Tharp's Thoughts Weekly Newsletter (View On-Line)
Start the New Year with Peak Performance Workshops in January!
The Christmas and New Year Holiday is fast approaching and we know a lot of you intend on coming to the January workshops but have not yet registered. We urge you to do so now. It is easy this time of year to let time get away from you and the next thing you know, it's already time for the workshops or they have sold out (or the early enrollment discount expires). Click here to learn more and register.
In other news, next week is Christmas and VTI will be operating with a very limited staff all week as most people are taking time off for the holiday. We are closed Christmas Eve and Christmas Day (and New Years Day the following week).
The Definitive Guide books have arrived and most every order placed has already been shipped. Take a look at all of these books! And this is just a small portion of the shipments!
Happiness as a Trading Edge
“We are shaped by our thoughts; we become what we think. When the mind is pure, joy follows like a shadow that never leaves.”
"Joy does not simply happen to us. We have to choose joy and keep choosing it every day."
I first traveled to Beverly Hills, California in 1994. I have to admit that my expectations of the area were set by a sitcom from my childhood days about Jed Clampett and his transplanted family: “The Beverly Hillbillies”. (To properly date myself here… can I add that I was a very young boy when I watched the show?) I expected to witness the opulence and exclusivity portrayed in the TV show, but what I experienced was so different that the memories have stayed with me to this day.
My trip was in support of a product that was in my business portfolio at DuPont — a high strength liner used to refurbish pipes that capitalized on the high tensile strength and lightweight characteristics of Kevlar® (the same fiber used in bullet-resistant vests). Believe it or not, Beverly Hills really does have hills and their storm drain pipes were being torn apart by the combination of pressure from heavy rains and big elevation drops. A construction company was using our material to reinforce the storm water system. It was a cool project and I was on site as part sales representative and part technical support (even if you’re in a business/marketing role, you can only hide the fact that you’re an engineer for so long…).
While I was there, I did see some magnificent houses — the ones built into the sides of hills were especially striking. Surprisingly, one of the things I remember most about this very affluent area was that people were unanimously and almost comically unhappy! Everyone was grousing about something. We weren’t digging or disturbing anyone’s yard, mind you — just relining existing pipes. Every personal interaction I had, whether it was business related or just meeting someone in passing had this heavy air of discomfort and dissatisfaction. And it wasn’t just me noticing these interactions as a visitor — I observed the people who lived there treating each other with the same air of melancholy.
For a striking difference — fast forward two years to another jobsite, this time in St. Maarten, the Dutch half of an Island in the Caribbean. By this point, I was working in an entirely different business role on a salt water desalination project. The project involved working far above the beautiful coastline and posh resorts in a village with dirt poor residents. They were so poor in fact, that when we were walking through the unpaved streets, one of the locals we were with pointed to a narrow ditch we were about to jump and said, “Don’t step in that” — I immediately saw (and smelled) why. It was an open ditch of untreated sewage running downhill out of the village.
The funny thing, though, was that despite living practically in squalor, these people were extraordinarily happy. Kids laughed and played with makeshift toys and balls. Everyone smiled. And people kept bringing us things. A homemade pastry from one house, cheese and crackers from another and one woman ran into her house and even brought us warm bottles of Coke. She said she was sorry that she didn’t have any ice at the moment.
Between these two experiences, I put together some important experiential learning of what I had understood theoretically —
- Money doesn’t automatically buy happiness, and
- “Stuff” (like nice houses and cars) can’t bring lasting joy.
Recently I’ve been working on tying in some great research on happiness to the field of trading and investing. As my Christmas present to you, I’d like to share some of my findings. Van has always been a proponent of trading while in the proper mental state. My experience and analysis certainly confirms and builds on that excellent foundation.
Happiness As An Edge
We do so many things in our lives attempting to create happiness. I suspect that many reading this article trade and invest, in part, because you get a certain amount of happiness from some aspect of the trading/investing process. But I also suspect that most could get even more happiness OUT of trading if you put more happiness INTO trading. Imagine using happiness as one of your trading edges. If that doesn’t make sense entirely, I’ll explain more in the next section.
First, though, I wanted to share some broader research about happiness with you. Don’t worry — this isn’t some fluffy stuff about rainbows and unicorns, this is real science with controlled studies that proves you and I can control a large part of our own happiness.
Let me introduce you to one of the best books I’ve read in years called The How of Happiness by Sonja Lyubomirsky. Here’s what Harvard Professor of Psychology Daniel Gilbert said about the book:
“Everyone has an opinion about happiness, and unfortunately, many of them write books. Finally we have a self-help book from a reputable scientist whose advice is based on the best experimental data. . . . and unlike almost every other book on the same shelf, it also happens to be true.”
