The Stupidity of Confidence

Few people know about the Dunning-Kruger effect, but it can be summarized in this one very simple quote from Bertrand Russell, “The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt.”

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Absolute certainty is always a sign of a small and simple mind and generally leads to very negative results -- as evidenced by the current US Congress. In investing absolute certainty can be a devastating handicap. Last night I was having dinner with a friend from Latin America and conversation turned to another friend of ours. I exclaimed how smart this other friend was, how in 2011 when I and many other investors were dubious about the global recovery, this guy was a very confident bull who had told me that the massive gains in US energy production would start a manufacturing renaissance in North America.

This guy was only right, but right big, so I was stunned to learn that he had just closed his hedge fund after steep losses. “Do you know what was wrong with him?” my dinner companion explained. “He always thought he was the smartest guy in the room and would never admit that he was wrong.”

Most people come to daytrading with the confidence that they can beat the market -- and worse -- with the false belief that they would spend most of their day counting profits. The reality could not be more different. Even if you are successful in trading, the fact of the matter is that the vast majority of your time is spent trying to manage losses, then the next largest percentage of the time is spent on trying to get back to break even and only a small and the least important part of the day is spent on booking gains.

Trading on a professional level is just like any other job -- 90% perspiration and 10% inspiration. That is why having inordinate confidence in your abilities is actually a very dangerous to your wealth. True confidence comes from competence. And competence requires massive amount of practice and trial and error work.

So forget all the idiotic self help books. The only people that they help are the author and the publisher. If want to trade well question everything. Question your setup, question your risk parameters, question your analysis -- question it all. And understand that in a probabilistic game -- there is no such thing as a “sure bet.” So always be ready to admit that you are wrong and have an emergency exit..

Boris Schlossberg

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