„What makes a decision great is not that it has a great outcome.
A great decision is the result of a good process, …“
_Annie Duke
hopefully inspiring 6 min
In the capital markets (as in most of life), decisions are made under uncertainty: available information is imperfect and the outcome is influenced by chance.
In such cases, good decisions can lead to bad results, and bad decisions can lead to good results.
The quality of such decisions can therefore only be measured by the decision-making process, not by the outcome.
The better the process, the more boring the process execution
Games can be roughly divided into three categories: Pure games of chance, such as dice (craps, hazard) or roulette, in which only luck plays a role. Games where only skill is important, such as chess. And so-called games of skill, where the outcome is determined by both luck and skill, such as poker, or indeed backgammon.
In the latter, there are fascinating aspects that can also be found in capital markets. If you spend enough time and attention on capital markets, you will realize that it is aspects like these that are far more decisive for success than any financial analyses, numerical models or forecasts. It is no coincidence that the most successful investors and traders are avid poker-, bridge– and backgammon players.
I recently experienced two such aspects quite unexpectedly with my son.
It was one of those hot Greek afternoons when, at best, tourists or dogs stray into the streets. Most others know the benefits of a shady spot at that time of day. Indulging in an afternoon nap, enjoying the company of friends over coffee, or playing backgammon. I recently did the latter with my son, who will be a teenager in a few years, and is delightfully adept at it (at learning the game, not at becoming a teenager)
He had grasped the game to such an extent in the ten or so hours he had played it by now that it was no longer merely tedious for me, but sometimes even exciting. I myself have played backgammon for more than 5,000, if not more than 10,000 hours.
Now once again the situation arose that my son with a certain dice combination (backgammon is played with 2 dice) could decide the game, which he had actually considered lost, in his favor. What fascinated me about this, and even made me feel like the „god of chance“ for a brief moment, were two things: on the one hand, the fervor with which he wished for this particular dice combination. What magical movements he used before throwing, what incantations he uttered while doing so, and what transcendent powers he invoked for help. On the other hand, the heartbreaking joy (sorrow) when he would actually (not) throw that single dice combination.
„Divine“ I felt, remembering my early years in the capital markets. When I still spent most of the time hoping, asking, and not infrequently even pleading for the successful development of my positions. And when my feelings, depending on the development, fluctuated between sky-high joy and irretrievably devastated. If there is a „God of chance,“ he must have looked down on me then with pity, as I now looked on my son, and thought, as I now thought, „Oh, my dear, if you only knew!“
If you only knew how little only luck can help you to your success. Because it’s just fickle, unreliable and unpredictable. How much more important it is right now to focus on developing your skills. The skills that will make your success more independent of the very luck you’re hoping for, begging for. There is so incredibly much for you to learn before it makes sense to deal with the vagaries of luck! Start right now, and block out the caprices of chance for the next few years.
If you only knew how much you are at my mercy, because your success depends so much on chance and mine so little. That you will only have a long-term chance of success in this game when chance is only a background noise for you, too, which enlivens the game with its unpredictability, but is of little importance for your success in the long run.
If you only knew how much I grant you this dice combination! I would give anything to see you always happy, even jubilant. If you only knew how hard it is for me that I nevertheless wish you not to be lucky too often. So that you learn as much as possible as quickly as possible, and especially so that you are saved from adopting playing styles that only work in combination with lots of luck. Yes, the victories will be particularly spectacular, but please don’t be a victim of such cheap sensations. And above all, I wish you little luck in the first years, so that you understand as soon as possible that here, as in all areas where chance plays an important role, the process is much more important than the individual game results. That here, as in most of life´s situations, a good process can lead to a bad result, and a bad process to a good one. And that’s exactly why you should (almost) always measure your progress by the process, not the outcome.
If you only knew how indifferent I am to whether you roll this dice combination now, and win the game. I am so sure that I am better at the game and that I will be the winner in the end that I am not at all affected by these 2-3 or even 20 tricks that luck may play on me.
If you only knew how much more uplifting and fulfilling the excitement is that one experiences when one is not concerned with chance, but with one’s own playing skills, strategies, and varying mental states. And how liberating, even empowering, the feeling is when one can calmly accept individual dice rolls for what they are: the component of the game that cannot be influenced. The component that makes the game, like life itself really, not only a cognitive challenge, but also a character challenge.
If you, dear reader, are actively involved in the capital markets, you should be aware of the character you represent in the above story.
The more emotions and hopes involved, the more reliably you portray my son. Emotions and hopes are a reliable indication that your success depends largely on luck. That’s why people are so happy about successful phases: they are happy because they were lucky. Only those who are indifferent to the daily events on the stock markets have a chance of success worth mentioning in the long run. They know that they cannot have any influence on these events, that they are merely erratic noise, and therefore offer absolutely no benefit for decision makings. Extraordinarily positive developments of their investments do not give them extraordinary feelings of happiness, but worry them just as much as extraordinarily negative developments: both are indications that an error may have crept into their processes.
If you know what you are doing, you will experience the developments on the capital markets, as well as the development of your own investments most of the time with one distinctive feeling: boredom. It is then quite clear in which range one’s own success will move in the coming years/decades. Where exactly one will stand within this range depends on coincidences that one cannot influence. Therefore, it makes little sense to waste time or emotions on that matter.
My experience has shown me that not only do all newcomers to the capital markets (without exception) represent my son’s character, but so do the vast majority of all other investors and traders. Therefore there is no shame in being one of them, too. It is important, however, to be aware of that fact, and to proceed accordingly.
If you deal with the capital markets solely to invest your assets sensibly – and not to pass your time or to pursue an (expensive) hobby – then in almost all cases you do this best as a spectator. As someone who invests in simple and inexpensive index funds (or ETFs). Or, as one of the most successful investors of all time put it:
„Unless an investor has access to ‚incredibly high-qualified professionals,‘ they should be 100 percent passive – that includes almost all individual investors and most institutional investors.“
David F. Swensen