Would You Take The $10M Part Two

Last week I posted this interview with NBA star LeBron James. James describes how at the age of 18 whilst living in both obscurity and poverty he made the very mature commercial decision to knock back a $10 million contract from Reebok – this contract whilst extraordinarily generous for someone who had never played professional basketball would have put a lock on his earnings for sometime. James now has an estimated net worth of in excess of $500 million. It is estimated that with the endorsement deals he has in place he should be worth around $1 billion by the time his playing career ends. Taking the $10 million would have precluded this sort of financial enrichment.

The question I posed was would you take the $10 million – if you answered or thought yes then the bad news is trading is probably not for you. At best trading will be a diversion for you in a futile attempt to drag yourself away from what Thoreau referred to as the life of quiet desperation. You will like the majority of speculators entertain yourself with trading and you will feel as if you are part of the action but your trading will never amount to much.

This may seem like a very harsh judgement but unfortunately trading is a profession where the ability to delay gratification is paramount to your success. Delaying gratification means that you can hold onto winning positions for longer. Consider the example below which is drawn from the experiences of someone I know.

You spot the breakout from resistance at around $0.05 and the lift in price is confirmed by a lift in volume. So you buy 100,000 at $0.055 and you watch price move very sharply to the $0.12 to $0.13 region and you convince yourself that the stock has topped. After all the candles look very bearish and you have made over twice your initial investment in a short space of time. As they say you cant go broke taking a profit – so you cash out and walk away feeling very pleased with yourself and wondering why people say they find trading difficult. The chart below shows a more interesting picture, on this I have applied a very basic transition stop and asked Metastock just to show me the new 52 week high as they occur.

So if we revisit the original trade where 100,000 shares were purchased at around $0.055 and then sold somewhere between $0.12 and $0.13  you have left around $600,000 on the table. All for the sake of being unable to delay the gratification you needed from trading. Traders build all sorts of rationalisations as to why they act in such a manner but in the end they all default back to an inability to wait. This is common to all traders – we all go through the same evolution. Some outgrow it and realise the folly of their ways whereas others carry on blindingly repeating the same mistakes and wondering why the big wins never come.

This issue of delaying gratification and the role it plays in success has long been a subject of interest to psychologist with the most famous  example being the Stanford Marshmallow Experiment. In this 50 year old experiment  children were offered a small reward immediately or a larger reward if they waited 15 minutes. During the 15 minutes the experiment left the room and left the small initial reward in plain sight of the child; the child was told they could eat it if they wanted but if they did they wouldn’t get the larger reward when the experimenter returned. Interestingly what was found was that those children who were able to resist  eating the immediate small reward the moment the experimenter left the room had better educational, health and financial outcomes than those who could not delay eating the reward.

The fundamental issue with trades such as the one above is that they come very rarely in a traders career and if you have a habit of missing them then your career as a trader will never move to the next level. And if you feel bad about the above example dont, because $600,000 is nothing. I have a friend who once left $14,000,000.00 slip through their fingers. Suffice to say he never recovered emotionally or financially.