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Results Are For The Birds

August 10, 2017

While reading a Michael Batnick article I came across a quote that I have seen repeated ad nauseam and which I find enormously problematic. It’s from mathematician Benoit Mandelbrot, who said “Winning strategies tend to have a brief half-life.” My dilemma with that statement is, ‘why do you refer to it as a winning strategy when it no longer wins?’

 

Before I go on to critique Mandelbrot I should preface that I am a 21 year old kid who knows very little about too many things, and I’m out of my league when talking about finance. But, to be a proper acolyte of the Ritholtz firm I must have an unreasonably strong opinion about something.

 

“It’s been said that everyone has the right to have that one topic that they are utterly unreasonable about. That one subject where no matter what anyone says, they are so sure they’re right that it’s a waste of time even trying to talk them out of it.” - Josh Brown

 

Since ‘simple beats complex’ is already monopolized by the Ritholtz pantheon, my unbending creed is don’t be results oriented.

 

When I began seriously tracking my online Hold ‘Em results I believed that I was a winning player. My early results seemed to confirm that view. After the first few weeks, during which I played about 15,000 hands, my results graph looked like a giraffe and I couldn’t have been more thrilled.  During the next 35,000 hands, however, I blew through my entire bankroll and two more deposits. Unsurprisingly, while playing those 35,000 hands I still thought I was using a winning strategy, simply because my first results were positive.

 

On the poker forums I frequented there was a sentiment that the best players preached to all the newcomers: stop being results oriented. Not being results oriented is an easy enough concept to grasp. To put it simply, you don’t judge the merit of a decision based on the results but rather the logic of the decision made with the information available to you. Sounds simple but it is so incredibly counterintuitive to how we live our lives.

 

School, for example, is an entirely results oriented institution. The grades you receive determine your standing not the decisions you made to yield those results.

 

I feel there is a certain attitude that investors take when critiquing their past ideas. The old strategy that produced good results made them feel so confident that when it no longer worked it was because the market ‘changed’ instead of their strategy being a losing one to begin with. I went through the same struggle with my poker career. Because I started out winning I had complete faith in my process, which made it easy to shrug off bad results. When I initially started losing, instead of blaming the markets, I blamed variance, chalking up all my losses to ‘running bad.’ It wasn’t until I lost too much and was forced to reevaluate my strategy that its shortcomings became obvious. By evaluating our results instead of our thought process we end up focusing on the wrong things that lead to further bad decisions.

 

Investors and clients alike need to be less focused on results and more focused on planning if they ever wish to truly feel comfortable with their positions. If you used a “winning strategy” in the past that no longer works now, it was always an incompetent strategy to begin with.

 

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