As per our 100 investing tips only a very small number of investors is able to control their emotions in decision making, and it is reflected in the number of successes they score. We have observed asymmetric dynamics in markets as per Tsaklanos his 1/99 Investing Principles. That said, how exactly does this work? What’s the psychology of this destructive effect of emotions? Let’s make this topic more actionable with the aim to help our followers be more successful in the future with our 10 tips to master investing without emotions!
Our favorite investors, without any doubt, is Stan Druckenmiller. Our style and thinking has similarities. We do not pretend with this that we are as good as he is, we just make the point that, directionally, our viewpoint and way of thinking share the same values and principles.
Druckenmiller is a self-made billionaire. He accumulated a net worth of $4.4B.
By looking and listening carefully to Druckenmiller we can learn a lot about what successful investing requires. It helps us understand how to master investing without emotions.
Although Druckenmiller never published any sort of guide like ’10 tips to master investing without emotions’ we derive multiple tips by carefully analyzing his most insightful speech and combine it with our own insights!
Tips from the most successful investor of our generation: concentrated bets and investing without emotions
From this article published on the WSJ in 1993 we observe a couple of things:
- When Quantum bet $10 billion on the German mark and against the British pound and the Italian lira last September, it was Stanley F. Druckenmiller who created the investment strategy, which made $2 billion in profits in a matter of weeks.
- When the Tokyo stock market began rallying last month [March 1993], a big buyer was the Quantum Group, the investment funds run by George Soros. Indeed, once word got around that Mr. Soros had bet big and fast on a range of Japanese securities, the rush into the market accelerated.
Mr. Druckenmiller’s strategy goes far beyond buying stocks and bonds, into the esoteric world of derivatives like options and futures on a variety of products worldwide, including foreign currencies, bonds and stock indexes. His success has contributed mightily to the perception that, while the 1980’s was the decade of the dealmakers, the 1990’s is the decade of derivatives.
Since Mr. Druckenmiller took over, Quantum’s funds have been averaging an annual gain of 40 percent in net asset value — higher even than Mr. Soros’s own outstanding record of 30 percent annually since 1969. Last year was his best yet — a 60 percent jump.
“Of all the people in the business, he is just the best, both at the macro level and with individual stocks,” said Julian Robertson.
Now that’s quite something, isn’t it.
What stands out from this article is (1) Druckenmiller is all about concentrated bets which deliver a serious return in a short time frame (2) he looks across asset classes!
That’s already 2 out of the 10 tips to master investing without emotions.
The 5 most important paragraphs you will ever read about successful investing without emotions
Here are 5 more tips as part of our 10 tips to master investing without emotions.
Just to continue on the path of Druckenmiller’s successes we feature 5 quotes from our top favorite document. It is a speech that Druckenmiller delivered in January of 2015. It has timeless wisdom on his successful investing method, and investors can learn a lot.
We pick out 5 quotes, and we consider them to be the 5 most important paragraphs that you will ever read!
If you were thinking that this amazingly intelligent financial industry community out there would also be amazingly performant than you are wrong. The really successful decision makers who accumulate wealth are scarce, and it confirms our 1/99 Investing Principles which suggest that the really successful investors are just 1%.
The financial world is chock full of noise and nonsense. It’s filled with smart people who don’t know a damn thing about how the world really works. The financial system’s incentive structure is set up so that as long as analysts sound smart and pretend like they know why stock xyz is going up, they get rewarded. This holds true for all the talking heads and “experts” except for those who actually trade real money. They either learn the game or get competed out.
The real drivers of prices is what you have to discover as an investor. Forget earnings, it starts in the currency and credit markets.
Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.
Chart analysis and technical analysis is by far the most important technique for timing markets. Fundamental analysis has no meaning in timing markets.
Another discipline I learned that helped me determine whether a stock would go up or down is technical analysis. Drelles was very technically oriented, and I was probably more receptive to technical analysis than anyone else in the department. Even though Drelles was the boss, a lot of people thought he was a kook because of all the chart books he kept. However, I found that technical analysis could be very effective. I never use valuation to time the market. I use liquidity considerations and technical analysis for timing. Valuation only tells me how far the market can go once a catalyst enters the picture to change the market direction.
Diversification is not going to help establish wealth in an accelerated manner.
And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they’re teaching at business school today is probably the most misguided concept everywhere. The mistake I’d say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully.
It is concentrated but very well researched moves that will deliver really significant returns.
And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that’s kind of the way my philosophy evolved, which was if you see – only maybe one or two times a year do you see something that really, really excites you…
The psychology of 3 emotion types and their destructive potential
All that said what does this mean for investors like (y)ourselves?
