You Already Know How to Be a Great Investor, So Why Aren't You Doing It?
Strategy and knowledge can be learned. But this one quality is the hardest — and yet most promising — for great traders.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
The hardest part of investing isn't finding good stocks. It isn't developing an effective strategy or understanding how to read a chart. Those things are difficult, but they can be learned. The hardest part of investing is doing what you already know you should do. In other words, have discipline.
Most people assume that the professionals have this figured out. They don't. The biggest mistake that experienced investors make isn't ignorance. It is letting emotions drive them to do things they know they shouldn't do. The more experience you have, the more confident you become, and sometimes that confidence is exactly what gets you into trouble.
There is no better illustration of this than Stanley Druckenmiller, one of the greatest investors in history. He averaged 30% annually over a 30-year career without a single losing year. He helped George Soros break the Bank of England in 1992. His track record is arguably the best in the business. And in early 2000, he made one of the most expensive emotional mistakes in Wall Street history.
Here is what happened. In 1999, Druckenmiller had the bright idea to short internet stocks, even though Yahoo and AOL had gone up tenfold and looked unstoppable. He lost $600 million on those shorts when he covered them. Then he watched two internal portfolio managers at Soros who hadn't sold out, making 3% a day while his Quantum fund sat flat. Their little account was up 50% on the year. Quantum was up 7%. He couldn't stand it anymore.
Three times that same week, he picked up the phone to buy tech stocks and put it back down. Don't do it. Don't do it, he told himself. The fourth time, he didn't put it back down. He bought $6 billion worth of tech stocks. He thinks he missed the absolute top of the dot-com bubble by about an hour. Six weeks later, he had left Soros and lost $3 billion.
When Ken Langone (the founder of Home Depot (HD) ) asked him at a 2015 speech what he learned from the experience, Druckenmiller gave this response: "You asked me what I learned. I didn't learn anything. I already knew that I wasn't supposed to do that. I was just an emotional basket case and couldn't help myself. So maybe I learned not to do it again, but I already knew that."
The greatest investor of his generation did it anyway. It wasn't ignorance. It wasn't a bad thesis. It was pure emotion. Fear of missing out while watching colleagues make money broke his discipline completely. If it can happen to Stanley Druckenmiller, it can happen to you. It can happen to me. It does happen to me.
Start With a Rule Book
The first step in dealing with this problem is to be clear about what you should do before you make an investment decision, before your emotions enter the picture. For the average individual investor, this is especially important because you may not have the deep market experience to make high-quality judgment calls on the fly. You need a framework.
It doesn't have to be complicated. It doesn't have to cover every possible scenario. But you need an outline that makes it clear when you are going off track. Write it down. A rule that only exists in your head is easy to bend when you are sitting in front of a screen watching a position go against you.
Your rule book should cover the basics. How much will you risk on a single position? At what point do you cut a loss? When do you add to a winner? What market conditions cause you to reduce overall exposure? These are not exotic questions. Most investors know the answers. The problem is that they aren't specific enough and then they aren't consistent enough in applying the rules when it matters most.
The Market Will Always Surprise You
Even the best rulebook is imperfect because the market is unpredictable in ways no one can fully anticipate. There will always be situations you don't prepare for. A news event comes out of nowhere. A stock behaves in a way that defies all logic. The tape does something you have never seen before.
When the unexpected happens, it becomes very easy to justify making exceptions to your rules. The circumstances are unusual. This situation is different. You tell yourself you are adapting to new information when, in reality, you are just doing what feels good in the moment. That is the emotional trap, and it is surprisingly easy to fall into even when you know it is happening.
Druckenmiller knew it was happening. He picked up the phone three times, then put it down. Then he picked it up a fourth time and bought $6 billion worth of stocks he knew he shouldn't buy. Knowing is not the same as doing. That gap is where the big money is lost.
I frequently run into my biggest problems when I am not vigilant enough and miss the trigger point for a necessary action. Maybe the stop loss level gets hit while I am distracted. Maybe I see it and hesitate. Once you miss the trigger, the temptation is to abandon the rule entirely and improvise. That improvisation almost always leads to bigger problems than the original mistake would have caused.
The Art of the Intelligent Exception
It can take years to fully understand this, but having clear rules is not just about following them. It is about knowing when to break them intelligently.
Trading will always require a certain amount of gut feel. Over time, if you pay attention, you develop an intuition worth trusting, even when it runs contrary to rules written for good reasons. Breaking a rule because you are emotional is a disaster. Breaking a rule because your experience and judgment tell you that this specific situation genuinely calls for a different approach is something else entirely.
The only way to develop that kind of judgment is to follow the rules consistently first. You have to earn the right to make exceptions by demonstrating to yourself that you can maintain discipline in normal circumstances. Investors who make constant exceptions never develop the baseline that allows them to distinguish between a legitimate deviation and an emotional one.
The Simple Truth
None of this is complicated in theory. If you cut your losses when you said you would, add to your winners instead of your losers, reduce exposure when the market turns hostile, and stay patient when conditions don't favor your approach, your results will improve dramatically. Most investors know this. Very few do it consistently.
The gap between knowing and doing is where fortunes are lost. Stanley Druckenmiller lost $3 billion in that gap in a single trade. He picked up the phone three times, then put it down. The fourth time cost him everything he had made that year and his partnership with George Soros.
The good news is that awareness is the beginning of improvement. Every time you catch yourself about to break a rule for emotional reasons and don't, you are building something valuable. You are building the discipline that separates the investors who last from the ones who don't.
You know what you should do. The only question is whether you will do it.
At the time of publication, DePorre had no position in any security mentioned.
