One of the best ways to avoid needless mistakes is to have a checklist. Atul Gawande’s bestseller, The Checklist Manifesto: How to Get Things Right, talks about how air forces and airlines implemented checklists and drastically reduced pilot error; how surgeons who follow checklists make fewer life-threatening errors; and how a cleanliness checklist in intensive care units virtually eliminated a type of deadly hospital infection.
I had lunch this week with an old student, who manages a private fund and is a friend and investor in Mohnish Pabrai‘s well known long-only equity fund that has returned 517% net since 2000. He adopted Mohnish’s use of checklists for his investment research, which was inspired by The Checklist Manifesto. When you are dealing with a number of complex variables, especially doing something you routinely do over and over, it’s easy to skip a step. Sometimes that step is the most important one, and you forgot it. A checklist helps you avoid those fatal mistakes.
Have you ever tried changing the routine for something ordinary that you do every day? Like shaving and showering or which teeth you brush in what order and up and down or side to side: just do a different thing first and sometimes you get totally messed up. You can’t remember which thing comes next. Now imagine doing the same when analyzing a market.
A well-planned and tested checklist makes it easier to pull the trigger in a timely and emotionally detached way.
I gave my checklist the acronym STIFF:
- Support and resistance
- Indicators (moving averages, MACD, ADX, volume)
- Fundamentals (seasonal tendencies, major world events, mainstream news so I can be aware of what the herd may do)
[pullquote]I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all. —Ecclesiastes 9:11 (KJV)[/pullquote]I like the name because STIFF allows me to be flexible. Once a potential trade passes all of the tests, I decide on an entry and two (2) exits. The first exit is for protection, a stop loss. The second exit is to keep me from holding on too long, wishing and hoping for just one more tick.
I don’t try to pick tops and bottoms. I like to trade what I call the “fat middle,” where the trend is clear and moving with momentum.
What about intuition and feeling? They do have a place. But if you’ve done the work, your feeling comes from a different place.
You aren’t wishing for something to happen. You’re just watching it unfold and getting the sense that what you hoped for is manifesting before your eyes. It’s the difference between desire for something that isn’t there and gratitude for something that is coming into view like a sunrise.
For me, the best trades are a combination of the checklist and the feeling of gratitude. Yes, the trade could still fail. “Time and chance happeneth” to us all.
Although we can’t control the markets or tell them what to do (though many of us keep trying, day after frustrating day), what we can control we must try to control. We can control what we focus our minds on. We can control what we allow to influence our decisions. And we, only we, can decide to act.
Use your checklist to get ready and aim. Then trust your feelings if they come from gratitude and not greed. Then just pull the trigger. You’ve done the work. You’ve controlled what you can control and detached from what you can’t.
That’s it. Bang.