Friday, May 29, 2009

Learn From My Mistakes

Traders and investors are often confronted with information that is counter to their expectations. It is not a matter of if this will happen, it is simply a matter of how one reacts. To be honest, I have reacted extremely poorly to a larger move than I thought possible in the Canadian Dollar and have been punished for that reaction. Perhaps I can blame the fact that I have spent the last two weeks in transition from Germany back to Canada. But far more likely is that I was simply recategorizing the contrary information as it transpired.

If I had asked myself a month ago what my threshold for upside was on the CDN, I would have likely said something like 82.5. At that point I should have had stops set and reevaluated the situation. But I did not. It blew through that level, and I adjusted my threshold to 86, which was a weekly moving average. At the time, I was looking for reasons to justify the move and again watched it blow through that level on it's way to 90 - round number resistance! The Loonie opened higher this morning and I have finally conceded - at a significant loss from what it should have been.

I am surely not alone in experiencing this kind of frustrating behaviour. But the worst part about it is that I am fully aware of the tendency (technically referred to as cognitive dissonance) and have previously caught myself many times from what would otherwise be terrible trades. I've spent a great deal of time reading and researching behavioural finance books, all of which are supposed to teach one how to defeat the natural human inclinations that make 90% of investors and traders lose money. For the most part, I've been very good at rooting it out, but I let myself slip this time.

It is just one expensive reminder that no matter what the situation, stop losses are an imperative part of investing, even for long term investments. Today's high volatility markets can be seductive, as one knows that in just one day things can turn around. It is tempting to "just wait one more day" before finally giving up on a losing trade. But the volatility makes the necessity for stops more important, not less.

For readers who have followed this blog since inception, it may be surprising to find out that I can be wrong. After calling the deflationary collapse years before any "expert" (there were in fact many others waiting for the same), and experiencing triple digit gains on my account two years in a row, I suppose being wrong was a tough pill to swallow.

I am sure I will learn from this mistake like I have others (I refuse to be one of those pundits who never admits they've ever been wrong). But I write this in hopes that my readers can learn from my mistake instead of making their own.

Perhaps it's time I reread one of my Kahneman and Tversky books...

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Henry said...


Which behavior finance books would u recommend for a beginner?

Henry (previously EconStudent)

Matt Stiles said...


The most comprehensive and simple I've come across is "Behavioral Finance and Wealth Management" by Michael M Pompian. It has a short chapter on each typical investor bias and practical applications for investors.

If you wanted to get down and dirty, you could try "Choices, Values and Frames" by Kahneman/Tversky or "Behavioral Finance" by Richard Thaler. The latter two are daunting reads filled with equations that contain more greek symbols than numbers. I couldn't finish them, but got quite a lot out of reading the conclusions at the end of every chapter.

Specifically for day traders, one should read "Trading in the Zone" by Mark Douglas and "Trading to Win" by Ari Kiev.

Hope that helps,

Anonymous said...

I've been reading your blog for the past few weeks and find your thoughts interesting. Obviously, you know you are not alone in the world of making mistakes when investing (especially when fundamentals do not dictate the market).

Fish10 said...


This market is oscillating so wildly between fear and greed and complacency- often in the same day - that they are impossible to forecast or trade.

The program trading drives the moves much further than fundamentals suggest.Look at oil - dropping demand, a glut of stored oil and the price is flying driven by speculators.

The USD will rise again as the deflationary process starts again- in ?X? months.

Matt Stiles said...


I agree. But I should have been smart enough to recognize that something was happening that I did not expect and evacuate the position. One can always jump back in after reevaluating without the emotions.

Medieval said...


On a related note, I currently work in the US and live in Windsor, Ontario (and pay rent and debt and utilities etc in CND). I work at an automotive (not the nicest word out there right now) testing facility. Last month we all got a 10% pay cut, so I effectively got a 30% pay cut in the past month and a half, and was already underpaid.

I know the CND may very well lose ground against the USD again, but this back and forth thing isn't very fun when you're barely making ends meet as it is.

I thankfully have decided to move away from Windsor to a more stable (for now) sector (nuclear power) back in Canada.

Double the salary for half the working hours... how can I say no? :)

Anyway, many guys at work talk about how they are losing money in the stock market from recent investments they have made to take advantage of the low market.

I told them if I felt like gambling I would go the Casino.

Good luck with your investments,


mike.montchalin said...


Thanks for sharing your self examination with us.

@ anonymous at 5:53pm, et al
Last night I reread
and am as impressed as when I first read it.

Matt, which of your pieces is your favorite?

Matt Stiles said...


Without thinking much, I'd probably say the first post on this site - the Themes for '07. More than any, I go back to reread that. Reading what I wrote over two years ago has a way of teaching me humility and gives perspective to how far I've come in terms of knowledge. Much of that article makes very little sense when looked at with hindsight. Some of it illogical, some of it was way early. Much was spot on.

Going back to read that and thinking about the mistakes I made is of great assistance to me now. And I'm sure some of what I am writing now will sound pretty silly in a few years. All part of the learning process - which I never intend to retire from.

In ancient Greece, when Socrates was considered by many to be among the wisest of people in Athens, he still refused to even acknowledge himself as a teacher and insisted that he knew very little of all what there is to know. I hope to maintain a similar ego in an industry that typically attracts arrogance.

How's that for a long answer to a short question?

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