Again and again I learned that lack of equity was a leading cause of failure.
~ Phil Knight, Shoe Dog
It seems this is an issue not unique to the world of trading.
With big eyes and full hearts, we often try to bite off more than we can chew. I am 1000% guilty of this.
I’ve often felt I was undercapitalized. But here’s the thing about that: this feeling doesn’t change as you get more capital. Like “keeping up with the Joneses,” we’ll always find somebody who is trading with more and we’ll appear inadequate in comparison. This is a game we can’t win and one that is damaging to the soul and pocketbook when we lose. Therefore, don’t play this game.
But there is a fine psychological line here.
One the one hand, it’s fair to acknowledge that what Mr. Knight speaks here is truth. Without the proper equity in any endeavor, the choices available to us tend to be on the riskier side. And risk means a heightened chance of losing or failure.
On the other hand, casting blame on the Equity Gods as the root of all our troubles and taking no personal responsibility for the predicament we find ourselves in is equally shitty. If the path we’re on doesn’t work because of lack of equity, well then find another path! As Ryan Holiday reminds us, the obstacle becomes the way.
A big advantage we have as traders, we can size our risk appropriately relative to our equity. We don’t have to risk everything we’ve got. I can earn the same 5% on my capital as the woman with the 8-figure portfolio in the same or similar trade. And if I can keep compounding my capital in percentage terms monthly and yearly, then before I know it, my capital becomes the equity I’ve always dreamed about.
Of course, as soon as I get to that level, then I’ll want MOAR…
The journey never ends.