Here’s something to think about that I think has implications beyond trading. It’s an obvious fact that to make money in trading — or anything, for that matter — one must be right. Or, at least, mostly right; more right than wrong with the difference being a gross margin of sorts.
From there, I think many people make what I believe is an erroneous leap: that to be enormously successful one must be right most of the time. But if you’ve developed a trading system where the great majority of your trades are winners, or an entrepreneurial approach where most or all of your business ventures succeed, it can likely only be because you are making high-probability decisions. High probability equates to low risk, which equates to small returns. That’s success, but it’s usually not enormous success.
Try it out. Go deposit your money in the local bank and you are virtually guaranteed to earn a return greater than zero 100% of the time. You can open a savings account or CD with virtual certainty of being right about earning a profit. You just won’t make any real money unless you’re into the seven figures already and just want to relax.
Paradoxically, I think the key to mega success is a whole lot of
failures. To strike it really big, you need a system that’s wrong 90%
of the time or more. But, that’s not all. Often, people crash and burn
because they erroneously think you have to be right most of the time, and then combine that with high-risk for
high-return trades and ventures. Thinking you have to be right puts you in a
psychological position of being married to your decisions, of having to defend them. So if you’re the kind of trader that has to be right most or all of the time, go buy some Spiders, Diamonds, and Qs, and just sit tight. Otherwise, your need to be right will motivate you to go for the hopeium pipe and wish for a turnaround. High risk/reward means you’re leveraged, which means that when things go south you lose your capital in huge chunks in big hurries. Then, you’re out of the game.
To achieve mega-success — say, a net worth north of $10 million — requires one of two things or both. You have to engage a high risk and/or you have to be very, very lucky.
But here’s the key to the whole thing: you make high risk bets; but because they’re high risk, they’re low probability; and because they’re low probability, you must do lots of them in order to ever expect success. And how do you do lots of them? Place small bets; learn to delight in being wrong so you can move on to the next thing; cut your losses early. Then, when you finally hit a winner you ride it for all it’s worth.
The above applies mostly to speculation in the stock market, real-estate ventures, and business speculation. But I think the principle can be applied to other areas of life as well. The most obvious that might come to mind is selecting a mate, or even friends. It ought to seem obvious that one is more likely to have a good spouse and good friends if one has played the field extensively and quickly, discarding undesirables in a heartbeat. It also ought to seem obvious that the way to get into trouble is to invest to much too early in a relationship, deciding you have to be "right" about that person.
The other area that comes to mind is actually the most important to civilization: trial and error; or, more simply: tinkering. Most civilization changing ideas, knowledge, and technology came as the by-product of a lot of messing around, littering the place with the wrong, the stupid, and the worthless. Then, every now and then, BINGO.
So I think the great paradox is that to really set yourself up for a great big huge success in life you’ve got to be wrong a lot — in fact, most of the time. You’ve got to be wrong a lot more than right in order to set up the right combination of risk and chance. Needing to be right is being too cautious, and being too cautious is never what sparks fortunes.