IT IS ONLY IN BEING WRONG THAT WE CAN LEARN TO BE RIGHT
What is the last thing you were wrong about? If you can’t remember or have to think hard – don’t worry. That’s perfectly normal. Humans are conditioned to avoid being wrong. And even when we are wrong we will often fight tooth and nail trying to convince ourselves that we are right. It’s a natural defense mechanism. As we have evolved over time human survival has become less about brute force and more about intellectual strength. It has been a natural progression into rational animals. But we don’t always behave rationally and often it is our primitive survival skills that act as the greatest hindrance.
Our minds have always been our greatest tools. Unfortunately, they can also be our most difficult obstacle. We fight being wrong because it is viewed as a weakness. A person who is often wrong is viewed as having an inferior intellect. And an inferior intellect means your survival skills are inferior. And who wants to mate with someone who can’t survive? You see how the evolutionary chain works here. We’re not so far removed from our ancient ancestors despite our very modern societies. And therein lies our greatest weakness. Our rather primitive “survive first” minds cannot accept being wrong. But it is only in being wrong that we can learn to be right.
I started thinking about all of this after watching a TED talk by Kathryn Schulz titled: On being wrong. It’s very good if you have 17 minutes to spare. There’s so much to learn from being wrong. Yet so many people fight it. I spent the better part of my youth being wrong. I was never the most intellectually gifted student so my mistakes were many. But I was persistent in the same way that any hungry animal is. In that attempt to justify my intellect to those around me I developed a near obsessive compulsive disorder attempting to resolve my own wrongness. And in this search for what was right I studied the only logical place – where I had been wrong. I’ve made mistakes in my life. Not just in the world of finance, but in love, in friendship and in work. And I regret not one of them. Because each of them was a learning experience infinitely more valuable than all of the times I was right. I have learned to embrace being wrong with the acceptance that learning from being wrong substantially increases my potential odds of being right in the future.
You might be wondering what in the world this has to do with investing? Well, it has everything to do with investing. Investing is psychological warfare. It is one of the last refuges of natural selection. The strong thrive and the weak die (unless you have superb banking lobbyists on the payroll). But we are ill-equipped to deal with the world of investing. Our primitive minds are built to survive first and act rationally last. In doing so, we often do what is detrimental to our financial health. That big tool inside our skulls acts on our primitive instincts and not the rationally developed processes that have sent the species surging to the top of the food chain.
The point here, is that learning from our past mistakes and accepting the fact that we are often going to be wrong will actually lead to a better skill set with which to deal with our future mistakes. The investor who accepts that there is no such thing as a holy grail in investing will soon realize that he/she must construct a portfolio that protects them from future calamity. And more importantly, through the use of past lessons we should all hope to create procedures to guide us during those times when our primitive mind tells us to react irrationally. You will be wrong. But it is only in being wrong that we can learn to be right.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
Follow Me:
38 Comments
I question whether being wrong exists.
Is it not by labeling a thought to an action that something becomes wrong? Therefore, at the same time such action can be labeled right.
Not judging, staying focused and using the mind as a tool (instead of a creator of virtual reality) seems the best way to me to learn trading just as riding a bike.
Lose money in this game and you’re wrong. It’s not a just a label. It is reality. I’ve learned more from my losses than I will ever learn from my gains.
I have probably been very unclear in making my point as you’re reaction seems to confirm my point. Are you wrong when you lose money ? Are you wrong when you fall of your bike when you learn to ride it? It is the following action that is of importance. Not how you qualify it.
are you trying to quantify ‘wrongness’? Yes, you are wrong when you lose money…..it doesn’t matter if your position would ultimately have made money. Heck, index-huggers are self certified geniuses when the market turns back in their favour ofater a large loss….but as an absolute reurn investor, or trader, you print a set of brackets and you’re wrong, my friend.
The next question is how/why were you wrong? The position? The reasoning? Or just the damn timing? The latter is awfully important. The discipline, as I’m sure you can appreciate, is make your wrongs ‘right’ by keeping them small…..
I think what Delphitrader is trying to say is… there is no such thing as “right” or “wrong”. Because, there you cant really define what is right and what is wrong. “Right” only exists when there is “Wrong”, just like happiness exists when only when there is sadness (if not everything will just feel indifferent). Its just a label, like a rose is just a rose, by any name. Thus, there is not much point trying to define if anything is right or wrong, but perhaps try to define it as whether it serves your purpose. I guess there is some philosophical idea behind what he is trying to say?
What I guess is more important is if it works towards your goal. Thus, if losing money allows you to learn a lesson, and become a better trader (your goal), losing money ‘works’.
My 2 cents worth… hope im working towards being a better trader too.
Cullen, I don’t even remember my best trades, but I remember my best losses. Sometimes your best trade is taking a loss and moving on, realizing that you were wrong and saving yourself a lot of money. As you said, learn from it. I don’t mind being wrong at all as long as I can understand why I was wrong and how to not make the same mistake in the future.
i have made some trades that were poorly thought out and that have yielded in profit, and some trades that were well-thought out and have produced losses. the thought process is all you can control, and then the market and events (which you can’t control) will price your decision.
everyone should have developed their own touchstones for determining whether a trade is well or poorly thought out. for some, a touchstone may be a sensible contrarianism (which i try to be), for another it is reading the bollinger bands, for another it is watching the 20, 50 and 200 day emas line up.
each may be wrong in the abstract, as ms schulz tells us, but you are not going to develop your own touchstone without venturing into wrongness.
