“Everything should be made as simple as possible, but not simpler.” Albert Einstein.
If you haven’t heard of it the acronym K.I.S.S. stands for Keep It Simple Stupid. This acronym is as applicable to the field of trading the markets as it is to any. The Keep It Simple Principle works best when activities are kept simple rather than made complex, therefore simplicity is the key goal and complexity should be avoided.
So why do people over complicate the approach to trading?
All too often traders and investors set out on the path of good intentions but sooner or later the market’s short term random behaviour challenges any strategy’s strengths and weaknesses. Whilst this market behaviour is accepted as inevitable, traders tend to over complicate the trading approach as they seek to solve the unsolvable problem of short term randomness, usually on the run in the heat of the moment.
Understandably nobody enjoys giving money back to the market, but rather than accept that it is part and parcel of trading a stress-tested edge, traders mostly decide to try and modify the strategy to filter out the losing trades. They begin to tinker, try new found indicators and use ever more complicated combinations as they feverishly look to analyse away the ‘bad’ signals from the strategy, resulting in a quagmire of indecision and chaos. The problem is that the price patterns for a ‘bad’ trade can look exactly the same as the price patterns for a ‘good’ trade so ‘good’ trades will also being analysed away.
I’m not saying that modifying and testing new concepts isn’t valid but when it’s done in the heat of the moment at the expense of an already profitable stress-tested system then the trader ends up greatly reducing the existing edge. Remember that every strategy will have a series of winning and losing trades. This combination is built into the edge. If this is accepted, stick with it.
When is enough, enough?
At some stage you just have to say enough is enough. Forget about listening to economists, media outlets’ stock picks, advertising by large fund managers that “time in the market” is the only way, brokers’ picks, story writers about a secret stock, and scrupulous marketers. Find yourself a system that has an edge and work towards building personalised processes that deliver the consistency and objectivity that will keep the activity of trading simple, focused, methodical and repeatable.
Think about the simplicity of McDonald’s restaurants for a minute and how they have adopted a true K.I.S.S approach. Their business systems allow their 1 million plus employees in over 31,000 franchised restaurants to efficiently deliver a consistent consumer product – wherever you are in the world your experience is very similar at a McDonalds restaurant. McDonald’s are said to serve 68 million customers a day and the McDonald’s system at the coal face is executed by a team of low skilled youthful employees.
There is absolutely no discretion used by any employees and managers are tasked with ensuring that the team implement the proven processes of the McDonald’s system without any discretion. It took massive effort to create the McDonalds processes but once in place they pay for themselves over and over again. The McDonald’s processes are an excellent example of solving complex logistical problems with simple processes whilst also keeping the customer experience simple and consistent.
You need to McDonaldise your trading
The definition of ‘process’ is “a series of actions or steps taken to achieve an end.” By definition this implies methodical and repeatable.
Quite simply, every investor needs to McDonaldise their trading. I’ve spent years training people on the markets and I am convinced that traders and investors need two pillars to simplify trading in order to achieve the success of protecting capital and outperforming the market benchmarks on an ongoing basis.
- You need a strategy that has a positive statistical edge. It determines what to buy, when to buy, how much to invest in each position and when to sell.
- You need simple processes to execute and manage the edge – could a low skilled teenager execute your investing processes? I have written much in this Blog about a Trading Plan. The ultimate test of yours is if a McDonald’s employee at the coalface could execute yours with a day or two’s training.
If you are going to trade the edge yourself, which is what the majority of investors do, then you need a third pillar, the necessary mindset to trade the edge.
I have written much on the psychology of trading on these Blog pages. As soon as you have attachment to the outcome of the process the necessary psychology required to follow the processes to achieve the edge skyrocket.
This is because we are so frail and full of fear of losing, being wrong or missing out. We put huge importance on our personal value based on the individual outcomes. The low skilled teenager would have no attachment to outcomes, he/she would just trust the process they were trained to follow. They put no importance on the outcome of the process, they put huge importance on how well they follow the process because they trust that the outcome will be satisfactory if they just follow the process. You might want to manage this teenager which, like the McDonalds manager, would simply involve you ensuring he/she followed the trading processes.
“The problem is that most overestimate the importance of events (outcomes) and underestimate the power of processes. We want quick fixes….. Don’t get me wrong. I appreciate events. They can be effective catalysts. But if you want lasting improvement, if you want power, then rely on processes.” John Maxwell
Markets are complicated, but trading them need not be. How simple are your investing processes? Can they be executed in 10 – 15 minutes a day?
If they rely on hours of reading stories from newsletters or annual reports or fund managers reports or brokers’ recommendations or pouring over charts or watching TV programs or reading the daily financial press or magazines then I would suggest they are not simple nor consistent nor objective and that they require an enormous amount of knowledge, discretion and skill to execute. Is this how you want to spend the rest of your investing career?