What Research Tells Us about Happiness
The first point that Lyubomirsky makes about happiness is that a large part of our personal happiness is in our control. Early thinking in the field suggested that happiness was largely a function of our genes, that is, you are either born happy or not happy. Research using identical and fraternal twins now shows, however, that about only 50% of our happiness can be attributed to genetic predisposition. Studies show that we all have a happiness set point, much like our weight set point. While some people are inclined to be skinny, others are inclined to be happy. More surprisingly, living circumstances (as my trips to Beverly Hills and St. Marteen anecdotally validate) only account for 10% of an individual’s happiness level. A full 40% of our day-to-day happiness is a direct result of our intentional activities. And that’s actually a lot to work with. This is such an important finding that Dr. Lyubomirsky initially was going to call the book “The 40% Solution”. So the key to improving our happiness comes by focusing on the 40% of it that we can control.
Happiness, the Christmas Season, and Happiness’ Older Sibling, Joy
Whatever your spiritual practice, I’m sure that you see people around you who are totally stressed out during the Christmas holidays. These are usually people who are:
- Trying to please everyone else or do what’s expected of them
- Trying to be perfect (find the perfect gift, decorate perfectly, etc.)
- Trying to find happiness in stuff
I actually feel deeply for people who turn a beautiful time meant for celebration and joy into a personal torture chamber. This brings me to a pause for a few thoughts on joy.
Joy is a very close cousin of happiness — I like to think of joy as a continual state of being while happiness is more of a renewable, temporary mental state. Joy, in my eyes, seems to reside more in the heart and soul, happiness in the mind and body.
In this Christmas season, I find my deepest sense of joy in a relationship with one who came to earth as a baby in a manger. Your spiritual tradition may lead to another source of primary joy. But whatever the source, the highest state of being for me is living in that joy moment-by-moment. Reveling in it and sharing that joy with all I touch. For me, the true meaning of this season is sharing my joy through a smile, a simple gesture of kindness or a listening ear (okay, and through some gift giving, too!). What are your favorite ways to lift someone’s spirits?
Happiness and Trading
It's no surprise that, like almost any worthwhile endeavor, managing our happiness requires effort. Here I see some great parallels between becoming a skilled trader and achieving a desired level of happiness. In both, so many people would like to have all of the benefits fall into their lap. The Holy Grail system that makes me rich or the magic pill/advice/”secret” that makes me happy. And in both arenas, there are loads of people ready to provide “The Answer”, when in fact, the answer is to find the things that really work and be intentional about practicing them regularly. One thing that works really well in trading is finding a mental state that works for you. Van suggests many in the Peak Performance Home Study course. My personal favorites are resourcefulness and relaxed alertness.
I have found that adding happiness or even joy to the process of trading really helps me. Here’s a thought for you — the opposite of joy is not sadness (a temporary state) but rather fear. And we all know the old saying that scared money is dead money. Trading scared is one of the quickest ways to strip an account — so getting to the opposite state of being is a goal for all of us to shoot for!
Personally, I have also tried trading for years with drudgery and striving but those states never seemed to help me. They often led to stress in my trading.
And surprise! The very same things that get people stressed out during the holidays effect traders as well:
- Trying to please everyone else or do what’s expected of them. As Van has described so well, we can’t please all of our parts all of time.
- Our part that wants excitement is usually in conflict with the part of us that wants security.
- Following the crowd (doing what’s expected) usually leads us to be the last one to try to jump on a trend just before the reversal…
- Trying to be perfect
- This one is easy to see — I know many people who are still waiting for perfection before they start trading — whether they are working on the perfect plan, the perfect time, a perfect system, etc.
- Trying to find happiness in stuff
- Traders love stuff — systems, entry tricks, all manners of shiny objects. This one is so prevalent, I’ve written whole articles about chasing shiny objects and the disappointment that follows.
Lastly, I’ll leave you with some good news. Dr. Lyubomirsky provided a good roadmap for the intentional steps we can take to increase our day-to-day levels of happiness — things that will most certainly help in our trading and investing performance. We’ll dig into those steps after New Year's to see how we can apply them as traders and investors.
Once again, I find myself grateful and admiring great researchers who give us applied psychology tools. I’d love to hear your thoughts and feedback — just send an email to drbarton “at” vantharp.com.
Whatever your spiritual tradition, I pray that the peace, love and joy of this special season is with you and your family.
Until next week…
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All Three Peak Performance Workshops Back-to-Back in January!
The Peak Performance 101 workshop is a prerequisite for the Super Trader Program and for the more advanced Peak Performance 202 and 203 workshops. These workshops have been selling out early, so don't let the holiday's distract you. If you'd like to come, register now to ensure you have a seat come January!
If you live in South Africa and expressed interest in Van presenting during a 2014 visit, we thank you for the feedback. Van's plans have changed however and it will be 2015 before he visits your beautiful country.
Click here to see the full workshop schedule or to register.
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The following is an excerpt from the 2nd edition of the Definitive Guide to Position SizingSM Strategies, which is now available for a special price of $199. For more information or to order, click here.