Good stuff Chris. I would add that there is a big difference between begin right in theory and wrong in action and being right in theory and right in action. Too many investors float by using flawed premises that result in success (by luck). Most of them likely don’t know it, but they’re not adding value. They’re just lucky. Of course, you’d rather be right in theory and in action, but I would venture to guess that being wrong in action is generally what forces one to tweak his theories. And that ultimately, is the cornerstone of a good investment outcome.
Good stuff Cullen. How do you recommend overcoming the psychological hurdles?
Interesting article!
My view ist that investing is a struggle of the investor with its own psychology. However I think the ability of learning is rather limited. I adhere not to the view of Warren Buffet, who thinks that good investors must be coined from their genes to react appropriately. But the habits and instinctive judgements of an adult are very hard to change.
My investing behaviour is a very good example, since I am frequently bearish in a way that turns out later to be very silly
.
IMHO unlearning wrong investment behaviour is very difficult. It is as difficult as reeducating a heavily violent and lazy person to a peaceful and hard-working member of the society.
Just my 2 ct.
Interesting article – the guys in the NY Fed and Frankfurt are getting a kick out of our primeval reactions I fear.
They have put us all into a prisoners dilemma box where the only option is to defect.
Looking at the structure of the Euro and its subversive attack on sovergin money I can’t help but think they have been planning this for decades.
“I was wrong once.”
-My wife
Learning from your mistakes is a private sector thing.
Not in general
.
The mistakes of financial analysts and traders making a wrong call are made typically in the public. In that case it is better to correct it in the public.
Politicians never learn from their mistakes. When the people lead the leaders will follow.
Sure they do, but only when they are forced to. Just like anyone else. When the alternative becomes less painful than the primary.
its good most people never admit they are wrong, its part of the human condition….makes for a market….we here want to be on the other side of that trade.
i laugh outloud everytime that direct TV ad comes on:
that russian rich guy w/the miniature giraffe, Epic Win, says “no pain………….no PAIN!”
it’s true, but you also have no GAIN.
I thought I was wrong once, but it turned out I made a mistake.
Wrong for the first time again!
I was wrong with regard to the need to balance the budget. this blog opened my eyes and that is why i am now a religious reader of it.
the other major shocker in my life was when i first read Descartes/Berkeley/Hume. i wasn’t wrong exactly, but i now realize that the entire foundation of personal existence is ultimately illusory.
So, why don’t you admit your mistake and realise that you have been wrong about inflation?
And you have been wrong about QE – contrary to your opinion, QE is inflationary i.e. dilutive of the existing money stock
Paul,
If I had been wrong about inflation I would admit it. But I haven’t been wrong. In fact, I’ve been remarkably right. I called for disinflation last year and low inflation this year. Those calls have both been right. If you aren’t familiar with my calls then I suggest you try to keep up more closely. Thanks.
Most traders/investors suffer from cognitive dissonance bias.
Cullen,
I can’t tell you personally how right this article is, and it should be reposted once a quarter.
Before the crash, I had invested heavily in Etrade. Obsessed over that investment, analyzed it every way I could, and there was just no fighting the overall trend and the garbage insider crap that was going on with its sugar-daddy hedge fund.
I have learned that lesson very hard, and have always diversified, even though I hold one fairly concentrated position right now.
One has to think macro as well as micro.
If gold punches through 1500, then rises up to 1600-1700, and then falls back to 1500 in June, we are going to $2500 gold in short order. HOwever, if it blows its lid to early, that’s exhaustion and you can probably short that parabolic move.
Marc Faber had a brilliant short interview piece on that which is quoted at ZH.
I have learned hundred times over from my losses and have developed an “iron hand” because of it.
One thing I will say though, I will never invest heavy in a bank again as that subjects you to the FDIC simply seizing it and saying “you’re done”, akin to what happened to WM.
Is this message meant for kid dynamite?
Ha. No.
Amazing timing though – ahem
I’ve actually had this queued up for several weeks. The Schulz talk and the KD discussion likely spurred me to finally finish it, but it’s certainly not targeted at him. I consider KD a friend of mine even though we disagree on the exact ways in which computers impact trading….
If you don’t have an opinion you can’t be wrong. I have opinions about lots of things, but on many other matters I’m not afraid to stay on the sidelines. When it comes to where to invest my hard earned capital I stay out of the short term game. It is an interesting intellectual challenge to try and understand the economy and the markets, but it is too unknowable for me to have an opinion strong enough to back with my money (in the short term). So I continue to put aside substantial sums of money each year in tax deferred retirement accounts and invest it in various mutual funds. I’m 100% invested in diversified stock funds, owns some REIT’s and I’m ahead of where I was before the crash because I never stopped putting away money. I’m 48 years old and will continue this strategy as long as I contnue working and I will begin shifting towards bonds in another 10 years. When I retire I will stay in balanced funds until the day I die. I’m not as sophisticated as many of the commenters here and that’s all right. It takes one big mistake to ruin a lifetime of capital accumulation and I’ve seen enough people do that to know that the ephemeral payoff is not worth the risk.
