Saturday, January 02, 2010

Right Efforts | Theory of Relativity | The Wisdom of 18 Year Olds

There are times in your life where there are a confluence of 'things' that solidify (for good or naught) certain concepts. Over this past week, I've had three such points of contact that have served to enhance my perspective on market matters.

First, on Christmas morning, I had what I considered a disastrous conversation with my son (18) where he opined: Face it Mom, you were lucky in your career. Since we're friends here and all of that, I can confess to you that I was damned angry. Oh, I had the "effort=outcome" discussion, and he knows quite well the level of "effort" on my part. (I've more to say on this later).

Second, I picked up Beating the Stock Market by McNeel and The Zurich Axioms by Max Gunther. Both had a reminder in them that the market, despite our best efforts, is still a game of chance. And both admonished that price patterns can delude us into thinking that (1) there is order in chaos; (2) history repeats itself; (3) there is a holy grail to any of 'this'.

Best to channel the great ones from time to time. Heraclitus stated (paraphrased): You don't step into the same river twice. That statement was a pleasant absolution of my visceral rejection of attempts by many to take the current market's zigs and wiggles and compare it to x, y, z point in time. The argument among which historical period this is most like chart-wise fails to consider that we've stepped into a different river now.

While we are bombarded with market platitudes that the market discounts the future, there is a failure to state this simple truth: No one (not even the market) knows the future. What we do know is this: The market is an imperfect discounter of what it perceives to be future value. As Father Time marches resolutely forward, the future is revealed. The future has a terrible habit (on which we can rely!) of abrading against the expectations of the many and rewarding the expectations the few. The market's zigs and wiggles, then, are merely the market's recalibration of its expectations of the unknowable as it becomes known COUPLED WITH available liquidity. The size of that gap determines whether we have a zig (big) v. a wiggle (small).

Third is a conversation with an Internet friend/trader on 'stock stuff'. There are two things that are important to say about this exchange.

  • While I've spent quite a bit of time reading and writing about my experience with the market, I've spent NO time talking about the vagaries of trading. This person has afforded me the opportunity to have such a conversation, largely because there is not one soul that I know in my off-line life that gives a whit about trading.
  • This might seem like an odd thing to say, but giving voice to one's thoughts in conversation is a different process than writing. More satisfying because you have the opportunity to be challenged/questioned, and you have the opportunity to do the same. Continuing to cultivate such discussions (real-time) is one of my goals this year.
The product of this pleasant exchange was to think about importance of being able to complete the phrase, "price relative to ____."

While I would love to believe that "effort=outcome" in all things, that pleasantry is simply not true. Unfortunately, I came to that conclusion as I wrestled with what I believed to be my son's dismissive comment that jarred me to my foundation. While attempting to think about it to acquire my ammunition to lob his way and blast this conclusion, I realized that I merely shot myself in the foot. (I've not shared this with him just yet!). But such thought wrangling is helpful, and it led me to the following conclusions:
  • Right effort within the wrong opportunity doesn't yield a commensurate outcome for the effort; and
  • Absent right effort, one cannot take advantage of the right opportunity.
Despite those two conclusions, I also note that, you can win without effort and without opportunity--those are life's little lotteries that happen to a few. I'm choosing not to highlight that to my son because I still embrace this little truism: "you make your own luck". The two points above are the embodiment of the off-cited definition of luck: the intersection of preparedness and opportunity. My embrace is not nearly so tight as it has been in the past, because there is also this: despite your best efforts, it is still maybe the 'wrong effort', and success may not come. I'm not trying to get overly philosophical here, and I may have the wrong effort underway to make my point.

"What's the point?" you may be asking while tapping your toe impatiently. The point is simply this

  • As investors/speculators we have to make the right effort (developing our skills to find the right opportunities); AND
  • We need to ensure that we are in the right opportunity.
Which leads finally to, "How do we know that we are in the right opportunity?"

To evaluate the right opportunity, you need to have some anchor points. These anchor points are simply your 'lines in the sand'. Whether you are a technical trader or a fundamental trader or the bastard child of both (as am I), you are making an entry based on a "price relative to ____" (your chosen criteria). Further you are making an exit based on "price relative to ____" being accomplished over some period of time that you are willing to be in THIS opportunity v. the other opportunities available to you. (And it implicitly includes both a dollar and time stop loss!).

Your job, then, is to find your inner physicist and develop your own theory of relativity for each opportunity in your life. If you were to do that, you'd make optimum decisions, and you'll realize the dreams of all economists who have this wrong-headed view that we are purely rational beings.

Whenever you feel that any of this seems impossible just remember don't have to be the best, you merely have to be a bit better than the rest.


Anonymous said...

Great food for thought! Keep it coming.

Biffermas (Chris) said...

Wow, nice article Leisa. As usual, you've given me some things to mull over.

Biffermas (Chris) said...

I've partially mulled over some points.

Here's an unsolicited opinion on your mother / son debate. Everybody who succeeds in life does so with some luck involved, bar none! Whether you were born into the right family, know the right people, fluke upon a novel approach, or you have the correct personality / temperament for a given situation. I can pinpoint many such times when I won the right lottery and was allowed passage into an elite room with many disgruntled persons left behind. I can also pinpoint some devastating events that derailed my planned life permanently and knocked me down a different road I neither wanted nor anticipated. The intersection of chance and preparation does in fact equal luck, which your son should know before entering the cruel world. However, "luck" might only be evident in retrospect, and seem like grand misfortune at the time it occurs.

engrishspeaker said...

Leisa, your children are wiser than you will ever realize or give them credit for. Trust them!