I wanted to share with you a quote from Jesse Livermore, which says,
“there is only one side of the market and it is not the bull side or the bear side,
but the right side”.
There are two great observations I have about this quote.
The first part of the quote says ‘its not the bull side or the bear side’; this is funny to me because after observing the financial markets for the better part of 20 years now in my career, I have found that people love to classify you as a bull or a bear. There is never an in-between and they tend to not psychologically accept the fact that you can go back and forth depending on the evidence that you see, but rather you’re simply branded as one or the other (bull vs. bear).
I have had mentors that have been branded as perma-bulls, and mentors who have been branded as perma-bears. Overall, in the end, I found that both (if not all) of them tend to actually be relatively fluid. There might be one place where they tend to lean more than others but overall it is safe to say they actually react to the evidence fairly well.
It’s not necessarily about their analysis, but rather how people perceive their analysis. I started in the industry in June 2000 and in my first few years while learning the technical tool kit was in a cyclical bear market during a secular bear market (2000-2001, and into the 2002 low’s). As far as I’m concerned that has absolutely skewed my perception of market activity likely for my entire career. When the market has been in an extended uptrend I am always looking for the top because that’s how I learned technical analysis, expecting the tops and thinking about the downside and potential risks.
By categorizing investors as either bulls or bears, I think we’re oversimplifying, rather than thinking about their tool kits and how they are interpreting the evidence. Additionally, we should consider that they can switch gears quickly if the evidence warrants it, which I feel is one of the great benefits of the technical tool kit.
The second part of this quote is, ‘it’s not the bull side or the bear side, but the right side’. I find that if you ever think that you’re right and the market is wrong, the reality is that you are wrong. The market is never wrong. Just because your analyses and processes have been good, doesn’t mean that the market is going to reward that good process. It’s all about the outcome. That is how most people are analyzing the financial markets, by the performance and outcome. If you start to feel like the market is wrong, you need to switch your thinking. The market is just what it IS. It is always right. It is the measure and the constant benchmark against which you are going to measure.
Your ability to outperform (or the times when you underperform) is caused by a mix of two things: skill and luck. Even the best investors have a period when luck is driving their returns and even the best investors have a mix of good processes and good routines (skill), but there is also some luck in where they have identified trends and the market has moved exactly where they expected it to (luck).
When considering skill vs. luck, it is important to remember that one of those you can control and one that you cannot control. If you find yourself trying to control the ‘luck’ side of the equation, that is the problem – this is typically when you start talking about the market being wrong and using wishful thinking analysis. That is all luck and none of it is controllable. What you do have control over is skill. These are your routines, processes, how you make decisions, what information you consume, who you talk to, who you surround yourself with, etc.
My challenge to you is to think about the skill side of the equation, all of the things you can control, and find one skill you can upgrade to make yourself more likely to outperform.
RR#6,
Dave
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. Please see the Disclaimer page for full details.