A while ago I read the book Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets and thats been playing in my head for a while but today I got a few more inspirations and that is why I have decided to write an article about it.
I was watching TV and there was an interview with a CEO of a major bank who in the last couple of years has earned over 400 million USD!…
Ultimately there is one truth, everyone is born into this world alone, and everyone dies alone.
However, It is very much up to chance how your life goes.
Will you be the child of a multimillionaire CEO, or the great granddaughter of the owner of the Hilton Hotels, or will you be born in a third-world country somewhere in the middle of nowhere?
What Nassim Taleb,the author of Fooled by Randomness,has become so well known for, is his theory of the Black Swan Event.This refers to those freak, one-of-a-kind events that happen once every couple of decades and deemed impossible by many so called experts, and yet they do happen.
Why the term Black Swan? Mr Taleb has an analogy where everyone in the world has only seen white swans. A study was conducted of 4000 swans and all of them were white…therefore it must mean that every single swan in the world is white.BUT…just one sighting of a black swan will disprove the entire statement.
Its the same with other things. Because something goes right 10000 times does not mean it will go right the next time…in fact, every time it goes right is one time closer to the time it goes wrong.
If you flip a coin 50 times and it lands on heads every time ,what will it land on? You would say that it would land on heads again, but every time the coin is flipped the circumstances chance so it has a 50% chance to land on heads or tails. Unless of course the coin is bias and always lands on one side OR it is a theoretical experiment where the coin is places in exactly the same position and flippend in exactly the same way with the same strength every time.
Nassim Taleb was a trader and Ive read articles that he made around 40 million usd in the 1987 stock market crash because of his Black Swan theory and he knew it was coming.
If you have been following the news lately, financial markets are in the same predicament as 1987 and have dropped close to 35% in the last year. Although many people claim they never saw it coming and it is a freak event, there are the contrary investors who have been predicting this crash from as early as 2004.
It is only the result of creating money out of thin air, and lending it to everyone.
Something can only go up in price as long as there are buyers. When there are no more buyers, the stock peaks and it comes crashing down. The economy moves in cycles, and there was a famous trader called Mr Gann, who discovered these cycles, and his major cycle was one of 20 years.
He also speculated that years ending with a 7 are negative for financial markets.
Well, it so happens that financial markets came crashing down in 2007, 20 years after the great stock market crash of 1987…coincidence? Many things also happen due to self-fulfilling prophecies, where something is predicted to happen in the future, and if enough people believe it, then their actions will lead to the fulfillment of that prediction.
Take as an example that someone says gold will go up this year. If enough people believe that statement, and enough people start to buy gold because they believe it will go up, then suprise suprise, gold goes up.
When things go exceptionally well, people tend to relate their success to skill and hard work.
Of course it is true that working harder, smarter and better will get you further in the world, luck and randomness play a huge role. It is a numbers game, which merely dictate that out of 1 000 000 lawyers, 10 will become the most famous and well paid in the world. Out of 20 000 stocks, 50 will always outperform and make you a millionaire, and when you incidently own one of these stocks and it does make you an instant millionaire, was it because you are so skilled? or was it because you saw an ad on TV that day about a company that got your attention and you decided…”Oh well, lets just put some money into that company for fun”.
It is especially true with card games and gambling like Poker and Blackjack. AS a skilled and professional player in the long run you can beat the game and come out a winner, yet the variance and swings are huge and you may just have more losing days than winning days.
I have done a lot of research and reading on Blackjack, and it made many professionals very rich in the days of card counting, a system that was developed to know when you could bet big and the cards were in your favour, and when you had to bet small when the cards were in the casinos favour.
You see, cards were dealt from one deck placed in a shoe. The system was based on the fact that every card drawn from the deck was NOT and independant action, but had an effect on the other cards remaining in the deck. Unlike Roulette, in which everytime the wheel is spun, it has absolutely no relation to the previous spin.
The casinos obviously were angry at losing so much money, and have come up with many ways and systems to stop the counting, and they have, since most modern cainos reshuffle their cards after every hand making counting impossible although there are still other methods that can be used to increase your favour. Most people dont know that the casino has an edge over the player of 8%, because I’m sure that if they knew that they wouldnt touch the game! I was in a casino a few weeks ago with a casino poker game where you had to wager 60 to win 20! How crazy is that?There is a way to play Blackjack called basic strategy,which when followed, reduces the house advantage to 0.5%.However, this is still negative for the player!
Blackjack continues to be the most popular casino game and its possible to make a lot of money from it, in the long run you can win…just be smart about it and do your homework before you start playing!
All in all, when things really go your way, just remember to ask yourself, is this all due to me, or is luck playing a bit part in it, just so that you don’t get overconfident and lose it all again:)