Law 101 Meets Psych 101

By NFTRH

Lawyers and Psychologists

Steve Saville has a post out called Don’t Think Like a Lawyer. In the post he notes the following…

“The job of a judge or juror is to impartially weigh the evidence and arguments put forward by both sides in an effort to determine which side has the stronger case. The job of a lawyer is to argue for one side, regardless of whether that side happens to be right or wrong. As a speculator it is important to think like a judge or a juror, not a lawyer.”

While I often talk about the same concept in psychological terms (subordinate ego, bias and automatic thinking regimens in service to one simple goal; being on the right side of markets) the lawyer analogy works as well. Lawyers often argue cases that are lost causes; that is their job. The market and its millions of inputs from man, machine and casino patron alike is the judge and jury because it renders the verdict to any given stance.

I prefer the psychological way of looking at it, however, because psychology is more interesting to me than law. But more to the point, it is personal psychology that makes some people act like lawyers in defense of their stance at any given time. In other words, personal psychology is behind the tendency to act like a lawyer in defending positions but a lawyer’s practice has little to do with human psychology.

Years ago I introduced my little robot friend here as a way of indicating that the guest writers selected for Biiwii.com were anything but robotic info-feeds (folks, being in the financial media sphere for 13 years now I can tell you without a doubt that the business has grown in that span into one giant cluster of automatically served articles, most of which are paid content in one form or another with the goal being your clicks and eyeballs, not to inform you with actual unique or beneficial material). Later I used Mr. Robot to make a point in an article about investor psychology called Deprogram Yourself.

We – with our egos that tell us we can’t possibly be as dumb as the crowd – think that we are immune to the mistakes that the other guy routinely makes. In some cases that is true. I suspect you, if you have taken the time to read this far, are probably an astute market student. But it takes a lot of work to come to the point of acting as an effective judge and jury to the benefit of your capital.

One Guy’s Psychological Makeup

Personally, I feel that I have a good grasp on human psychology where groups of people and markets are concerned. Using tools from sources like Sentimentrader and using my own eyes and gut I am able to identify mass behavior that tells a story. Look no further than Treasury bonds, on which NFTRH has been 100% on target for the last year. It was not a stroke of genius; it was simply a reading of all too clear market sentiment (i.e. psych) signals.

Where do I go wrong (because after all, we all go wrong on occasion)? Well, on the bigger pictures I tend to end up being right an overwhelming amount of the time but on the shorter time frames, especially with respect to personal trading, I tend to make mistakes when I go against disciplines or parameters that I’d laid out ahead of time, with foresight.

As a glaring example, there was an NFTRH+ trade idea on Silicon Motion in June. This is a stock I’d traded successfully (and NFTRH+’d successfully) in the past and probably felt a level of confidence that was simply a product of my ego. As laid out for subscribers the parameters were noted very clearly…

“The weekly view introduces the cautionary point that SIMO is reacting downward from its all-time high, and the upside target off of the Q4 2016 to Q1 2017 pattern has been reached. Targets are not stop signs, but it is all the more reason to respect the daily SMA 50 above on a daily closing basis. Maybe it can get a little wiggle room, but I’d keep it pretty strict.”

After briefly bouncing (ah thought I, another great SIMO trade on the way) it edged below the SMA 50, which was the signal that the trade was not going as planned. That is when someone following the parameters would get out with an insignificant (stop) loss. But I personally thought too much about how it could be just a shake out and besides, I don’t trade stocks one for one; I hold them as a part of a portfolio. It didn’t help that I was on vacation and somewhat distracted, but that’s no excuse. If you’re going to take a trade you’re going to be responsible for it.

I ended up taking a larger loss than should have been the case had I respected my own limits. So that is an example of my own psychology profile, complete with ego and greed, getting in the way. Another issue I have as an individual market participant is to assign personalities to my winners; as if they are my friends, buddies… trusted pals. Very bad Gary. Fix that!

What am I good at? Most of all I am good at identifying bullshit, whether grounded in truth or not. A lawyer will argue the case in an effort to prove its validity, but a psychologist will see that ego, bias and human herding may get involved to an unhealthy degree. In the markets you can be wrong for extended periods of time, even if you are to be proven right one day.

Gold Bugs Lawyer Up But You Shouldn’t

saul goodman

Using Saville’s lawyer example, the best cases I’ve seen have come from the ideological hotbed known as the precious metals sector. There is an ‘us against them’ team mentality where the righteous and honorable gold bug is pitted against the evil forces of paper and digital money who exist as an affront to god himself and must be fought as a matter of duty. You know who the major gold bug characters are who’ve kept the troops well in line over the years against the forces of evil. I’ll not elaborate other than cough cough, Jim Sinclair, cough cough. There are/were many others digging out the nefarious details for enthralled gold bugs, especially where evil silver manipulators and Commitments of Traders (hint: the commercial hedgers are the bad guys) are concerned. It’s a cult with some really compelling stories.

kool aidLately too, there is a new cult and it has The Who’s ‘We Won’t Get Fooled Again’ as its theme song. It is peopled by former Kool-Aid drinking gold bugs and it holds up a market seer (and former Sinclair pet) and his computer and various charting enterprises that follow what is obviously a bear trend in the sector, to the utter exclusion of the macro fundamentals that will one day change to favorable for precious metals and the miners. They will argue a case about long-term trend lines and broken support levels. But here is the thing with those absolutes; they can change in an instant, before long-term charts catch on. In other words, there is a charting mini-cult out there that thinks fundamentals no longer matter… or at least should not be factored. That is lazy and automatic thinking in my opinion; and I’m a chart guy!

Use the Law and Psychology Together

Meanwhile, staying with the gold bug example, sentiment is very reliable here. When the gold “community” (one definition: a group of people having a particular characteristic in common) is in full frontal lecture mode and large speculators (per the CoT) are vigorously long, its hubris (and ego) is setting up to be its downfall. It works that way in bull or bear markets, with the difference being pullbacks within bull trends vs. renewed bear trends. When the bugs want to lynch their leaders and the CoT are aligned properly, bounces or rallies are indicated to be not far off.

As for using the law, as Saville wrote, you should never be a lawyer but it is your duty – and that of no one else – to be your own judge and jury after making sure your psych profile is in line and double and triple checked. These are the financial markets, complete with immoral [← that’s my bias and ego speaking!] policy makers overly managing what I consider to be the unmanageable [← again… ].

How do you keep your profile in line? How do you double check? First, you be honest with yourself about your strong suits and weak points. Second, you either do your own work or you seek out the work of reputable sources to factor in with your own opinions. Third, you never but never get lazy or automatic in your thought processes. This is work. For some of us it is a passion but for others it’s like being on a chain gang out off Highway 1, breaking rocks.

So let’s add that element to the theme as well…

  1. Be in control of, or at least understand your personal psychology…
  2. Try to understand the group psychology at work in markets…
  3. Apply these along with macro and technical data to render informed judgement…
  4. Be prepared to always be working, hopefully at a labor of love…
  5. Bringing it full circle back to psychology, be prepared to subordinate ego and admit when you are wrong (it’s okay, really).

Okay folks, I am not sure where this post came from. It was supposed to be more of a blurb. I’ve got a report to write. Have a nice weekend.

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