A friend recently passed me a short book full of pithy advice about investing. The 45 page, 120-plus-year old classic, Speculation as a Fine Art and Thoughts on Life, heavily influenced the legendary success of Edwin Lefevre and his famous book Reminiscence of a Stock Operator. Given the importance of this work, I am doing a series of posts as I methodically go through Dickson Watts’s advice.
We must first ask, “What is speculation?” Mr. Watts concludes, “Speculation is a venture based upon calculation. Gambling is a venture without calculation.” Although, he adds there is a small amount of gambling in the art of speculation, and vice versa.
Regardless of the exact semantics, what was once called “speculation” is now called “investing.” If you are reading this article, you probably take calculated risks in the markets of your choice. Therefore, technically speaking, you are a speculator.
Now that we have solved our existential dilemma, we can climb the logic tree and ask, “How can we become successful speculators?” Mr. Watts saves us from seeking the one-size-fits-all Holy Grail by noting, “There is no royal road to success in speculation.”
This means the road to success is unique for each of us. If we desire to attain financial freedom or beat the markets, we must survey our strengths and weaknesses as well as our passions and aversions. The result will yield a recipe for a delectable experience as a speculator.
Although we must each follow our own path to riches, Watts asserts successful speculators share five essential qualities. The following are the first two: Self-reliance and Judgment. I will comment on the remaining three next time. In Watts’s pithy words:
1. Self-Reliance: “A man [or woman] must think for himself, must follow his own convictions. George MacDonald says: ‘A man cannot have another man’s ideas any more than he can another man’s soul or another man’s body.’ Self-trust is the foundation of successful effort.”
That was deep! Seriously, if you depend on others for success, you will fail the moment those people disappear. Many top traders tell me some of their clients and students do very poorly despite the pro’s best efforts to teach. The common problem is people prefer to simply follow others without understanding why (i.e., the framework). However, once you develop your own framework — especially after a great mentorship — and rely on that framework, you can fish for a lifetime.
If you cannot remain equanimous while speculating, then your emotions will ultimately wreak havoc on your portfolio like hormones raging through a teenage boy. Further, if you easily fall prey to addictions such as gambling, your best investment will be to stay away from the markets. We can improve these qualities with exercises including breathing, relaxing, or meditating. However, we must have at least a reasonable baseline of equanimity before we invest in a single share of anything.
OK. That’s enough to reflect on for now. Although Watts’s advice seems overly simplistic, it is very powerful (the basics are always very powerful). I guarantee a person who masters a handful of basic qualities will always be waiting in the winner’s circle watching everyone else get lost in the superfluous. So, don’t hesitate. Start applying this time-tested advice today!
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