The Irrationality Of Humans
A wheel has a 99% chance of making you a billionaire, and a 1% chance it kills you. Do you spin it?
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Now, to the article ☕
The Irrationality Of Humans
A wheel has a 99% chance of making you a billionaire, and a 1% chance it kills you. Do you spin it? Or in simpler terms, if the Russian roulette revolver has 1 round and 99 other holes, do you still play the game, if winning = billionaire and losing = death?
All things being equal, the rational answer for this is a resounding no. Why? Because you cannot stomach the downside. You literally cannot live if you lose. In a world where you have to be alive to enjoy living in it, death is game over. The argument that you should take it because "the probability of it happening is low" does not make sense because IF the worst happens, there is no escape.
This concept seems exceedingly simple, yet so many people fall prey to it. The simplest example of this is seen in the LUNA crash, where people lost their life savings and their entire net worth in the collapse. These people were playing the game of roulette, and when the time came, they couldn't fathom the downside. "It won't happen", they claimed. "It's a billion-dollar protocol", they cried.
Just because the probability of it happening is low, does not mean it won't happen. And just because it hasn't happened does not mean it won't.
Do you now see what I mean? The markets can be thought of as a giant wheel of fortune - but some of the spaces are marked with death. Most of the spaces are marked with good luck of course, but you can never count the spaces of death out.
So, how does one go about avoiding these "death spaces"?
Well, it's simple really - you can't. Black swan events such as the Covid-19 crash can never be predicted nor avoided - but as individual investors, you instead hedge your risk. This means that instead of avoiding the spin, you make it such that even if you landed on the "death space", you'd still be fine.
You replace the bullet in the revolver with a dummy round; You make sure that if you get wiped out, it's not game over.
And that's why the number #1 rule in investing is to "never invest more than what you're okay with losing". Never over-allocate your positions and always have a backup plan if things go south.
Stop Spinning The Wheel Of Fortune
Back to the example of the stock market being akin to the wheel of fortune - bear markets are when most of the options on the wheel have turned from being positive +EV outcomes to negative -EV results.
But for some reason, many of you are still spinning this wheel of misfortune despite the changing circumstances. Many have been hooked to the adrenaline of winning money from this game, and want to "feel the rush" again. And that's how you get wiped out.
Sure, there are some spaces in which you can land on to still make money; some trades you can take to make some dough. But upon zooming out, you'll see that if you keep playing the game in unfavourable circumstances, the average outcome is negative for you.
No amount of singular plays, scalps, or shorts will make you as much money as waiting for the wheel to change back to being a "mostly positive" wheel ; Nothing will make you as much money as the up-only conditions we had back before the bear.
Don't believe me? Well let's ask the experts:
I hope all of you are enjoying the season and conserving your energy. It saddens me to watch people continuously try to bottom tick this market. We are talking about people who are feverously mad with the need to do what for even the most skilled is impossible.
Please don't blindly follow people on twitter with financial decisions. Trust me, I have watched more pros absolutely whiff the last few months to further amplify the fact that no one really knows much. At best, the good know when the juice is flowing, and right now it isn't.
There's still plays to be made [always is], yet I've decided against advocating or posting them; problem with these is they are often singular [thus crowded] and, for vast majority of participants, extremely difficult to pull off in these conditions.
Most would botch it.
These are traders who have been here since the beginning - people who have had massive years of experience in trading. While experience does not always equal to expertise, these traders have the trading history to back their claims up.
If anything, I've learnt to follow the people better than I at this game. Why? Because the hallmark of a great trader is the amount of time they've been playing this game and their relative performance. And I haven't been playing for long, so objectively, I can't be considered "good".
It's why Warren Buffett is considered to be one of the best - the fact that he's been playing the game for so long, yet has been mostly up-only.
You can't just look at someone who's done a 1000x on his portfolio and consider them a good trader when they've only traded in up-only conditions. You have to look at it holistically - would you consider someone who made 1000x on LUNA yet lost it all in the crash a "good trader"?
And so, when someone who has done well across the peaks and valleys appears - you listen. And so I've stopped spinning the wheel for now, sitting quietly until it is time to act again. As @smileycapital on Twitter says:
Patience is a position.
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