Wednesday, August 27, 2008

Persistence: Is It Always Good?

Dreams don’t always come true. It’s hard to accept, but no matter how much we want something, and no matter how hard we try, it’s quite possible to fail to achieve our goals. Some psychologists argue that people can learn almost anything. If one believes that a skill can be learned through hard work and practice, he or she will persist until the skill is learned. To some extent, many skills can be learned, but if you have pushed yourself to the limit and tried a variety of things, you have probably found that some skills are just not possible to learn. For example, I was the first chair clarinetist in high school band, but I could not compete with future professional musicians I met in college. I won first place in physics at the county science fair in high school, but barely passed physics in college. And although some people like my writing, the highest I placed in high school essay contests was third place, and my writing doesn’t even come close to my college friends who became screenwriters and reporters. There is nothing wrong with admitting one’s limitations, and I have many of them. I know that no matter how hard I try, I can never achieve all my dreams.

But despite my natural limitations, if I truly believed it was possible to achieve my goals and that anything could be learned, I would make many attempts and surely live by old adages like, “at first if you don’t succeed, try, try again,” or “practice makes perfect.” Unfortunately, some skills just cannot be learned. Honing the proper mental edge requires that you admit your limitations and set realistic goals, rather than fool yourself into thinking you can achieve the impossible. In Wednesday’s Marketwise column, a trader named Tom asked me if it were possible that dreams don’t always come true. The fundamental issues addressed in this column go beyond trading and extend to anyone with high aspirations trying to achieve one’s goals.

I received an email from Tom who has been trading for many years yet feeling he is making little progress. He feels like giving up. In his own words, he says, “I have given everything I could to this dream…and it is just not working anymore…Do you think…[it is] possible to believe in something that long and in the end not have it work out?”

I like to be optimistic, but realistically, we know that the odds of a trader making it are slim. Hard work and persistence are not always the only prerequisites to success. Do you think everyone who tries to become a surgeon makes it? Do you think everyone who went to law school passes the bar? The sad fact is that many people pursue seemingly realistic dreams that don’t come true. An unfortunate fact of life is that one can pursue a dream for many years and never achieve success. That said, I have seen many people beat the odds. Perhaps it is merely American mythology, but there are countless stories about people who beat the odds and achieved success (In their own way, for example, I think both presidential candidates illustrate how one can beat the odds). The bottom line is that you will never know what you can do unless you try, so you might as well try and see what happens. Maybe you will be one of the rare few that beat the odds and become successful.

On the other hand, it’s vital to avoid getting hurt. Trading is potentially dangerous. It can not only ding your ego, but also hurt you financially. All traders must ask themselves if they would be better off spending their time pursuing other activities. If you think trading is doing more harm than good, you should stop.

Here’s an exercise that may help you decide if trading is right for you. Ask yourself, would you trade for no money. Suppose that you did not have a dime to bet. Would you enjoy following stock prices anyway? Would you enjoy reading about stocks, making forecasts, and seeing if you were right just for the fun of it? If the answer is yes, trading may be right for you. But if you think, why bother following the markets just for fun, then you may want to consider whether trading is right for you. In other words, if you are in it only for the money, it may not be right for you. But if you are not losing any money, why not pursue trading? As long as it does not hurt you psychologically (or financially) or consume your time when you should be doing other things, what is the harm?

Unfortunately, many people do not approach trading wisely. They set unrealistic goals and waste their time trying to achieve the impossible dream. Setting well-defined, realistic goals is essential for achieving high levels of performance. Specific goals are the best, and allow for direct feedback. You know exactly where you stand. It may not always be a good idea to set goals too high, however. If you have the requisite skills, setting high performance goals and trying to reach them can be a powerful motivator. But if you don't have the requisite skills, and fail to achieve your goals, you may tend to feel disappointed and just want to give up. It may be useful to set a learning goal during initial stages of learning, and then move up to setting high performance goals after you have achieved an adequate level of mastery.

Psychologists have discovered that performance goals, such as trying to achieve a 20% profit for month, are not always the best goals. Here's why. One may not have the experience or skills to reach a goal that exceeds one's abilities. For example, would you try to run a 20-mile marathon if you can't even run a mile? Of course not. So why make such high and lofty trading goals until you have the requisite knowledge and skills? Many novices make the mistake of setting their goals too high. It's understandable in a way. Ambitious people are taught to set high performance goals. If one doesn't even consider achieving an ambitious goal, then one may not even try to achieve it. It is vital to set high standards and do whatever it takes to reach them. But goals should be set realistically.

