Every time I read this quote, I have the exact same reaction. Tim Ferrissâan author, investor, and an advisor to companies like Facebook, Twitter, Evernote, and Uber, among othersâhas it right. Human emotions open the door to miscues that only a system approach can thwart.
In fact, that quote reminds me of one of my favorite bits of trading wisdomâone espoused back in 400 B.C. by Chuang Tzu, who, along with Lao Tzu, is a defining figure in Chinese Taoism.
In my investing seminars, and in talks I give to investment groups, I make a lot of my key points by using stories about risk and risk management that listeners can relate to. And if youâve spent any time at all in the marketsâmeaning youâve seen how easy it is for emotions to blur your thoughtsâyouâll be able to relate to my 2,400-year-old trading lesson.
Chuang Tzuâs message is clear . . .
In pressure situations, we all too often see emotion trump skill . . . trump knowledge . . . trump experience.
Two thousand years later, the same holds true in the global capital markets.
As investors . . . or as traders . . . weâre financial archers. And our goal, of course, is to win gold in the form of market-beating profits.
For us here, the big prize weâre shooting for is millionaire status. Or more.
So we all have a goal. Weâre all intelligent people. And we all have insights, knowledge, and experience gained from years in school, in the business world, and even in the markets.
But Iâm willing to bet that one thing has blocked you from achieving that big goal . . . that gold ring prize . . . that millionaire status that I just referred to.
And itâs the same obstacle that kept Chuang Tzuâs archer from winning his brass buckle . . . or his prize of gold.
Iâm talking, of course, about emotion.
With a learned skill like archery, thereâs no real way to systematize the process of firing an arrow into a target.
Which is why machine guns were invented.
But with investing, you can create a system that will blunt emotion . . . and do so in a way that removes the chaos-triggering miscues from the trading process.
Wall Street pros refer to this as ârunning a system.â
In this chapter, Iâm going to show you how to do it.
Just Enough to Be Dangerous
During my days as a chemical engineer at DuPont, whenever a colleague was first promoted to a general management position, we jokingly predicted exactly how theyâd spend their first couple of weeks on the jobâeven if we knew nothing about them beforehand. Armed only with their previous job title, we could predict exactly where this newly promoted neophyte would beâand could also predict exactly what theyâd be doing.
Accountants spent those first few weeks in their new post behind closed doors studying the numbers.
Engineers walked the plant floor examining the production line.
Salespeople went out to meet key customers.
Information technologists toured the server room and went over the IT architecture.
During periods of transition or challengeâwithout failâwe gravitate toward our natural biases . . . toward our comfort zones. Itâs human nature.
When I start to explain this systems approach to trading, I often think back to those DuPont days. Today, as a trader, I would never put money at risk without first having in hand a robust system to deliver safe, consistent profits. Back then, I would never attempt to synthesize complex chemicals without a proven process and a checklist to follow.
In my talks with investors, my favorite analogy is the mixing of ammonium perchlorate (AP)âwhich you might know by another name.
Like rocket fuel.
AP is a truly amazing propellant.
At room temperature, itâs a solid crystalline compound. And unlike other explosivesâsuch as nitroglycerineâitâs surprisingly stable. You can drop it, kick it, or smash itâwith no ill effects whatsoever.
And when it burns, it doesnât even produce smoke.
AP is safe enough for amateur model rocketeers to buy in prepackaged cartridges at Hobby Lobby. But itâs powerful enough to lift the 4.4 million pounds of Space Shuttle, external tank, fuel, and solid-rocket boosters off the launch pad, and push it into orbit.
Sometimes that allureâthat mix of power and apparent safetyâis too compelling to ignore . . . and amateur rocket builders try to mix up their own batch of AP at home. The ingredientsâhousehold chemicals like table salt, ammonia, and common pool cleanerâare readily available.
However, the synthesis is anything but simple.
For starters, the anode and cathode materials for the initial oxidization stage of the process must be compatible with each other and carefully chosen. Quantities and proportions of component chemicals must be of specific concentrations measured accurately down to the hundredth of a gram.
Temperatures must be precisely controlled to within one degree and run through a gradual 24-hour cooling period on a pre-calculated gradient to ensure proper precipitation of the end product.
Any error along the way can allow powerful and highly unstable contaminants to become part of the mix. In one set of chemical ratios, those can result in a useless, harmless glop. But in a different ratioâthis turns into a miscue that goes by the acronym âB.O.O.M.â
As we travel this journey together, weâll repeatedly refer to the structural framework of the 10-Minute Millionaire system: identify the extreme, get an Edge, run the system.
Once you do understand this framework, youâll have the insights you need to run through the actual three-step process for making money: Find the Extreme, Frame the Trade, and Book the Profit.
Weâve already talked about finding the extreme and getting an Edge (and weâll circle back on both yet again).
But now itâs time to focus on the last piece of this triadârunning the system.
For an aspiring millionaire, knowing how to spot extremes and get an Edgeâbut not knowing how to run the systemâis akin to saying, âHey, Iâve got some household chemicalsâand a rocket I really want to launch. Letâs mix up this stuff and make us some rocket fuel. Launch comes directly after lunch.â
With a proven system to guide you through the propellant-making processâwhile keeping you safeâyouâre likely to end up with one of two results at opposite ends of the spectrum.
At one end, youâll end up with a powerful propellantâone that will launch your profit rocket skyward.
At the other extreme, youâll end up with a manageable loss akin to useless sludge. Useless . . . but also relatively harmless. You wonât be able to launch your rocket. But you also wonât face the risk of blowing yourself up.
Unfortunately, if you donât have a system to guide you, you canât be sure which outcome youâll end up with. Without a ...
