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Great Expectations

InvestorEducation / Trader Psychology Oct 27, 2009 - 05:39 PM GMT

By: Charles_Maley

InvestorEducation

The best things in life are unexpected - because there were no expectations - ELI KHAMAROV

Legendary trader Roy Longstreet was once asked by Intermarket Magazine, “Why have you succeeded in trading to such a degree and why do most traders fail?”  Roy answered “Many major problems people have in trading are caused by their expectations – of where the market is headed, how much money will they make from this trade, etc. One thing I learned that has helped me: it is wrong for a person to enter any market with any preconceived expectations.”


He went on to say, “I know that there’s always the possibility that what I don’t want to happen, will happen. The market will not act in accord with my expectations. You have to ask yourself the question, how must you function to survive? The answer is to be able to accept a loss. Not having expectations makes it a little easier to accept a loss. You must realize that losing is part of soul growth, so to speak. It’s necessary. It’s hard to accept, but necessary.”

This problem of attaching ourselves to an outcome is not exclusive to trading, but is a problem in investing in general. Expectations of higher and higher returns have become commonplace in an environment of lower opportunity to do so. Few people consider the fact that when they invest today, the riskless marketplace pays close to zero.  For example, the one month Treasury Bill pays $40 for a $100,000 investment, and inflation is running around -1.3%, based on the Consumer Price Index.

All these things have an impact on available returns. Investors seem to recognize this fact when buying yield (bonds or CD’s), but not necessarily when dealing with other asset classes like stocks or commodities. For instance, the Ten Year Treasury Note will pay 3.59% per year for the next ten years, principal returned. We accept this or we would not buy the instrument. However, it’s not that simple when faced with other Investments.

For example, earnings per share (EPS) in the stock market have historically grown two percentage points above inflation. So let’s say annual inflation runs at 0%, we are talking about 2% earnings growth. Assuming share prices rise with earnings, you will get 2% annual gains. With The Dividend Yield around 3% right now, that is a forecasted total return of around 5%. Now, do you think that the average person has invested in the stock market for a 5% return?

I would guess they are looking for much more, and this opens the door for surprises. When the outcome is different than the expectation, we usually react emotionally, something that hardly ever works out.

 So, if possible, discount the predetermined expectations, and stay flexible to do what’s necessary. Confucius once said, “The expectations of life depend upon diligence; the mechanic that would perfect his work must first sharpen his tools.”

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Charles Maley
www.viewpointsofacommoditytrader.com
Charles has been in the financial arena since 1980. Charles is a Partner of Angus Jackson Partners, Inc. where he is currently building a track record trading the concepts that has taken thirty years to learn. He uses multiple trading systems to trade over 65 markets with multiple risk management strategies. More importantly he manages the programs in the “Real World”, adjusting for the surprises of inevitable change and random events. Charles keeps a Blog on the concepts, observations, and intuitions that can help all traders become better traders.


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