Stock trading observations

It’s been over a year of being actively involved in picking and acquiring shares of publicly trading companies. It’s not a full-time endeavor but I do spend a significant amount of time on it nevertheless. It’s probably the third-largest time expenditure outside of my family and a day job.

What’s interesting about being in this space is how much you learn, and the diversity of the information you pick up.

What you learn when you are active in the market

If I think about the areas that I have encountered, the following stand out (in no particular order):

• math, although nothing too complicated, mostly getting really familiar and intimate with expected value calculations
• probabilistic thinking — might be the best part of the endeavor
• accounting — reading earning reports initially was just a wall of tables and numbers, but with time it has become a more informed scan picking out figures and key pieces of information
• economics — you become in tune with macro trends, job reports, sector performances, that sort of thing
• psychology — you learn about yourself and how you react to events, you learn even more about other people and how they react to events
• trading techniques — last but not least, there is a ton to digest here, position-sizing, entry/exit criteria, that sort of thing

In short, the experience so far has been nothing but constant education. The financial investment/speculation space is enormous.

Major differences between a newcomer and a more experienced trader

I have observed several of what I would consider key differences between someone who is just starting with trading and someone who has been doing it for a while.

There are more than several, but this is the key difference:

The search of a “sure” thing, the need for certainty that newcomer has while the experienced trader looks for probabilities skewed in his favor yet at the same time is aware that nothing is guaranteed

The need for certainty

When I see someone that is new to trading ask a question, it’s the usual “what stock should I buy?”. And if you give an answer that’s specific, e.g. you give a ticker, the expectation is that the stock will shoot up right after it’s purchased, or at the very least it will never go down in price.

If it does go down, it is deemed to be a bad recommendation and a search for another ticker begins.

Such a process is incredibly flawed. Even if the question is not about a specific ticker, it’s always a question that asks about a future and demands certainty in the response. Give me a sure thing. Give me a fact about the future.

I call this “certainty seeking”. And it’s a wrong way to go about investing. The only thing that’s certain about the immediate future is that the sun will come up tomorrow. In trading, I can’t think of many things that are certain.

You can’t seek the absolute truth. You need to get comfortable with probabilistic thinking. I can’t count how many times I have seen “well this stock can’t go any higher” be proved wrong immediately as the stock goes higher. And reverse as well, something that can’t get any lower just gets worse.

When you are new, you ask questions such as “will the next week be green? I think it will be green!” and it’s such a useless question. No one knows what the market will do.

And you can repeat this over and over again but a newcomer ignores this. A very common conversation you can observe:

Question: “Do you think it can rise more, the stock seems so high already?”

Answer: “No one knows. It could still have some room left”

Question: “How much do you think it will rise?”

Answer: “….”

The best you can do is gather facts, stories, ideas, put them together, and come up with what’s more likely, will it be higher than today in a year or two. That’s it. In between, it will be high and low and lower and higher and no one knows when that will happen.

Instead of searching for certainty, seek probabilities, and then have a plan for several outcomes. There could be more than two outcomes, think through them, and consider what you will do when each outcome happens. And that’s not enough. You need to also be prepared to encounter something that you did not plan. It’s ok, it will happen, you just have to roll with it.