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Market Lab Report - The Importance of Developing Judgement as a Trader and Investor 10/22/22

The most misunderstood aspect of trading and investing in my view, and something that investors consistently fail to understand, is the value of developing judgment. As I’ve noted in recent reports, the longer I spend in the markets the more I get these “instinctive” feelings that I have tended to ignore over the years, even though my instincts are often correct in hindsight, much to my chagrin.

As noted in the book, The Hour Between Dog and Wolf – How Risk Taking Transforms Us Body and Mind by John Coates (Penguin Press, 2012), which I highly recommend that you all read, what we call instinct is in fact the process of the body and the mind working together to produce responses that otherwise might not come to light through the brain alone.

Therefore, when asked to explain my “thought process” I sometimes have a tough time doing so because my “process” does not involve linear thinking, it is more automatic and instinctive. This table from The Hour Between Dog and Wolf describes the difference between “automatic thought” and “controlled thought.” I would say that most of my “thought” occurs as automatic thought, while most investors who are just learning tend to assume it is all about controlled thought.

I observed this in Bill O’Neil when I ran money for him mostly during our daily discussions, which could last as long as one to two hours as we sat on the phone going over the real-time action in the general market, individual stocks, and underlying conditions. He was mostly an instinctive trader, and what he saw in the market that made him act when he did and in the manner that he did was well beyond what he tried to codify in his books with the CAN SLIM acronym or “formula” as some like to call it. My experience has proven to me that successful investing is at least a couple of levels above the simple act of following a “formula” or “recipe.” Bill O’Neil was, for me, a living example of this.

Nevertheless, CAN SLIM represents his attempt to put it all into a series of rules, checklists, “models” and other cognitive devices that try to distill it all down to a simple step-by-step method that anyone can follow. But what was going on in Bill O’Neil’s mind, and body, for that matter, as he processed real-time market information against the backdrop of his immense experience was on an entirely different level altogether.

In reflecting over the time that I spent working with Bill and the copious notes that I took every time we spoke on the phone daily, I realize that this is what I was learning from him in real-time. I was getting a sense of the subtler elements at play in his “process,” which was really automatic thinking in action and certainly not a controlled “thought process.” I was learning not a set of rules or axioms to follow every time we discussed the market in real-time, but a way of looking at things that allowed me to assess information and react appropriately beyond any conscious thinking process.

While many want to believe it is so, successful investing cannot be distilled down to a simple recipe or “thought process” that can be automatically mimicked. Because it involves more than a conscious thought process, it is difficult to explain in precise terms. This is what I have found to be the case in my own experience as a simple practical matter. It may be because, as the author of The Hour Between Dog and Wolf explains, “In fact our conscious brain has surprisingly little grasp of what makes us decide to do one thing rather than another.”

Of course, this does not mean that fools cannot make money in a roaring bull market following even the simplest of investing “systems.” Sometimes, the trends become so strong, like a raging current, that all one needs to do is jump into the river to catch a fast, wild ride. That is what a lot of new retail investors were doing into February of 2021, when FOMO names went parabolic, and I started seeing YouTube videos from “expert” retail investors who triumphantly described their deep, complex investment methods and techniques: “First I find a stock going up, and I buy it. And then when it stops going up, I sell it.”

At some point, however, the raging bull current ends and the rats do not know when to stop pulling the levers to get the treat even long after the treats are gone. To be successful over the longer-term requires, in my view, the ability to grow knowledge not only in the brain, but also in the body, as described in The Hour Between Dog and Wolf. For me, the book helped me understand a little better what I have always viewed as sheer judgment, but which may better be described as a nebulous kind of mind/body cognition.

What does this mean on a practical level? It means that investors must take responsibility for developing this type of automatic thinking ability by seeding their consciousness. In our weekly live webinars, I use a teaching process where I repeatedly tell little stories about stocks and the market as I see it all unfold in real-time. This is just like what Bill used to do when he and I sat on the phone discussing the market in real-time.

What I am hoping to do is not teach you what to think, but how to think. If you understand how to think, then you can exercise free will in your actions which in turn allows you to develop mind/body cognition on your own, and in your own way. I am sure many of you have already noticed that you have developed some decent “judgment” over time.

Some call this the product of “screen time.” This is simply the process of sitting in front of the computer screen watching stocks trade or going through your stock screens and charts every day as a way of observing the market in real-time and allowing your mind-body to perceive, even subconsciously, the patterns that are emerging in the present.

This is not something that one can necessarily “teach,” and I am sure most of you understand what I’m saying on a visceral level. It all boils down to the hard reality that there are no gurus, and in the end, we are all just students of the market. So, take responsibility for your role as a student of the market, and put in the effort and time to develop your mind-body knowledge with the clear understanding that it is not all about the mind and “mental processes.” As soon as you understand this, you move beyond treating investing/trading as a mere rote process and into the realm of true investment/trading knowledge.

- Gil Morales, October 22, 2022
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