4.1. THE PSYCHOLOGY OF SUCCESS LIES IN TAMING THE EGO

Ironically, one of the biggest causes of failure can be success itself. This may sound strange, but big initial success in the stock market, as defined by achieving a return well into triple-digit percentages, can easily give one a false sense of investment omniscience and omnipotence. However, it is an extremely destructive illusion rooted in the ego. As a trader, your ego is always your enemy, because as Eckhard Tolle wrote, "The ego is always on guard against any kind of perceived diminishment.... It is much more interested in self-preservation than in the truth." Bill O'Neil warned us as we have recorded in our trading diaries that we should "never let the truth become your enemy," and traders who operate within the realm of their egos set themselves up for exactly that.

This inflated sense of all-knowing invincibility was rampant in many investors during the dot-com mania of the late 1990s, and it eventually led to the demise of various colleagues of ours who had made piles of money during the bubble market and had sold out reasonably well near the top. However, some began to believe that it was due entirely to their "brilliance" and that they could make it happen with a wave of their newly found magic investment wand. Thinking that this "Midas touch" of theirs would last forever, many bought "monuments" to their investment genius such as fast cars, second homes, and NetJets memberships. All of this was then reinforced by their own projections of how much they would be worth in 5, 10, 15 years at their current rates of ROI, or "return on investment." Some quit their jobs at William O'Neil + Company, Inc., where we were working, to open up their own shops or go off as independent portfolio managers in 1999 and 2000. Such career moves were made by these traders on the premise that they had completely figured out the markets—even though they had only traded through one brief market cycle, let alone not having had at least 10 years of trading experience in the market.

In a way, big success in the market can become like Mickey Mouse's enchanted broom in the classic animated movie The Sorcerer's Apprentice. In this classic Disney allegory Mickey is able to use his rudimentary magical skills to induce a broom to do his work for him, but soon finds that his control of the broom is not as complete as he was led to initially believe, given his success in casting the initial spell over the broom. Ultimately the broom ends up causing a great deal of damage because Mickey doesn't have sufficient knowledge to control it. In the same way, a little success in the stock market can be a dangerous thing. As Bill O'Neil once told one of us, "You start making big money in the market and you think you know something—you don't know anything! It's the market that knows something, not you!" This is a fundamental truth of investing. It's the market that knows something, not you; your job is just to learn how to read and follow the market.

The problem is that once you start making big money in the market, you begin to think you've figured out the market and that it's you and not the market that knows something, and so you start telling the market what to do and where you think it should go, which only serves to take you away from the correct, pure approach of watching the market day-to-day, simply striving to listen to what it is telling you. Ultimately, all you are setting yourself up for is the opportunity to be taught a brutal lesson by the market, which will be more than willing to show you who the boss is. All the intellectualization in the world has never been shown to accurately predict the future of the market. For example, Alan Greenspan's famous "Irrational Exuberance" speech in 1997 was three years short of the actual bursting of the dot-com bubble. Many lost big, and much opportunity cost was borne attempting to call the top of that market based on what one thought should occur, and that the market's rallying tendencies were unjustified and based on "irrational exuberance." The more successful you are as a trader, the greater the tendency over time to try to impose on the market that which you think should occur.

The other problem with making big money in the market is that we live in a society that measures success by material acquisitions. Therefore, becoming a servant of your ego after experiencing a period of great success in the markets is a trap that is quite easy for a trader to fall into given that our modern, materialistic culture encourages such behavior. Anybody who has read Trader Magazine gets a front-cover view of the shallow standard of conspicuous consumption and materialism that allegedly drives the trader psyche. Big houses, fast cars, private jets, fine wines, expensive watches, and more are worshiped as signs of success among traders, and are offered up as the ideal of what successful traders should aspire to. We could not disagree more. In our view, material self-gratification should never be one's motive for trading. The best traders generally find that their greatest sense of satisfaction, those moments when they are most at peace, occurs when they are simply trading "in the zone." In this sense, being a successful trader is nothing more than seeking bliss through practicing one's craft well. Ultimately, it is not about the money, although it is true that being a successful trader can make one wealthy, just as being successful in a variety of other vocations can make you wealthy as well. We, however, would urge traders and investors to focus on the joy of practicing their craft and to seek that as their fulfillment. Success and making big money in the market will flow from that ethic. And when you do make big money, as much as possible seek to use your wealth to simplify your life, not to make it more complicated by encumbering yourself with a portfolio of excess materialism. In our view, Henry David Thoreau expressed an ultimate truth when he wrote, "A man is rich in proportion to the number of things he can afford to let alone" (Walden, or Life in the Woods [Boston: Ticknor & Fields, 1854]).

