I cannot count the number of times my trading was going along really well, then all of the sudden, wham… all my profits were erased in one fell swoop, one bad trade. In retrospect, I got arrogant, and decided, because of my invulnerability, to assume extra risk which became my undoing.

Despite many decades of trading, I still occasionally get a b**ch-slap from the mistress of the market when I get excessively confident. In my own case, this seems to happen when I have many trades on and all are solidly in the black, or I've had a real good run. I get a sense of invulnerability, hubris, and that's my own personal kryptonite. At least I can recognize this flaw, and it hasn't reared its ugly head in a few months. Usually when my normal balance between my offensive and defensive game goes out of whack is when I get killed. Now I have a system in place that identifies when I'm about ready to go on tilt. The system hasn't kicked in yet, so maybe I'm learning something.

When I was coming up, an old grain trader told me that "Hope" is for losers. I used to get stuck in a position, and hope it would come back, and it usually would not. In fact, my friends saw me hoping for an improvement and were fading me all the way down. It took awhile, but I learned that hope won't bring the market to your favor, but hope will make you go bankrupt. Finding people full of hope can be a gold mine for you, provided you play it right. Seeing a person "Hope" for his position to improve enables another person to get additional clarity on what the market is going to do….at least in my case…..but I like fading losers. The converse is that I don't mind or take it personally when people fade me when I'm wrong.

Luck is just wrong. I don't believe in luck, and if it were to exist it would be a zero sum game. Is a person who wins the lottery lucky, or is he just part of the statistical distribution? I like to think of luck as an offspring of statistics and probabilities. There is a probability for every possible occurrence in the universe, and things just happen without any mysticism involved..Some gamblers like to have lucky rabbit's feet, or other talismans. I like to sit in position to those guys in table games. Some guys like to brag about their lucky streaks and I listen carefully. I like to observe their streak, and at some point, start to fade them, a little at first before I really press. Sometimes this works, sometimes I get my butt handed to me on a silver platter, it depends.

My favorite are the superstitious, as they believe that some mystic power controls their destiny. Evidence of any kind of lucky charm raises my curiosity and I try to observe that person for any fade clue. It's tough enough to pull money out of the markets. The emotions of hubris, hope, and luck make it near impossible to make money. These emotions are akin to having a horse player bet the his idea of an overlay, only to lose, and hear the lament, "Boy, I wish there were just one more furlong." In horses, as in the market, and life, there is not one more furlong and do-overs aren't allowed.

Kim Zussman replies:

How about this definition of luck: 

From Merriam-Webster:

1 a : a force that brings good fortune or adversity b : the events or circumstances that operate for or against an individual

2 : favoring chance

3. Favorable or unfavorable outcome which was not caused by skill, effort, or actions taken.

I purposely left out "ability", since some large fraction of ability is genetic, and one can only obtain good parents by luck.

Janice Dorn writes:

Self attribution bias applied to trading posits that traders attribute good results to skill and bad results to bad luck. This is a common bias that underlies the inability of many to admit they made a mistake.

Rudolf Hauser writes:

Kim's definition of luck is a good one but I disagree when he writes "I don't believe in luck, and if it were to exist it would be a zero sum game." There is no question that ability, persistence, preparation and work in general are needed to take advantage of opportunity, but luck also plays a part. So much of what we do involves interaction with other people and some depends on being in the right place at the right time. The geologist or anthropologist who is traveling somewhere and happens to notice some clues that will lead to a significant discovery is the beneficiary of both his or her skill and good the good fortune of being alert (not luck –or is it if you were just doing something else at that time and so missed what you otherwise would have notice so you had bad luck) and the luck of being in the right place at a time they had the experience to take advantage of the opportunity.

Or what about the person who takes a job in a local company that just has a product about to take off and ends up making a super salary and seeing the stock he purchased in the company rise and make him rich whereas if he had done the same in another town with the same skills and hard work doing much less well because the people running the company in and industry with no such product line and whom he had never meet were bad managers and ran the company into the ground? Sure he or she did not have perfect foresight and the ability to evaluate the thousands of people one interact with and predict how will interact with them over a lifetime–but then who does?

