On the drive to an abbreviated New Year’s Day poker session (which yielded +$1K in two hours, a good omen for the year ahead), an FM radio DJ presented the following stats:
- 45% of Americans make new year’s resolutions.
- Only 8% successfully keep them (however that’s defined).
Who knows how valid those numbers are. If they are in the ballpark, though, the picture is a bleak one. (A speculation: Your local gym sees bigger spikes in January membership revenue than any other month of the year, with corresponding lapse / cancellation spikes in March and June.)
This type of thing is worth remembering when considering investing advice directed at the general public. Typical investing dogma assumes “you have no discipline” because, well, in aggregate it’s a reasonable assumption. To the degree you look like the average investor, you need serious help (and need to be protected from yourself).
And yet, as Nietzsche wrote, “The higher we soar, the smaller we appear to those who cannot fly.” The more you do to set yourself apart, the less that one-size-fits-all advice for the discipline-challenged masses need apply.
In that spirit, a Mercenary Trader new year’s resolution for 2013: Maximizing FLOW.
Our version of flow has a more nuanced meaning than the usual…
The succinct definition of flow (via Wikipedia) is “complete absorption in what one does.”
A little more expansively, Mihaly Csikszentmihalyi – a pioneer of the subject – roughly defines flow as an optimal configuration of the challenge / skills balance, or CS Balance.
If the challenge is too high relative to skill, anxiety and worry result.
If the challenge is too low relative to skill level, boredom and apathy result.
Hitting the sweet spot, when the challenge is engaging but appropriate to skill, results in flow.
In respect to work, performance and life fulfillment, we want as much time in flow as possible.
This requires “pushing the envelope,” cultivating new skills, exploiting opportunities while maintaining balance, and so on.
FLOW = Fluid Local Optimum Winship
Along with Mihaly C.’s idea, we see FLOW as “Fluid Local Optimum Winship.” So let’s dig into what “Fluid Local Optimum” means.
The essence of Fluid Local Optimum as a concept is maximizing total fulfillment (via correct strategic focus) at any given moment. Wherever you are, whatever you are doing, there is a course of action that provides the most advantageous result in terms of work, play, and life in the context of a coherent whole.
When working, you are giving 100% and laser-focused on taking the best strategic action. When playing with your kids, you are 100% focused on them. When enjoying a romantic dinner by candlelight, you are totally immersed in the person across the table from you, and so on.
The “fluid” aspect relates to a natural and powerful flexibility: The ability to “pay attention,” as the old zen masters extol, and to compartmentalize in a healthy way as such that your forces are concentrated appropriately at any given moment. Competition is total competition. Relaxation is total relaxation. Shifting fluidly from one mode to another, furthermore, is a specific life-enhancing skill that improves with devotion and practice.
“Fluid Local Optimum” also has specific application to poker and trading — and any competitive endeavor involving wins and losses, really — where total performance is the result of cumulative actions across a spectrum of engagements (the net of accumulated results).
As lovers of the game, there are plenty of reasons to play beyond money. And yet, profitability – net accumulation of dollars, dosh, shekels, benjamins – is the ultimate measure of success for what we do. Risk-adjusted profitability is what it’s all about.
As such, consider the following poker and trading principles:
Net profitability = inflow minus outflow.
A well managed loss trumps a poorly managed win.
It’s not how often you win or lose, but the net ratio of wins to losses that counts.
Some of these sessions will be winning sessions. Others (unless you are Bernie Madoff) will be losing sessions.
Because your net profitability comprises winning sessions minus losing sessions, or inflow minus outflow, how you handle the losing sessions becomes paramount. The manner in which you lose will deeply determine how much you win, because your losses are subtracted from your wins.
To further underscore the point: It often takes more skill (and emotional control) to minimize losses than it does to maximize wins. As a result, there is a greater skill differential — a greater ability to set one’s self apart — through the handling of bad runs versus good runs.
To wit, anyone (maybe almost anyone) can win big when they are flopping straights and full houses left and right. But bad players will consistently lose $3,000 on their bad nights, where a good player will only lose $500, and so on. The art of winning is inseparably intertwined with the art of losing, because minimized losses contribute to larger net cumulative wins.
In trading the idea is the same. The trader who runs up huge gains on a hot streak, then blows it all out when markets turn against him, fails to understand the net profitability concept.
The resulting reality is counter intuitive to the average trader, let alone the typical undisciplined American who can’t even keep a new year’s resolution:
The goal is still absolute profit over the full range of sessions, of course.
