Skip to main content

Napoleon’s Lucky Generals: "I know he's a good general, but is he lucky?"

With most market participants making money this year, the timeless quote by Napoleon in the subject line rears its head, once again. Regular non-readers know the wonderment I have on the impact of luck on investment outcomes.

The markets have been on a tear (sure you didn’t notice), and my mailbox/chat is seeing two polarized stances. On one side is the Bullish Apology. Where market participants pre-emptively share justifications for continued strong markets everywhere. This group exhibits hyper optimism, using recent history as the periscope through which to peer at and gauge the future. 

The second, and potentially, the more interesting group, is the Bubble Babble crowd. This group looks askance at the rallies, and deems things a bubble. This year has given this group a great polarizer. Bitcoin. A tiny bit know much about it. Most know a bit about it; yet there is a growing supply of those sharing their two coins, calling Bitcoin a bubble.

Both groups share certain characteristics. They are tenanted with folks that have ridden the high tide and exhibit a sense of triumph. Both exude high conviction; in their own, and others’, interpretation of reality. Rather than reality itself. 

Both have vociferous voices. Of those that missed out on the rally and/or entered belatedly. Many suffer from bouts of ignorance, which is quickly anesthetised with conviction in their own, and others’, interpretation of reality. 

This belief inhibits both groups from acknowledging the charms of Lady Luck in influencing investment outcomes.

India Equity Universe: Falling strike rates of Napoleon’s Lucky Generals.

The experience illustrates why a probabilistic psyche and a healthy prescription of humility are such useful attributes in investing.

The optimal strategy is to participate in games where one has reason to genuinely believe that they: 

1) understand the game.

2) have favourable long-term odds. 

Here’s my bullish apology at bursting the CAGR bubble. 

Most of us are unlikely to ever be Napoleon’s Lucky Generals over long periods. Positing investment decisions on being one is fraught with the risk of ending with globules in one’s bank accounts.
Labels:

Comments

Post a Comment

Popular posts from this blog

The Strange Life of Abraham de Moivre

This edition is about a topic that fascinates me: bidding behaviour.   On how people make decisions under conditions of uncertainty. And the notion of ‘rationality’.   *****  Many of you participated in a game I played with you recently. (I’m sure you are glad that I didn’t ask you to predict your expiry dates!)   An investment prospect offers 100% return potential over your benchmark return (your ‘required return’). How much of this excess return would you be willing to pay/share upfront to participate in the idea? There were no right answers for this ‘buy in’. Only interesting answers.   Chart time. Buyin for ‘50%’ represents 50% and above.     Participants comprised of finance and non-finance backgrounds. The left bins generally had finance people; who opted for some variant of upfront fee and profit share structures. Many non-finance guys populated the higher bins. Interestingly, several finance folks populated the 50% and above bin. And I had s
Post a Comment
Read more

'CORN'y Connection

A common theme in investing is that, in the long-term, asset prices adhere to fundamentals. The road to adherence is often an irregular one, prices overshoot and undershoot along the way...but ultimately, they behave like obedient children. Sometimes though, the relationships between asset prices are hidden from the eye. Peer through the layers and one might just be able to come up with a relationship that could form the basis of a trading strategy. 'Corn'y Connection , is one such linkage... The Craze for Maize Lot of factors have driven corn (maize) prices of late. The rush of demand for et hanol has ensured that corn finally got its due. Apart from the fundamental factors of demand and supply, speculative demand for the commodity has served to increase the volatility in corn prices. Not surprisingly, corn prices have surged quite a bit (refer adjoining figure) . Along with the rise in corn prices, the 200-day historic volatility has increased significantly. Cor
7 comments
Read more

Freudian Vulture Fallacy

“Sometimes a cigar is just a cigar .” - Sigmund Freud ***** CAN YOU SEE A VULTURE? "The Virgin and Child with St. Anne" by Leonardo da Vinci (1503) In a 1910 essay, Freud made a valiant attempt at divining an aspect of the painter Leonardo da Vinci’s personality through the above painting. Freud peered at the picture after tilting his head to the left, and noticed a vulture. Off went Freud on his psychoanalytic jet and concluded that the picture hid an insight into the painter’s life.  It seemed to speak volumes about da Vinci’s ‘homosexual’ childhood fantasy. Freud relied on a translation of da Vinci’s writings, apart from the painting, for his interpretation. Only the unforgiving arrow of time would pass true judgment on Freud’s mental frolics. The great man had mistranslated the word for ‘vulture’. The edifice on which Freud’s theory of da Vinci’s sexual fantasies rested was an illusion. Freud apparently considered the essay to be the on
Post a Comment
Read more