There’s a really simple way of making sure that you never lose money in any particular market. Whether it’s sports trading or financial markets and the simple way to avoid making a loss is to not do anything. That is what we call paralysis by analysis.
The first time I came across this concept was in the late 90s early 00s and this was when the stock market was having a very rapid run-up and I joined an investment club locally thinking that that may actually help me make more rational decisions. In fact what it did was it put me off collective decisions for life because in the run-up to the peak of the market around that time the investment club was debating constantly, every time we get together, once a month, and having a few beers in that, they would debate constantly all the ideas put forward and one by one reject them all. So basically every single idea that they discussed had a flaw within it and therefore it was rejected. There was no ability to get a consensus on an action within the investment club. I sat there every month just thinking well this is ridiculous; but worse was to follow. As the market climbed, eventually it peaked and then crashed and of course what happened then was because the investment club held a lot of cash and had done absolutely nothing with it they outperformed the market so remarkably the investment club decided that in fact they were all very wise through their complete lack of activity and in in fact outperform the market and therefore that was the best strategy going forward was to do nothing.
That was the first time I’d really come across and engaged in this paralysis by analysis and the problem is actually quite a natural thing to do. If you imagine that you’re a caveman, you’re walking down some ravine somewhere; you hear a rustle in the bush. If you were a caveman that could actually be a life-threatening situation, an animal could jump out and eat you because it was very hungry. However the reality is in today’s world that’s not going to happen (or it’s very unlikely to happen). It’s very unlikely that especially with health and safety on the other side of the fence there’s a life-threatening situation.
So the problem is that when you analyse something in enough detail there will always be an excuse to not do something. As I walked across the road this morning there were cars in front of me a lot of them don’t stop for some reason at the Pelican crossing that we have. I could make the decision that in order to ensure that I did not die crossing the road that I should not cross the road but the fact is that I did cross the road and I have crossed the road many times and I have not died yet so it’s more about that balance between you know the payoff that you’re going to get and the risk that you take you cannot eliminate risk for anything.
From a sports trading perspective the important element of what I’m trying to get across here is that every trade you do carries risk all you can do is attempt to influence it. There are some things that you know but in fact a lot of the risks that you should be worried about are the ones that you don’t know about. The things that come completely out of the blue that have a significant impact. The fact that risk exists in the market shouldn’t stop you from taking some. This was a big leap that I’ve made in the years that I’ve been doing this is that I used to get stuck into that mode of operation where I wouldn’t do something because there was risk attached but what I do now is I have a grade effectively of risk that I’m looking at and I have a list of things that ideally I would want to do or see to get involved in something. Therefore you know there will be some markets where all of those things line up perfectly and everything is brilliant.
It’s like this has happened, this is going on, I’m seeing this, I’m looking at that, this situation is occurring and so on. If all of those things line up then that’s like a grade 10 and that is a let’s be a little bit more aggressive, let’s really go for this and we’ll see what we can do. However, if none of those things line up then I just scratch my head and go you know what I just I don’t have a clue what’s going on here so I’m not going to do anything and then you may get sort of a three or a four where you’re sort of thinking well I think I know what’s going to go on and then my response to all of that is just to lower stakes dramatically.
If you don’t modify your stakes, you don’t modify their level of aggressiveness that you have in an investment on the stock market, sports trading, crossing the road, then you misalign the reward with the amount of risk that you’re taking. The simple fact is (and this stops a lot of people from taking risk) you cannot let me repeat that again you cannot completely eliminate all risk and therefore there’s no point in worrying about it all you can do is grade it all you can do is say well I definitely know what’s going on here I’m going to cross the road here there is no traffic and therefore it is perfectly safe to cross the road and in fact I could do a roly-poly crawl on my knees and I will still get to the other side safely. Whereas if you stuck a blindfold on and you made no appreciation of what was going on around you then you almost certainly get run over if you cross the road and it’s the same with trading.
There are certain things that you’re looking for, characteristics that feel or don’t feel comfortable, things that confirm what you’re about to doing, things that deny them and all you can do is grade what you’re doing in that particular market.
My response to risk in the market if there’s too much of it I won’t do it if I don’t see much at all then I’ll be quite aggressive and then they’ll be gradients in between where I’ll think well yeah I know what’s going on here I feel comfortable this in a way I go. There are lots of other tricks that you can put into the mix as well but essentially what I’m trying to say to you is: if you overanalyse a situation you cannot analyse out all of the risk. Risk exists whether you like it or not and that shouldn’t stop you from doing a trade but it should mean that you just adjust what you’re doing and typically what you into to do.
If you’re not certain you tend to lower stakes and if you are certain then you would raise them and that’s my approach to risk in general.