As a psychologist working with traders and portfolio managers in the financial markets, I have an unusual front row seat on the factors that account for success and disappointment. The past year has been particularly challenging for both traders and investors, as few have capitalized on the large moves: higher in the U.S. dollar and lower in the commodity markets. Stocks have been in a somewhat volatile range and sussing out central banks for good rates trades has been perhaps the hardest strategy of all. Not surprisingly, it's been a challenging year for hedge funds, but also for individual traders and investors.
So how can we improve our trading and investment returns in 2016? A very interesting article on mindset shifts for organizations by Tamnay Vora suggests that the key to success is becoming more adaptable and agile, a conclusion I reached separately when studying highly successful participants in financial markets. Contrary to popular opinion, those successful money managers are not simply more disciplined and consistent in implementing decision-making processes. Rather, like nimble technology firms, they are quick to recognize shifting market conditions and quickly devise strategies for exploiting those. My distinct conclusion after reviewing these stellar performers was: Creativity is the new discipline.
Vora's article illustrates three themes for shifting mindsets within organizations that are particularly important for investor performance in the new year:
- From Profit To Purpose - Too much time and effort is spent on "finding the next trade" and too little energy goes into reflecting upon and cultivating one's edge in financial markets. The successful market participants I know have spent a great deal of effort thinking about--and researching--a unique approach to trading and investing that captures an enduring bias in the market place. Tracking and exploiting those biases become their purpose: what motivates them above and beyond day to day profit/loss figures. In every case, the unique approach to markets also exploits a unique set of cognitive and emotional strengths for the investor. For example, one portfolio manager I work with comes from a background in the physical sciences. He has applied engineering methods to financial markets, thereby reducing the emotional aspects of decision making which, for him, are destabilizing. He is trading currencies, equities, and fixed income products, but what drives him is the purpose behind solving engineering problems.
- From Planning To Experimentation - When I looked at the most successful traders and investors, all had substantially grown and developed from year to year. They went well beyond writing in a journal and setting general goals. They developed new tools for assessing market opportunities; they tracked new markets offering fresh opportunity; they expanded their repertoire by blending more tactical, opportunistic trading to longer-term holding of positions. There was absolutely nothing static about these successful managers: they not only planned out their year, but continually updated and revised plans based on evolving opportunity sets. Very, very often, the new strategies and markets were traded with less risk until they had proven themselves in real time. This experimentation process kept the traders highly engaged in markets, even when the markets themselves were relatively quiet.This poses huge psychological advantages, as it becomes a positive focus even during times of trading losses.
- From Privacy To Transparency - Perhaps the greatest change I've seen in professional money management is the shift from investing as a solo activity to more team-based approaches. In many cases, there is a formal building of teams, as money managers hire junior talent to fill holes in needed skills and experience. In other cases, the teamwork is virtual, with professional networking supplying needed perspective. There is a clear recognition that there is too much happening in the world, too much happening in markets, and too much research to stay on top of for trading to be a solo endeavor. Equally important, traders increasingly recognize that interacting with other curious and talented peers allows for cross-fertilization of ideas and a richer creative process. In the old days, privacy ruled: you never wanted to give away your edge. The most successful traders I've worked with, however, are very willing to give--and get plenty in return. They are not just trading markets; they're also trading information.
To build on the ideas of Sachs and Kundu, trading and investing success requires that we change as fast as markets do. Market themes change, correlations among markets change, volatility patterns change, and trends change. Doing what works today and continuing to do it with rigid fidelity is a formula for obsolescence. As Sachs and Kundu emphasize, embracing change means embracing disruption. This, perhaps, is the most noteworthy characteristic of successful investors of all. They embrace novelty, disruption, and the shaking up of ideas and methods. They simply evolve at a faster pace than their peers.
What have you done well in 2015 that you want to build upon in 2016? Where have you fallen short in 2015 and how will you improve upon that in 2016? What are the market opportunities you missed and how might you have participated in them? What are the ways in which you are distinct from other investors and traders and how do you draw upon those strengths daily? What opportunities do you see in markets that others overlook? How do you use losing trades and investments as fuel for learning and adaptation?
You are most likely to find success in markets if you can draw upon the best of who you are--your distinctive strengths--and find ever new ways to apply those to ever-changing markets.