Below are 3 more tips which lead us to our 10 tips to master investing without emotions.
We believe there are 3 emotion types which act as a serious impediment to see what this small group of really successful investors do see. The 3 emotion types are:
- Fear Of Missing Out (FOMO) which makes investors chase prices higher.
- The psychology of repetition: focus on ongoing price changes, especially green or red figures, creates the perception it is the ‘truth’.
- Hope: see what you want to see as opposed to trends or trend changes.
First, the destructive concept of FOMO. It has become a well known concept since the big crypto and Bitcoin burst. Essentially, this is an emotion that kicks in once investors feel that they are missing big returns by staying on the sidelines.
The antidote of this emotion? Very simple, thorough research to identify emerging trends in their early stage. This requires a very focused method, and very focused efforts. It also requires focus on the big picture trends, across markets and assets. Essentially, it is what we are doing in our 15 Leading Indicators For The Dominant Market Trend method combined with our The TOP 3 Investing Opportunities analysis.
Second, the psychology of repetition kicks in as one looks at ongoing price changes. The psychology of repetition is how our brain and psyche works. By repetition we get acquainted with a topic. After repetition we start (dis)liking something. Repetition eventually evokes emotions.
Try to understand how much of your precious time you are spending on checking prices of markets or stocks you already know. Look what happens, emotionally, when you check these prices. Verify how many times you are checking them. Do you recognize the above mentioned effect of repetition and a certain sympathy or hostility, both emotions, when checking prices?
The other destructive effect of the psychology of repetition is that one believes a repetitive view to be the truth. This essentially means that if someone is confronted with say 10 or 100 times looking at a green screen the belief grows that an uptrend is the one and only truth. So it becomes impossible to spot a trend change. Moreover, declining prices are perceived as a buy opportunity because the truth is that this market or asset or stock goes up. Needless to say, missing a trend change, or going long once prices start their decline, have a destructive outcome.
The antidote of the effect of repetition may sound stupid, but we don’t think it is: charts. The charts show structures and trends. If you take chart analysis one step further you look at correlations and inter-chart effects. There is no green or red on those screens, at least not primarily. The repetitive green or red figures, triggering emotions on your end, does not kick in as an effect.
Third, the missed opportunities because of hope. It is funny how hope can lead you to conclude something totally different than what is happening in reality. Looking at one and the same stock or market, even at the same chart, may have an emotionless person conclude something totally different than a person that ‘hopes’ to see something in it.
The big problem with hope is that it can go on for much longer than anyone can imagine! Eventually, it turns into indifference. The outcome is certainly not profits!
Today’s world is almost designed to live on hope. If there is one thing out there that is becoming almost impossible to resist is the hope that you can chase through digital social confirmation. The biggest risk today is the combination of financial media with social media. It is so easy to find someone who confirms with your hope, it is in fact easy to find many articles on financial media and contributors on social media that share the same thinking (hope).
The antidote to this is … not reading financial media and social media. At least, being extremely selective. Are you able to do that? Can you limit the time you spend on social and financial media to 20 minutes per day? Are you able to NOT look into social and financial media if prices of your holdings go against you? Good luck with that, it requires a lot of discipline combined with a very focused mindset on your method.
Successful investing without emotions is like F1 racing
Interestingly, when we think about emotions, and especially being emotionless in analyzing markets and deciding on your investments, we think of a comparison with F1 racing.
Let’s do the math:
- F1 racers need to be extremely disciplined. Investors as well.
- F1 racers need to work hard to acquire all the techniques on a diversity of of race-courses. Investors need to be able to adapt to all sorts of market circumstances and it requires lots of study to get acquainted with investing techniques.
- F1 racers need to be able to stay in their flow. This is likely the most important comparison. Investors must stay in their flow, on par with market movements, they have to be balanced at any point in time. Even with concentrated bets discussed above (as to Druckenmillers method) the account value over time stays on par with returns in markets. A quick acceleration in returns reflects a quick acceleration in a specific market or stock or asset.
- F1 racers need to be focused on perfect execution. Investors need to execute their trades, with a smart approach on entry and exit as well (!) in a perfect way.
- F1 racers understand they are not the only ones on the road. Investors play individually, they don’t see the other market participants. Regardless, it is by understanding where the crowd is and what they are doing that investors can understand how they position vs. the rest. This should result in a strong desire to be in silent bull markets as well as early stages of bull markts.
If anything any F1 racer wants to avoid what is seen on the image below. Too much risk, overcrowded situations, greed or hope likely have catastrophic results. Similarly, emotions by investors have only destructive effects.
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