When novices set high goals that exceed their skills, they usually fail, feel discouraged, and give up. So if you are a novice trader or a trader struggling to regain profitability, it may not be a good idea to strive for a specific performance goal, such as a 20% profit per month, at least not until one develops the skills to meet this expectation consistently. It's useful to distinguish performance goals from learning goals. When we set goals, we usually think of setting performance goals; that is, we think about a specific percentage a month we should achieve. But for novice traders, it is more useful to consider setting learning goals rather than performance goals. A learning goal is more modest and can be achieved more easily. It involves breaking down the larger goal into specific steps that are doable, and rewarding oneself after each step is accomplished. For example, a learning goal may be stating, "I'm going to study for 30 hours a week to learn a new trading technique." The specific goal will not immediately lead to the larger goal of making a 20% profit per month, but it is easy to achieve, will lead to personal satisfaction upon completion, and in the long run, will contribute to the long term goal of becoming a seasoned trader.

So if you're a novice or a struggling trader, set yourself up to win. Don't set overly high performance goals. Set realistic learning goals instead. Break the larger goal down into specific steps, and reward yourself after you complete each one. Focus on skill building rather than performance.

Although research has shown that setting learning goals, rather than performance goals, enhance persistence, some researchers warn than encouraging people to set learning goals may be misleading. For example, if a young musician does not have the talent to join the symphony, setting learning goals may encourage him or her to persist, but the final goal of becoming a concert musician may never be achieved. It is the same with trading. If you just don’t have the talent and capital, you will never make it, no matter how much effort you put in. So it is not realistic to expect the impossible. But again, you will never know what will happen until you try. And just like amateur musicians who play only for their enjoyment and occasionally for family and friends, there is nothing wrong with pursuing an activity if you find it fun and inherently rewarding. Trading can be the same way. If you enjoy making investments, then do it. As long as you don’t lose money that you cannot afford to lose, then what is the harm? As long as trading does not interfere with other aspects of your life, why not enjoy studying the markets? Trading is like many aspects of life. Some people have expensive hobbies that they cannot afford, and pursuing a hobby that becomes like an “addiction” that consumes your life may be harmful. But if you consciously decide to pursue studying the markets because it is fun and inherently rewarding, there is no reason not to continue. As long as you don’t get hurt or hurt anyone else, why not do what you want?

5 comments:

Adrian said...

I think this plays well into the idea of 'niches', areas that individuals are able to thrive in due to a confluence of abilities and desire. There are people who will tell you to work on your weak points to become a well-rounded person but I think the way to achieve success is to focus on your strengths. There may come a time when you've achieved such elite levels of mastery that your weaknesses are holding you back, but for most people you'll get the best bang for your time if you just work on what you're good at and what you enjoy doing.

For traders this may mean that you shouldn't day trade or you shouldn't position trade. It may mean that you shouldn't trade at all. Could you become a trader? Theoretically, possibly, but if trading isn't a natural fit you probably wouldn't enjoy the result even if you did manage to achieve your goal so what's the point?

Moise Levi said...

Great article, thanks

Anonymous said...

Good Article, I would say that it was the perfect balance between pessimism and optimism.

Rian said...

Great articles in this blog but please show the blog archives at the side bar so we can be much easier to navigate your blog, thanks

Unknown said...

Interesting article and perspective with a lot of truth. I felt, however, that you left out one key element. In all walks of life there are degrees of success.

Consider running (though the parallels between running and trading a limited). Roughly there are three groups related to running. THose who effortlessly run (say) a marathon; those who after a lot of training limp in towards the end of the allowed time and those who cannot physically run the distance under any circumstance.

So it is with trading. A small elite group of people who effortlessly trade - read the markets well and have the discipline to handle risk. Then there are the people in the middle who attend courses, read a lot, study and limp on as a trader keeping their head, barely, above water.

The third group usually flames out. They get in and my even have some luck and then loss it all.

So the question can people in group 2 and 3 ever become upwardly mobile. After say 5 years of effort or perhaps a huge and expendable bank account or an understanding spouse with a lucrative job.

Can bad traders become mediocre; can mediocre become good.

On a slightly different topic - another useful test to see whether you are genuinely interested in trading. If you came into a lot of money - say won a lottery - would you continue to trade?