MICHEL PIREU: Successful market trading boils down to an even temperament
Eternal pessimists and optimists find it difficult to change behaviour, which can result in terrible investment decisions
“One cannot but pity the man with sallow face and sluggish gait,” Henry Clews wrote in 1908, “who, when everybody else is feeling the happy impulse of a common prosperity, persists in believing that the country is going to the dogs, and steadily sells stocks while everybody else is buying them. He is simply ruining himself through unconsciousness that he views everything through bilious spectacles.
“Equally is the man to be commiserated who, from a constitutional intoxication of hope, keeps on buying and holding when it is manifest that the country has passed the summit of an era of prosperity and is destined to a general reaction in trade and values. Of course, such men never remain long in Wall Street.”
Clews was, of course, talking about the ceaseless pessimist or optimist, whose behaviour studies show may be at least partially influenced by genetics and, as such, a trait of temperament which makes it difficult to change. As conveyed in the parable of the scorpion and the frog, in which the scorpion stings the frog while being ferried across a river on its back, thus killing the frog and drowning himself in the process: “Logic, cried the dying frog as he started under, bearing the scorpion down with him, there is no logic in this! I know, said the scorpion, but I can’t help it. It’s in my nature.”
The problem here is that “such men never remain long on Wall Street”, that it doesn’t matter how intelligent you are, how much knowledge you have, how deep your wisdom or powerful your judgment, temperament has “the power to demolish all efforts”. That means some of us are just not suited to the game. According to Fred C Kelly, author of Why You Win Or Lose, first published in 1930, that includes a surprisingly large number of us.
“Many a man or woman who would not expect to be successful as a circus clown, opera singer or grocer without some kind of preparation or talent, nevertheless expects to be successful right off in the stock market — probably the most intricate and difficult game on earth. The reason for this faith and success without any special qualification is doubtless the almost universal belief in luck. But, somebody says, intelligent people don’t believe in luck. Ah, but they do! No matter how intelligent you may be, you have a sneaking faith in the back of your head that some special attribute in yourself will somehow protect you from misfortune.
“When you hear of a bad railroad accident you can’t picture yourself as being on a train at such a time. When the insurance company tells you that your life expectancy is a certain number of years, you secretly expect to live considerably longer than that, because of your belief that you yourself are especially blessed.
“Everybody is like that. You see a bunch of gamins playing craps. One of them has gradually lost until his last penny is gone. He turns to a pal and asks: ‘lend me a quarter will you?’, sure that if he had just had a little more money he could win back all he lost. Likewise, the man who through the lack of the right kind of preparation or temperament has persistently lost in the market for 10 years, keeps right on playing with unfaltering faith in his ultimate success.”
“I am convinced,” said Clews, “that many a highly intelligent person has no business dabbling with stocks at all, because they are too handicapped by temperament not suited to this particular game. To begin with, the stock market is no place for a person who lets strong convictions take root in his mind and stay there. Another group, and it is a large group, who should stay away from Wall Street, is made up of those who expect the good things in life to come too easily.”
Charlie Munger echoed the sentiment when he said: “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success….
“Most people are too fretful; they worry too much. There’s something to be said for developing the disposition to own stocks without fretting. [But] temperament alone won’t do it. You need a lot of curiosity for a long, long time. You need to have a passionate interest in why things are happening. That cast of mind, kept over long periods, gradually improves your ability to focus on reality. If you don’t have that cast of mind, you’re destined for failure.”
“Human beings have precisely the wrong instincts when it comes to the markets,” said Irving Kahn. “If you recognise this, you can resist the urge to buy into a rally and sell into a decline.”
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