have the discipline to take the trades and follow the system! The reason this happens is because dumb money makes decisions based on emotions rather than logic.
To be successful in life and in the market, the first step is to prepare to win by having a well‐thought‐out plan. The second step is to be able to execute it, even when you don't feel like it and/or when the pressure is on. Do not take my word for it; look at this timeless quote from the 1700s:
By failing to prepare, you are preparing to fail.
—Benjamin Franklin
Let's illustrate this powerful point in a different way. Lots of people have trouble losing weight, and it's not because they don't know what to do. To lose weight, you have to burn more calories than you consume. It's a simple formula: calories in versus calories out. Yet, in the real world, as of 2020, 71.6% of adults in the United States were overweight, with four out of 10 registering as obese. Despite how simple weight management is on paper, people, it turns out, don't make logical decisions.
At this point, you might be asking yourself “why?” You see, it all comes down to our association with two driving forces behind almost all our decisions: pain and pleasure. Since the beginning of time, people have been programmed to avoid pain and seek pleasure; it is how our ancestors literally survived. People look at something and they, in a microsecond, instinctively think, “Does this give me pain or pleasure right now?” In most cases, if it triggers pain, they will avoid it, and if it gives them immediate pleasure, they will keep doing it.
Smart money knows that there are short, intermediate, and long‐term consequences to every decision we make. The dumb money is short‐sighted and only thinks about right now (short‐term consequences). The smart money takes the long view, plans ahead, and wins. In practice, something can give you pain in the short term but a tremendous amount of pleasure in the long term and vice versa. Food is the easiest way to explain this timeless lesson because it is something we can all relate to.
You see, people like to eat because it provides immediate, short‐term pleasure, and they do not like to exercise because, for the untrained mind, it triggers instant short‐term pain. That's why most people are overweight. People who are in shape do the exact opposite; they learn how to rewire their brains, and associate pleasure with sweating and pain with eating cookies. Why? Because they are looking at the long‐term consequences of their actions, not the short‐term ones. Once you are aware of this dynamic, you can change it, and, more importantly, control it. The easiest way to do that is to focus on the long‐term consequences. If that activity gives you long‐term pleasure, go ahead and do it.
PSYCHOLOGY OF SUCCESS
Winners win. They understand the psychology of success. They have a clear goal in their mind's eye. Then, they build a smart game plan to accomplish that goal. They are extremely disciplined. They use their pain and they do not let their pain use them. That means they look forward and embrace making mistakes. They study their mistakes, they lean into their mistakes, and most importantly they learn from their mistakes, so they don't happen again. They use their pain so their pain doesn't use them. That means they turn their (emotional) pain into a massive driving force of good. That force essentially becomes the fuel that drives them to go above and beyond, to keep pushing, and to not give up. They keep doing all of that until they win. Everyone else makes excuses or gives up. Remember, winners win.
Weight loss, just like succeeding in most things in life, is 99% psychological and 1% everything else (the mechanics or the exact knowledge about what to do). Throughout the decades, there have been many different fad diets and new exercise trends, yet Americans (and people all over the developed world) continue to get heavier because human nature never changes.
The same is true with money. Why are most people struggling financially? Building wealth is, after all, a simple formula: cash flow in versus cash flow out. The pain/pleasure dynamic is at play in our subconscious minds (where Shmelf hides) when it comes to how we spend and invest our money, and, in most cases, we are not even aware of it! When people spend money, the short‐term result is pleasure, and the long‐term consequence is pain when, after years of mindlessly spending, they don't have enough money to live the lifestyle they desire.
The smart money flips it; they associate pain with spending and pleasure with saving and investing. Over time, they end up with a lot more money and the retirement lifestyle they desire. Another powerful force that should be considered is that when people buy things they are buying things that typically make them feel good and then they justify that purchase with what I call “emotional” logic. As you can guess, emotional logic is usually biased and not sound. It is carefully selected to justify the emotional decision that was already made.
When I described my first big loss in the market, I told you how devastating it was for me emotionally (it generated emotional pain). I knew how hard I had worked for every dollar that evaporated during that period. I was emotionally attached to those dollars. When I started trading with fake money, I realized I didn't have the same emotional attachment to the units I was trading. It was infinitely easier to make logical, dispassionate decisions and to follow the trading strategy week in and week out—which strikingly improved results.
Armed with the realization that I had been making emotional trading decisions, I wondered how many others were letting their emotions impact their trades. I suspected I wasn't the only person making emotional and irrational decisions with their money. It triggered a new line of inquiry for me in my study of markets. At that point, I really wanted to understand human nature and the impact psychology has on the decision‐making process—specifically, how it impacts our decisions about money.
During the course of my research, I came across a quote dating back to the early 1900s and that was made famous by Warren Buffett's mentor, the celebrated investor Benjamin Graham. Graham said, “The investors’ chief problem, and even his worst enemy, is likely to be himself.” It takes a healthy measure of intellectual humility to understand what that means, and even more to do something about it.
More research uncovered a great book titled The Psychology of the Stock Market, written by G. C. Selden the same year the Titanic sank. On Amazon.com, the description of the book reads as follows:
When this book was originally published in 1912, Selden's idea that “movements of prices on the exchanges are dependent to a very considerable degree on the mental attitude of the investing and trading public” was a novel notion. It is still happening today, an established fact. Though published in 1912, Selden's book could have been written today. This makes complete sense, as the main topic—human psychology—has not changed at all in the past century.
I started digging back further, finding more evidence that psychology—human nature—had been impacting markets for centuries. For a while, I became obsessed with economic and market‐related bubbles, conditions in which market prices seem to become completely unhinged from reality, and the inevitable messy crash that followed. In my short life, I'd lived through and actively participated in two massive bubbles and subsequent busts: the dot‐com bubble of the late 1990s and the U.S. housing bubble that crashed in 2008.
I went back and studied every major economic cycle going back to the third century and every major bubble and bust I could find. I found that history was littered with numerous bubbles and subsequent busts. There are over 50 bubbles, busts, and bear markets—from the famous Tulip Bubble in 1637 to the COVID meltdown in March of 2020. The good news is that every bear market is followed by a major bull market. Then, the market gets extended, buyers are nowhere to be found, and then a new bear market/corrective phase happens. This cycle repeats itself over and over again throughout history.
Here are a few examples: the Great Depression followed the Roaring Twenties. Before that, unbridled confidence in America's westward expansion sent railroad stocks soaring until the bottom fell out in the Panic of 1857. During the Age of Discovery, both the British and French mercantilists were propelled by wild speculative investments that left many in financial ruin. And of course, there was the seventeenth‐century