I found myself in perfect agreement with your 'Zen Trading' rules. Having 20 years of first and second market experience in every thing from common stocks to trading Canadian Bankers Acceptance futures on the floor of the Bourse de Montreal, I've learned what works. As you so smartly point out, I also learned what doesn't work. The fault for all failures is, of course, myself. Until investors accept this important finding they will always seek scapegoats and thus won't treat the real disease, themselves.
I'm also a pilot. I find the rules also are in perfect agreement with safe flying:
1. Have a Plan.
Both "weekend" VFR pilots and commercial IFR only pilots always have a plan. Many of us will commit them to writing (flight plan log), others get to store them in electronic flight management systems, but every good pilot has a plan.
2. Expect to be Wrong
A good pilot expects a system failure, a weather diversion, and he's prepared to deal with it, not ignore it. Blindly ignoring a minor malfunction or pressing on into dangerous weather doesn't create survivors, it creates business for the local funeral home. Our "loss" is much more severe than a trading loss, our loss is unrecoverable. We "preflight" to reduce surprises. Unlike the boneheaded Nobel Laureates at Long Term Capital (what a name!) - we know risk can only be reduced, never eliminated.
3. Predetermine Stops Before Opening Any Position.
Good pilots will set personal (weather) minimums that exceed published FAA minimums. The same pilots will determine in advance when they will abort a takeoff, when they will deviate for weather or cancel a flight. The regulations not only give the pilot in command the responsibility for conducting a safe flight but the authority to make it happen.
4. Discipline is Everything.
Absolutely. The regulations are there because other idiots didn't have discipline and the Feds now insist on it. Adherence to any plan requires discipline. You can have the most elaborate plan but if you lack the discipline to follow it the plan is worthless. A saying is 'fly the plan'. There are times [rare and unusual to be sure] where the plan must be ditched - the plan covers these situations too, much like our constitution allows for its own modification. A truly evolving document.
5. Emotion is the enemy of investors:
Pilots have all sorts of checklists that come from all sorts of sources. One of them is called the IMSAFE checklist, it covers the pilot (or flight crew). In its simplest form:
Illness - Don't fly if ill.
Medication. Good pilots do not "self medicate". If you're on non-FAA approved medication don't fly.
Alcohol - The "reg" says no flying within 8 hours ("bottle to throttle rule"). Most operators say 10-12 hours, some say 24. I don't drink at all.
Stress. Another difficult to quantify area.
Fatigue. NASA has done a lot of work on this. Safety data indicates anywhere from 20% to 40% of all truck accidents are fatigue related. NASA research indicates humans are extremely poor at detecting fatigue or determining their own level of fatigue.
Emotion. Right there on the "checklist". Do not fly if emotionally upset, recent death in the family, etc.
6. Take responsibility for your self, your capital and your trades.
For pilots the regulations (Title 14 U.S.C. Part 91) actually clarifies this point quite well. The pilot in command is responsible (by law). Even if the pilot does not own the aircraft he flies, he is the one who is directly responsible to determine if it is in an airworthy condition, not the mechanic, and not the company.
7. Constantly Improve.
Safety data shows conclusively that pilots who take additional (non-mandatory) training are safer pilots. All sorts of organizations and agencies offer free or nearly free safety seminars. It is the "safe" pilots who show up for these, of course. To some extent the regulations require pilots to take re-current training, but the more the better.
There have been drastic accidents of airline pilots flying their little homebuilt or Cessna light airplanes on the weekends because these aircraft fly differently. There have been problems where one less experienced pilot flying with a very experienced pilot thought or assumed that the experienced pilot knew what he was doing. I'm sure you'll agree, the same sorts of human interaction problems occur in the trading world.
8. Change is Constant.
As you can well imagine, weather is the big constant for fliers. There are other more technical things involved here, such as how the aircraft flies as weight (fuel) is burned or shifted about. Nonetheless, you hit the head with the hammer.
9. Short is not a four letter word.
For the pilot in me I look to reject a takeoff not make a takeoff. It is a whole change of the mindset. I look to find things wrong, not right. While the market does indeed go to 9,500 by going up more often and in greater magnitude than it goes down [up bias], not getting married to any investment is an important concept lost on the holders of Lucent, Mattel, Global Crossing, Kmart, etc.
10. Stock selection matters less than sector and market direction.
John C. Bogle, Chairman Emeritus, Vanguard Group, pointed this out a while back. The "mix" is the prime determinant of returns in a diversified portfolio over time, not the individual selections in the portfolio. Of course he's an index guy, which often doesn't please brokers and analysts (I was former Series 7 Rep, latter a convert to efficient market). William Oneill of Investors Business Daily has pointed out that roughly 75% of the stocks will move with the market. I've also noted significant asymmetric risk, which investors are experiencing now. The market will fall tend to fall faster than it rises in any given period of time, that's another topic item as well.
These items I believe directly apply to trading and investing. If 80% of all aviation accidents are related to pilot error and some 90% of all auto accidents then it is the human creature that is at fault, not the "system", the "government" or some other entity. There have been great strides in improving automobile safety (I remember having to do a brake job every 3,000 miles and an overhaul every 20,000 miles - now days cars run to 100,000 without a tune up of any kind) yet the accident rate has not decreased. Some 40,000 people DIE on US highways and roads each and every year, some 250,000 reported accidents a year. I'll get on my high horse and mention that the US commercial aviation industry only looses about 100 people per year in US based accidents - this suggests the media has the wrong target when it comes to focusing on accidents - but that's another story entirely.
Newbies thing its all Greek yet it really is quite simple. The same factors that hurt their performance hurt the performance of aviation air crews, nuclear submarine drivers, and NASA space probe designers and controllers. The human has not undergone any significant degree of evolution in the past ten thousand years. Newbies get all wrapped up in "them versus us" as you wisely pointed out, or get all wrapped up in the right tools and technology to have or buy. They're missing the point. You've done a great service with your articles.
Thanks for all of your great articles Barry.
Byron F. "Whitacre" Blake
Boca Raton, Florida
