A stag has a decision to make each time it visits the watering hole, a dangerous place where it’s primary predators often lurk for an easy meal.
Sometimes the danger is obvious to the stag, a lion may be sat in plain sight. Other times, it may be a rattling of leafs or maybe too empty, creating an illusion that everybody else is avoiding the danger which lurk beneath.
Whilst the former is an obvious risk aversion, the latter is far less clear. Are the leafs rattling due to a small breeze or an innocent field mouse? Is the watering hole empty because quite literally nobody is around?
In all scenarios you wouldn’t know the outcome until after the fact.
Scenario 1 is easy to avoid as the danger is obvious and clear, Scenario 2 provides a sense of uncertainty. What if the leafs are not a lion lurking but are just thanks to a field mouse? Question is, do you take the risk, one that your life depends on.
In all above scenarios most Stags will avoid the watering hole, even at the cost of missing out on some much needed hydration, the risk is simply too great.
The crazy thing about the investment and trading world, is most will not only risk Scenario 2 like it’s a sure thing, by convincing each other it’s just a field mouse or a day breeze; as a predator is not in plain sight nor guaranteed. They’ll also take the risk in Scenario 1, reassuring themselves that the lions likely not hungry and since a few other Stags are already closer to the lion than you, you’ll remain safe, he’ll get them first.
Scenario 2 is something we see far more often, when a bad trade rewards 100,000’s of investors it suckers more on the sidelines to take the risk. It also creates a bias for those who made it out the first time, assuring they take the risk again.
Eventually everybody in Scenario 2 succumbs to the same fate as those in Scenario 1, it just takes a little longer to play out.
There’s an old age saying, “It’s not how much you make, it’s how much you keep”.
Like the famous words of Warren Buffet ‘Rule 1: Never lose money, Rule 2: Never forget rule 1″.
The art to trading is making as much as possible when the conditions are right and when there’s no risk of complete ruin. Any risk that is able to completely wipe you out falls into Scenario 1, any risk that offers a negative R/R over a long period of time falls into Scenario 2.
Scenario 3 is when you miss out on “opportunity” to assure the long term growth and survival of your lifestyle and account. Meaning, you never take a trade that risks complete ruin and you never take a trade with a negative R/R profile over the long term. This includes taking a 50/50 flip with 2/1 odds and a sizing of 20%, you’ll still catch the “bad end” of the probability chain here and go broke.
The reason I bring this up now is a reminder that most (outside of the Gang) will give back the gains accumulated from this recent run and most will do so at a rapid pace. It took an average of 16 months (or there about) for almost every retail investor to give back all of their gains from the post covid rally.
Those who have accumulated substantial gains the past few months by adopting the principles in Scenario 3, they must not become attracted to the so called “opportunity” that Scenario 1 and 2 present.
Remember, almost all traders eventually go broke, it doesn’t mean they’re broke all the time.
Whenever we have a big run up, like the one which just presented itself. I often remind people to take some chips off the table and allow a few days for the emotional energy to calm.
Those chips should ideally be put to use in solidify the foundations for said individual to make and continue to make sound decisions in the future.
Meaning, if you have a loan or credit card balance and have just made multiples of it in this recent rally then clear the debt. If you have renovations which need doing and are in the same position, do it. If you’re in a position to lower your stress levels, burdens (emotion or Financial) without jeopardising the integrity of your account, do it.
You know by now that most of trading is mindset, the stronger your mental framework and the calmer your surroundings, the easier it is to outperform.
I see so many people make outstanding progress in their accounts during short periods of time, only to give the majority of it back. Whilst this comes down to a flaw in their trading plan and often sizing, I often believe had they had taken a whopping chuck out, say 50%, to solidify their base position, they would be in a much better position to not only keep their gains, but to finally become profitable and continue their growth trajectory.
If you believe you cannot withdraw a portion of your gains as you’re in fear of not being able to return to said account balance, then you likely lack the ability to do it anyway, thereby reinforcing the need to withdraw.
Inside and outside of trading I’ve often had conversations of always maintaining a “base” and consistently improving upon it. One in which cannot be leveraged and acts as the safety net should you fall too during complete devastation/failure.
A Wannabe surfing instructor (David) who lives in the UK decides to move to Australia to pursue his dream. He tells his family not to worry as he’s going to rent his flat in Devon and he has enough savings for 6 months in Australia and a ticket home.
In reality David has no base nor safety net. If the Airbnb doesn’t rent he’ll have to use his (6 month Aussie buffer) to pay the mortgage and bills. This adds to his stress of finding a job in Australia. If that’s the case he’s likely to make poorer decisions, which only adds to the financial burden. This then turns into a downward spiral and something which seemed fool proof was actually quite risky.
If the house is mortgage free and David has 6 months of bills set aside for his house, then his base is a housing and the knowing that even the most low paid jobs can keep the lights on. In that situation David is likely much calmer, can afford the luxury of picking better tenants and will be less pushy in Australia at finding customers.
When it comes to trading the pressure is often sustainably higher and things can spiral at much faster rates. David will likely take 3-4 months to run out of cash in Scenario 1. In scenario 2 he’s In a better mental and financial position for his dream to succeed.
A traders Scenario 1, is we have the ability to lose everything in a matter of days and in extreme situations.. hours. Thereby our base is making sure we have things in place to prevent this, and specifically in the early stages, of bouncing back.
Example, Something as simple as paying off a credit card does numerous things.
- It increases your borrowing power giving you an out should you ever need it.
- It takes cash off the table and puts it somewhere that takes a few days to get back. Remember that paying off debt doesn’t mean you can’t retake it out at later date. It simply means you’ve reduced your risk exposure and increased your “base”. As you now need to make less monthly for the same standard of living.
- Reduces stress and the ridiculous notion of “When I get to X account balance I’ll pay off my credit card”
Don’t have any debt? Something as boring as buying £20,000 of premium bonds forces you to lock £20,000 for 5-7 days. Meaning, if you do something really stupid (likely in the first few years), you can’t top your account back up until you’ve calmed down (tilt often won’t last that long).
Remember, your “base” is what you fall too in complete disaster. Assets – (Debt + living costs for 12/24 months). In a shit storm that’s the figure you’ll likely end up with. For a trader I wouldn’t count your balance as Assets, as it’s the destruction of this that then starts the shit storm of everything else unravelling. Remember, for people who don’t gamble on a daily basis like we do, it’s much harder to randomly incinerate your entire networth by the weekend
Furthermore, the higher your base the calmer you feel. The calmer you feel the better decisions you make and the more patience you acquire. This combination leads to increased performance, growth and the cycle continues.
Eventually, the goal is to have your base as having the ability to live your life in the way you see fit for perpetuity, also referred too as “Fuck You Money”.
Anyways, on the watchlist.
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