There is no question in my mind that a person who does not fully apply themselves is not likely to be able to take advantage of what good fortune of opportunity presents itself but there is also no question that luck plays a major part in life. And it's not just genetic– if you were born in a country in perpetual war and poverty your changes of a good life are much less than if you were born in the U.S.A. Or what about the Jewish children born in the 1930's in Germany or central Europe rather than the U.S.A. or being born in either place in the 1960's? Was that there bad luck or a failure of keen judgment and hard work on their part if they died in Hitler's gas chamber? What about the person who contracts a disease and dies from it when a cure would have been available had he gotten the disease a decade later? Was that something he or she could have prevented or just bad luck?

Kim Zussman adds:

I know a guy who is a retired contractor/developer, who "came from Germany with $20 in his pocket" and is now very wealthy. He developed a number of commercial and residential properties.

Why so successful?

1. He happened to like to work outdoors, was good with building, and good at commanding laborers
2. Was born charming
3. Was lucky to have lived through three decades of atypically high appreciation in real estate

Had any of the above three been missing, especially #3, he would not been as successful — maybe even a failure. I call that luck.

You can say the same about stock bulls in the 90s, oils and railroads in the past — all kinds of bull markets and bubbles, without which the great moguls and flops would not be. Not to mention war heroes who survived to tell the story, as opposed to those who took equal action but were silenced.

Economic society is pretty much zero sum over short periods, if you add all the give and take together.

Russ Sears writes:

Much of what we call luck is really the skill, effort and actions taken by others and given to us by the generosity of those most successful.

This would include living in a free country.

Further, much of this skill, is willingness to take actions and give effort where the difference between success and failure often hinges on the smallest thread. A thread so small, that even the most skilled, those putting the most effort can not be assured that any fruit will be borne. But one where the skill lies only in putting the edge in their favor.

This would include parenting and trading.

Finally, much of what looks like incredible luck is compounding of these skills over time and history.

However, to anecdotal throw a wrench into the "no such thing as luck" I have a relative by marriage, that won 2 lotteries. One a $4.3 million jackpot in MO state lottery, by entering one ticket a week. The other a half million Reader Digest sweep-stake, by answering the junk mailer. But she would like to remain anonymous.

The untold story however, is how the money tore apart her family. Luck or curse, I leave it to the reader.

Jim Sogi writes:

 Chinese proverb

Good Luck Bad Luck!

There is a Chinese story of a farmer who used an old horse to till his fields. One day, the horse escaped into the hills and when the farmer's neighbors sympathized with the old man over his bad luck, the farmer replied, "Bad luck? Good luck? Who knows?" A week later, the horse returned with a herd of horses from the hills and this time the neighbors congratulated the farmer on his good luck. His reply was, "Good luck? Bad luck? Who knows?"

Then, when the farmer's son was attempting to tame one of the wild horses, he fell off its back and broke his leg. Everyone thought this very bad luck. Not the farmer, whose only reaction was, "Bad luck? Good luck? Who knows?"

Some weeks later, the army marched into the village and conscripted every able-bodied youth they found there. When they saw the farmer's son with his broken leg, they let him off. Now was that good luck or bad luck?

Who knows?





Speak your mind

9 Comments so far

  1. Leonardo on February 17, 2010 4:36 am

    I remember reading once that ‘hope is a great companion but a oor guide’

  2. Nick Pribus on February 17, 2010 7:33 am

    There’s a guy in my town, a very wealthy one, and we were involved in a real estate deal in Kazakhstan. In June 2007, right before the market started it’s long downward spiral I went to his office so he could sign some papers. What several months before had been a buslting palace of activity was vacant except for him. I asked where is everybody and he replied that he had just finished selling every piece of real estate he owned.

    He was sure lucky to get our when he did. I make it a habit now to study, and to copy, the luck of other wealthy men.

  3. Kermit Johnson on February 17, 2010 10:06 am

    Anyone involved in the markets for a period of time knows about hubris. Victor identified it very clearly as the enemy in his books. The interesting thing to me is that, even though we know the symptoms, it seems there are times when we are incapable of evading the effects. There are times when I have made the same mistake that I know I have made many times in the past, and I have known at the time I was making the mistake that it was the same mistake. It seems I can make some "software" workarounds to the hard-wiring in my brain, but those software patches are not always successful. Hopefully, as we age, we are a bit more successful at recognizing these times and avoiding the dips that seem to be inevitable. (Of course, like many things, this is not only in markets. Look at Toyota. Look at the current state of climate science.)

    One helpful exercise I did many years ago was to generate a chart in Excel using its random number generator. Put a "price" in the A1 cell and a simple formula that randomly generates the daily "price change" in A2. Make a chart of this changing "price" and it will change every time you click on A2, as I remember. It can be an eye opener.

