There is a passage from a classical Chinese text, written thousands of years ago, that describes the plight of many struggling traders today.
It's from The Zhuangzi and translates as follows:
They are consumed with anxiety over trivial matters but remain arrogantly oblivious to the things truly worth fearing. Their words fly from their mouths like crossbow bolts, so sure are they that they know right from wrong. They cling to their positions as though they had sworn an oath, so sure are they of victory. Their gradual decline is like autumn fading into winter this is how they dwindle day by day. They drown in what they do you cannot make them turn back. They begin to suffocate, as though sealed up in a box this is how they decline into senility. And as their minds approach death, nothing can cause them to turn back to the light.
Bleak stuff indeed. So, how does it apply to struggling traders?
Well, first, consider there is a whole contingent of people familiar with "the rules," yet still not satisfied with their results or where they have wound up. And when I refer to "the rules" in air quotes, I mean the stuff you will find in just about every trading book that was ever published.
Stuff like this:
● Cut your losses and let your profits run.
● The first loss is the best loss.
● Always plan your trade and trade your plan.
● Trade with the trend.
Now hold on, isn't that stuff legitimate? Don't all those old truisms have merit?
Sure, they do. But they certainly aren't enough ON THEIR OWN MERITS to succeed in trading. If you hang out on trading websites, or in the trading and investing section of bookstores, you will find those "truths" posted everywhere. You will hear them preached like gospel, with an implied message of profit salvation.
Yet, those wise old truths sure haven't helped the vast majority of traders who can parrot them. There are no bonus points (let alone extra profits in the trading account) for being able to recite that stuff in your sleep.
That Zhuangzhi passage reminded me of struggling traders who stick to "the old truths"… despite a perpetual track record of sub-par performance. They never do anything special, never make life changing profits, and never actually experience enough success to feel like they have truly succeeded at trading.
Let's break down the Zhuangzhi passage sentence by sentence and see how it can apply to struggling traders.
They are consumed with anxiety over trivial matters but remain arrogantly oblivious to the things truly worth fearing.
You know, the thing that is REALLY worth fearing?
Time, or rather, the loss of opportunity to learn and grow, which primarily relies on time as an input.
With time comes opportunity to learn. With opportunity to learn comes opportunity to grow… and with sufficient growth, one can find the necessary breakthroughs to reach full potential.
The passage of time in the absence of real growth when time is wasted spinning one's wheels is such that core lessons are never learned… core breakthroughs are never experienced… and then, time's up!
You can always earn more capital… unless you run out of time.
That is why one might argue it is far better to blow up a few trading stakes at small recoverable levels and learn quality lessons from the experience than to stay at hobbyist level permanently.
By the way, regarding the strategy of blowing up early to acquire seasoning and skills - that is exactly what Paul Tudor Jones did. He understood that the point of trading small was learning the ropes in order to trade big… which meant pushing the envelope and learning from the results.
The following is from a PTJ interview in the foreword of an updated Reminiscences of a Stock Operator edition:
In the book, I think [Livermore] lost his entire fortune four or five times. I did the same thing but was fortunate enough to do it all in my early twenties on very small stakes of capital. I think I lost $10,000 when I was 22, and when I was 25 I lost about $50,000, which was all I had to my name. It felt like a fortune at the time. It was then that my father flew up from Memphis and sat me down in my tiny New York City apartment and began lecturing me as lawyers do. He commanded, "Leave the gambling den behind. Come home and get a real job in a safe profession like real estate." Of course, I did not, and the rest is history…
The thing to fear, as the young PTJ knew, was not the risk of temporary small-stakes capital loss for the sake of a learning curve… but the danger of a boring and unfulfilling life, having turned away from the trading game before the lessons clicked.
And thus, to the degree the experienced trader continues to dabble and play footsie with markets while fearing inconsequential things, he or she might miss the thing to REALLY fear… a loss of time that means a loss of learning and a loss of breakthrough… which means never graduating to the fulfillment of one's potential. Just being a dabbler forever… an aphorism quoter on Twitter for all time.
Continuing with the Zhuangzhi breakdown:
Their words fly from their mouths like crossbow bolts, so sure are they that they know right from wrong. They cling to their positions as though they had sworn an oath, so sure are they of victory.
These traders are "sure" they know right from wrong (in terms of what trading success consists of). They are sure it is all contained in the trading commandments they have memorized, which they then repeat dutifully and often to everyone around them. (We all know the guy who tweets the same things over and over, day after day, ad infinitum…)
These traders "cling to their positions" of "knowing" the trading rules in the sense of never examining their rigid mindset never stopping and saying "Wait… perhaps I am missing something crucial here…"
They keep the faith with religious fervor. And the net result is generally as follows (Zhuangzi again):
Their gradual decline is like autumn fading into winter this is how they dwindle day by day. They drown in what they do you cannot make them turn back. They begin to suffocate, as though sealed up in a box this is how they decline into senility. And as their minds approach death, nothing can cause them to turn back to the light.
