When gold or uranium or whatever I’m speculating on at the moment corrects, two different things happen. Clients (subscribers) write in to share their excitement over the stocks they just bought or averaged down on. Other readers write in to share their frustration, fear, and impatience over Mr. Market’s stubborn refusal to do what he “should” do.
This pattern is very strong. It’s now been 1.5 years since I launched The Independent Speculator. I can’t say I’ve never had any complaints, but I can say that not a single client has yet complained about market fluctuations, corrections, or even the setbacks in the uranium space.
Social media is another matter. I have to say that even there, I seem to be attracting a more disciplined crowd than the average investors I dealt with in my prior work. Still, I do see a lot more angst there, and it’s where my harshest critics lurk.
But I don’t blame people for worrying—nor even for expressing their concern. Seems very human to me.
So, when a reader asked me how I maintain my sang froid in the face of Mr. Market’s often crazy behavior, it seemed like a good idea to try to help, if I can.
Note the “if I can.” Frankly, my initial reaction was to think that people who can’t handle the heat shouldn’t try to get close to where they’re pouring gold.
Truth is, I think some people—no, honestly, most people—are just not suited to speculation.
They’re too prone to letting their emotions make their choices. FOMO makes them buy high. Panic makes them sell low. They reverse the formula for success in speculation.
It’s precisely because this is so common that stocks, asset classes, and entire markets can become so overbought and oversold. That in turn creates opportunities for those few with the courage to be contrarians to step in and make fortunes.
But if you read my work and haven’t been scared off, you’re already a cut above the average investor.
And while it’s very difficult for most people to change in personality, discipline is something that can be learned.
I’m not an emotionless robot. I’m as frequently shocked, frustrated, and angered by Mr. Market’s wrong-headed actions as anyone else. I don’t try to ignore or suppress these feelings; they convey important information.
But here’s the key: I’ve trained myself to listen to what my feelings are telling me, but act on what my reason tells me.
What makes a person courageous isn’t that they feel no fear, but that they do the right thing anyway.
But it’s one thing to decide to be a disciplined and courageous contrarian, and another to actually do it. Fair enough—but deciding to develop speculator’s discipline is an essential first step.
Here are some practical tips that have helped me develop my own discipline:
- Understand and accept that Mr. Market doesn’t give a large rodent’s posterior what we think, want, or need. He’s not a person. He doesn’t care. He’s millions of impatient, driven, and sometimes desperate people buying and selling in response to many factors. But if we’re right—if our basis for speculation is correct—he does eventually come around to reality.
- Speculate only with money you can afford to lose. This was one of the first things Doug Casey taught me, and it sure has saved me from major grief. We never know for certain that we’re right until a trade closes with a win. It’s much easier to be calm about the roller-coaster ride in between if being wrong won’t make us homeless. People nod when I say this—then bet the farm anyway when a promoter hits them with an exciting story. Make this an absolute, non-negotiable rule. You’ll sleep better at night and make better decisions.
- Write your speculations off when you make them. By this I mean that when you speculate, don’t think of it as investing. Think of it as spending. Once the money is spent, it’s gone. If you can speculate and be okay with the idea that the money is gone, then any other outcome is a vast improvement. If I ever set up a fund, I may have to call it the Kiss Your Money Goodbye Before You Give It to Me Fund, to make sure people really understand that they are speculating.
Personally, I don’t think of my brokerage accounts as assets at all. I think of them as being like lottery drums in which I have tickets I spent money on. But it’s a game in which my research and experience make for much better odds than I’d get in Vegas. This may sound like a pop-psychology gimmick, but it works. Feelings are responses to values. If we change the mental value we attach to something, it changes our feelings about what happens to that thing.
- Take profits. Whether it’s the old Casey formula of selling half on our first double or putting a trailing stop loss on a big win that’s still rising, nothing takes the fear out of a trade like going risk-free.
As for more specific steps you can take to develop your own brand of speculator’s discipline, well, I’m not a psychologist. I can’t tell you what might help you the most. I can say that it’s important to understand that developing good habits of discipline takes time. It’s a process. And like sports training, the more you train, the better you get.
I can also recommend Stephen Covey’s best selling book, The 7 Habits of Highly Effective People.
A key takeaway from that book for me was the seventh habit, which is to have purpose.
Nothing focuses action like having a goal that means a lot to us. It focuses the mind, gets us out of bed in the morning, and motivates us to make the hard choices in pursuit of fulfilling our purpose.
I can’t—and wouldn’t—tell you what your own purpose should be.
But I can tell you that without a purpose that matters to you and a clear understanding of how your speculations tie in to that mission, it will be hard to keep your actions coherent, let alone develop strong habits of discipline.
I can also say that “making money” is not enough. It’s too vague on its own to focus action. Money is a means, not an end.
(All of this may make you curious about what purpose gets me up in the morning. Answer: Don Quixote.)
Rick Rule likes to say that our greatest obstacle to success lies to the right of our left ear and to the left of our right ear. I agree.
Hence the greatest profit is to be had from concentrating our efforts there.
That’s my take.