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Does being responsible pay off?

Photo of Chris Tate, Author By Chris Tate, Author

min read

Exceptional traders take responsibility for their profits – and losses.

Trading or investing is a uniquely simple profession. The spectrum of actions available is extremely limited: you can buy a share, sell a share or simply abstain from taking any action.

This simplicity arises because the philosophy of trading is also extremely simple: aim to buy those things that are trending up, sell those that are trending down and don’t bet the farm on any single trade.

In some ways, this simplicity puts us in an enviable position compared to other professions, where the alternatives offered to any course of action could seem endless and each could have extreme consequences. Yet the execution of trading is quite difficult and defeats many who attempt to undertake it.

As easy as losing weight

To use an analogy, consider the notion of weight loss. We know the rules: eat a little less and exercise a little more, and repeat until you reach your goal. Despite the simplicity of the rules, for a variety of reasons it is very hard for people to stick to any form of weight loss plan.

It’s the same with trading. It is difficult for traders to overcome their own psychology and stick to a trading plan.

Trading at its core is a psychological profession. In reality it has little to do with what the market does and everything to do with your response to the market.

Surfstich as an example

Consider the recent suggestions of legal action surrounding the listed company Surfstich. Investors are apparently disappointed with the actions of management and the subsequent fall in the share price.

The alleged transgressions are not the subject of this examination. Instead, let’s look at the actions of investors once it became apparent the share price was not following a trajectory that would keep them happy.

Surfstich listed in 2014 to much fanfare. As can be seen from this chart, the stock initially failed to live up to the hype of listing and the price languished for several weeks before eventually climbing beyond the listing price.

Chart 1: Surfstich

Tate - Surf Stitch price chart


The shares spent considerable time at a premium to the listing price, eventually hitting a post-listing high of $2.13. In the chart above I have also plotted volume (the red bars) and it can be seen there was no shortage of either willing sellers or buyers.

The stock had more than enough liquidity for investors to take some form of defensive action and cap their losses.

It is this failure to take action that I want to look at, because it is at the heart of many of the trading catastrophes that afflict professional and amateurs alike. This isn’t the first time it has happened and it won’t be the last.

There are countless mum-and-dad investors still holding the likes of ABC Learning and Babcock and Brown. They are in good company because many professional investors will still be holding their worthless scrip, having failed to take the last opportunity to sell it.

Understand the ‘pain point’

When undertaking any form of investment, the first cornerstone action is set a pain point at which we admit we were wrong in our judgement. To undertake this step, we need to accept an “internal locus of control”, where we realise we are responsible for all our actions and the consequences that flow from them.

Failure to do so is to adopt a self-serving mindset where we believe successes are our own but failures are the result of others.

If put in the context of any form of investment, those with a self-serving mindset believe that when the share price increases and they are profitable, this is the result of actions they have taken. After all, it was their decision to buy the stock and this decision has been the catalyst for their profitability.

Whereas when share prices begin to fall, this is the fault of someone else. Good things that flow from our decision-making are purely the result of our good judgement; bad things are the result of the malfeasance of either someone else or the market simply not understanding the story as well as we do.

Opportunities to exit

Looking at Surfstich, we can see that its fall from grace was no more spectacular than countless other listed companies and like those there were ample opportunities to exit any position.

The average daily volume for Surfstich since listing had been about 960,000 shares. However, to exit a position an investor needs to admit their initial narrative is wrong and is no longer shared by the market.

If there is one thing that being in the markets for decades has taught me it is that everyone has trouble admitting they were wrong. Yet the capacity to admit a mistake, take some form of corrective action and begin the process again, is the hallmark of a successful investor.

It’s as if we believe the market will ultimately understand that our story is the correct one. The problem with this approach is not only the myopia it engenders in those undertaking the investment process, but it also neglects the simple fact that the market is a giant voting machine.

Whenever you see price action and a trend unfolding from it, you are seeing the market vote. And in investing or trading the only vote that counts is the market’s. My vote and your vote are completely irrelevant and this sense of irrelevancy disturbs traders.

The market neither knows of nor cares about our opinion and we must accept this if we are to be successful. But doing so is as hard as accepting that we are the architects of both our own success and our own failure.
 

About the author

Chris Tate is a full-time private trader and author of several best-selling books, including The Art of Trading and The Art of Options Trading. For his free trading plan template, click here.

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The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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