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In 1963 Edward O Thorp released a book called “Beat the Dealer.” The book outlined that the game of blackjack could be “beaten.” It showed that the player had the edge if they played the game based on statistics rather than hunches, and the book showed exactly how to do it. The casinos were furious, many of them wanted blackjack pulled off the casino floor. The casino operators quickly figured that with just a little time invested, all of the players would be able to take money out of the casino consistently. After all, isn’t it obvious that if there was a game involving money and that all a player had to do to consistently make money was read a book and spend about a day memorizing the strategy to consistently win that they would do it? Well, it turns out, that’s not exactly true. What happened after the book came out was very different than what the casinos feared. Yes, people did flock to the blackjack tables because of all of the press that “you can beat blackjack,” but they weren’t playing using Thorp’s strategy. They were having fun....guessing, having hunches, and going for the “big one.” And, it was twice as fun because they knew that they could win consistently according to Thorp. (Unfortunately, the way to win consistently was not by playing hunches). The bottom line is that people intrinsically want action, chance, and a feeling that their individualized hunches are unique, magical, profitable, and not reproducible by others...they want to feel special. This is exactly the way that most people approach the stock market, with discretionary hunches. For some reason, it’s not fun in any game to just have a “magic formula” or to know the secret of a magic trick. In a way, we all like to be on unstable ground, flying by the seat of our pants (that sounds fun, doesn’t it?), to guess and be right, and to think what we’re doing can’t be boiled down to a science that can be reproduced by others. Doctors definitely feel this way. They feel that their diagnostic abilities can’t be programmed into a computer, but that there is some fuzzy logic that can’t be reproduced...that each case is “different.” Is it? After all, there is a decision making tree that goes on in our heads--can’t this just be programmed? Just like stock market decision making. (Did I just write that?) In a way, we don’t want to hear or believe that. But I believe it is true, and if it were true wouldn’t that really take all of the fun out of “the great game.” And then, who would want to play? Because for many of us this really is more about having fun, taking chances, and nailing a “10 bagger” just once than it is about making money. So, for those of us who do want to make money. How do we use this information to our advantage? First, you must understand that you too want action (it is human nature), and you must control that urge. This is called over-trading. Don’t take trades (risk) that don’t have a big return/risk ratios just because you want to be doing something. It’s often difficult to resolve in your mind (and to your friends and family) that you are a “trader” trying to make money when you have no trades on...Get over it. This is the feeling that the lottery people are trying to sell you on...“You can only have the dream if you have a ticket.” In the stock market the ticket is having a position on the table. Don’t take the trade unless there is a high return/risk ratio. Obviously these don’t come every day (unless you are truly an intraday trader, and even in that case it is not every day). Be selective when you put your money out there. Don’t try to make something happen--stick with your plan. If no trades are setting up...relax (I know it’s tough). I know several traders that are so hungry for trades all of the time that they dilute their good trades with a bunch of poor trades just because they need action, a chance to make money. Over time, this is a losing strategy for two reasons, you have risk exposure in a position that has a small chance of making money which obviously ends up costing you money, and when great trades show up-your capital is tied up in bad trades so you have lost opportunities. This leads to ruin. The second way that people’s thirst for action and chance gives you an advantage is that it drives their emotions and therefore their decisions. Essentially, my entire trading style is based on taking the opposite sides of trades of others when they are selling out of panic or buying out of euphoria because they just “have to be in” the latest biotech stock being touted on CNBC, or they need to be out or sell short the stock with the latest earnings miss. This leads to exaggerated and inefficient stock market moves that you can take advantage of. At heart, we are all just followers, most of us just want to participate, be in the game, feel included, and know that there is just a chance, no matter how small, of winning big. That is why most of us play this game. If you don’t believe me just take a walk around any casino; they (the casino) sells “crib sheets” telling you the most statistically advantageous way to play blackjack, and you can even bring the cheat sheet to the table while you play. Almost nobody does that..it’s just not that fun. It’s about making money. Good Luck... Steven

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