You had just earned your first pot of gold…several hundred thousands, millions or more. A multi-bagger returns from your investments; a lucrative business ventures. Or a promotion to be the MD or better CEO; a biggest pay raise you can ever imagine...so on and so forth.
You are happy and over the moon. Of course Fools will be arrogant! You attributed the “success” to you being the smartest, most capable and possibly is hardwork paid off.
In other words, you think you are the smartest and invincible?
Now, someone by the name of Nassim Taleb is there to argue with you. He will probably tell you straight in your face…
“Do not be Fooled by Randomness. There is something called Dumb Luck!”
Fooled by Randomness – The Hidden Role of Chance in the Markets and in Life
Fooled by Randomness, is a thought provoking and one of the smartest books around. I finished reading the book last month. The reading was done almost entirely throughout air plane journeys I had last month. The book was recommended to me by fellow blogger LP.
Nassim Nicholas Taleb is a former option trader and a current Professor in Risk Engineering. See here for more info. I had also earlier written a post “Failure is Not an Option, It's a Must - Nassim Nicholas Taleb”
Story of Neighbours - Janitor Lottery Man & Dentist
To begin the idea of randomness, I will recall a short story written in the book.
Consider two neighbours, John Doe A, a janitor who won the New Jersey lottery and moved to a wealthy neighbourhood, compared to John Doe B, his next-door neighbour of more modest condition who has been drilling teeth eight hours a day over the past 35 years – A Dentist.
Clearly one can say that, thanks to the dullness of his career, if John Doe B had to relive his life a few thousand times since graduation from dental school, the range of possible outcomes would be rather narrow (assuming he is properly insured).
At the best, he would end up drilling the rich teeth of the New York Park Avenue residents, while the worst would show him drilling those of some semi-deserted town full of trailers in the Catskills.
As to John Doe A, if he had to relive his life a million times, almost all of them would see him performing janitorial activities (and spending endless dollars on fruitless lottery tickets), and one in a million would see him winning the New Jersey lottery.
Provoking Thoughts by the Author
Below I will share some interesting thoughts / excerpts in the book
Humans are often unaware of existence of randomness.
Do not look too much for explanation for events. It can just be random.
Small Success & Big Failures
Even if you win 99 times out of 100, there is no certainty that you are successful. Your one failure can be so big and disastrous that it bankrupt you.
"Option sellers, it is said, eat like chickens and go to the bathroom like elephants", which is to say, option sellers may earn a steady small income from selling the options, but when a disaster happens they lose a fortune.
There are routes to success that are non-random. Those who go the extra mile are rewarded. In my profession one may own a security that benefits from lower market prices, but may not react at all until some critical point. Most people give up before the rewards.
Time Eliminates Randomness
Nassim believes that success can be attributed to luck because of a lucky sample path or a rare event. Only over long time we can see true capabilities. Time aggregation eliminates effects of randomness.
Manage risk and avoid blow up. Blow up is describe as not just to lose money; but to lose more money than one ever expected, to the point of being thrown out of the business
Stop loss, a predetermined exit point, a protection against the black swan. It seems like it is rarely practiced.
Nassim described Nero as a trader who is very risk averse.
“Nero rapidly exits trades after a predetermined loss. He never puts himself in a situation where he can lose more than, say, $1,000,000 - regardless of the probability of such an event. That amount has always been variable; it depends on his accumulated profits for the year.
Nero's temperament is such that he does not mind losing small money. "I love taking small losses", he says. "I just need my winners to be large". In no circumstances does he want to be exposed to those rare events, like panics and sudden crashes that wipe a trader out in a flash. To the contrary, he wants to benefit from them.
Why doesn't Nero make more money? Because of his trading style - or perhaps his personality. Nero's objective is not to maximize his profits, so much as it is to avoid having this entertaining money machine called trading taken away from him. Blowing up would mean returning to the tedium of the university or the non-trading life.
Every time his risks increase, he conjures up the image of the quiet hallway at the university, the long mornings at his desk spent in revising a paper, kept awake by bad coffee. No, he does not want to have to face the solemn university library where he was bored to tears. "I am shooting for longevity", he is wont to say.”
History & Probability - Irrelevant
Historical event and frequency of probability is totally irrelevant for event of success. It needs to be judged in connection with the magnitude of outcome. E.g. Event A: 999/1000 chance of winning $1 and Event B: 1/1000 chance of losing $10k. Will you bet?
Odds are that we would make money by betting for event A, but it is not a good idea to do so.
Media & Journalist - Useless
Nassim thinks that reading newspaper is a complete waste of time, because journalists are being paid to provide explanations, and will gladly and readily provide them accordingly. He said:
“On the rare occasions when I boarded the 6:42 train to New York I observed with amazement the hordes of depressed business commuters (who seemed to have preferred to be elsewhere) studiously buried in the Wall Street Journal, apprised of the minutiae of companies that, at the time of writing, are probably out of business. Indeed it is difficult to ascertain whether they seem depressed because they are reading the newspaper, or if depressive people tend to read the newspaper, or if people who are living outside their genetic habitat both read the newspaper and look sleepy and depressed.”
Emotions in Investment - Detrimental
“When I see an investor monitoring his portfolio with live prices on his cellular telephone or his PalmPilot, I smile and smile.”
Studies have shown that we feel the effects of negative emotions 2.25 times stronger than we feel the effects of positive emotions. Therefore if we view an investment portfolio every minute of the day, the mere randomness factor of the markets will cause us to feel more pain than positive emotions, even if our portfolio has increased in value.
Wealth - Do Not Compare
When there are too many millionaires next door, you are often a failure, a very successful but comparative failure. Therefore move away from your house / neighbourhood.
“We should remember that becoming rich is purely a selfish act and not a social act. I am not impressed by people with money. Becoming rich is not directly a moral achievement… ”
On Jim Rogers
“Even some experienced trading veterans do not seem to get the point that frequencies do not matter. Jim Rogers, a "legendary" investor, made the following statement:
I don't buy options. Buying options is another way to go to the poorhouse. Someone did a study for the SEC and discovered that 90 percent of all options expire as losses. Well, I figured out that if 90 percent of all long option positions lost money, that meant that 90 percent of all short option positions make money. If I want to use options to be bearish, I sell calls.
Visibly, the statistic that 90% of all option positions lost money is meaningless, (i.e., the frequency) if we do not take into account how much money is made on average during the remaining 10%. If we make 50 times our bet on average when the option is in the money, then I can safely make the statement that buying options is another way to go to the palazzo rather than the poorhouse.”
On George Soros
Nassim mentioned that instead Rogers’ partner, George Soros knew how to handle randomness, by keeping a critical open mind and changing his opinions with minimal shame. (which carries the side effect making him treat people like napkins)
Clearly, I am amazed by how one topic of “Randomness” can lead to an Author write a whole book.
I am actually further humbled after finished reading the book. I very much agreed that a random event of luck is critical to being successful, i.e. if success is very much related to wealth. And the time factor is not a critical consideration.
Nonetheless, I also believed that success over a sustained long period of time, by itself cannot only be attributed to luck or randomness.
No matter what, I always remind myself as follows.
“In times when we are doing great, do not be too arrogant and over the moon. It can be that we have not experience the worst, or the success is entirely through randomness, which may not last.
On the contrary, when we are NOT doing well due to random events, do not be devastated and give up. Our time of success will come eventually, that is, if we persist, continue to improve ourselves, have good attitude, positive mindset..etc.”
Maybe also a little bit more of self-efficacy!
Do you agree that success is random?