Like Poker, Investing is about *Not Losing*

On and off, I go through my bookmarks of the web to see how some notable people are doing after their moment of fame. One stock market trader that posts at High Probability Trading blog became exceptionally famous after a tirade of cursing after losing over $30k on a bad trade when the stock market tanked.

I have a mild-interest in watching people day trade, simply to see if there are people out there that are able read into the tea-leaves of the daily market to make a few quick bucks here and there with the ebbing tides of the stock market. It seems that the man at this blog can't seem to eek out consistent gains, though he consistently mentions that he has a "solid plan" to make money on the market and that some trades on the open market are "easy" to make money on.

If that were the case, why not stick to the trades that you are almost certain to make money on?

TV and the movies are horrible places to learn about anything that is a combination of luck and skill. They have this strange idea that the path to success can be summarized into a series of short episodes or a 2 hour feature film. Sure, they make it look like the main character goes through a lot, works hard and in the end gets a few almost impossible lucky breaks and lives happily ever after, but the reality of the matter is that life doesn't work like that-- you just can't expect to take wild swings at things expecting to eventually make a hit (you'll throw your arms out eventually)... but I digress...

Every risk you take should be calculated

The idea that continually taking risks without weighing the costs, hoping to make a hit is not a bright idea; it's also a cardinal rule in poker which few understand. Every risk that you take should be calculated-- weigh what the risk costs to take the chance and the consequences of you losing vs the rewards and the probability of you winning.

There is something in the world of probability called the "expectation value," which basically means that if you had a 60% chance of winning $100, then the expectation value of the outcome is $60. If someone told you that it would cost you $50 for you to have a 60% chance of winning $100 would you take it? I would! Over and over again, simply because the expectation value is greater than the risk I would have to bare. In the long run, I will also win out on the game.

The interesting thing about the mechanics of making decisions depends on the reliability of your data. In the case of the day trading guy, he seems to be able to pick out a few "good trades." If I were him, I'd stick to those trades and take the easy money if that is the case. I would be far more happier to know that I'm consistent at making money instead of having a string of good runs, then getting hammered by a series of bad runs-- the emotional roller coaster isn't worth
it. I'd be far happier to make 8 wins out of 10 versus 40 out of 100. That is the name of the game, especially when you've got money on the line.

Don't get the wrong idea that it isn't worth taking the risk to learn something new; because I highly recommend taking a chance on something new whenever you can. Just make sure that you're not risking more than you can handle.