This is not the spectacular blowup of the short vol seller. It's a slow churning death of small loss after small loss. The slow bleed of thousands of trades with stops placed too close… and profits too meager to move any kind of needle.
There is no graduation, no transition to meaningful sizeup, no scaling to a position of strength and fulfillment… no making the light worth the candle.
There is just playing around without building… tinkering without learning… churn without growth. It's a sort of thingruel persistence… a stubborn surviving, and then a fading away.
In poker, there is a saying attributed to the legendary Doyle Brunson: "Going out like Broomcorn's Uncle."
Nobody really ever figured out who Broomcorn's Uncle is, but the saying refers to a poker player who is so meek and conservative he simply lets himself get anted to death. He takes nick after nick and cut after cut until finally his stack is chiseled down to oblivion, like the fading dwindlers of the Zhuangzhi passage.
It's a strange thing. If a poker player goes out like Broomcorn's Uncle, he was playing the game sitting there at the table, engaging with opponents but he wasn't actually "playing the game."
Instead, that player becomes so focused on the mere aspect of surviving… the mere angle of not losing… that he lost sight of the fact that you need courage, guts, strategic vision, and the passion to step forth and exploit victory's bold moments if you choose to play the game in the first place.
There is a sort of rigor mortis that can set in for the hobbyist trader set in their ways, set in their habits and set in their permanent biases. They've been trading for years, so they "know" all there is to know or so they think because the old truths are seen as beall endall, and years in the saddle give them license to be cranky.
Contemplating knowledge gaps becomes a less and less palatable thing over time because that would require admitting that knowledge gaps exist. And so they harden… but never break through… and then finally fade.
How do you avoid this fate? In a nutshell, first by remembering that taking on risk at the right time and place is the whole point of trading. If you are scared to ever go for the gusto, there was no point in entering markets in the first place. It's good to survive and not blow up… but not if the follow-on recipe is bread and thin gruel forever!
It's hard to do that, of course. It's hard to control risk most of the time, then press aggressively in the opportune windows. It's hard to scale up in windows of true opportunity, while maintaining deep patience otherwise. But this hardness is a feature not a bug because if it wasn't damn hard there wouldn't be so much profit in it!
Traders who have survived but not thrived have typically learned the basics of preserving their capital. The next hard lesson is learning how to push hard when it counts… how to make the light worth the candle via size.
This is how the legends like Stan Druckenmiller produced their outsized returns. They understood the concept of the big bet and when to swing hard. Druck's words below:
The first thing I heard when I got in the business, not from my mentor, was bulls make money, bears make money, and pigs get slaughtered. I'm here to tell you I was a pig. And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig. I think diversification and all the stuff they're teaching at business school today is probably the most misguided concept everywhere. And if you look at all the great investors that are as different as Warren Buffett, Carl Icahn, Ken Langone, they tend to be very, very concentrated bets. They see something, they bet it, and they bet the ranch on it. And that's kind of the way my philosophy evolved, which was if you see - only maybe one or two times a year do you see something that really, really excites you… The mistake I'd say 98% of money managers and individuals make is they feel like they got to be playing in a bunch of stuff. And if you really see it, put all your eggs in one basket and then watch the basket very carefully.
And there is just no easy way to learn that. No easy way. It CAN be learned, yes of course. But the learning of it is hard. It is a hard thing. And again this makes sense. If learning how to make big bets at the right time, while maintaining risk control properly, was an easy thing, then lots of people would do it. The reason only a small handful of traders pull it off is precisely BECAUSE OF the hardness and challenge of the path.
But the payoff for doing this for trying and succeeding is far more than money. The pursuit itself sings to the practitioner's soul, and as such, the vitality of the adventurous trader's spirit does not fade. Hunter S. Thompson:
Turn back the pages of history and see the men who have shaped the destiny of the world. Security was never theirs, but they lived rather than existed. Where would the world be if all men had sought security and not taken risks or gambled with their lives on the chance that, if they won, life would be different and richer? It is from the bystanders (who are in the vast majority) that we receive the propaganda that life is not worth living, that life is drudgery, that the ambitions of youth must he laid aside for a life which is but a painful wait for death. These are the ones who squeeze what excitement they can from life out of the imaginations and experiences of others through books and movies. These are the insignificant and forgotten men who preach conformity because it is all they know. These are the men who dream at night of what could have been, but who wake at dawn to take their places at the now-familiar rut and to merely exist through another day. For them, the romance of life is long dead and they are forced to go through the years on a treadmill, cursing their existence, yet afraid to die because of the unknown which faces them after death. They lacked the only true courage: the kind which enables men to face the unknown regardless of the consequences.
As an afterthought, it seems hardly proper to write of life without once mentioning happiness; so we shall let the reader answer this question for himself: who is the happier man, he who has braved the storm of life and lived or he who has stayed securely on shore and merely existed?
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors