The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success

4.5. DEVELOPING A VARIANT PERCEPTION

Variant perception was first introduced by Michael Steinhardt about 20 years ago to underscore the fact that the best way to make money in the markets is to know something that others don't yet know, to think ahead of the curve, and to anticipate when something is going to happen.

To do that, you have to understand something about the company and how it is functioning, how the particular industry is doing, what is going on in the economy, and a variety of other things. The more you know, the more you can make a calculation about the likely target or trajectory the stock is going to follow because you have done the work.

One critical part of the work in developing a variant view is to focus on stories with an element of change. The presence of change is important because where there is change, there is the potential for different outcomes, which equals investment opportunity. Change can take the form of new management, new products, and new market opportunities. Review a whole checklist of items before earnings to increase your sense of the probability of being paid in terms of short-term, quarterly, and annual earnings, options, management, what the sell-side is saying, and what makes stocks high-probability investments. Ask yourself the following questions:

• Is there an element of change and a clear path to getting paid?

• How much does the thesis depend on internal or external factors?

• What are the catalysts; what are you playing for?

• Have you ...