The investing and trading world is much like driving on the road. What do we find while we are out on the road? We mostly moderate our driving in line with the way others are driving. If other cars are moving fast then we tend to move faster; if others are going at a sedate pace, so do we. If others observe a signal, we tend to do so. But when a few cars over run a signal- and there is no cop around- we tend to follow suit and break that signal too, even though we may really not want to. We have a built in sense of what is too fast or bit reckless and don’t take undue risk. Unless we are under the influence of some substance. In that case you are not yourself anyway.
How does this tie in with investing and trading? Everyone thinks he can invest or trade. Just like everyone thinks he can drive. If you take a poll of people to ask how they think they drive, the most received answer would be ‘better than average’. But when you are average, you generally tend to look at the actions of others to govern or guide your own. In the markets everyone knows that he is not an expert but still think of themselves as being ‘better than average’ investors. Thus, there is a tendency to keep looking at the others and this happens through websites, TV commentaries, chats and discussion forums like Whatsapp etc. Those guide most of the action of individual investors even without many of them knowing it. When others speed up in the market, so do we. When others break rules in the market (buying at the high, selling at the low, turning to reckless speculation etc.), we too start doing the same. We then rationalize the whole thing by saying it doesn’t matter so much that we lost because everyone else has lost too!
Skilled driving on the road is a learnt one. When to speed up and when to be careful is a studied response. How to compensate for the errors of others that might cause us damage is a skill developed through great alertness, all the time, to what’s happening on the road. Not only do we have to watch for other vehicles on our side of the road but also the ones coming from the opposite and Similarly, in trading and investing, manoeuvring skilfully thru different sectors and stocks and their up and down movements is a learnt one (read: TA and FA). Advisors have to be picked carefully, methods have to be chosen appropriate to our own personality and a good market tracking mechanism has to be in place for us to know all the time the current market cycle and behaviour.
On the road we are, most of the time, ready to scream at others for anything that is going wrong. So also in trading and investing- we are ever ready to blame others for any lapses or lack of success. But the reality is that most of the fault is our own. Flouting rules on the road is easy and done so most often. Similarly in trading (particularly) flouting rules is what brings us grief. On the road we get away with breaking the rules many times because the policing mechanism is not there. In trading too we get away with it as the trend glosses over our errors. Both lead to learning the wrong lesson- that we can get away with breaking rules. But eventually, in both places, this will bring grief. And the costs are often heavy.
Thus, whether on the road or in the market, matters run parallel on many fronts. It is for us to realize this similarity. One can always sleep peacefully in the backseat when the car is in the hands of a good driver. In investing and trading, you are yourself the driver. If you want to sleep peacefully with your trades or investments, it is vital that you learn to become a good driver.