I think about smooth stretches of things going well, where life just gets better and I go from strength to strength and rough patches where it seems a karmic Pareto principle (that “80/20” rule) seems to be set on reverse. I think about all my fellow risk-takers in markets, business and life, my friends and acquaintances as well as some of my regular readers and what they are going through.
Some of these regular readers have very generously reached out to me. They told me about themselves and where they are in the markets and what they would like to do. I wanted to write something relevant and I rediscovered something I wrote almost five years ago. Those thoughts still resonate and after some new tweaks, I want to share them.
When I first started investment and speculation, my “process”, such as it was, focused on ideas and reassuring myself about the “rightness” of my views versus the crowd. It was about buying cigar butts and the proverbial “fifty cent dollar”. Over time, it’s evolved into time, price and risk driven decisions in equities and futures. Now it’s about being able to play the game as best as I can, as long as I wish.
If there was one thing I learned in the past few years of trading, there are many paths to “heaven”, and they all deal with decidedly non-linear, bumpy and bendy speculative operations. Stock picking, price following, pattern reading, mean reverting, value/capital structure arbitraging plays all have one thing in common. The best market “operators” are rewarded by “lumpy” bursts of profits, bright munificent fireworks of “genius” or “prowess”, and otherwise endure or sleep through hopefully tepid interregnums of thumb-twiddling at best (or at worst, horrific givebacks of gains).
Some operators’ performance averages make it seem that they can’t help but print money year after year, perhaps for decades, but the reality is the best of them either ride a roller coaster / bucking bronco, or sit on a white sand beach, with a sweet board, waiting for “toasty” waves. Given enough time, would be “money printers”, who are in effect steamroller-avoiding nickel pluckers, will inevitably run into a bad stretch and there are two scenarios. Those who are levered up during such a bad stretch are put away and find new callings and ways to earn bread, butter and board. The humpty dumpty lumpy breadwinner, however will wait, respectful of the magic optionality of a dust-collecting bank-roll, with egos sublimated into hobbies, long walks, book reading, wind surfing, skiing, hobo rail riding and similar sundry recreations.
This is where you will find a variety of lumpy return pros like Warren Buffett, Paul Tudor Jones, David Harding, Bill Dunn, David Einhorn, Seth Klarman, Mohnish Pabrai, Jim Rogers, Li Ka Shing and I’ll include Jeff Bezos* to make it 10 fingers worth. There are many more. These are just some of the racing pros who can handle a Grand Prix level race, and yet are probably the most safety-conscious road drivers you’ll find on Sunday outings. They know when to make a bet, how much, when to press it, when to fold and how to build their bankrolls. (*When you think about it, for Bezos to take $1m of “tough raise” and go from being derided as a book seller to planetary platform builder involves a whole lot of compounding.)
In life, it’s much the same, you may live through great stretches of smooth success, and then low/quiet periods or rough patches. Your job is to do your best throughout it all, and try and be consistent in habit and outlook. It’s not easy to remain consistent when life’s karmic pareto principle is set in reverse, is it?
Here’s the thing to keep in mind. If you’re lucky, you have a “tomorrow” to wake up to: you will have to wake up and shower/bathe, take the kids to school, go to class, eat, go on dates or nurture/please your mate/spouse, pay your bills, mortgage and/or rent. As I just said, if you’re lucky you get to string together a lone line of tomorrows populated with such details. Glamorous huh? What would you give to have even just 18 minutes, never mind 18 months, of what the “lumpy return pros” enjoy? But wait a moment, let’s tie this back to life on Earth. The same planet which enjoyed by the “lumpy return pros” is populated mostly by folks with “lumpy return amateurs” whose lifestyle is the opposite.
If you take a step back, most people on Earth have to step their tomorrow game JUST to keep breathing and eating. Their lives may be marked by 18 year periods of rough patches and not 18 months, 18 weeks, 18 days or 18 hours of what we enjoy. If you think about that reality for most folks, then my modest suggestion that you consider consistency in habit and outlook might in fact be a luxury you can easily afford. Before I get too “new age” and spiritual, I am saying to sit still — perhaps metaphorically, or even literally, on the beach and do “nothing” until the next toasty wave arrives — is in fact part of the reward.
Don’t like that metaphor? Want it more fun? Okay, then life is daily parade of party invitations. Only thing is you don’t know which ones are lively and one for the books and which ones either sent you to the emergency room or worse stretched the minutes into hours. In that case: Keep going to each party of all your tomorrows and occasionally you might win some prizes at the door. You just don’t know when. If even a festive metaphor still doesn’t feel right then let me state it bluntly: Keep striving and surviving. There is no certainty about which day brings the win and which day is your last. The only certainty is nothing will be won if nothing is done. You accept the invitation and the mystery of each tomorrow.
What is common among the best lumpy market operators, is their ability to deal with uncertainty, day after day. They strive and survive and are content to wait and then act when they can. They deal in risk and time, allowing them to set up the size and price depending on what their tomorrows offer them. Over time, each of the aforementioned pros, and their colleagues are able to manage the reality of uncertainty. The best of them deal with a changing market environment and shifting opportunity costs for their specialities, and can pick their spots and moments to play. Otherwise they stand pat and sit on hands, happy to go play and pursue other passions with one eye peeled for the next play.
I know from past experience, a change is coming for me personally, and I near the end to 18 months in relative quiescence, negotiate past the last of a series of rough patches and the karmic pareto switch in my life flips towards smoother stretches. I look forward to the coming 18 months and I wish you lots of lumpy good luck ahead.
Originally published at www.rooster360.com on January 17, 2017.