Guest?post from Travis Anderson
The Three Phases of a Trader’s Education: Psychology, Money Management, Method by Jeffery Kennedy
This article is an advisory excerpt by Jeffrey Kennedy, Chief Commodity Analyst at Elliott Wave International (EWI). He advises aspiring traders to conform to three phases of a trader?s education. The first of the phases is ?Methodology?, which relates to the development of a trading system. ?Money Management? is the next phase. This phase is an analogous construct of examples for managing portfolio windfalls and tactical risk mitigation. The final phase is ?Psychology?, whereby the author reveals the importance of personal and group psychology.
Most importantly the author discusses that aspiring traders should use the phases in reverse order. The author advises traders to first understand psychology both on a personal level and then the crowd as a means to focus on money management. Achieving focus minimizes distractions when deploying a trading methodology.
Much to my consternation, Mr. Kennedy?s three phases are almost applicable to anything that we do as professionals or in life for that matter. Think about it for a second. Most of us belong to an organization of people called a company or at least a congregation of sorts. Psychology is absolutely apparent on a daily basis. We all live in a money driven world, so money management is a necessity. What about ?Methodology?? Everything has a system, everything! Think about your daily routine….wake up, make coffee, pants go on one leg at a time, check email, start work etc?. ?Let?s take a journey with these three phases in the suggested order as I try to put this into a project management context.
How does psychology on a project impact our decisions? The answer is different for each of us and is dependent on the type of project. However, one fact remains true for all of us. People are emotional beings of nature with behaviors of sorts that come into play for each and every one of us on a daily basis. If you are the project manager of a large group of people or just a few programmers, the decisions we make ripple through the masses with resounding affect. So it is important to understand your own psychology and then control the affects of our decisions through effective communication at all levels (up, down, and across) of the organization.
Perception is reality! How are you perceived on the project?
After understanding the affects of psychology in a project environment, we look at how a project manager handles a capital investment opportunity.
The CEO has selected you as the most capable to evaluate a capital opportunity to invest $100,000 today and, depending on the state of the economy at the end of the year, the investment should fetch one of these equally probable payoffs:
Pessimistic: ? $80,000
Most Likely:?? $110,000
Dig deep, dust off those odd texts books, and prepare yourself for some fun! Your sponsor has confidence that you will apply logic and money management techniques to derive a decision whether to ?go? or ?no go? on this project opportunity.
Considering that all scenarios have the same probability, the expected payoff is as follows:
C1 = (probability)(pess+most+opt)=(1/3)(80,000+110,000+140,000)=$110,000
This represents an expected return of 10% on the investment of $100,000. Now we need to remember that a discount rate applies.
We could invest our money in the stock market. With some research, there is a common stock that has the same risk and turns out to be a perfect match. Given a normal economy, Stock X is forecasted at $110. The stock price will lower in a slump and higher in a boom. Stock X and your investment are identical as follows:
Pessimistic: ? $80
Most Likely:?? $110
The current price of Stock X is $95.65 and offers an expected rate of return of 15%.
Expected return = expected profit/investment=110-95.65/95.65=.15 or 15%
The 15% represents the company?s opportunity cost for the project. In order to value the project, discount the expected cash flow by the opportunity cost of capital as follows:
PV=expected cash flow/(1+discount rate)=110,000/1.15=$95,650
This is the amount it would cost investors in the stock market to buy an expected cash flow of $110,000 by buying 1000 shares of Stock X. It is therefore the sum that investors would be prepared to pay for your project.
NPV=opportunity cost ? initial investment = 95,650 – 100,000 = ($4,350)
The *NPV is negative and therefore is not an opportunity the company should pursue.
* NPV rule: Accept investments that have positive net present values
*Rate of return rule: Accept investments that offer rates of return in excess of their opportunity costs of capital.
Hopefully this contextual analysis provides insight to how the three phases provide value in the project management arena. ?As project managers, we get things done though our influence of those people employed on our projects. The teams’ perception is their reality, so it important to understand as we move forward on project objectives. Also, substantiate our decisions by using sound money management techniques to derive best case scenarios that help our organizations become more sustainable. Finally, the method we use to become successful project managers should indeed be something simple and usable, but thorough at any case.
Source: Elliott Wave International
Source Date: July 23, 2009