I’m not saying any of this to be boastful, though I know a few will see it that way. People need to hear that it doesn’t take a rocket scientist to get ahead in this game. What it does take is patience, discipline, and faith in the future. I think it is important that people see another point of view and to know that short term trading is not the be all end all of investment success. It may make for a challenging past time, and there may be a few of us who are good at it, but remember, a little knowledge is a dangerous thing. My money is on the long term.
As long as you agree with an optimistic view of the future. If history shows one thing it’s that the market and the economy as a whole is biased on the growth/bullish side.
As for mutual funds, isn’t it just as hard to pick a good fund as it is to pick a good stock?
If history is any guide, and there is no better guide, then how can one NOT be optimistic about the future? How many times has the world been down this road? The S&P was at 12 right after WWII. Living standards today are better than they have ever been and humanity has never posessed greater wealth. How many people had given up and thought the world was basically over in the 1930′s? Thank God there weren’t internet chat rooms then – one would have gotten so depressed listening to the incessant griping that there would have been waves of mass suicides.
As far as which mutual funds to pick – I think one could do a lot worse than going with any of the Vanguard or T Rowe Price life cycle funds (Vanguard Wellington 10 yr avg is 6.66% and the Wellesley Income Fund is 6.57% during one of the worst investment decades in history). You’re not going to make a killing and certainly will not get killed. I’m interested in staying alive and preserving wealth. A 6% to 8% average return makes me very happy. If I pull no more than 4% to 6% from my account to live on when I’m no longer working I’ll never run out of money, die rich, and leave a nice legacy. I don’t see how short term trading changes that equation. If one thinks they can beat those numbers with that kind of a strategy, good luck and God bless you. But when you are working with a portfolio in the hundreds of thousands of dollars you’re talking about very high stake wagers that can blow up in your face. I’m not smart enough to jump on that playing field and prosper.
There actually may be a scientific basis to this idea. The book The Talent Code is about how super-successful musicians, athletes, etc. get their edge by building up lots of myelin in the neural pathways associated with their chosen activity. And what the author calls “deep practice” involves breaking a complex skill down into smaller pieces and then stringing it back together while correcting errors. Funny, today I just got to the part about how mistakes are essential to the process. I’m not affiliated with the book in any way, just enjoying it a lot.
I think its called trial and error. You can’t be afraid to fail, because the failures teach you what not to do. I well recall reading the missive about how many failures Lincoln experienced before he won the presidency and who hasn’t heard about the countless failures Edison endured before he was successful with the light bulb. I am dubious about similarly being able to master short term investing. The near future is so unpredictable and markets behave so irrationally. How can one sanely subject their retirement funds or their kid’s college fund to this kind of strategy? It is beyond the average mere mortal.
Just because you lose money doesn’t mean you were wrong. That’s what he was trying to say. A lot of stuff can happen to make a stock/deal go sour. You can say it “lost,” or “didn’t make money,” but the word “wrong” has a different meaning. Bad timing can happen. Someone who invested in BP before the spill was unlucky, but he would be considered “wrong” by the standard of the author–however, he might be “right” if he waits long enough.
Well, it’s a matter of timing. If you have the right thesis and your timing is wrong then you are wrong (Julian Robertson comes to mind). If you have the wrong thesis and have the wrong timing you are still wrong. If you have the wrong thesis and the right timing you can still be right (see Peter Schiff’s career). If you have the right thesis and the right timing then you end up as John Paulson.
In this business, losing money is being wrong. You might slide by based on getting the theory right, but ultimately, making money is what counts.
It depends on your intention when going into the trade. If your trade loses money and that was your conscious intention you were right
You go into a trade with certain expectations/beliefs of what’s going to happen and when. If your expectations aren’t matched you should adjust/exit your trade, not your expectations. Not admitting you are wrong can cost you dearly, it’s also the reason why many investors hold on to losing trades (I wasn’t wrong, it will turn) and exit winning trades (I was right, now I better get out so I won’t be wrong in the future) far too early.
“Wrong” is a strong word. So is losing. And it’s good to use these words even though people seem to fear them. It’s probably political correctness gone too far, like Congressmen saying “It was not intended to be a factual statement” instead of “I lied”. Not saying “I’m wrong” and sugar coating it with statements like “It was just my timing, I was unlucky”, or blaming your Broker/Goldman Sachs/HFT helps put your mind at ease when it should be on alert.
It’s kind of like going to an AA meeting and saying “My name is blah and I’m an alcoholic”. Accepting that reality is the most important step to remedy that situation.
My name is Nils and I’m wrong all the time.
I used to be wrong but I solved that problem every time I think I should sell I buy and every time I think I should Buy I short. I have never been so right.
I rather love Christ and be wrong than not love Christ and be right.