What Do You Really Do?

Yesterday I was trying to explain to my young son what I actually do everyday. ……

“So you must guess the price direction?”

“Yeah, in a way, I try to guess intelligently of course.”

“You must be really smart.”

“Yeah, but smart has nothing to do with making money (in the markets).”

“So you must be really lucky.”

“That I don’t know, sometimes good things happen, but I be crazy to depend on luck, and you shouldn’t too.”

“Do you have to work real hard?”

“Sometimes – it all depends on how easy the opportunities come (to make money).”

“So you sit and wait?”

“First, I actively scout around for opportunities to see if they are there, hiding somewhere, but if I don’t see them, I just wait – sometimes a long time.”

“Is it fun? But honestly sounds boring.”

“On some days – interesting, other days – dead boring – for my style of trading anyway.”

“Is it difficult to learn what you are doing?”

“Yes it is difficult – but only in the beginning. I trade in two main ways – with an advantage (an edge) that I have spotted, and with an edge that did not quite crystalize as I hoped. We call the advantage an edge. You can learn both ways.”

“Huh? So you win money with an edge, and you lose money without an edge?”

“Truth be told, sometimes yes, sometimes no. There is no guarantee an edge will help you be profitable, but it does increase the likelihood. Sometimes the edge you believe is there has disappeared, but you can still make money if price somehow moves in your preferred direction – for whatever reasons we may not know till much later.”

“Sounds very much like Chance.”

“Not at all really. In fact chance is purposely (deliberately) minimized but unpredictability is left alone.”

“Okay, what kind of logic is that?”

“A logic you don’t learn in school huh? Let’s use an example, you spot a few opportunities, and after analyzing them, you pick the one that has the most chance of making money – or you reduce the chance of making a mistake. But there are many unexpected events that may happen in this world, and so affect the trading markets – and hence affect your choice.

Assuming you think Starbucks is great, you study everything about Starbucks, and you buy Starbucks shares thinking it will be even greater. Then terrorists attack Starbucks in Australia, in Indonesia – all unexpected and unpredictable events to you.  Now let’s say consumers start avoiding  hotspots like Starbucks.  What do you think will happen to Starbuck’s share price? You analyzed the Starbucks opportunity to minimize the chance of making a wrong investment, but you cannot take away the risks that unpredicted events may happen.

Sometimes these unpredictable events destroy your original game plan, sometimes they help you make more money (Example – if new research shows drinking coffee will boost children’s IQ). Can you stop or start these unpredictable events? No – we just have to accept they happen.”

“So we just work on what we can manage – our judgment, and leave the market to do what it wants to do.”

“Though we cannot predict or stop unexpected events, we can minimize the damage such events can do to us – if we expect such events to prevail, we enact a process called “reducing losses”. Alternately, we can also maximize gains from such events if they are in our favor. So we cannot manage these unpredicted events, but we can manage the impact these unpredicted events levy on us.

…..  you are yawning so much , better  get to bed.”