The Only Thing I Am Certain Of Is That Certainty Kills

One of the worst things that traders can do is to think they know anything. The more certainty you have the less flexibility you will have in changing your mind.

Of course we do all that we can to skew the odds in our favor. We read, we model, we figure out how to structure the trade, and we look at how it would fit in our portfolio.  We do all this but in the end we have to be ready to cut and run because there is no 100% certainty in this business.

In fact the more certain you are that you are right the worse it can be for you. Want to lose 100% of your money? Go find a stock that you “know” will go up where you “know” that everyone else is wrong and then hold onto it no matter what.

What is fascinating is that it is widely believed that if you buy a few stocks and hold them you will make money the reality is that about 40% of stocks actually lose money over time while 64% of stocks under-perform the indices over time. The belief comes from the fact that the indices go up over time as they dump the losers and add to the winners. The main takeaway is that many stocks-40% of them-have negative lifetime returns.(for more on this search for the paper “capitalism distribution” it is full of interesting and useful data)

Trade certainty gets even harder when it comes to commodities and currencies as there is no reason why any of them “have to” go higher. Look at a 30+ year chart of any of the major currency pairs or commodities. They go up, they go down, and they go back up again. This cycle repeats over and over.

If you can’t be flexible in your thinking then the only thing you can be certain of is that you will eventually lose a lot of money.  If you look at any successful fund manager who has been at it for a long time you will see a lot of flexibility in their approach. Maybe the king of flexibility is Soros.

Go read Alchemy of Finance* and you will see that while he explains all these grand theories on what he thinks is going to happen in the market he is wrong almost every single time. Despite this he made over 120% during his “real time experiment”.

A typical entry in the book would read something like this “I thought the Fed would do this and then the German Bundesbank would do this so I bought Deutchemarks” of course the Deutsche mark would then start to tank and he would sell out, double his size, short the Deutsche mark, and make $200 million.

Despite his belief that such and such was going to happen he was not against changing his mind at all once he realized he was wrong.  He has almost no ego in his trading and in the end just wants to be on the right side of the market. The Soros/Druckenmiller track record is the best 30+ year record I know of so maybe there is something to this whole figure out a view, bet on the view, and then if it isn’t working dump the view approach. Read anything you can about Soros/Druckenmiller and you will find that their true edge was not in their research or political* views but in their ability to change their mind in an instant.

I have been thinking of this more than normal the past nine days as most of our positions, which had been working very well for most of the year, started to go against us. At first you assume its just some normal volatility but then it gets worse and you have to say “I guess I am wrong now” and move on. It is annoying when you have a theme going that you still think makes sense but in the end you have to decide what is more important to you-being right or making money? They are definitely NOT the same thing.


Happy Trading,

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*Alchemy of Finance-If you have not read this book change that now. Read it 2-3 or even more times and you will get more from it each time.

*Political views-As far as I can tell Soros and Druckenmiller are on different sides of the political spectrum. But guess what? It doesn’t matter. This is just further evidence that politics have almost nothing to do with making money….unless of course you are a politican.



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