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Investing Advice: Why Winners Keep Winning

Posted On May 18, 2018 1:42 pm
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To start, imagine we have 400 marbles in a bag equally spread across 4 different colors (i.e. 100 black, 100 blue, 100 red, 100 green). Now we draw a color at random and add 1 additional marble of that same color back to the bag. So, if we drew a green marble in the first round, we would have 101 green marbles, 100 red, 100 black, and 100 blue in the bag at the end of the first round. We would keep drawing marbles and adding the 1 additional marble to the bag over 40 rounds and then end the game.

One such simulation of this game could look like this (Note: the colors represent the marble market shares in each round):

However, what if we rigged the game such that we gave a particular color an advantage to start? For example, instead of giving 1 additional marble in each round, we give 100 additional marbles in each round. If we did this, one color would have a market share of 40% (200/500) while the remaining colors had a share 20% (100/500) starting round 2. This is a starting advantage of 20% (40% — 20%) in market share. One such simulation could look like this:

As you can see, the green color starts with a huge lead and never gives it up over time. Across 1,000 simulations like the one above, the distribution of final market share for the advantaged color (i.e. green) could look like this:

With that 20% initial advantage, the final market share increases significantly. What is even more amazing is that this advantage was only given in the first round and everything after that was left to chance.

Think about the story you tell yourself about yourself. In all the lives you could be living, in all of the worlds you could simulate, how much did luck play a role in this one?Have you gotten more than your fair share? Have you had to deal with more struggles than most? I ask you this question because accepting luck as a primary determinant in your life is one of the most liberating ways to view the world. Why? Because when you realize the magnitude of happenstance and serendipity in your life, you can stop judging yourself on your outcomes and start focusing on your efforts. It’s the only thing you can control.

So don’t let good luck put you on a pedestal, but don’t let bad luck knock you down either. Because for every Stephen King there is a Richard Bachman that never saw the light of day.

Yes, some of us are born with more advantages than others and some of us are born with less, but you should never let that define how hard you try.

 Related: How Much is Your Broker Costing You? It’s More Than You Think.

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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