Turning Lemons Into $$

Some Practical Advice for today's times

There is a lot of anxiety out there.

I work in a very safe occupation at a company that is doing fine, and even at that, talking to co-workers it is like the sky is falling. Some have kids who were working in roles that are impacted by shifting funding. Some are later and life and depressed about their 401k going down. But as a gauge of anxiety, when people who are fine are in pure panic mode, it tells you something.

Then finance and market commentators (who remember need to write about things to get clicks and need to write emotionally to get clicks since clicks = revenues) are out with predictions of

Let’s put aside all the politics or opinions on whether the fear the sky is falling is warranted or not, and instead see what we can learn about the recent market and economic situation so we don’t make the same mistake next time.

If you want to get wealthy, one of the best things you can do is take an honest assessment of your actions and try to improve.

I personally think a lot of the panic is from people who convinced themselves they were geniuses during the historic bull run we have been on, who are reluctant to admit they made a mistake. Easier to blame DC or things outside your control than to say ‘hey, maybe my success wasn’t due to my massive smarts’.

Remember, everyone is a genius in a bull market. (And if you allow me to mix trite sayings) but it is in a bear market where the tide going out shows you who was swimming naked.

But before getting into the lessons, lets cover something important to get the right mindset.

Outcome =/= Process

This is a tough one to really figure out. Did a positive/negative outcome result from a good/bad process or just random noise.

You can do everything optimal and still get a bad result. And you can do everything wrong and still get a good result.

Over a long enough time period, a good process will outperform a poor one. But on smaller scales there is a lot of noise in the result.

To put it in an easier to understand context, lets take an example of poker, particularly Texas Hold’em. Imagine 2 players going head to head. Player 1, Midwit Doggie, gets dealt a 2-7 offsuit, the worst hand to be dealt and Player 2, Gambler McProbability, gets pocket rockets (2 aces, a really good hand).

McProbability has almost a 9-in-10 chance of winning and he does the right thing and raises before the flop (next round 3 cards get flipped over). Midwit Doggie puts more money in to call.

The flop comes and there is another ace, putting McProbability at over a 95% chance to win:

But despite having nothing going in their hand Midwit Doggie calls the bet again. In fact both players are now ‘all-in’. They turn their cards over and just wait for the last 2 cards to come out.

Midwit Doggie gets the flush and wins.

Hopefully it is obvious in this example that despite winning the hand in the end, Midwit Doggie’s process was flawed. He was willing to go all in with a hand that had almost no chance of winning. In fact, since he went all-in before even knowing what McProbability had in his hand. 3% chance of winning isn’t even the worst probability of winning at that point. Let’s say McProbability had an ace and a queen of hearts instead of pocket rockets:

The fact the significantly worse hand ended up winning is what is called ‘random noise’. If you deal that starting hand 100 times, 90 of them go the other way. Doggie staying in and betting is an example of a flawed process (poor decision making) and good outcome. Conversely, McProbability’s fate is an example of a good process (betting more as his probability of winning increased) and a bad outcome (losing).

This is fairly easy to see in games like poker, which make for a good example, but can be a lot harder to see in real life.

Poker has a limited number of cards (52) which means even if there is a lot of potential outcomes, it is finite and measurable. Additionally, the rules of the game don’t change, so you can play over and over with all the constraints and probabilities the same.

Life is different. There is near infinite possibilities, the rules are changing, no one situation you face is confined by the same constraints as the prior situations. Sure, things ‘rhyme’, and you can learn from mistakes, but it is much more chaotic. That makes it harder to look back and know exactly what was process error vs random noise that lead to a particular outcome.

Coming full circle, this means most people tend to err on attributing good outcomes with good process and bad outcomes with randomness (things outside their control). Hence, they never do much growing and developing.

Long preview this week, but it sets the stage for the advice to come about what to do now and what to learn from how the last couple months impacted you.