In my most recent article, I mentioned the TV show Billions. Have you seen it?
The hit series follows the trials and tribulations of billionaire hedge fund manager Bobby Axelrod, founder of Axe Capital.
The series is based on the real-life saga of the battle between hedge fund legend Steven Cohen of S.A.C. Capital Advisors and U.S. attorney for the Southern District of New York Preet Bharara.
One of the show’s main characters is Wendy Rhoades.
Now, Rhoades is not a brainiac financial analyst. Nor is she a “swing for the fences” trader.
No, Rhoades is a psychiatrist.
When traders are suffering a losing streak, a session with in-house performance coach Rhoades clears the cobwebs… and helps gets Axe Capital’s traders back on track.
Like the show itself, Rhoades is based loosely on a real-life character – the late Ari Kiev. Kiev served as a full-time coach to all of S.A.C.’s top traders.
Why would a top hedge fund spend millions on hiring a leading trading psychiatrist?
The answer is clear.
Cohen understood that profitable trading is about more than just calculating the right answer to a complex equation. Profitable trading is all about psychology.
As real-life trading coach Van Tharp says, “Psychology accounts for 100% of your investment success.”
Everything else is a sideshow.
The Trader as an Athlete
A street-smart trader like Cohen recognized one lesson much better than most Nobel Prize-winning professors: Psychology trumps textbooks.
Top hedge funds employ trading psychologists for the same reason that top athletes hire sports psychologists: to help them perform at their highest levels.
Top athletes will tell you that 90% of their success is mental. Peak performers also recognize the value of a coach to keep them at the top of their game.
No wonder former athletes from the world’s top athletic programs populate the ranks of the world’s leading hedge funds.
That is no accident.
It takes relentless discipline to be a top-performing athlete. And that relentless discipline is what it takes to become a top trader.
Why Psychology Matters to You
So what does the psychology of a top-performing trader at one of the world’s leading hedge funds have to do with you?
More than you think. Consider how you make investment decisions…
Say you are a subscriber to Oxford Swing Trader, my swing trading research service.
I can recommend that you invest in a stock. I can recommend that you size your position to match your risk appetite. I can also recommend a specific stop or exit price.
But here’s the elephant in the room: None of this matters if you do not have the discipline to invest, size appropriately and stick to the recommended stops.
Psychology applies to more than just successful short-term trading.
The world’s greatest long-term investor, Warren Buffett, agrees that psychology is key to successful long-term investing.
Buffett has described Benjamin Graham’s 1949 classic The Intelligent Investor: The Definitive Book on Value Investing as “by far the best book on investing ever written.”
According to Buffett, Graham’s advice to take advantage of the manic-depressive “Mr. Market’s mood swings” is the single most important thing he ever read.
So, if you want to develop an edge in trading or investing, invest in learning about investment psychology.
Psychology is rarely where the world’s top investors start. But it is the place where they all end up.
P.S. Van Tharp’s Trade Your Way to Financial Freedom is one of the most valuable books on the importance of psychology in trading and investing.
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About Nicholas Vardy
An accomplished investment advisor and widely recognized expert on quantitative investing, global investing and exchange-traded funds, Nicholas has been a regular commentator on CNN International and Fox Business Network. He has also been cited in The Wall Street Journal, Financial Times, Newsweek, Fox Business News, CBS, MarketWatch, Yahoo Finance and MSN Money Central. Nicholas holds a bachelor’s and a master’s from Stanford University and a J.D. from Harvard Law School. It’s no wonder his groundbreaking content is published regularly in the free daily e-letter Liberty Through Wealth.