A Powerful Lesson in Investing – Courtesy of Fast Eddie Felson
The same qualities that made you wealthy can be a detriment when it comes to trading
In the 1986 Movie “The Color of Money” Paul Newman (reviving his Fast Eddie Felson role from The Hustler) schools his protégé Vincent (Tom Cruise) in the art of making money as a pool hustler.
The lesson of The Color of Money: “Pool excellence is not about excellent pool.”
Cruise has all the gifts of a great pool player. But Newman teaches him that monetizing that gift involves a lot more than just playing great pool. His famous line: “Pool excellence is *not* about excellent pool.” In other words, the big money winners were less about always having to win and more focused on how to take the most money from the game.
The lesson comes back to Newman in cold hearted fashion in the end.
…while a “never give up” attitude can serve you well in the outside world, it can be disastrous in a trading environment.”
It’s a painful lesson that is directly applicable to many investors and traders today.
Many high net worth investors come from successful careers or businesses where breaking through obstacles by hard-nosed determination was paramount. They are used to winning. If this is you, that competitive spirit likely served you well in the business world or your chosen field of expertise. But it can actually be a detriment when it comes to trading or investing.
Why? Because while a “never give up” attitude can serve you well in the outside world, it can be disastrous in a trading environment. “I did the research, I know I’m right,” reasons the new trader. “I’ll just stick it out a little longer. It has to turn around.”
How many times have you heard yourself saying this? But you know how that movie usually ends, don’t you?
No judgement here. We’ve all been there.
The point is, successful traders and investors possess the counter-intuitive ability of knowing when to give up – for the greater good of making money. And for the profitable ones, that point usually comes sooner rather than later. They have given up that need to win each and every time in favor of the bigger picture.
Alan Greenspan said it best: “Amateurs want to be right. Professionals want to make money.”
“Amateurs want to be right. Professionals want to make money.”
The Unsettling Truth for Long Term Wealth Builders
As we, unbelievably, are already closing in on the end of Q1 2017, the investment landscape is becoming more chaotic. Trumpism has brought hope to many on the investment and economic front. But things are getting a little hairy out there. Iran and North Korea are launching missiles. Political and cultural warfare is becoming more virulent in the US. And for investors looms a potentially overheated stock market that could be due for a painful correction soon.
Stocks are now in the second oldest bull market on record. Kopin Tan, in February 13th edition of Barrons notes that “indicators of market breadth show that 76% of global stock markets today are overbought.” Tan follows up with an ominous warning: “The unwinding of one of the planets biggest bubbles isn’t behind us; in fact, it has barely begun…”
Bulls that continue to “buy high” and watch it go higher are jubilant in their ability to be “right.” And they can continue to be right for some time. They can continue to “win.” But the unsettling truth is, when the market turns, and it will, sooner or later, that need to win, that need for the thrill of being “right” will be disastrous for some.
Will it for you?
Trading for All the Wrong Reasons
Our friend, Dr. Alexander Elder, wrote one of the greatest trading books of all time entitled “Trading for a Living.” In it, he tells this story:
For the past 17 years I’ve had a friend whose wife is fat. She is an elegant dresser, and she has been on a diet for as long as I have known her. She says she wants to lose weight and she does not eat cake or potatoes in front of people – but when I come into her kitchen, I often see her go at it with a big fork. She says she wants to be slim, but remains as fat today as the day we met. Why?
The short term pleasure of eating is stronger for her than the delayed pleasure and health benefits of weight loss. My friend’s wife reminds me of a great many traders who say they want to be successful but keep making impulsive trades – going for the short term thrills of gambling in the markets.”
Do you know Dr. Elder’s profession before becoming a legendary trader and world famous trading coach? He was a psychiatrist. Not an analyst. Not a mathematician. Not a computer whiz. A psychiatrist.
If you are investing or trading for the “thrill of the kill” and possess a psychological need to “win”, you’re going to run into trouble as a trader. Never underestimate the psychological aspect of investing your own money.
You don’t have to be “right” or “win” to make money in the markets. In fact, being right consistently is very, very difficult. That’s why you choose a strategy that allows you to be wrong and still make money. It is the most important investing lesson I ever learned as a professional trader.
Like a long time client of mine once told me “I sell options because I’m not a very good trader. It’s the only way I can make money in the market.” It’s a humble but potentially highly profitable philosophy.
The Blessing of the Option Seller
Selling options allows you to bypass many of the phycological pitfalls that befall many a trader or investor: The need to win, the dopamine rush of being right, the agonizing decision of where to take a profit on a winning trade.
…being right consistently is very, very difficult. That’s why you choose a strategy that allows you to be wrong and still make money
As a seller of options, you embrace the Greenspan quote (and Fast Eddie philosophy) as mantra. You don’t care about being “right” anymore. You don’t try to guess at market direction any more. You don’t have to “beat” the market anymore.
Selling deep out of the money commodities options means only selecting points where the market is most unlikely to go. You don’t have to be “right.” You only have to be not very, very wrong.
Are you Cruise or Newman?
At the end of the movie, thinking he can revive his career as a pool player, Newman sets his sights on winning the tournament.
Chance pits him against Cruise in one of the tournament’s final rounds. Incredibly, Newman wins. Later as he celebrates his big win, Cruise shows up at his hotel room offering him “his cut.” Only then does Newman realize the cold, hard truth. Cruise lost the game on purpose. A side bet paid a bigger premium than the prize money.
The Color of Money: Are you investing to win, or investing to make money?
Newman lost sight of his own lessons by focusing only on winning the tournament. He may have won, but it was a hollow victory. Cruise, finally learning the lesson of his mentor, played the game only in a manner that paid him the most (and most certain) money. You can question Cruise’s character’s ethics in the movie. But its directly applicable lesson to investing is unmistakable. Cruise focused on making money. Winning the tournament for bragging rights was irrelevant to him.
In The Color of Money, Cruise and Newman’s characters, in essence, switched roles. Newman acted like the amateur. Cruise acted like a savvy professional – and walked away with all the money.
Which one do you want to be?