But the total amount of that profit is maximized by minimizing outflow (losing as little as possible) when losses are required.
This brings us back to the “fluid local optimum” concept: If your goal is winning over the long haul of accumulated sessions, then there is never a situation, or even a moment, when less than optimal decision making is desirable.
On a technical level, the “fluid” part relates to the fact that:
The focus shifts seamlessly (fluidly) between maximizing profit and mitigating loss (as appropriate to situational context).
If you let yourself tilt, you suck…
Now let’s get gritty for a quick minute.
Poker players have a condition known as “going on tilt.” There are different kinds of tilt: Rage tilt, self-pity tilt, revenge tilt, and so on. The central feature of tilt is throwing strategy out the window – or letting one’s game degrade at the margins – as emotional response to adverse events takes over.
Traders and investors go on tilt too. Losing X trades in a row… getting emotional as the market continues to act “irrational”… getting angry at the idiots who refuse to see the value in that brilliant stock investment, as the share price drips down day after day… markets are very much a place for emotions to rein and tilt to creep in, leading to financial losses of moderate to severe amount (or in some cases, total blowout).
Here is the gritty part:
There is no excuse for tilt. None. If you let yourself tilt, you suck. Sorry, but it’s true.
The good news is, suckage is not a permanent condition…
Many commentators on the poker and trading game are friendly and accomodating to various levels of tilt. “Oh, everyone tilts once in a while.” Nope. Not everyone. It may be true that most competitors tilt, but it doesn’t take away from the fact that tilting is a weakness that dilutes and devalues one’s performance like nothing else.
Have we ever gone on tilt? Of course. Lots of times in fact… but in the past, while learning the game. Tilting is something you do as you are growing… while you are in the process of honing and perfecting your craft.
There is not, in otherwords, a permanent divide between those who tilt and those who don’t. There is only a separate class of traders and poker players who tilted at one time – perhaps for an extended length of time – but then figured out how to stop doing it.
Understanding FLOW – Fluid Local Optimum Winship – is a recipe for transcending tilt.
Managing losses (and bad runs) is as critical to total performance as managing wins.
The skillful player can differentiate moreso in periods of adversity than periods of good fortune.
What matters is cumulative net. To bring home the maximum, you must be a competitor all the time.
This is also a recipe for living the best life…
It’s mind blowing how sloppy so many poker players and traders are. They put the time and energy in… they put their hard-earned capital at risk… and then they shrug at half-assed efforts or give themselves a pass on immature (and costly) responses to unremarkable adverse excursions. Why???
Now let’s get big picture zen for a minute. FLOW is not just about winning in markets and at the poker table. It’s about big picture winship in everything.
To make money in poker and trading, you must occasionally lose money (manage drawdowns and hopefully minimize them). This is not just a “sad fact,” it is a simple reality that is embedded in the existence of opportunity itself. (We laugh at those who lament the reality of occasionally having to lose. If you were able to devise a strategy that never lost, who would play with you? And if others were able to do the same, who would play with them?)
Life is similar in that, while poker and trading require drawdown management, life requires “undesirable activity management.” Put plainly, sometimes you have to do shit you really don’t want to do.
Now, as Steve Jobs once said, if you wake up too many mornings in a row and don’t like what you are doing, you should change something. But as a general principle, even if you have the best job in the world – and the Mercenary setup comes pretty damn close! – there will still be grind activities, blah tasks, undesirable shit to get done etc. that necessarily contributes to maximizing life on the whole.
And this is where FLOW contributes to living the best life. If you have some nasty project to get done, just get it done. If the reality of your afternoon is that it isn’t going to be so hot, then go ahead and immerse yourself in whatever the task is at hand. Think about the full picture, including the net cumulative benefits (future benefits) of getting XYZ done efficiently and smoothly with minimal resistance.
We forget who said it first, but concentration is like sunlight. When you marshal your resources of focus, it’s like using a powerful magnifying glass. In contrast, all too many people take diluted half-assed approaches to things: Half at work but half day dreaming. Half committed to a course of action but half sulky and resentful. Half maintaining a healthy perspective but half angry. Half committed to being a true competitor but half lazy / holding back. And so on.
Maximizing FLOW, then, means understanding that 1) there is always an optimal decision to make; 2) managing losses, and adversity in general, is a key aspect of winning; and 3) the more of a true competitor and life maximizer you become, the closer you can come to living the best life, however you choose to define it.
Here’s to kicking out the FLOW jams in 2013…