Knowing When You've Won
Marketwatch had two articles where the first half of the story was the same but the endings were completely different. In the first one, a trader starting with $35,000, grew their pot up to $1 million. He did with options, mostly. He had some specific thoughts on cash levels and position sizing and had an insanely good result. The other trader, started with $15,000, grew that to $1 million and then proceeded to trade himself into oblivion.
For purposes of this post we will assume both stories are completely true. It doesn't matter whether they were lucky or good in getting to $1 million, the fact is they got there. I would add here that just because the first guy still has the money doesn't mean his story is over. When I saw that first article, I tweeted it out and said that if it was true, he should take $900,000 off the table right away. In a similar context for how I discuss Bitcoin, if it grows into a life-changing piece of money, sell it (or at least some) and let it change your life. How much money do you have right now? If it grew by $1 million somehow in a short period of time, would that be life changing? It would be for me. In relation to what we have, that is a lot of money.
Occasionally, people get insanely lucky. There's no shame in realizing that the great thing that happened to you was luck not skill but you need the introspection to realize this and act accordingly. There's a good chance that the guy who went from $35,000 to $1 million was lucky. Putting $900,000 into a t-bill or the like would simply be prudent risk management. If it was skill, then he'd be able to trade the remaining $100,000 into another large sum, bank most of that and repeat. And if it was luck, he'd have $900,000 safely socked away and depending on his age, that $900,000 would either be a pretty good retirement nest egg or a great head start.
Whatever the odds that the first guy was lucky, the odds that the second guy, the one who lost it all, was just lucky are even greater.
A sentiment that seems to tie in here came from "Orange Book" on Twitter who said "net worth is less important than financial freedom." When you spend some time to understand what your real goals are, as opposed to picking an arbitrary dollar amount because it sounds big, you then understand what freedom to you actually is and will have better awareness if you get there ahead of time. I've told the story many times of the co-worker of mine at Charles Schwab who at the height of the internet bubble had amassed about $1.5 million in his 401k. I, along with one other guy in our area, begged him to cash out (long story short it would have been the right move, regardless of what happened next). He felt he needed $5 million. He'd won and he didn't realize and then of course the bubble popped and the value of all of his Schwab stock imploded. The option to cash out was gone.
I was lucky to clue into the ideas of knowing when you've won, or might have won, and that what is important is financial freedom, more so than an arbitrary dollar amount, at a relatively young age. These concepts are a path to having less stress in your life. I feel like my wife and I won by figuring out how to earn a little more than we need/want to spend doing work that I love without having a commute and setting my own schedule. That description could apply to someone making $50,000/yr or $50,000/mo. It's lifestyle preferences not dollars that are the primary drivers to that outcome.
Where so much of investing and personal finance is behavioral, the examples from this post serve to really hit on that point. The stock market will take of itself (the ergodicity we discussed the other day). It is the behavioral mistakes that do people in. In practical retirement planning terms, if you think you'll need $1,250,000 when you're 65 and you find yourself at 50 with $900,000, realize that you've probably won and maybe you can get away with less of your asset allocation exposed to risk assets.