A great truth

Many traders and investors, who have experienced the highs and lows of trading, regularly look for a method or system in the hope that they will discover a “new” hidden truth. A great truth is that there are no “new” hidden truths in the universe of the markets, just “new truths” to individuals that for the first time are discovering what already exists in the market universe.

During their search the investor usually and incorrectly focuses their attention on how much money can be made with the new system. They ask irrelevant questions that fail to qualify if the system is right for them and suited to their own personal needs and risk profile (assuming that they know what their risk profile is).

Many investors also make the mistake of trying to “shoehorn” a system into their own biases when what’s required is a shift in the investor’s thinking to be aligned to the system. The educated and experienced investor understands that a system that generates entry and exit signals from research criteria emanates from the market. So in order to create consistency and objectivity, the experienced investor aligns their thinking to that of the system. When this is achieved the investor is able to think from the markets perspective and has the ability to become one with the market.

Many investors focus too much on short term performance rather than basing their evaluation of the strategy on its own merits. More relevant questions include: is the system capable of making money over the long term, is the strategy capable of out-performing the market (All Ordinaries Accumulation index for ASX or JSE-ALSH index for JSE investors or S&P500 / Nasdaq Composite for USA equity investors), over what timeframe does the system trade, can risk be quantified on an individual trade and portfolio basis, is the risk acceptable to my skill level and personal risk profile, do I need to work on my risk profile to trade the system, does the system trade low, medium and high risk probability opportunities with different position sizes, does the system have definable exits, do the risk management measures handle increasing and decreasing exposure to the market depending on market conditions and does the system have sound money management rules?

Investors who ask irrelevant questions are typically in search of continuous security and comfort in all market conditions or even seek a guarantee that they will always make money. While it is a known fact that there is no such thing as a guarantee when it comes to the market, experienced and successful investors trust the probabilities of their system and the execution of their processes rather than focusing on individual trade outcomes.

By doing this they understand how to create certainty in an uncertain environment, over a large sample of trades. They accept and are at peace with the short-term outcomes of the system because they fully trust the probabilistic edge of the system and therefore trust that it will deliver according to its design objectives.

This is THE great truth of active investing.

If you have chosen a strategy or system that has a researched, proven and positive EDGE, do yourself a great service and shift your energy towards acquiring the skills to implement and execute its processes. If you skip parts of the process you will only harm your EDGE and thereby yourself by not growing your skills, learning from the EDGE and delivering the profits that the edge has proven to deliver.

If you are investing without an EDGE, which might mean that you are reading reports, reading newsletters, taking broker recommendations and stock tips or just working off your gut feel, I highly recommend that you build or buy one!