Thursday, September 20, 2007

Investment and Trading Philosophy: Who Needs It?

A little over 30 years ago, in an address to West Point graduates, Ayn Rand asked the question: "Philosophy: Who Needs It?". Her basic point was that philosophy, while abstract, is the most practical of disciplines. It provides us with the principles that will guide our lives. The issue is not whether or not we follow a philosophy; rather, it is whether we are conscious of the philosophy we are following.

For the same reason, albeit in a more limited context, market participants need an investment or trading philosophy. Mike Goodson, writing in his blog for the VesTopia site, recently made this excellent point:

I am tempted to say that the hardest part of investing for the non-professional is not straying from one's core investment philosophy, but I am afraid that the real answer is the lack of a core investment philosophy.

I think this is a very important distinction. You cannot stray from a discipline you never defined in the first place. Someone who begins a business starts with a well-researched business plan: it defines opportunities, competitive threats, core strengths, and the like. Behind every business plan is an implicit or explicit business philosophy: a set of principles that lays out one's role in the marketplace, criteria of success, and overriding priorities.

So many of the success stories in business, from Ford to GE to Toyota to Berkshire Hathaway to Ben & Jerry's to Starbucks to Google, are examples of business plans that yoke superior products and services to distinctive business philosophies.

It's common to assert that "trading is a business". If so, do you have a business philosophy that explicitly defines your values and priorities? Do you have a concrete plan that explicitly defines opportunity and threat, that guides your interactions in the marketplace?

Warren Buffett has a philosophy regarding value and a set of methods for defining and investing in such value. Victor Niederhoffer draws inspiration from Galton to define a scientific worldview and a set of methods for identifying and acting upon market patterns. The trend following of the Turtles lies upon a philosophical foundation regarding human nature, as well as specific techniques for defining and exploiting directional movement.

When I've been in a hiring role at trading firms, candidates have been keen to convince me of their passion for trading. Rarely, however, do they display a passion for truly thinking about their trading. Ask a trader about the abstractions of philosophy and you're likely to hear, "Who needs it?" It's during those volatile market storms, such as we've had recently, however, that we find the answer to that question.

Philosophy is our compass when we're lost; it provides a road map to success and a path to personal fulfillment.


Greatness and the Devotion to Development

Reflections on Life and Markets