Trading, Ebola and Luck
On a day when the city of New York received its first confirmed case of Ebola, I thought it may be a good opportunity to ruminate on the issue of luck in both life and trading. While all of us in the advanced industrialized world love to believe in the Anglo-Saxon maxim that hard work results in just rewards the truth is far more complicated and far less obvious.
The fact of the matter is that for all us born at the right time, in the right place, destiny is far more a function of luck than we like to believe. I am perhaps more appreciative of the capricious nature of luck, because at the age of eleven I was plucked out of the Soviet Union, my mother at the last minute decided to go to America rather than Israel, then once there married my All American stepfather and I was able to spend my adolescence in the plush suburbs of Washington DC, then go to Ivy League school, settle in New York and ultimately end up in finance a talking head on CNBC.
Yes I was a hard working student, but that mattered far less than you think. I was lucky to end up in America, lucky to go to school in New York, lucky to stumble into FX and because I am one of the few guys that is up at 3 AM in the morning and can make it to studios at 30 Rock in 20 minutes flat, lucky to get the first call by producers chasing the latest headline in the markets.
If I was born in West Africa my fate would almost certainly be different, irrespective of how smart I was or how hard I applied myself.
I bring all this up because in the world of trading we often attribute our success to skill and intelligence when in fact luck is a major factor that we conveniently ignore. The truth of the markets is that there are only two trades to make -- continuation or mean reversion -- and our success is far more dependent on the type of the market we are in, rather than the skill of our trade strategy.
This idea was really brought home to me this week as I was testing an end of the day mean reversion strategy over a ten year period of time and saw it literally rise and fall with the state of the market. I had designed it to be robust enough to remain flat during unfavorable times, but it was amazing to see the difference in returns between the high volatility years versus the low ones. I was mildly amused to think that had I released this system in 2009 I would have been considered a genius trader, but the very same strategy last year would make look like a total loser who couldn’t make a pip if his life depended on it.
There is an old saying on Wall Street that goes -- Don’t confuse brains with a bull market. We should all try to remember that every day.