So, as you realize your destiny as a successful trader making millions in the market ask yourself whether it is worth using your wealth for the purpose of acquiring so many things that in the end they may end up owning you more than you own them. By seeking to maintain such "O'Neil-style" ethics, you lay the groundwork for successful trading over the long term that will not result in your ultimate demise as you avoid the materialistic ego traps that suck in not just traders, but many other members of our society in any number of walks of life.

Preoccupation with trading and investing as a way to satisfy the needs of the ego is a recipe for disaster. This materialistic ethic stems from a basic lack of understanding of what investing is when distilled down to its essential reality. Like surfers who ride the momentous mass of ocean waves, we must realize that we are not the wave—we only ride the wave, and our skill is in assessing the size and duration of the wave in order to maximize the ride we are able to sustain, and this is the only factor we can control. Ultimately, it is up to the wave to decide just how big and how long a ride we get. The best ocean-wave surfers in the world carry with them a sense of humility based on their experience, which has led to the respect and the deep understanding they have for the power of the ocean and the immense natural forces that drive its movements. In the same way, as traders, we must develop a respect for the power of the markets and the immense natural forces that drive them. The market is simply Wyckoff's "mass mind," and by understanding the message in the market's movements we can maximize our "ride." Like a surfer, misjudging or losing perspective of these forces as we instead emphasize service to the ego can result in a trader being swept away by these same forces and smashed upon the rocks of bad, ego-based investment decisions. As traders we must remain mindful of these forces, and hence develop a strong sense of humility as we operate in the face of such forces.

Bill O'Neil used to tell us that nothing destroys a trader faster than an inflated ego. In observing Bill, we noticed he never let his winnings or his losses affect his judgment, and he never got excited when he was making big money. Even if you called him during a big up day in the markets when you were excited, such as in late 1998 when we owned the big leaders in the market and they were all running like mad to the upside, he was fairly blasé about it all. After expressing your excitement to him about how fast these stocks were moving to the upside and how much money we were making, Bill would, after listening quietly, let out a long, whooshing sigh (the "sigh of exasperation"), and respond with a curt, "Don't talk about your stocks," before abruptly hanging up. It was his own way of saying what Gordon Gekko, the lead character in the movie Wall Street, meant when he said, "First rule of investing is never get excited about stocks; clouds the judgment!"

To eliminate the ego you must move beyond your thinking mind to observe how you feel and how your emotions are affecting your physiology. Is your breathing shallow or swift, is your heart beating faster, are your palms sweating, do you feel powerful, do you feel frustration, do you feel elation, do you feel hope, or do you feel a sense of dread? Maintaining awareness of these emotional factors keeps you from becoming wrapped up in them. Eckhard Tolle's books, starting with Practicing the Power of Now, deal with this topic in greater deal, which we will also discuss more fully in Chapter 6. He explains that emotional states are simply traps that we allow our thinking mind to fall into. By remaining in the present, and aware of when we are falling into one of these emotional traps, whether a negative emotion like frustration or a positive one like excitement, we simply act and flow in the moment, unencumbered by the ego-mind.

Eliminating the ego also means understanding what your motives for trading and investing are. If you look at trading as solely a means to an end that is primarily materialistic, then you may be more vulnerable to expressions of ego. There is certainly nothing wrong with enjoying the fruits of your labor, but it is necessary to keep it all in perspective. Bill O'Neil would put it in very simple terms, "Now don't start getting carried away with yourself!"

Finally, always maintain a healthy sense of humility and respect for the markets. They operate according to forces that are far larger and far more powerful than we are, and our only task is to try to profitably synchronize our investment decisions to the movements of these immense forces. We ourselves are not the forces, and likewise we do not control them. Like the fishes in the sea, we can only move with them, avoiding the devastation that resistance inevitably brings.