Nothing changes on New Year’s Day
– U2, New Year’s Day
The hot take among cynics is that there’s nothing more cliché than making resolutions on New Year’s Day – an arbitrary date with no significance – which you’re destined to abandon in short order.
Don’t count me among the cynics.
In his book, The Disciplined Trader, the late Mark Douglas describes the nature of markets;
The markets are always in motion; they never stop, only pause. As long as there are traders who, for whatever reasons, are willing to buy higher than the last price or sell for less than the last price, prices will remain in perpetual motion.
Even when the market is closed, prices are theoretically in motion. For example, what traders may be willing to buy or sell at on the opening the next day does not have to be at the price level the market closed at the previous day.
To counteract the market’s perpetuity, we pick arbitrary moments in time to measure success or failure. The closing bell for day traders, end of quarter for investors, and last trading day of the year for indexes.
Time – though limited for individuals – is also perpetual, and New Year’s Day is the arbitrary moment we choose to clear the slate, reset, and prepare for a better future.
It’s the exact opposite of cynicism. It’s optimism.
With that in mind, here are some New Year’s resolutions for active investors to consider.
Revisit Your Risk Profile
All politics is local, all risk is personal.
One person’s reasonable risk is another’s extreme risk. But far too often we fail to acknowledge our risk tolerance before putting money on the line.
Being intellectually untethered from risk only sets the stage for emotional decision making when things don’t go as planned.
Establishing what you’re willing to lose before you enter a position is good. Accepting the reality that you may hit your max loss is even better because it helps keep emotions at arm’s length when the time comes to act.
Who thought the financial story of 2017 would be Bitcoin? I sure didn’t.
But putting aside the pros and cons of cryptocurrency as an assets class, most of the public never even had a chance to profit from the outsized moves in this space because they refused to view it as a viable investment.
I stayed out of Bitcoin because I didn’t understand it or believe in it, and there’s an argument to be made that this is a wise investing philosophy. But I’m not the market, and smarter people than me did understand it and did believe in it.
Perhaps I should have too? Or at least entertained the possibility.
What’s the next big non-traditional investment? Maybe it’s marijuana stocks? Maybe it’s Rally Rd? Who knows? But this year I’m keeping an open mind.
Write Every Day
In my opinion, the most powerful thing an investor can do to improve their performance is to write every day.
It can be about anything – a trade you made, an investment you’re contemplating, or an idea you read about. Something about putting cursor to screen on a regular basis helps crystallize your thinking and inoculates you against your own BS.
In public or private, even for just a few minutes per day, if you pick only one resolution for the new year, let it be to write every day.
Leave Your Politics at the Door
Trump’s an idiot. The market doesn’t care.
If you stayed in cash in 2017 because you don’t like Trump, you were wrong and are poorer for it.
Resolve to keep your investment decisions separate from your politics no matter who’s in office.
Go Outside Your Wheelhouse
Think bonds are for old folks? Day trading for lunatics? Portfolio theory for fund managers?
You might be right.
But markets and money are interconnected, and the more you learn about different aspects of the financial universe the better.
Pick one new subject to learn about each month and by this time next year I guarantee you’ll be a more well-rounded and confident investor.
Put the Book Down
Reading is good. I do it all the time and you’re doing it now.
However, excessive reading can provide a crutch to lean on for those who are intimidated by the markets, i.e. “I’ll put my money to work once I finish reading these 73 books on investing.”
You can read a hundred books on the history, manufacture, and elemental composition of sugar, but you’ll never know what it tastes like until you put it on your tongue.
Likewise, you’ll never get a feel for investing or a true sense of how your emotions will affect your decision-making process until you put real money to work.
The good news is that investing is not an all or nothing proposition. Instead, start a small amount of money, then, as your experience and confidence grow, slowly scale up until you get to a level where you’re comfortable.
And don’t ever stop reading.
Question (All) Your Beliefs
Most people understand the relationship between work and money. You might hate your job or think you’re underpaid, but you recognize the cause and effect – show up for work regularly and every two weeks you get paid.
When it comes to making money in the market, there is no direct cause and effect.
For example, average down in one stock and you end up making money. Do the same thing with another, you lose your shirt.
Human beings don’t like the unknown, so we form beliefs to explain things we don’t understand. It’s why the Greeks and Romans invented their gods. Better to believe that Apollo pulls the sun across the sky with his golden chariot than to admit to yourself you have no idea WTF is going on.
Confirmation bias. Recency bias. Negativity bias. The gambler’s fallacy. Spurious correlation. The bandwagon effect. Saliency. The sunken cost fallacy. These, and other beliefs may be affecting the way you invest, and you may not even know it.
Google them all to see if you recognize their fingerprints on your market beliefs.
Nothing changes New Year’s Day? I’d like to think it can. And hopefully, these resolutions will help bring you change for the better in 2018.