Rolling the Dice or Reading the Price
3 simple steps to convince your uncle that you are not a gambler
When people get to know that you are a trader of the stock markets, their first reaction usually is “Oh! you’re a gambler”. This is usually followed by some back-and-forth arguments, & sometimes heated conversations, with both sides refusing to understand each other’s point.
Rather than getting all aggressive in such situations or just sulking in a corner, here’s how to counter them logically point-by-point in 3 simple steps.
Step 1: Define luck & skill
Straightforwardly admit that there is an element of luck involved in trading, just as it is involved in a lot of games, events, and even life itself1.
So what is gambling? What is luck? Let's first have a consensus on how we define 'gambling' or ‘luck’, with an easy-to-relate example.
Suppose you are playing a game of snakes & ladders, & your counter is on number 98. If your dice rolls 1, you'll get bitten by the big snake on number 99, that will take you straight down to number 41.
Now suppose you’re playing with a young kid, & you want him to win that game. No matter how hard you try, you can’t ‘make’ the dice roll a 1.
The point is, in a game of snakes & ladders, ‘can you lose on purpose?’ The answer is no. Can you lose on purpose in stock trading? Definitely.
Just like these examples, an activity where you can’t wilfully lose2 is not skill & hence is plain luck, or what you call gambling.
Step 2: Introduce the luck-skill continuum
Once you’ve established what gambling or luck is, the next step is to introduce the view that instead of segregating anything between pure luck & pure skill, the more practical (& preferable) approach is to see things as a combination of both, & try to place them on a spectrum ranging from (almost) pure luck to (almost) pure skill.
From what we learnt in step 1, there are certain games that are almost 100% luck. For instance, the game of Roshambo (rock, paper, and scissors), Spin the wheel, Snakes & Ladders, or a simple lottery ticket.
On the other extreme, we have activities with almost 100% skill, like Chess, the game of ‘Go’, Mountain/rock climbing, or Long Range Competitive Shooting.
In between, we have a very large area of hazy overlap between luck & skill, in games like Poker, Scrabble, Blackjack, & Backgammon3.
Stock trading also falls in this overlapping region of the luck-skill spectrum. Let’s assume you have a portfolio of 10 stocks with similar fundamentals & similar charts. Still, 6 out of the 10 turn out to be losing trades. The 4 winning trades, though, more than make up for these losses. You repeat this process over & over again, not knowing which 4 out of every 10 will be winners. And still end up being consistently profitable.
In trading, apart from black swan events, a common element of luck is created by the imperfect nature of your thinking process. Why did you make that decision that ended up in you getting a losing trade? On some other day you might not have made that choice. Still you are the same trader with the same level of skill.
Step 3: Explain the importance of the sample size
By now, you’ve established that trading is not gambling, rather it’s a game of predominantly skill with overlaps of luck. Rather than the amount of luck, the more skill you have, the more likely you are to be a profitable trader. That is proven time and time again in real-life experiences & in tournaments like the U.S. investing championships.
But this is proven only in the long run. In the short run, just about any trader can beat anyone else, given enough luck. On a lucky day, a lousy trader like you (uhm…) can beat a star trader like Minervini4, for instance.
Or suppose you are playing just a single ball in the game of cricket with one of the best players, say Virat Kohli. He swings & misses, but when you are batting, you nick the ball & end up in a four. You emerged the winner over a pro in that single ball. This is a random outcome. But will the outcome be the same in, say, 6 balls? 10 overs? 20 overs? You are not looking so confident now, as the outcome looks very bleak for a novice like you.
So, over the long run, the net luck of a player mostly cancels out with the net luck of the opponent. And it’s skill that decides the broader outcome. Over a large sample-size, randomness is not the most likely outcome in stock trading.
Yes, you can be a lousy trader, & end up blowing your account. That’s not bad luck; that’s your level of skill (or rather the lack of it). The more skilled you are, the more ‘lucky’ you will be. While both are mutually attractive entities, only one component of the two is in our hands.
TL;DR
Any activity where your actions can change the outcome, where contests & championships can take place, where decision-making gets feedback, & where randomness is not the most likely outcome over a large sample-size, is not gambling; it’s a sport.
Yes, people can choose to play sports like a gamble. But for the ones who are skilled, luck is not the major factor in their success. And for these skilled players, stock trading is not gambling.
So, the next time you get bombarded by “Oh!-stock-market-is-just-a-gamble” jibes at a dinner party by fixed-deposit uncles and aunts, what you need to remember is the thread above. Probably, if some of them have an open mind, they will see your point of view.
What was the tagline of the Bollywood movie ‘Zindagi ek Jua’?
You guessed it correct. It was ‘Life is a gamble’.
This concept was mentioned in the ‘The Success Equation’. An amazing book by Michael J. Mauboussin. Highly recommended reading.
Backgammon is one of my favourite indoor games. You can catch me on the Backgammon Legends app for a game.
Good one Nitinbhai .. enjoyed reading it..
Lovely reqd nitin, really liked how you differentiated btwn different sports and games based on luck and skill. Nice !!