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Conformity a Major Hurdle to Peak Trading

December 6, 2009

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 behaviour, which has evolutionary importance among human beings. But at a time when our behaviour 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 Crichton

Its far too natural for us humans to make the socially acceptable choices in life. We are punished via negative reinforcement for making decisions that are not conventional.  As it is often said- it is better to fail conventionally than fail unconventionally, for the blame will be placed on  the individual versus the circumstances when taking the path less travelled. If you buy and hold, you can always blame a poor market for your losses, in contrast you will typically get credit for skill in good markets. In contrast the trader will face intense scrutiny for underperforming in a  good markets, and receive credit for performing well in a poor market.   Trading is no different from any other endeavour that is crippled by our primitive decision-making facilities. For all the intelligence that exists in the world, few of us wish to be different, and the logical few are only too aware of the severe costs of making unconventional decisions that fail—even when they know it is the right choice.

Standing alone when the crowd is against you is that hardest thing to do. Thinking differently about things and questioning the root assumptions that all of us take for granted is a common trait of most successful traders. This does not mean that you have to be a contrarian– a true non-conformist that is logical and self-aware will try to recognize when the crowd is right, and when the crowd is wrong. It is overly simplistic to believe that the crowd is always wrong. In fact, the truth is that conforming to certain accepted standards and practices in any profession will keep you out of trouble. You are receiving the benefit of collective experience–an evolutionary trait that was developed to pass on knowledge so that in times past we would not eat poisonous plants, or try to hunt dangerous animals. In reference to investing, its hard to go very wrong by sticking to the basics of diversification and good asset allocation. Its hard to go wrong by sticking with a typical but well thought out plan. Conformity will keep you within the great bell curve of success—your probability of failure is now much lower than learning things for yourself. However the flip side is that your probability of extreme success is also now much lower. To really be in the 2nd or 3rd standard deviation of traders, you will have to think for yourself and question broad assumptions. This inevitably means that you will faces greater chances of failure along the way. But if you read books about world-famous traders you will quickly realize that almost every single one struggled for years developing their unique strategies  before becoming massively successful.

If your goal is to ensure a good chance of modest success, than follow the conventional advice and stick with your plan. If your goal is to be a top trader then you will have to experiment and think for yourself and constantly learn and fail. You probably will not succeed, but you certainly have no chance of getting there if you do not try. So try to learn the hard way by keeping your bets small and always learning, and when you start becoming consistent and successful you can slowly increase your bet size. There is no rule that you need to go broke trying!

8 Comments leave one →
  1. Durden permalink
    December 6, 2009 3:24 pm

    This is great, David! Looking forward to more articles like this.

  2. david varadi permalink*
    December 6, 2009 4:57 pm

    hi durden, thanks very much—a little outside my normal realm/expertise, but I will definitely keep your feedback in mind.

  3. December 6, 2009 11:07 pm

    “A true non-conformist that is logical and self-aware will try to recognize when the crowd is right, and when the crowd is wrong.”

    Just added the above to my list of quotables =)

    “If your goal is to ensure a good chance of modest success, than follow the conventional advice and stick with your plan. If your goal is to be a top trader then you will have to experiment and think for yourself and constantly learn and fail.”

    This is similar to what Buffett recommended. Only those willing to devote significant amount of time should stray from the benchmark. everyone else should buy a low cost ETF.

    • david varadi permalink*
      December 7, 2009 12:00 am

      hi henry thanks, and as for you 2nd comment I completely agree. in my opinion people should make up their minds whether they want to really go for it and put in the time, otherwise they should just diversify into ETFs and follow the markets for fun.
      dv

  4. Alex permalink
    December 7, 2009 7:35 pm

    Good stuff, David. Soros considers himself a philosopher first and investor second. I think you got a bit of that in you. As far as crowd wisdom vs stupidity, Livermore himself said that it was the SITTING that made him the most money and not being a step ahead of the crowd. He’d be sitting on the gold trend instead of trying to guess the top. Of course he wasn’t adaptive like your index and BK’d a few times until pulling his own plug, but either way your advice is sound and Livermore himself would vote for adaptability.

    • david varadi permalink*
      December 7, 2009 7:38 pm

      thanks very much alex and very well said. Livermore would certainly be on top of computerized methods because they are objective. as for being part philosopher, i confess to being more of a big picture guy than a quant. Observation comes more easily to me than pure numbers.

      best
      dv

  5. John permalink
    December 7, 2009 9:18 pm

    Great post! I plan to quote you in my next newsletter.

    • david varadi permalink*
      December 7, 2009 9:31 pm

      thanks john. glad you enjoyed it.
      cheers
      dv

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