Five Lessons in Entrepreneurship from the Worlds of Trading and Gambling
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When most of us think of entrepreneurs, we tend to think of men and women who have brought something new to the world; innovative software titans such as Bill Gates, or the electric car trailblazer Elon Musk. We don’t readily associate entrepreneurship with speculators such as financial traders or professional gamblers. However, this might be a mistake, as these guys and girls have much more in common with the classic entrepreneur than you might have first thought.
Although it sometimes seems that financial traders produce no tangible benefits to society, the truth is that their constant buying and selling lowers costs for all who want to access these markets. For example, when we apply for a 30-year mortgage at a bank, or make a transaction in a foreign currency, the presence of 24/7 financial markets means there is always someone at the other end of the deal to take all the risk, as well as the rewards, drastically reducing the costs for us.
Professional gamblers on the other hand are perhaps the purest entrepreneurs of them all, competing their wits against each other to steal the lion’s share of their respective markets. Sometimes that market will be a deck of cards around a pool table, sometimes the market will be the total amount wagered on the Kentucky Derby, but each time they enter the marketplace, they are in it to win it.
Given the parallels between trading and gambling on one hand and traditional entrepreneurship on the other, there should be little surprise that these fascinating and exciting professions offer some compelling lessons to the budding businessperson. Let’s look at 5 things we as entrepreneurs can learn from the trading floor, the poker table, and other places where the pro speculators gather.
Lesson 1: Don’t follow the crowd
Experienced traders know that once everyone has already bought a stock, then the only way the price can go is down. The famous stock trader of the 1920’s, Joseph P Kennedy, used to say that he knew a crash was on its way when he started to get stock tips from his shoeshine boy And the same is true today, with the most successful speculators such as Warren Buffet opting to buy only where there is ‘blood on the streets’, and everybody else has sold out. FX traders even read sentiment indicators to see what everyone else is doing, for the sole reason of trading against them. It seems that it really doesn’t pay to follow the crowd, and if everyone agrees with your investment decision, then it’s probably not a good one. The best traders know their own minds, and have no problem playing the contrarian.
How entrepreneurs can apply this to their business: Running a business calls for making difficult and sometimes unpopular decisions. As Steve Jobs memorably put it, “a lot of times, people don't know what they want until you show it to them”. However, you don’t need to be designing innovative devices like the iPhone to reap the benefits of embracing a contrarian outlook. Staying away from saturated markets, and differentiating yourself from your immediate competition by trying something that none of them currently offer, are both great ways of avoiding the groupthink that dominates so many industries today.
Lesson 2: Choose the right balance between risk and reward
If you have played poker either with friends or online, you will have learned pretty darned fast that not all hands are likely to be winning ones. The best players only go all in when their hand is good, and when they calculate that the expected outcome is likely to be positive. Otherwise, they only risk the absolute minimum necessary. Similarly, shrewd visitors to casinos will only choose to play games which offer the maximum chances of winning, for example, pooled jackpots on online slots, or games of skill where (assuming they are good enough) they can erode the house’s edge (for example, blackjack).
How entrepreneurs can apply this to their business: Every time we start a new business venture, we need to commit time and/or money, and we will never know in advance if this investment will be a winner or a loser. Therefore, it makes sense to only invest these precious resources into opportunities which offer the chance of a big payout at the end. If the expected profit margins are tight and uncertain, then it’s not a good idea to risk too much time and money into the venture. For example, opening a convenience store next door to a major supermarket might work if you can keep your prices low enough, but you would probably be better off opting for a residential location which is less well served by your competition.
Lesson 3: Choose your moment (and be ready for it)
A corollary to choosing the right balance between risk and reward is that you will often need to wait for that perfect balance to arrive. Pro poker players in Las Vegas don’t spend every day at the card table. Instead, they wait for the big ‘whales’ with large bank accounts and low skill levels to come to town, as they know that’s when the biggest pay-offs come. Similarly, the wisest sports bettors wait for the odds to drift in their favor before pouncing on them. This requires bucket loads of patience and eyes like a hawk, but the best speculators know when to strike and when to sit on their hands.
