Audrey Deschenes
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Audrey Deschenes in Trading. Let's get it started!,

Learn how to take comfort in the unknown

Based on my 30 years in the markets, the single best lesson that I can impart to investors to dramatically improve their investment performance is one of my basic principles, “No one knows with certainty what is going to happen next.” Practicing this simple principle in my investment calls is in part responsible for consistently generating profits.

Once an investor embraces the idea that no one knows with certainty what is going to happen next, the investor is free from cognitive bias and is able to analyze markets objectively. This simple idea is so powerful, that over years my followers have dubbed it Nigam’s second law of investing.

This law is especially powerful because Wall Street is the only place where gurus can be consistently wrong and still keep their jobs. Further, a typical investor is bombarded with so many views from so many talking heads that it is difficult to discern the validity of predictions made by gurus. Plus, there is an overabundance of gurus, and it is often difficult to find enough information to verify their track records relative to the risks taken separate from the luck of a rising market.

As part of this lesson, make a list of gurus you follow on stocks and silver and test their calls against the two charts shown below.

Take a look at the annotated chart of the SPDR S&P 500 ETF Trust SPY, +0.46% going back to 1993.

Over the 21-year period shown on the chart, there are five major turning points; three on the buy side and two on the sell side. For a moment, let us forget about perfection or excellence and think in terms of mediocrity. How many gurus you follow called all five of these major turning points even halfway correctly?

Now as part of the lesson, let us step beyond stocks and look at a chart of the iShares Silver Trust ETF SLV, -1.60% going back to 2010.

How many gurus you follow called the major turning points correctly and made you money in silver over the last four years?

In my experience, a typical investor can do better than a typical guru if the investor simply internalizes the idea of not knowing the future.

This lesson is much harder to practice in real life than it seems. To practice this and dramatically improve investment performance, one needs to change the two fundamental beliefs that are part of the human condition.

The need to be right

Part of the human condition is that humans want to be right. When a typical investor makes an investment, he or she wants to be right. The investor looks at almost all of the incoming information through the lense of wanting to be right. The investor tends to look for information and data that supports the investor’s opinion, and tends to dismiss information and data that may make the investor wonder if he or she is wrong.

When an investor detaches himself or herself from the need to be right by accepting that no one knows what is going to happen next, the investor tends to look at all the incoming information, both in support and against the investor’s decision with objectivity.

Ability to take small losses

Part of the human condition is that humans do not like to lose. The hallmark of great investors is to cut losses quickly. When an investor changes his or her belief system to one in which they don't know what is going to happen next, the investor is automatically propelled into the discipline of taking losses in a rational manner when dictated by the incoming data and information.

The final word

Class, make this one change in your belief system, and go beat the gurus.