This evening, Howard Lindzon was on Twitter (follow me here) discussing the merits of paper trading versus trading with real money. This ones an easy one for me. I think there is no practice like the real thing. I have learned 95% of the things in my life from doing. This is because life is all about learning what not to do. It’s about learning from your mistakes and constantly improving upon them to become a better ________ (fill in the blank).
Many of my greatest lessons came from my colossal failures. You see, trading is analogous to life in more ways than one. And failure happens to be an important component of both. In trading, if you can’t see and feel the failures you’ll never really understand how to overcome them in the future. The problem with paper trading is that you don’t learn to understand the emotional aspects of dealing with failures. And this is one of the most difficult hurdles for an investor to overcome.
Several months ago I wrote a piece titled “It’s only in being wrong that we can learn to be right”. I wrote:
“You might be wondering what in the world this has to do with investing? Well, it has everything to do with investing. Investing is psychological warfare. It is one of the last refuges of natural selection. The strong thrive and the weak die (unless you have superb banking lobbyists on the payroll). But we are ill-equipped to deal with the world of investing. Our primitive minds are built to survive first and act rationally last. In doing so, we often do what is detrimental to our financial health. That big tool inside our skulls acts on our primitive instincts and not the rationally developed processes that have sent the species surging to the top of the food chain.
The point here, is that learning from our past mistakes and accepting the fact that we are often going to be wrong will actually lead to a better skill set with which to deal with our future mistakes. The investor who accepts that there is no such thing as a holy grail in investing will soon realize that he/she must construct a portfolio that protects them from future calamity. And more importantly, through the use of past lessons we should all hope to create procedures to guide us during those times when our primitive mind tells us to react irrationally. You will be wrong. But it is only in being wrong that we can learn to be right.”
There’s no education like the real thing. Even if it costs you a few bucks. I actually paper traded when I first started and it was a complete waste of time. Executing an actual trade and executing one on paper are not remotely similar to one another. And I quickly found out that the two were dramatically different. What worked in a simulated paper game did not come close to working in the real world.
I opened my first brokerage account with $500 and I was prepared to lose it all. I did some crazy things now that I think about it. I even kept a journal of my strategy progression that I keep in my desk to this day. I read it and laugh at how far I’ve come since then. I would have never been able to do it had I not learned real lessons trading real money. In short, don’t waste your time paper trading. There’s nothing like the real thing….
Investing is one of those things where you need to just jump into the water and learn to swim before your head gets submerged. You don’t learn a thing sitting on the edge contemplating whether or not to jump….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.