Why Traders Don’t Appreciate
The Power of Position Sizing Strategies
Despite the importance of all the material I have presented about position sizing strategies, most people have psychological biases that will cause them to 1) ignore the material totally or 2) do exactly the opposite of what is recommended. As a result, I want to show you some of those biases and what you can do to overcome them.
French Economist George Anderla found that the rate of information flow with which we human beings must cope doubled in the 1,500 years between the time of Jesus and Leonardo DaVinci. By the year 1750 (i.e., in about 250 years), it doubled again. The next doubling only took about 150 years to about 1900. The onset of the computer age, in the 1960s, reduced the doubling time to about 5 years. And, with the Internet, the amount of information to which we are exposed currently doubles in less than a year.
Researchers now estimate that humans, with what we currently use of our brain potential, can only take in 12% of the visual information available. And for traders and investors the situation is at an extreme. A trader or investor, looking at every market in the world simultaneously, could easily have about a million bits of information coming at him or her every second. Since there are usually some markets open around the world at all times, the information flow does not stop. Some poor traders actually stay glued to their trading screens, trying to process as much information as possible for as long as their brain will permit.
The conscious mind has a limited capacity to process, about 7 (plus or minus 2) chunks of information at a time under ideal conditions. A “chunk” of information could be one bit or it could be thousands of bits (for example, a chunk could be the number 0 or a number like 7,941). Read the following list of numbers, look away, and then try to write them all down.
34 39 85 93 21 98 43 56 76 53
You probably couldn’t do it because we can only consciously process 7 (plus or minus 2) chunks of information at one time. Yet we have millions of bits of information coming at us every second. And with the current rate of information availability doubling every year, how do we cope?
The answer is that we generalize, delete, and distort the information to which we are exposed. We generalize and delete most of the information. For example, “Oh, I'm not interested in the stock market.” That one sentence takes about 90% of the information available on the markets, generalizes it as “stock market information,” and then deletes it from consideration.
Psychologists have taken a lot of these deletions and distortions and grouped them together under the label “judgmental heuristics.” They are called “judgmental” because they affect our decision making process. They are called “heuristics” because they allow us to shift through and sort out a lot of information in a short period of time. Heuristics are shortcuts! We could never make market decisions without them, but they are also very dangerous to people who are not aware that they exist. They affect the way we develop trading systems and make investment decisions.
The primary way most people use judgmental heuristics is to preserve the status quo. We typically trade our beliefs about the market and once we've made up our minds about those beliefs, we're not likely to change them. And when we play the markets, we assume that we are considering all of the available information. Instead, we may have already eliminated the most useful information available by our selective perception.
Interestingly enough, William Eckhardt points out in his chapter of The New Market Wizards that progress in knowledge results more from efforts to find fault with our theories, rather than prove them.1 If his concept is true, then the more we tend to realize our beliefs and assumptions (especially about the market) and disprove them, the more success we are likely to have making money in the market.
Thus, what are the beliefs and theories that need to be disproved for us to make progress? These beliefs represent many of the biases that we must overcome in order to make progress. My journey as a trading coach and as a modeler has certainly involved a lot of disproving the status quo.
The secret to success is in understanding how these biases affect you, and then turning yourself into an effective investor/trader. If you try to project what you learn outside of yourself onto the market, you will not be able to apply any of the principles taught in this book. Money is made through the personal application of these principles.
1. Schwager, Jack, and William Eckhardt. New Market Wizards. Harper Collins, 1992.
About the Author: Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and outstanding Peak Performance Home Study Program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.vantharp.com. His newest book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.
New, Second Edition, The Definitive Guide To Position Sizing Strategies is Now Available!
The name Van Tharp is often synonymous with the term Position Sizing. In fact, Van invented and coined the term. It's one of the most important concepts that a trader can understand, yet so often, traders misjudge how critical a role it plays in your results. To help traders, Van set out to create the definitive compilation of this weighty subject some years back. Based on the feedback from the book’s first edition readers, he was quite successful and now he is releasing the second edition.
If you think your systems are more important than your position sizing strategies in meeting your objectives, we strongly encourage you to study this book. Understanding position sizing topics will have more impact on your trading results than any other single “technical” subject. After reading it, you'll understand why many traders keep the book close by as desk reference.
It's a substantial book, well worth its $249 price tag, however, during our sale you can get the NEW edition for $199! But hurry, the sale will be ending soon.
Learn More Order Now
Mailbag: December 18th, 2013
I have read the Chinese version of “Super Trader” and been your reader since 2011. This email is responding to Mr. Barton’s project two in his article last week, expressing gratitude directly to someone in the field of trading.
I would like to thank you for writing books and managing newsletters about your trading concept and mindset, which are rarely seen in my country. Because of your books and newsletters, an individual trader like me outside of the US can learn and apply your methods to improve the trading in Taiwan stock market. Especially, these articles make me believe that trading to rich can really be materialized, and I am truly grateful
Thank you, Dr. Tharp. May you and your family enjoy a Thanksgiving full of gratitude, love and joy.
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