In trading, I always set a limit to define my risk. So, on a trip to Las Vegas last year, I decided to do the same exact thing.
Now, you should know that I'm NOT a gambler. But after 3-days attending a conference in sin city, I had to try my hand at the tables.
Before leaving Caesars Palace, I hit the cash machine and pulled out $100 (I even left my debit card in the hotel room, to avoid the urgent to get more cash later in the night).
Just like I do when I place a trade, I set a limit of $100 to gamble with on this occasion, thereby defining my risk. Of course, just like trading efficient options markets I wanted to get as much mileage out of my $100 as possible., Sso I headed to old downtown Vegas where the odds and minimum bets were the best. My goal was to have fun, I just wanted to have fun, but at the same time I wanted to maximize my time on the table, ultimately knowing that eventually the casino’s small edge would catch up with me. It always does when the odds are stacked against you.
Amazingly, I found a $1 craps table with 100x times odds within minutes of arriving downtown. And I quickly discovered a half-drunken gentleman who let it be known that it was his payday. He had managed to triple his paycheck over the past hour.
All I could say was “awesome” and wished him continued success in his winning ways. But I soon noticed that his destiny was bleak. He was taking low-probability bets at every turn.
Meanwhile, I, on the other hand,I methodically played the pass line and maximized the odds behind each wager.
I allowed probability to make Probability was guiding my decisions. But my strategy, at least for the time being, Initially, my strategy was failing me. And to my left the half-drunken gentlemanwas the drunk guy, who continued to move toward a complete state of drunkenness, continued to defy who defied the odds by WINNING making low-probability bets … and winning.
Every “right” decision I made quickly turned into a loser, while every “wrong” decision made by by my now drunken playing partnerthe other player was a winner.
His loud drunken statewinning streak had caught the attention of passersby. Several made comments such as “wow, this guy is amazing” or “this guy is good.”
Of course, no one paid attention to my methodical and boring high-probability strategy, probably because I wasn’t loud and boisterous. Why would they? I wasn’t winning.
But I knew his fate was sealed. He had no process, no strategy. He made drunken stupid bets based on zero statistical advantages. Yet he continued to defy the odds.
Meanwhile, my statistical methods – making every bet to maximize my probability of success – were losing.
And now itThen it became even more interesting. The gentleman gambler started to increase his bets. I'm not a professional gambler, but I knew that tThe end was near.
How could I tell? Because it's just like trading. I can’t tell you how many timesDuring my 20 years in the markets, I’ve seen traders , particularly options traders, become overconfident after a winning streak and decide to arbitrarily increase their position size. This is often a recipe for catastrophic failure.
Predictably, the gentleman guy eventually gave up all of his winnings and his paycheck. Sadly, his ignorance regarding probabilities had caught up with him.
I, on the other hand,Meanwhile, I was back above break-even (after being . I was down to a little more than $310 at one point). And then, before the probability gods began to finally work in my favor.
So, what’s the lesson herefrom my late night in downtown Las Vegas?
It all goes back to my #1 rule as a trader: NEVER BUY OPTIONS.
It's critical to sSpend more time focusing on the process and the strategy rather than the end results. Remember, if randomness was not a factor, every decision we make as investors would be based solely on the outcome. And if that were the case, the process or strategy would be judged solely on the end result.
But as we all knowIn gambling and trading, randomness is ever always present in investing as it is in gambling. And aWlthough we are drawn tooften judge our investments decisions and those of othersbased upon on outcomes. However,, it is often dangerous to do so without some perspective on how they got therethe process.
This type of behavioral trait leads to a herd mentality and failure. as a long-term investor. Randomness can indeed teach us the wrong lessons.
But with a sound process or strategy, we you'll know what to expect.
Yet, most self-directed investors Unfortunately, most traders don’t take the time to learn strategies with statistical advantages. They prefer buy the stock, ETF or mutual fund that has recently performed the best. They have no systematic rules or process, just a hunch based on randomness.
The drunken Las Vegas gentleman gambler had no process and no discipline, and we saw his fate. The market for trading stocks or options is no differentexactly the same.
This is why I love to trade options. I almost always want to act trade as the casino.
How do I do this? I want to sellBy selling investors options with a low-probability of success. Typically, I sell options to other traders, and they have a 15% chance of winning.
with approximately a 15% chance of success. This gives me an 85% chance of winning on each and every trade.
Andy CrowderI challenge self-directed investors to find a better strategy when investing in stocks, ETFs, or mutual funds.