Let's talk money and markets. Specifically, the skills required to trade markets. For that we are going to turn to Brett Steenbarger. Having worked in the field of brief psychotherapy Steenbarger now coaches stock market traders. The point that most intrigues me in his approach is the bald assertion that social skills and trading skills are the same!
First, a caveat. For most people trading markets-- moving into and out of them quickly-- is very, very difficult. It is not for the faint of heart or the short of funds. It is inherently risky.
If you are not a professional, and if you have not trained yourself for trading, you would do better by investing, that is, buying stocks and bonds and holding them for the longer term.
That much said, even investors must decide when to buy and to sell. When you stock is moving ahead smartly, should you let your profits run or should you take some off the table? And when your stock is falling like a rock, should you take your losses, hold on for dear life, or buy more?
There is always an element of trading in any investment decision. And there is also an element of psychology, what market players call sentiment.
The best-known principle of market psychology is this: whatever the strongest prevailing sentiment, do the opposite. If everyone is long energy and short financials, then short energy and go long financials. This is called contrarian investing.
In ethical terms, it is a play on temperance. It says that you should always go against emotional extremes.
Legendary investor John Templeton told people that going against the crowd was a sign of moral virtue. If people want your stock that badly-- by offering a ridiculous price for it-- you can be a good person by letting them have it. And if they want to get rid of their stock that badly-- by offering it an an absurdly low price-- you can be a good person by taking it off their hands.
In practical terms, when everyone at CNBC tells you that it can never come down, you should sell it. When they say that it can never go up, you should buy.
Of course, you must have a notion of value to play the game. Sometimes people will sell you something cheaply because it is worthless. John Templeton was one of the world's great value investors.
Beyond that, Templeton's idea suggests that virtue is not merely its own reward. It pays off in other ways too.
I was reminded of this when I was reading Brett Steenbarger's blog, TraderFeed. Yesterday he wrote: "I personally find it interesting that traders who lack social skills-- who don't read people well-- also seem to struggle with markets. I listen carefully to the market views of defensive, abrasive, or socially inept people; they're uncommonly wrong, which makes their opinions useful in unintended ways."
To most people this is not self-evident. Many of us learned about Wall Street traders by reading Michael Lewis's book, Liar's Poker.
There Lewis offered that the great bond traders at Salomon Bros. had dubbed themselves: Big Swinging Dicks.
Apparently these overgrown frat boys were aggressive, rude, and abrasive to an extreme. A BSD would throw his mother off a cliff for an eighth of a point, and would gamble on anything, like the arrival time of the pizza delivery boy.
The value of Lewis' take lay in the notion that these were not traders, they were gamblers. And gamblers always lose in the long run.
As for the Big Swinging Dicks from Salomon Bros.... where are they now? One of the major BSDs was John Meriwether who went on to found Long Term Capital Management, a hedge fund that could not fail... until it did. The collpse of LTCM was extravagant to an extreme. It nearly destroyed the financial system. You can read the story in Roger Lowenstein's book, When Genius Failed.
Steenbarger's advice is intriguing because it runs directly counter to the ethos of the Salomon Bros. bond traders. Clearly, his is the more sober, sensible, and profitable direction.
He is telling us that successful traders do not get caught up in the emotion of the moment; they do not follow their bliss or their despair. And he was telling us that the same applies in your relationships with other people. Good social skills are essential to good trading, good investing, and a good life.
Why? Because people who succeed in the markets are people who respect the markets. As Steenbarger brilliantly put it: "It is not about imposing your views on what markets 'should' be doing; its about reading what they 'are' doing...."
In more interpersonal terms, people who are abrasive and obnoxious are trying to impose their will on others. They believe in their genius; they are convinced that they are right; they believe that they can and must control others. They become so totally enamoured of their own genius that they miss the signs that other people are turning away from them.
A market is made up of billions of individual decisions. To imagine that you can walk into it and make it do what you think it should do is a recipe for financial ruin. Humility, not pride, will make you a better trader and a better person.
Steenbarger is telling us that people who respect other people do better than people who want to assert their own needs, no matter what. Can you, for example, tell when your friends are tiring of your complaints or when they feel you are depriving them of your presence? Do you persist in the face of subtle discouraging cues or do you insist that they keep listening? When someone offers a subtle hint that they do not want to go out with you, do you keep asking or do you withdraw gracefully?
Reading people well is like reading markets well. A lot of it involves following subtle cues and knowing how to take a hint. Despite what many therapists say, it is a bad thing to have to spell everything out, to explain yourself all the time, to insist on satisfying your needs, and to assert yourself against friends and neighbors.
Being tactful and considerate, respecting other people's feelings... these are the ways to get along with others, and they are at the core of the kind of ethical behavior that will improve your life and your trading.
You can be as right as rain, but forcing your truth on others is simply wrong. As Steenbarger might suggest... if you disagree, try forcing your truth on the stock market.
Virtue may be its own reward, but it may also reward you in other, less mysterious ways.