How entrepreneurs can apply this to their business: Timing is a big factor in a business’s success or failure, as any ice cream salesperson will attest to. But it’s not just about picking the perfect weather conditions for your product to sell. In today’s world of smartphones, social media and instant news, opportunities to promote products and services come and go faster than ever before. For example, Twitter is a great place to take advantage of trending hashtags, and during the 2014 Soccer World Cup, the Castrol brand saw an amazing 21,960% increase in engagement. just by jumping on the #WorldCup hashtag bandwagon. Not all brands who tried this had anything like the same rate of success, however, but those that did had previously made a detailed and well-thought-out plan about how to take advantage of the event. And perhaps that is the biggest secret of perfect timing: being prepared. Those poker sharks in Vegas know in advance when the high-rollers are arriving at the airport, and have a plan prepared in their heads for when they do. If you want to gain an edge over the competition, then preparation is key.
Lesson 4: Cut your losses, fast
The famous turtle trader experiment of the early 80’s showed that people with zero stock trading experience could quickly learn to use a simple method to beat the market. The ‘trick’, if you could call it that, was to let their winning trades run for as long as possible, but to close out their losing trades quickly and with a minimum of fuss. At one point, the Turtles apparently were picking stocks at random and just exiting those trades which lost a certain pre-defined amount, and they still managed to bank some serious money. The celebrated hedge fund manager Paul Tudor Jones agrees with the Turtle philosophy, stating that “If I have positions going against me, I get out; if they are going for me, I keep them”.
How entrepreneurs can apply this to their business: We all come up with ideas that seem great on paper but somehow just don’t work in the real world. The trick is not to let these mistakes destroy your business. If something isn’t working, then let it go, and move on. Of course, you will need to give your ideas a fair chance to prove themselves, but don’t hold onto them forever. The prudent way to approach new investments is to do as the Turtles did. Before you get into a trade, define how long you will give it before it needs to start turning a profit, and what your maximum loss will be. If it hits that maximum loss or doesn’t turn good in the expected time frame, then get out, take the loss and reevaluate.
Lesson 5: Don’t get greedy
There is an old trading adage that “there are old traders, and there are bold traders, but there are no old bold traders”. It is true that both the gambling and trading worlds are full of Icarus-like stories of those on a winning streak who just didn’t know when to stop, and the wise speculator knows not to stay too long in a winning trade for the wrong reasons. Sure, if a stock is making new highs, then statistically-speaking it will probably continue to do so, so you should stay in it like the Turtles did, but just remind yourself that it won’t keep going up just because you think you deserve to own another yacht. Gordon Gekko may have stated that “Greed is Good”, but look what happened to him. The roulette table in a casino is perhaps the best place to see greed in action, where every night some fortunate punter builds an impressive winning run which would be enough to change their life forever, only to lose it all at the end when the luck inevitably runs out.
How entrepreneurs can apply this to their business: As entrepreneurs, we need to stay humble, and focus on the process of making profits, and not on the outcome. For most of us, the process of making money is simply to keep on making customers happy, and figuring out new ways to delight them. Don’t become arrogant and assume that you don’t have to keep on working hard. You are not entitled to that yacht, you need to work for it. Too many businesses act as if the money will keep on flowing no matter what the competition is doing. A good example is Nokia. Back in 2007, the Finnish tech giant sold more cell phones than anyone else on the planet, and when the iPhone was released, they dismissed it as a gimmick made by a company who had never made a phone before. Ten years later, Nokia no longer make phones. Or what about the self-styled ‘pharma bro’ Martin Shkreli? Even if he had doubled the price of those HIV pills, then probably no-one would have had a problem. But a 4000% price hike overnight? That was just pure greed, and few will shed a tear for him as he goes to prison. Making profits are great. Greed is self-destructive.
Running a successful business is often a difficult and challenging endeavor, but if you are open to learning from others, you will truly be standing on the shoulders of giants. Gambling and trading offer fascinating insights into how to improve your business, and these 5 lessons from the world of professional speculators should be a useful resource for the entrepreneur who is looking to gain an edge on the competition.