Stock Market Wizard, U.S. Investing Champion Mark Minervini Shares Ideas and Wisdom Here FREE!
January 21, 2015
Understand that Practice Does Not Make Perfect
I know people who have managed money on Wall Street for decades yet have only mediocre results to show for it. You would think that after all those years of practice their performance would be stellar or at least would improve over time. Not necessarily. Practice does not make perfect. In fact, practice can make performance worse if you are practicing the wrong things.
When you repeat something over and over, your brain strengthens the neural pathways that reinforce the action. The problem is that these pathways will be reinforced for incorrect actions as well as correct actions. Any pattern of action repeated continuously will eventually become habit. Therefore, practice does not make perfect; practice only makes habitual.
In other words, the fact that you’ve been doing something for a while doesn’t mean you are guaranteed success. It could be that you’re just reinforcing bad habits. I subscribe to the advice of the legendary football coach Vince Lombardi. As he said, “Practice does not make perfect. Only perfect practice makes perfect.
In the stock market, practicing wrong will bring you the occasional success even if you’re using flawed principles. After all, you could throw darts at a list of stocks and hit a winner once in a while, but you will not generate consistent returns and eventually you will lose.
The reason most investors practice incorrectly is that they refuse to objectively analyze their results to discover where their approach is going wrong. They try to forget the losses and keep doing what they’ve always done.
The proliferation of cheap brokerage commissions, Internet trading, and web-based stock market data may have provided everyone with the same technology, but it did not grant investors an equal ability to use those resources.
Just as picking up a five-iron doesn’t make you Tiger Woods, opening a brokerage account and sitting in front of a computer screen doesn’t make you Peter Lynch or Warren Buffett. That’s something you must work for, and it takes time and practice. What’s important is that you learn how to practice correctly.
Avoid Paper Trading
Do the thing and you will have the power. —Ralph Waldo Emerson
As new investors learn the ropes, often they engage in paper trading to practice before putting real money at risk. Although this sounds reasonable, I am not a fan of paper trading, and I don’t recommend doing it any longer than absolutely necessary until you have some money to invest. To me, paper trading is the wrong type of practice.
It’s like preparing for a professional boxing match by only shadowboxing; you won’t know what it’s like to get hit until you enter the ring with a real opponent. Paper trading does little to prepare you for when you are trading for real and the market delivers a real punch. Because you are not used to feeling the emotional as well as the financial pressure, it will be unlikely that you will make the same decisions you did in your practice sessions.
Although paper trading may help you learn your way around the market, it can also create a false sense of security and impede your performance and learning process.
The psychologist Henry L. Roediger III, who is the principal investigator for the department of psychology at Washington University in St. Louis, conducted an experiment in which students were divided into two groups to study a natural history text. Group A studied the text for four sessions.
Group B studied only once but was tested on the subject three times. A week later the two groups were tested, and group B scored 50 percent higher than group A. This demonstrates the power of actually doing the thing you’re trying to accomplish versus preparing for it in simulation.
If you’re just starting out, you should trade with real money as soon as possible. If you’re a novice trader, a good way to gain experience is to trade with an amount of money that is small enough to lose without changing your life but large enough that losses are at least somewhat painful.
Don’t fool yourself into a false sense of reality. Get accustomed to trading for real because that’s what you’re going to have to do to make real money.
Commit to an Approach
You don’t need a PhD in math or physics to be successful in the stock market,just the right knowledge, a good work ethic, and discipline. My SEPAmethodology was developed after decades of searching, testing, and going back to the drawing board countless times to uncover what actually works.
You, too, will go through your own trial-and-error period: window-shopping and trying various concepts and approaches to the stock market, whether value, growth, fundamental, technical, or some combination.
In the end, to succeed, you will need to settle on an approach that makes sense to you. Most important, you must commit to perfecting and refining your understanding of that methodology and its execution.
A stock trading strategy is like a marriage; if you’re not faithful, you probably won’t have a good outcome. It takes time and dedication, but your objective should be to become a specialist in your approach to the market.
Although strategy is important, it’s not as critical as knowledge and the discipline to apply and adhere to your rules. A trader who really knows the strengths and weaknesses of his or her strategy can do significantly better than someone who knows only a little about a superior strategy.
Of course, the ideal situation would be to know a lot about a great strategy. That should be your ultimate goal.
Invest in Yourself First
When I began trading in the early 1980s, I endured a six-year period whenI didn’t make any money in stocks. In fact, I had a net loss. It wasn’t until 1989 that I began to achieve meaningful success. What kept me going? Unconditional persistence! An investment in knowledge, which takes time to acquire, is an investment in yourself, but it requires persistence.
When you make an unshakable commitmentto a way of life, you put yourself way ahead of most others in the race for success. Why? Because most people have a natural tendency to overestimate what they can achieve in the short run and underestimate what they canaccomplish over the long haul. They think they’ve made a commitment, but when they run into difficulty, they lose steam or quit.
Most people get interested in trading but few make a real commitment. The difference between interest and commitment is the will not to give up. When you truly commit to something, you have no alternative but success. Getting interested will get you started, but commitment gets you tothe finish line.
The first and best investment you can make is an investment in yourself, a commitment to do what it takes and to persist. Persistence is more important than knowledge. You must persevere if you wish to succeed in anything. Knowledge and skill can be acquired through study and practice, but nothing great comes to those who quit.
Expect Some Rotten Days
Many of life’s failures are people who did not realize how close they were to success when they gave up. —Thomas Edison
The key to success is to become a successful thinker and then act on those thoughts. That doesn’t mean that all your ideas and actions will always produce the desired results. At times you will feel that success is unattainable. You may even feel like giving up. I know. I’ve been there.
As I said, I went six consecutive years without making a penny while pursuing stock trading. Along the way I had days when I felt so demoralized by my unsatisfactory results that I almost threw in the towel and gave up.
However, I knew the power of persistence. Then, after more than a decade of trial and error, I was making more money in a single week than I dreamed of making in a year. I experienced what the English poet and playwright Robert Browning meant when he wrote, “A minute’s success pays the failure of years.”
Remember, if you choose not to take risks, to play it safe, you will never know what it feels like to accomplish your dreams. Go boldly after what you want and expect some setbacks, some disappointments, and some rotten days. Embrace them all as a valuable part of the process and learn to say, “Thank you teacher.”
Be happy, feel appreciative, and celebrate when you win. Don’t look back with regrets at failures. The past cannot be changed, only learned from. Most important, never let rotten days make you give up.
Excerpts from TRADE LIKE A STOCK MARKET WIZARD (McGraw Hill – 2012)