A successful investor isn't all that different from a successful athlete, says sports psychologist Thomas J. Ferraro. In both cases, winning is about having knowledge, guts and passion.
By knowledge, Ferraro -- who counsels professional athletes in golf, boxing and basketball -- means learning more about the markets, and the companies and sectors they cover, as well as the competition. Traders also need guts, he says, not necessarily to pull the trigger on a big trade, but to pull out of a trade that's gone sour. Finally, the psychologist says, traders need to have a lifelong passion for the art of the trade, not just the money, or they'll burn out.
Recent Meet the Streets
UPENN Law School's
American Benefits Council's
Entrepreneur and author,
Here he discusses some of the common psychological obstacles traders face and what they can do to overcome them.
TSC: What guidance that you give to athletes would you give to traders, too?
I give guidance to the athletes in a number of different ways. We try to teach them how to be disciplined in their approach to their mind, their playing field and to their emotions -- emotionally, cognitively, physically. To know their limitations. To stick to their preset routines. To really take that seriously, to plan for all and any contingencies or anxieties.
This disciplined response to any given situation obviously applies to trading, as well, for the only traders that survive are those who have a disciplined strategy -- a sell strategy when the stock is going up and when it is going down. And they stick to that strategy. The ones that don't stick to that strategy, well, when they feel that they have no confidence, when they become emotionally anxious or greedy -- these are the ones that lack discipline. And, of course, they are the ones that will lose their position and eventually be out of a job.
TSC: Have you worked with traders before, and, if so, what have been some of their hang-ups?
I work with independent daytraders, people in and out of the market perhaps five to 10 times a day. In terms of their hang-ups, there are a number of things that go on. Greed is one problem. Certainly, sometimes, there's a greed to hold on to stocks; they don't optimally sell off at the right time.
Some traders call this the "endowment effect." If you own something, you automatically think it's worth more than it really is. That's an interesting psychological problem that also translates into sports. My family used to own thoroughbred horses, and I remember once we were offered $125,000 for this 2-year-old. When you hear it, you immediately say, "No, that's not enough. It's worth much more than that." By virtue of the fact that you own it and somebody offered a price.
In this particular case, we held onto it, the horse. We shipped it down to Ocala
Fla.. We put it in training down there and it broke down, and we had to kill it. That's a typical example of the "endowment effect," which I think traders have.
Another problem many traders have is passivity. They hold onto things -- and they freeze. They don't act. They don't have the guts to act. They lose confidence, they've had a bad losing streak, and the passivity, the procrastination, really sinks in.
Holding onto losers is exceptionally common among traders and stockbrokers. And then they become losers themselves. In sports, we call that "choking." It's very subtle, but it's a very, very deadly situation for them and for their career. A trader needs to have guts. They need to be action-oriented: to sell fast and buy fast.
TSC: Well, being a wallflower isn't exactly a problem among too many traders. Is there a chance of a trader being too aggressive? Take a look at some of these financiers and CEOs grabbing the headlines, like Enron's Kenneth Lay, for example.
Actually, being aggressive, being a "bad boy" in the world of sports or high finance is the other side of the spectrum, and is actually very, very common. Dennis Rodman, John McEnroe, Roberto Alomar. John Rocker is a famous one from about two years ago. He was very aggressive and very odd.
In the world of trading, a number of different people would fit this bill, as well. In fact, overaggressive, narcissistic and sociopathic disregard for laws, rules and mores is a problem in many walks of life, not just on the playing field or the court. This is a very common problem in all walks of life, including business and trading.
You may ask yourself, "How can these people think they can get away with this kind of stuff and be so blatantly narcissistic?" This
a problem in America, where people get greedy, they're arrogant, they're highly competitive -- and they have no sense that anyone is going to catch them. They're just that arrogant.
The third problem that traders face, of course, is drug abuse and alcoholism. The level of stress on the trading floor is, really, pretty exceptional. There's a lack of control, and there's a lot of money involved. People feel very, very helpless and very anxious about that, and a very common solution to this is to self-medicate.
TSC: So, what is it that a successful trader has that their less-successful counterpart, working just as hard on the same trading floor, does not? Why is one guy rich and the other guy not?
Three reasons: knowledge, guts and passion. The supersuccessful trader is not so arrogant that he is not afraid to learn. Take a look at Tiger Woods, who's notorious for rising at 5 a.m., lighting up the links and practicing -- and all the other players are still in bed. In a field where golf pros work
hard, Tiger Woods works three times harder to acquire more knowledge than his foes. This kind of extreme hard work and discipline is uniformly true of anyone who is successful.
Guts. Decisive action. A tremendous amount of courage. A trader who can take the ball and run with it. If they need to sell fast, buy fast, they act -- they don't procrastinate.
And for anyone to be successful, in any chosen field, is an absolute passion for their work. They have to love it. A trader has to love risk-taking.
TSC: Dr. Ferraro, you've often said that one of the great obstacles many professional athletes face is a fear of success. Do traders sometimes face this obstacle, and if so, why?
Fear of success is a common problem that's deeply unconscious. There are basically two reasons that people have a fear of winning. No. 1, the first dynamic is that when we begin to define that winning is on the trading floor, what we begin to talk about is risking more money, as opposed to less money. And when you begin to risk more, you experience a tremendous amount of anxiety. And people tend to back off from that.
I worked with a college basketball player on this last night. He tends to have a very, very good first round and then systematically backs off and gets more and more cautious. One of the reasons for that is he is deathly afraid of being in the heat of competition on the last day of the tournament. If you fail, the sense of disappointment can be massive. So, many people won't even allow themselves to come close to their potential because they know, subconsciously, if they try and then fail, it would be greatly disappointing and depressing.
The second dynamic behind a fear of success is, if you succeed, someone else fails, and that can induce a lot of guilt in people, and that's generally subconscious. So anyone who tends to have sensitivity about them is also afraid of success. That's why narcissistic people are so very successful: They consider their opponents not as other human beings but as objects in their way. So there's no guilt involved in their success.
TSC: In closing, do you think athletes make good investors?
No, they generally make very poor investors. A friend of mine, a lawyer who handles professional boxers, had a pro named Tony win about $300,000 in a fight. Two weeks after Tony received the check, he called my friend telling him he needed another $50,000, having spent the money on cars, parties and jewelry. So, many professional athletes tend to be undereducated about money and too prone to overspend.