  4. Captain Allusion on February 17, 2010 12:04 pm

    Was meeting the Greek guy a lucky instance? :) . couldn’t resist.

  5. Chopshop on February 18, 2010 6:08 am

    “Luck is the residue of design” ~ Branch Rickey

  6. Don Chu on February 18, 2010 11:07 am

    Mr Jim Sogi extends very nicely on Luck and Horses with the reference to the old Chinese story. But the actual proverb is a little more substantial than just “Good Luck Bad Luck”.
    赛翁失马 焉知非福 may be loosely transliterated as - The Elder of the Steppes Looses a Horse, Whither Good or Bad Fortune…

    And rather than a simplistic farmer, the actual text of the story goes: “近塞上之人有善术者 - Within the Near Steppes there is a man who is a practitioner of the Arts” (where Arts here means the various arts of the I Ching).

    And while the actual singular author of this proverb and story may be unknown, this well-known proverb/story is taken from the equally well-known classic, the HuaiNanZi(Masters of HuaiNan), believed to be a compilation of several authors.
    (Story taken from chapter 18 - 人間訓/In the World of Man)

    But actually, on reading Jeff’s article above, I am reminded of another story, this time from the Chuang Tzu; which speaks of the relationship of the unending chain of -predator-prey-predator-prey-…, between Hubris and (mis)Fortune. After all, in the thick of hubris, little does the hunter know that he is the hunted as well:

    As Chuang Tzu was rambling in the park of Diao-ling he saw a strange bird which came from the south. Its wings were seven cubits in width, and its eyes were large, an inch in circuit. It touched the forehead of Chuang Tzu as it passed him, and lighted in a grove of chestnut trees. ‘What bird is this?’ said he, ‘with such great wings not to go on! and with such large eyes not to see me!’ He lifted up his robe, and hurried with his slingshot, waiting for (an opportunity to shoot) it. (Meanwhile) he saw a cicada, which had just alighted in a beautiful shady spot, and forgot its (care for its) body. (Just then), a preying mantis raised its feelers, and pounced on the cicada, in its eagerness for its prey, (also) forgetting (its care for) its body; while the strange bird took advantage of its opportunity to secure them both, in view of that gain forgetting its true (instinct of preservation). Chuang Tzu with an upsurge of emotion, said, ‘Ah! so it is that things bring evil on one another, each of these creatures invited its own calamity.’ (With this) he put away his slingshot, and was hurrying away back, when the forest ranger (who had, unbeknownst to Chuang Tzu, been following him) pursued him with terms of reproach.

    Chuang Tzu, Outer Chapters

  7. Anonymous on February 18, 2010 1:23 pm

    from Telegraph.co.uk:

    In the wake of these studies, I think there are three easy techniques that can help to maximise good fortune:

    Unlucky people often fail to follow their intuition when making a choice, whereas lucky people tend to respect hunches. Lucky people are interested in how they both think and feel about the various options, rather than simply looking at the rational side of the situation. I think this helps them because gut feelings act as an alarm bell - a reason to consider a decision carefully.
    Unlucky people tend to be creatures of routine. They tend to take the same route to and from work and talk to the same types of people at parties. In contrast, many lucky people try to introduce variety into their lives. For example, one person described how he thought of a colour before arriving at a party and then introduced himself to people wearing that colour. This kind of behaviour boosts the likelihood of chance opportunities by introducing variety.
    Lucky people tend to see the positive side of their ill fortune. They imagine how things could have been worse. In one interview, a lucky volunteer arrived with his leg in a plaster cast and described how he had fallen down a flight of stairs. I asked him whether he still felt lucky and he cheerfully explained that he felt luckier than before. As he pointed out, he could have broken his neck.

  8. New Article « Masteroftheuniverse’s Weblog on February 18, 2010 7:13 pm

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  9. Sam on February 19, 2010 10:29 am

    I have to agree that luck does not exist, but probability does. Every lucky or unlucky event has a certain probability of happening. Just because an event only has a .01% chance of happening does not mean that it will not happen likewise it does not mean that it is luck, good or bad, when it does happen.

    Essentially luck, chance and probability are all the same thing. What it really comes down to is how you understand this concept. A believer in luck will often find themselves on the wrong side attributing their pain to something they can’t control, believers in chance will often think they are helpless in rare situations that arise in their lives and believers in probability will understand that almost anything is possible and will not be surprised by a variety of different outcomes in any given situation.

    But this of course is just my humble opinion.


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