Neel Kashkari asks the question every trader should always have on his mind

Author: Adam Button | Category: Education

It's great to have a strong opinion, but never forget this one thing

If you're going to trade, you need to have strong opinions. After all, you're betting money on one outcome or another.

In a market, you're also betting against the collective wisdom of the crowd. You're saying that the price that all the buyers and sellers have currently agreed on is wrong and that you know better.

That takes a certain stubbornness.

The trap is that it can turn into blindness. It's easier to stick to your guns when you only look at one side of the story. You can cherry-pick facts and arguments to make you feel comfortable with your decision.

The problem is that you shouldn't feel too comfortable.

Enter Neel Kashkari

What Kashkari did at the March 2017 FOMC decision was just like making a trade. The wisdom of the crowd -- the wisdom of the FOMC -- was that rates needed to move higher. Every Fed member voted for higher rates but he stood alone and dissented. Like a trader, he believes he's smarter than the crowd.

In an essay he published explaining his dissent, he makes a compelling, impassioned case that inflation isn't a problem and that there is no rush to raise rates.

In particular, he argues there is slack in the labor force among prime age workers.

But that's all beside the point.

Neel Kashkari is the Minneapolis Fed President and a former assistant Treasury Secretary but he came from Goldman Sachs and that's where he might have learned a very important lesson.

After he makes an impassioned argument, he devotes an entire section to a question that traders always need to ask themselves: What if I'm wrong.

"What might my analysis be missing?" He writes. He takes on the tough arguments for why interest rates should go higher.

The lesson

It's easier to stay committed to an idea or a trade when you ignore the other side of the argument. But trading isn't easy.

Before you even get into a trade, you need to set parameters for determining if you're wrong. Most often, that's a technical level. That might not mean your fundamental thesis is incorrect but it's a benchmark for when it's time to re-evaluate. And it's always easier to evaluate from the sidelines.

Whenever you can, set benchmarks that will flag when you're wrong before getting in a trade. Once you're in it, the work doesn't stop. The challenge is to read everything that would invalidate your thesis without getting spooked out of the trade. The clearer the thesis of the trade is in your mind beforehand, the easier that will be.

By the way, Kashkari has some humility and a sense of humor too.