Arriving home after a Crosshairs Trading© Seminar one weekend I sat down to relax and read a newly published article by Malcolm Gladwell, the popular author of such books as THE TIPPING POINT  and BLINK, among others.  The article, published in an issue of THE NEW YORKER, questions the popular assumption that entrepreneurs are inherently high risk takers.  We assume, do we not, that a successful entrepreneur is successful because at some point in the past she was willing to take a risky bet that others were not?  If we agree with the basic definition of entrepreneurial-the willingness to take risks in order to make a profit-then should we not also assume that stock traders are entrepreneurial? And if entrepreneurial then high risk takers?


But do our assumptions about entrepreneurs in general and stock traders in particular really hold up in the high court of evidence? With the help of Mr Gladwell, and a few simple rules, these basic assumptions may just need to be reassessed.  After all, have you ever thought there may be a big difference between the successful entrepreneur and the unsuccessful one?  Let’s take a look.

Risk vs. Reducing the Chances of Failure

Risk does not imply taking an uncalculated gamble. Citing Ted Turner’s decision to buy an Atlanta television station that eventually catapulted him to billionaire status, Gladwell quotes a Turner biographer who says Turner was “attracted to the risk of the [station] deal, but it seems just as plausible to say that he was attracted by the deal’s lack or risk.”  Turner had the odds of success stacked in his favor and he took advantage of it. He saw an opportunity others could not see; not too high a risk that others would not dare take.  Gladwell points out a study by French Scholars Michel Villette and Catherine Vuillermot, who found that an entrepreneur focuses on “hedging his bets and minimizing his chances of failure.  The truly successful…is anything but a risk-taker. He is a predator, and predators seek to incur the least risk possible while hunting.”

And the entrepreneurial stock trader?  How does he incur the “least risk possible” and focus on “minimizing his chances of failure”?  He does so by staying focused on the most highly probable trade opportunities based on a proven strategy.  The entrepreneurial trader is able to see, like Turner, the opportunities that are least likely to fail, while the emotionally driven, unsuccessful trader takes on high risk, low percentage trades.  The former minimizes failure; the latter minimizes success. Entrepreneurial trading is not about taken on multiple high risk opportunities in the hopes that one will eventually pan out. It is about minimizing the risk of failure by taking on the rare, highly probable opportunities that others cannot see.  The real risk, then, is in missing an advantageous opportunity.

Nerves of Steel vs. Focused Discipline

Taking on risk does not imply nerves of steel.  Gladwell turns his attention to the most well known trader of our time, hedge fund manager John Paulson.  Without going into detail here, Paulson made what has been called “the greatest trade ever” by Gregory Zuckerman, who recently published a book by the same title.  Paulson shorted the real estate market at its peak and in the process turned a low risk investment into a multi-billion dollar windfall.  Did Paulson possess nerves of steel that allowed him to stick his neck out when others’ were in the sand? Or were others simply too pre-occupied to recognize what Paulson believed was an opportunity as clear as the nose on his face?  In fact, while Paulson was shorting, other traders thought he was nuts.  His “negative-carry” trade was considered too risky by most because unless the trade works quickly the cost can become “ruinously expensive”.  But Paulson knew better. He and a team of associates at his firm undertook an extensive analysis of the real estate market and found a bubble that was on the verge of bursting.  Paulson’s extensive research of the real estate market lowered the risk of his trade.  Paulson was already rich.  He did not need to make this trade. He did not need to win the lottery. He saw an opportunity and he made a well thought out, calculated risk based on extensive research.  He could not pass it up and he didn’t.  Gladwell debunks the nerves of steel assumption:

“What Paulson’s story makes clear is how different the predator is from our conventional notion of the successful businessman.  The risk-taking model suggests that the entrepreneur’s chief advantage is one of temperament (nerves of steel) he’s braver than the rest of us are.  In the predator model, the entrepreneur’s advantage is analytical-he’s better at figuring out a sure thing than the rest of us.  Paulson looked at the same marketplace as everyone else on Wall Street did. But he saw a different pattern” [bold mine].

In like fashion, the successful, entrepreneurial traders are the ones who make thoroughly researched, well calculated, low risk trades by finding and exploiting  particular patterns.  While others are trading off emotion, news, crowd mentality, etc. the entrepreneurial trader is taking advantage of  historically tested, repeatable, highly probable patterns.  Sun Tzu, in his Art of War, outlined the same phenomenon 2000 years ago, when discussing the warrior as risk taker:

Now the general who wins a battle makes many calculations in his temple ere the battle is fought.  The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat: how much more no calculation at all!  It is by attention to this point that I can foresee who is likely to win or lose.

The traders who win are the ones who have the discipline of calculated focus; those who lose have neither discipline or focus.  The entrepreneurial trader cannot have one without the other.  Just ask John Paulson.

Reckless Behavior vs. Confidence

Taking a risk does not imply reckless behavior.  Turner, Paulson, Sam Walton, and other well-known entrepreneurs. assessed opportunities, risking their own reputation in the process.  Sam Walton was so confident in his initial retailing venture that he financed it with money from his in-laws. Paulson was made fun of.  Turner’s attorneys disagreed with his television station pursuits, and Walton’s in-laws had to deal with early failures and requests for more money.  What may have been viewed as reckless behavior was actually calm confidence.  Why the willingness to endure personal abuse? As Gladwell explains, “Perhaps they [the entrepreneurs] are so sufficiently secure and confident that they don’t need public approval.  Or perhaps they are so caught up in their own calculations that they don’t notice.  The simplest explanation, though, is that its just another manifestation of their relentless pursuit of the sure thing.”

Successful entrepreneurs are confident as a result of their calculations, not in spite of them.  Failed entrepreneurs, on the other hand, fail because they violate basic, established principles of success.  They are wreckless in their calculations and in their pursuits.

And traders? Successful traders remain confident in the face of uncertainty, knowing that their analysis and preparation will, over time, allow them to maintain a steadily rising equity curve.  Their confidence comes from trusting themselves to do the right thing- win, lose, or draw.  The sure thing is in knowing that the probabilities are stacked in their favor when proper calculations have been made.

So, in conclusion, successful traders are those who are entrepreneurial predators.  They practice risk management in pursuit of their prey by making focused and calculated, high probability trades based on a calm, confident self trust.  And our above equation thus becomes:


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  1. Nathan Belomy
    August 28, 2011 | 2:45 pm

    Nice article, I found it useful. I write some stuff on stock trading as I do it as well. Easy to relate to what you are saying here, thanks.

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