This Week’s Trading Lesson
Sound Systems Yield Success:
When you think of the best run companies in the world, what names come to mind? Wal-Mart? Proctor and Gamble? Perhaps Apple? Think of the worst run companies and you might think of a company like Enron, which is now out of business because it was run so poorly.
If we compare Wal-Mart, the world’s largest retailer and a model of incredible cost efficiency, with Enron, the once high flying energy firm that ultimately burned out on bad deals, we see that the price paid for leadership meant little. Wal-Mart executives, by Enron standards, are poorly paid. Enron sought the brightest and best and paid them very well. Wal-Mart grows their leadership internally and pays their highest earners with modest salaries. Enron went bankrupt despite their smart and talented people.
What is the difference, does money not buy quality?
With my very limited knowledge of either company, one thing that stands out to me is the difference in systems and processes for (e.g. risk management) that each employ. Every task that a Wal-Mart employee is clearly defined and modeled for success. Employees at Enron were allowed to sort of do what ever they thought would help the company succeed. A noble idea, but the lack of standards allowed for individual goals to take priority to the detriment of the company.
Plan & Processes Take Precedence Over Talent:
From this example, it seems that plan and process take precedence over talent. A disciplined, highly calculated and planned business is able to do well even though it may not have the smartest people running the business.
And so it goes for trading.
I have taught aspiring traders from every possible background. The well educated and the drop outs, Mensa level IQs and those who might be referred to as not the brightest bulb on the tree. I have taught those who have already achieved financial success and those who are in pursuit of that dream.
Anyone Can Succeed or Fail:
And what stands out, after teaching a few thousand people, is that there is nothing about a person’s background that predicts trading success. When trading, anyone can succeed or fail.
Sound System (Plan & Process) Win:
So what does matter? At the very top of my list would be having a sound back-tested system (plan + process). Having a detailed, well tested and constructed plan for making money in the market is a must. Every aspect of the plan must be well thought out and based on prior market action. The more steps in the trader’s plan that are left to human judgement, the greater the chance that the plan will achieve a poor result.
With a good plan, can anyone get the job done? If you ask Wal-Mart, the answer is probably yes. They hire thousands of people to do the various jobs that they employ and could not possibly expect that talent will allow each employee to get the job done. Their people succeed because their jobs are well defined.
Define Your Tasks:
What is important is how the tasks are defined. Wal-Mart succeeds in part because they have so much retailing experience. Their employees and management use their experience and resources to develop the very best processes. With those processes, even people who lack experience or talent are able to succeed.
This is exactly how it works for traders. I have seen so many successful and bright people fail in the stock market simply because they did not have the experience to develop the right plan.
Is Your Job Hard?
Think about what you do in your career. Is your job hard? Most people would answer no to this question since doing their job is what they are experts at. To the surgeon who has performed 1000 surgeries, the 1001st surgery is not particularly difficult. For the person who has never done one, it is a great and dangerous challenge, no matter how smart they are.
Can Anyone Succeed on Wall Street? Most Lose
Does this mean that anyone can succeed as a trader if given a good trading plan? No, at least no better than anyone could succeed at removing your wisdom teeth if given a step by step process for doing it. You still need to practice the plan before you can achieve success.
Having a planned process helps us shorten the time it takes to learn something. The Wal-Mart employee or the surgeon can each do their job well by combining a good plan with some time for practice. The Enron employee might have had better success if they had a good plan to work from.
If You Do Not Have a Sound Trading Plan, Stop Trading:
If you do not have a trading plan, stop trading. You might argue that you have done really well in the market over the past couple of months and you therefore do not need a plan. I would respond with some of the examples of people who gave back all their profits and more when the stock market was not working in their favor. Remember the old adage: Everyone is a genius in a bull market. A trending market can make the inexperienced look like they know what they are doing.
You can either create your own plan or you can buy one from someone who has put in the time to create a good one. I think that everyone should try to create their own plan because you learn a lot by doing so. Investing your time and money in studying what other successful people on Wall Street do (and have done) is a great way to find success on Wall Street.
Simplicity in a Plan Usually Works Best:
Your plan must be written down. It must be tested. It must be practiced. It must have a positive expectation. All trading plans should evolve with the market and as you gain experience. They need not be complex, simplicity in a plan usually works best. Plan the trade and trade the plan.
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Source: Stockscores.com Perspectives for the week ending July 16, 2013