"If a betting game among a certain number of participants is played long enough, eventually one player will have all the money. If there is any skill involved, it will accelerate the process of concentrating all the stakes in a few hands. Something like this happens in the market. There is a persistent overall tendency for equity to flow from the many to the few. In the long run, the majority loses. The implication for the trader is that to win you have to act like the minority. If you bring normal human habits and tendencies to trading, you'll gravitate toward the majority and inevitably lose." – William Eckhardt

Over the last few years, there has been quite a bit of research on investing and psychology, suggesting that our emotional hardwiring stacks the deck against us.  I casually read the research and found it interesting, but largely dismissed it because I felt it did not apply to me.  After all, I have an MBA, have worked on the Street for 25 years, and am pretty self-aware.  I understand the whole fear and greed bit.  I have a methodical approach to the markets, and the apparent irrationality of the "masses" is just not me.

On the other hand, there are too many systems traders and hedge funds with unbelievable long-term track records, too long and too good to dismiss as luck or chance.  They have amassed billions largely through internal compounding at incredible rates of return- and so it is obvious they are doing something different.  As I read interviews with many of these traders, there is a similarity of approach that is, directly or implicitly, statistically based.  That is, if the objective is a high rate of consistent annual compounding, certain money management techniques are unavoidable.

Then there is my own track record.  I have not amassed billions.  Every now and then I will own one or two poor investments that undermines the overall performance for the year.  And there have been a few great  investments that I recognized at exactly the right time and the right price, ultimately appreciating manyfold.  But did I reap those windfalls?  No.  I sold too soon.  And I realized that my emotional response to the markets, not my intelligence, defined my investment performance.

So I created a little system for myself, to mimic the money management approach of the big guys.  For example, follow the trend.  Markets are efficient but not random.  I would deliberately cut my losses at a predetermined amount and let the profits ride on the stocks that kept rising.  Sounds pretty obvious (which, by the way, is the opposite of what every financial planner counsels.  Rebalancing involves selling winners and reinvesting in the losers).  Amateurs lose by keeping their losers, pros lose by selling their winners too soon.  I was no sucker.  I would follow the statistics.

I couldn't do it.

I bought a collapsing stock, thinking I was buying cheap, but it only became cheaper; thereby violating rule #1: losers average losers.  I would buy a stock that was "too low" and sell a stock that was "too high."  Like I knew.  When a stock fell below my sell point, I rationalized why I shouldn't sell and over-rode my system.  Sometimes the stock rallied back, but a few times it kept falling, which only served to elicit further rationalization.  Many times an investment would rise and fall back repeatedly, so that on the next rise, I  sold and grabbed the money – and then watched the stock continue to triple in price.  It was a tremendous eye-opener.  I was every bit the sucker as the "masses."

Successful investing often requires what is most uncomfortable, and often most unnatural.  Particularly in the current market, the safest investments may appear to be the most risky, and the riskiest investments appear to be the most prudent.  I have incorporated a simple rule in my own trading:  never sell outright.  I am now forced out of a position by one of two types of stop orders.  A stop loss is placed upon the initial buy, on the assumption that if my initial premise is wrong, the stock will fall and I will cut my losses.  The other is a trailing stop.  If I am right and the stock rises, the stop loss order will trail up behind the stop price.  I can then capture all the gain that is possible, until the run finally reverses and the trailing stop is triggered.