Why Its So Important to "Know Thyself", to Know Your Weaknesses

May 28, 2015

3 minute read

“A stock operator has to fight a lot of expensive enemies within himself.” -Jesse Livermore

Over the weekend I came across a brief interview with Bill Gross published in the New York Times, in which he says, “There was an old dude, Jesse Livermore, who wrote a great book that said the most important thing in investing was to know yourself — your weaknesses, your flaws and your strengths.”

Bill Gross thinks the end is near http://t.co/X2KK7om1MK $SPY $TLT

— Jesse Felder (@jessefelder) May 24, 2015

I thought about that for quite a while after reading it. I read Reminiscences of a Stock Operator a long time ago and didn’t quite remember the book the way Gross did. But thinking about the Gross quote, I realized that all of my greatest trades have been the result of taking advantage of my greatest natural strengths. All of my greatest mistakes have been the result of not recognizing quickly enough the natural weakness that was at the root of the losing trade.

I decided to actually put pen to paper to consciously explore what I believe are my natural strengths and weaknesses. This, to become more acutely aware of them in order to better actively take advantage of my natural strengths and avoid or ameliorate my natural weaknesses.

Here’s what I believe are my natural strengths:

A willingness to go against the herd. More so, a natural skepticism toward what’s popular.
An ability to see points of view or arguments on their merits, without logical biases.
Confidence in my own research and abilities.
A natural inclination towards unloved and overlooked opportunities.
A deep passion to constantly learn and improve.

Here’s what I believe are my natural weaknesses:

I have a hard time staying with there trend, especially once it becomes popular.
At times I can be too skeptical or focus too much on worst-case scenarios.
I can be overconfident even when the market tells me I’m wrong.
I tend to look for confirmation of my point of view rather than opposing views.
At times I seem to care more about being right than making money.

Over the years I’ve managed to address many of these weaknesses. There isn’t any trader who is even mildly profitable who hasn’t been able to do this at least to some degree. But writing them down, putting them on paper somehow helps to compartmentalize them and, more importantly, address them directly.

I realized that consciously addressing them by coming up with tactics to ameliorate them might give me the opportunity to turn my natural weaknesses into developed strengths (as opposed to natural ones). This is something I’ve also done subconsciously to an extent but to do it consciously and methodically could potentially magnify the benefits.

Taking each natural weakness one by one:

Hard time staying with the trend – Modify my sell discipline to take advantage of the long-term trend. So long as there is no compelling reason to sell we will continue to hold until the long-term trend changes.
Too skeptical – Don’t let macro worries get in the way of good micro opportunities. It’s okay to ‘worry top down’ so long as you continue to ‘invest bottom up.’
Overconfidence – Confidence is great and even necessary but humility is just as important. You must respect the market even if you don’t defer to it.
Confirmation bias – The greatest investors regularly seek to understand the other side of a trade even better than those taking it. Spend far more time studying the opposing view.
Being right versus making money – Regularly admit you’re wrong even in the smallest cases. Make it a habit so that acknowledging a mistake and moving on can happen very quickly.

These natural weaknesses are precisely the “expensive enemies” Livermore wrote about. But by ‘keeping your friends (natural strengths) close and your enemies (natural weaknesses) closer,’ in this way I believe a stock operator gives himself the best opportunity to find success in the markets in his own unique way.