How to Make Smarter Decisions
Five Key Ideas from Chapter 9 of Psychological Analysis by Adam Sarhan
I assume that most of you have heard this before, but there is a story about Warren Buffett telling his pilot to list his top 25 priorities and then cross off everything that isn’t in his top five. He explains that anything outside the top five is just a distraction that prevents you from being truly excellent at those top five priorities.
I’ve been focusing on my type 3-5 priorities daily while ruthlessly eliminating everything else from my daily life. No more NBA playoffs. No more pro wrestling YouTube deep dives. I didn’t buy Elden Ring. I stopped building Lego sets.
If something doesn’t directly contribute to leading my company, writing, getting healthy, investing, or traveling with my wife, I don’t have time for it. It’s been hard to see some things fall out of my life, but the focus this has given me for difficult decisions has been incredible.
(This book club email contributes to my reading and writing, so it is here to stay, although we may see it evolve to include more personal development books as we move forward.)
We read Chapter 9 of Psychological Analysis by Adam Sarhan this week, and it followed in the same style of bringing tons of knowledge in a format that makes it easy to read and digest.
People Are Creatures of Habit
Remember, people are creatures of habit; if you fill your day with good habits, your life will be filled with good things. Conversely, if you fill your day with bad habits, bad things will happen. Life is simple. Don’t make it more complicated.
In Psychological Analysis, Adam Sarhan leads off his chapter on making smarter decisions by discussing the power of building good habits in your life. He stresses that something that simple will make a profound difference in your trading.
I find this to be true in all aspects of life. During the past few years, I have systematically replaced one bad habit after another with things that make positive contributions to my life.
I used to unwind after work by drinking a 12-pack of Miller Lite, crushing through three-pound bags of Gummy Bears, and playing PlayStation (NBA2K was my thing for a good long time). Now I spend my evenings using the treadmill, sipping bone broth, and reading fiction. It’s a different world.
When Our Emotions Are Influencing
The point is that we need to know when our emotions are influencing our buying decisions because when we trade in the market, we don’t need to love our stocks, and we don’t need our trades to make us feel good about ourselves. We trade in the market to make money, and, as I hope you have learned by now, the smart money makes objective/rational decisions with their money, not emotional ones.
Sarhan explains that the key to making good trading decisions starts with awareness of how our emotions impact those decisions and learning to separate those emotions from the decisions.
Over the past year, I’ve learned that removing emotions from trading is much more complicated than I initially expected. I find that those emotions have subtle, sneaky ways of slipping into trading decisions, so you have to watch for any trace of them constantly.
Write Down Your Thoughts About the Market
First, write down your thoughts about the market every night or every weekend and share them with someone else. This way you “get out of your head” and have accountability for your ideas. Also, when your ideas are written down there is a clear archive of them that you can look back on forever.
Sarhan advocated writing down your thoughts on the market every night to help you get out of your own head and see the bigger picture better.
I’ve always had a “close down the market” practice that I work through every night, but I recently started making an effort to write out my thoughts as I work through my screens each night. This is a game changer, and I can’t stress enough how important it is.
I now see it as a version of Julia Cameron’s Morning Pages for stock trading. I do three hand-written general pages in the morning, and then I close out the evening with one more page breaking down the market for that day.
Write Down Three Columns
I grab a pen and a black piece of paper and write down three columns titled M, Crowd, Against. Then, I write I down at least three reasons why I want to do something (buy, sell, or hold) in the Me column. Then, in the Crowd column, I write down what I suspect “they” think, and then I imagine what traders who are against my position might think, and I write three things down in the Against column.
Sarhan recommends writing down three reasons each for “Me,” “Crowd,” and “Against” before every trade to present the entire argument for and against any idea. Once again, the goal is to get an outside perspective on the trade.
One of my biggest problems is that I don’t take enough time to consider the potential for a trade to go against me. I’m fine when they do, but it’s not a strong enough part of my process before taking a trade.
This simple process will correct that, and I think it will keep me out of some of the trades that end up looking foolish in hindsight.
Prepared For It
If you make objective, unemotional decisions, if you respect risk, if you don’t fight the tape, and if you don’t let yourself be swayed by the crowd, then you’ll very often find that, even though you couldn’t have predicted a big market disruption, you were, nevertheless, prepared for it.
Sarhan closes this week’s chapter with four simple things we can all do to make sure we stay out of harm’s way during the next major downtrend. He explains that it really is as simple as removing emotion, respecting risk, avoiding fighting the tape, and steering clear of delusional crowds.
I don’t think you could come up with a better way to summarize Sarhan’s concept of psychological analysis. If the goal of keeping your head straight is important to you, write down these four ideas on an index card and tape them to your computer screen!
I’m going to remind everyone that I’d like to develop this into more of a conversation, so you can click here to go to andysbookclub.com, where the comments are open for this post. Let me know which point hits home for your and why, and let’s see if we can’t build something special.
Have a fantastic and profitable week!