There is an interesting anecdote in a recent Bloomberg story by Kit Chellel about a gambler, Bill Benter, who created an algorithm that allowed him to profitably bet on horse racing. In 2001, Benter essentially walked away from a $16 million payday on an exotic multi-race bet, essentially to allow himself the freedom to continue betting in the future. As Chellel writes, “Publicity is a hex for professional gamblers.”
Not many people have the ability to walk away from a payday like that. The proceeds from the unclaimed winning ticket would eventually go to charity. A recent winner of the Powerball lottery, $264 million worth to be exact, sued the New Hampshire lottery commission in order to keep her identity hidden. In the financial markets the issue of publicity and anonymity are moot. That is, unless you want to publicize your gains/losses as the trader in the tweet below did.
Yesterday, before Walmart earnings, a trader was up $53,000 on the single position. They were showing it to everyone on the Internet.
Then yesterday happened.
These two screenshots show the before and after.
I do have mad respect for this dude showing his account up AND down. pic.twitter.com/bUXSwMCblj
— BTFD Coach Brad Scheplick (@scheplick) May 18, 2018
When you win the lottery or hit on an exotic horse bet you know exactly how much you have won. The problem or participants in the financial markets, or the startup scene, don’t know whether the gains they have amassed are durable or whether they are at-risk of ebbing away. (The calculation in the venture capital world is especially tricky. See this post about why you ‘should say no to early liquidity.’)
Justin Castelli at All About the Benjamins has a post up talking about the risks, early cryptocurrency adopters are taking by not diversifying some portion of their profits into traditional assets. This despite the fact that prices for most cryptocurrencies have come down significantly since the beginning of the year. Castelli writes:
Early cryptocurrency investors are not much different than Enron and GE employees; they’ve built wealth that could be life-changing, but that wealth is at risk due to it being concentrated to a single asset class. They have a choice: do they ignore the lessons from Enron and GE, or do they begin to diversify to protect their wealth from cryptocurrencies losing their luster?
Cryptocurrency enthusiasts are no different than other investors in that they have been both smart AND lucky. There is no shame in being lucky. Managing gains, especially large ones, is just as difficult as managing losses. Lawrence Hamtil at Fortune Financial writes about the experience of an investor in the hot uranium market about a decade ago or so.
That being said, it must be admitted that luck is a big factor in investment success. But luck as an explanation can be overrated, too, as this experience taught me. To some extent, it was the man’s good luck to have had the resources available to invest when he did, but he also had to have the conviction to follow through and stay committed. It was also poor risk management, not just bad luck, when the tide went out and his portfolio plummeted. In sum, luck matters only in so much as one is equipped and willing to exploit it.
Exploiting opportunities isn’t easy. Not only do you have to recognize them, but you also have to follow through. That is why some people say you should ‘declare victory’ once you have amassed enough to retire comfortably with little (or no) financial risk. Joel M. Schofer at Humble Dollar writes:
Bill Bernstein recommends that—once you’ve won the game—you should stop playing. What exactly does that mean? Bernstein suggests you dramatically reduce the risk you are taking with your retirement portfolio. To him, there’s no sense in taking risk you don’t need to take.
As Schofer notes that is easier said than done. There is likely some middle ground. Taking gains, especially lottery-like checks, can provide you the ability to fund a stable and prosperous future. With that accomplished there is the psychological freedom to pursue a more diverse set of opportunities. Those may still be in finance and business, but they may also be in wholly unrelated areas. As Jonathan Clements, also writing at Humble Dollar, highlights the benefits of putting your financial life in order early so you can spend your later years pursuing your passions. Clements writes:
I’d argue it makes more sense to pursue our passions in our 50s than our 20s. There are obvious exceptions: If you have athletic talent, it wouldn’t be wise to delay your NBA tryout until age 55. But for those of us who aren’t seven feet tall (or, for that matter, six feet), saving first and pursuing passions later makes a ton of sense. My advice: Spend your 20s and 30s getting yourself in great financial shape—and one day your current self will be filled with gratitude for your old self.
Getting into great financial shape isn’t easy. However if you have an opportunity, small or large, to put your future self in the enviable position to pursue freedom and passion, don’t miss out.