Trading and Gambling PartII

Picture this sequence from the film the Last Samurai. Ken Watanabe, Tom Cruise and their band of Samurai warriors are ranged against the vast army of the Japanese Emperor. The Samurais have their sword and bows while the Emperor’s army has rifles with bayonets, cannons and even machine guns. The armies charge against each other and the battle is joined. The Samurais battle valiantly. Their display of adrenaline driven courage is awe inspiring. They kill two- no three soldiers for every Samurai they lose. But in the end the heroic battle is in vain as they all die in that battle field, every one of them to the last man.

The Emperors army, on the other hand, has to do very little to ensure victory. The odds are heavily in their favour. Sooner or later, their victory is assured. There is no heroism in their victory. It is just another day in the office for them.

Now picture the first sequence of the film Gladiator. Russell Crowe and his army has fought many battles over ten years and conquered vast territories. The only battle left is against a band of headstrong locals of Germania. The locals are hardly an army. The vast Roman army is a well oiled machine. Still the locals fight to retain their freedom. The battle is furious but swift. The locals are crushed. At the end of the fight, all Russell Crowe can feel for his ten years of war is a sense of tiredness and a sense of boredom. Ten years of battle against ill prepared foreigners has taken its toll. He no longer wants to continue to lead the army in a fight against strange lands and cultures.

In these two sequences, who do you think had the most excitement? Who were the most alive? In the Last Samurai it was clearly Ken Watanabe and his Samurais. In the Gladiator it was clearly the locals. Who do you think had the odds against them and who held the edge? The Samurais and the locals had the odds heavily stacked against them. The Emperor’s army and the Romans of the Gladiator clearly had the edge. The losers were fighting a heroic fight against all odds. The battle against the odds was an exciting one. Each one of the losers was bursting with excitement and adrenaline as they fought furiously in a losing cause. The winners on the other hand knew that all they had to do to win was to engage the losers in battle. Their sheer numbers would ensure victory. It was only a matter of time. The longer the battle waged the more certain their victory. Theirs was a victory without glory.

This is the curse of both the trader and the gambler. The gambler fights against the odds and therefore has a lot of excitement until he keeps betting. But the longer he plays and the longer he craves this excitement the more certain his defeat. It is easy, no there is great lure, for him to continue bet until his money runs out. Every bet gives him an adrenaline surge. He is alive every moment. This excitement, this sense of living life on the edge, is the lure and also at the same time the cause of the downfall of the gambler.

On the other hand, the trader has the odds in his favour (or let us at least agree he should have the odds in his favour if he considers himself a trader). He has to mechanically continue to bet as and when his methodology requires him to. There is no excitement or a sense of individual achievement for the trader. To top it, playing this game with efficient risk management will ensure that he makes only normal returns over a long period of time. In order to be successful the trader has to be prepared to treat trading as a business and not as a source of excitement. This is the curse of the trader.

The trader has the odds in his favour but gets boredom as a consequence. The gambler gets all the excitement but gets ruined as a result. So the choice really is between winning with boredom and losing with excitement. The problem in the real world is that even when the choice is laid out in this fashion, a lot of people might prefer the later.                                                                                                 

So this concludes my lesson on Trading and Gambling! For me a great way to distinguish whether what you are doing is trading or gambling is to ask yourself how you are feeling. If you feel fear then that is fine. A little fear of losing is normal. On the other hand, if you are always on the edge and always excited while you are trading then the chances are that what you are really engaging in is an activity where you are not sure of the odds and an activity where you do not have a clearly defined method and hence your sense of personal decision making and involvement in the trade is high. Unfortunately, this kind of trading comes awfully close to being gambling with its resultant consequences!