The Wall Street Journal ran a tabloid-like article about Monroe Trout. The article spoke of a lawsuit between Trout and his brother. Why mention this article? The piece that ran in the Journal also poked fun at Trout for following the philosophical tenets of Ayn Rand. This seems like an odd thing to make fun of given that Ayn Rand is also Alan Greenspan’s favorite author.
Rand’s teachings and writings rooted in laissez-faire capitalism are the ground upon which successful traders must stand:
Man’s mind, states John Galt, the protagonist of Atlas Shrugged, is his basic tool of survival. Life is given to him, survival is not. His body is given to him, its sustenance is not. His mind is given to him, its content is not. To remain alive, he must act, and before he can act he must know the nature and purpose of his action. He cannot obtain his food without a knowledge of food and of the way to obtain it. He cannot dig a ditch or build a cyclotron without a knowledge of his aim and of the means to achieve it. To remain alive, he must think. Thinking is not an automatic process. A man can choose to think or to let his mind stagnate, or he can choose actively to turn against his intelligence, to evade his knowledge, to subvert his reason. If he refuses to think, he courts disaster: he cannot with impunity reject his means of perceiving reality.
Ponder her writing in the context of trading. Would not the quick fix of blindly following your broker’s opinions, chatting at Motley Fool, griping at RagingBull.com, trading RSI or watching support/resistance levels — don’t these actions all involve choosing not to think? Would you not be allowing your mind to stagnate by evading the pure reality that these actions distort? To follow these hollow messages over the year indeed courts disaster. We are sure all readers know at least one person that went belly up by refusing to think.
Trading is a game where it’s you against the world. It’s not you and your friend or you and your broker fighting together. It’s you. You are left to objectively use your mind to determine the best course of action in order pull a profit from the great ocean of other traders in the world that also play the game. You must dig deep to understand why one course of action is better than another and avoid decision making based on fear. Pure fear is why the Nasdaq rose so far and plunged so low. And those that controlled their fear made a killing.
The phrase “choosing not to think” is the precise diagnosis of every trading failure Rand would identify. The broker’s tip is not thinking. The message board consensus is not thinking. The RSI crossover signal without understanding why it produces edge is not thinking. All of these substitute someone else’s process, or no process at all, for the trader’s own rational assessment of what the market is doing and what the rules for responding to it should be. Galt’s argument is that survival requires active thought, and that the refusal to think courts disaster with the same certainty that refusing to eat courts starvation. The trading parallel is exact. The trader who refuses to think through their approach, who takes someone else’s word for what to do and why, is courting financial disaster as surely as the man who refuses to think about where his food comes from.
The Nasdaq rise and plunge is Rand’s argument at market scale. Pure fear drove the rise as investors feared missing what everyone else was gaining. Pure fear drove the collapse as the same investors feared losing what they had gained. Both moves were driven by emotion overriding rational assessment. The traders who controlled their fear, who had a system, rules, and the discipline to follow them regardless of what the crowd was doing, made a killing in both directions.
Atlas Shrugged by Ayn Rand
No long comment here. Atlas Shrugged is considered by many top traders required reading. It is the capitalist manifesto. Read it.
Frequently Asked Questions
What does John Galt’s speech have to do with trading?
It describes the prerequisite for any kind of productive achievement: active, independent thought. Trading on broker recommendations, message board tips, or indicator signals without understanding the underlying logic is the trading equivalent of refusing to think. It courts disaster because it substitutes someone else’s assessment for a genuine rational evaluation of the situation. The trader who thinks for themselves, builds a system with understood logic, and follows it with discipline is applying Galt’s principle directly.
Why is trading described as “you against the world”?
Because every trade is zero-sum. For every gain there is a corresponding loss on the other side. The broker, the message board poster, and the newsletter writer are not on your side of that equation. They have their own incentives. The only entity in trading that is purely aligned with your financial outcome is your own rational judgment applied through a sound systematic process.
What role did fear play in the Nasdaq rise and collapse?
Fear of missing out drove the rise as investors entered overvalued positions because the crowd was gaining and they feared being left behind. Fear of further loss drove the collapse as the same investors sold at the bottom because the crowd was panicking and they feared losing everything. Both waves of fear-driven behavior were predictable and exploitable by traders with a systematic approach designed to follow price trends and exit when the rules said to exit.
Trend Following Systems
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