Beating the market by trading like a sociopath (part 2)

Predators tend to see in black and white.  Scientists have suggested that contrast against background may be more helpful for predators in detecting potential prey than color, helping them to focus on crucial spatial relationships rather than extraneous details.  I’m color-blind to mass hysteria.  My lack of empathy means I don’t get caught up in other people’s panic, particularly mass panic.  It gives me an incredibly unique perspective.  And in the financial world, being able to think opposite the pack is all you need.

Traders laud the “contrarian” mentality.  Warren Buffett famously said “Be greedy when others are fearful and fearful when others are greedy.”  Easier said than done for the vast majority of stock traders.  And when I’m trading stocks, those are the people I am up against.  On every stock trade there is someone who wants to sell and someone who wants to buy, at least at a particular price.  Both tend to think the other is an idiot.  In simple terms, the person who is selling thinks that she is getting out just in time while the person buying thinks that they are about to make good money.

Because the actual transaction is faceless, I can’t practice my usual people-reading skills or manipulation, but I don’t need to.  I understand mass psychology.  And the truth is that the market doesn’t really reflect some magical perfect valuation of a stock under the efficient market hypothesis.  It reflects the mass consensus of how actual individual investors value the stock.  It is the sum total of everyone’s hopes and fears about what a company is capable of doing.  Preying on people’s hopes and fears is my métier, even en masse.  To my colorblind eyes, I see these features more starkly than anything else.

Given a choice of hopes and fears, preying on people’s fears is the better bet by far.  Hope is too ethereal.  People are too unpredictable when acting on hope.  I’d rather rely on their fear, but even that is tricky.  When the market spooks, it can be as senselessly destructive and difficult to exploit as a stampede.  When I trade stocks the main thing I am focused on is not people’s fear of losing what they have, but fear of losing out—of having missed an opportunity to make millions.  I look for stocks that have the visceral pull of get-rich-quick schemes.

Beating the market by trading like a sociopath (part 1)

I love money.  It’s so impersonal.  In a world where winning is the best thing, money is frequently how I keep score.  I don’t like spending it, necessarily.  Money doesn’t matter to me in itself.  I only like it because other people care about it a lot (more than almost anything else in the world).  Because they care about it so much, they will fight hard for it—against me or anybody else.  It makes the game very fun.  And although it is never high stakes on my part, it almost always is with whomever I am playing against.  I play because it’s a game.  Others play because it’s their life.  People are frequently ruined.

I have an incredibly green thumb for money.  I fully funded my retirement by the time I was 30 years old.  Since I started investing seriously in 2004, I have averaged a 9.5% return in the stock market—257% better than the average returns of the S&P 500 over the same period of 3.7%.  It’s sick how well I do trading stocks.  Beating the market this soundly and consistently is unheard of and many argue it is impossible (or due solely to luck).  In 2011, only 4 out of 5 mutual fund managers beat the market, and only a handful of individuals have managed to do so with any regularity. One Forbes article (“Why Smart People Fail to Beat the Market") put it this way “There are only two ways to beat the stock market in the long-term, net of expenses: one, trade on superior information; two, be lucky.” (Unfortunately, the efficient market hypothesis holds that all available information about a company’s future prospects are already widely known and reflected in the price of a stock,  so that just leaves one way to beat the market.  The one exception is so-called insider information, which is largely illegal to trade upon.).

But I am not trading on better knowledge.  I am a relatively unsophisticated investor.  Instead, I am trading on a special vision.