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Practice Does Not Make Perfect

July 07, 2014

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.



Why I Don’t Like 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 earn 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.



Excerpt from Trade Like A Stock Market Wizard by Mark Minervini (McGraw Hill Publishing –2012)

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