Just Another Jim: The 4 Cardinal Virtues of Trading, pt 4

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The Four Cardinal Virtues of Trading, pt 4 of 5

Justice, the Virtue of Being a Good Sport

Being a good sport is a counter-intuitive virtue. This virtue lives on the border of two realities. The first reality is that on the macro level, the universe is preeminently just and fair. The second reality is that on the micro level, there is no such thing as fairness and the world will take advantage of you every chance it gets. Being a good sport involves taking both of these realities seriously.

Macro Justice and Micro Unfairness

On the largest social level, one can look at the Khmer Rouge of Cambodia to see these two realities at work. In the end, Pol Pot's regime was evil and utterly unjust and it collapsed through a combination of internal and external forces. The reality of the world is that such a regime cannot survive for long before it is destroyed. This macro-justice view is little comfort to the thousands of people whose skeletons covered the killing fields. On that micro level, the Khmer Rouge was supremely and irrevocably unjust.

This same dynamic can be seen at the biological level. Cancer is disease where certain cells grow uncontrollably. The basic biology of the human body says that uncontrolled growth cannot be sustained. That uncontrolled growth will eventually result in the destruction of the body and the death of the individual with cancer. From a biological level this is a perfectly just system. Uncontrolled growth cannot be sustained and will result in death. For the individual with the cancer this is a desperately unjust disease, because they will die as a result.

The Fall of the Gold Kings

The local Fairbanks, Alaska hockey team (in the 90s), the Gold Kings, played in the same league as the Russian military team from Vladivostok. I don't know a lot about hockey, but I know enough about human nature to recognize that the Russians had figured out exactly what the American weakness was and took advantage of it.

In the first period the Russian team played a defensive game with few attempts at scoring. On the other hand, they took every opportunity to take Gold Kings players out by knocking them against the boards. The Russian's strategy was only borderline legal, but they were subtle. As a result they played a very physical period and only spent a few minutes in the penalty box.

On the other hand, by the end of the first period the Gold Kings had, as a team, lost their cool. During the second period it seemed their strategy had degenerated into a tit-for-tat attempt to take the Russians out on the boards. In response, the Russians began to play serious offensive hockey. Because the Gold Kings were focused on the Russian skaters rather than the puck, the Russians took a commanding lead and never looked back.

The Gold Kings hockey team illustrate perfectly what the virtue of being a good sport is not. Life is not fair. The Russians took advantage of them. Rather than being good sports, they decided to get even. Since the game of hockey is not about getting even but about making goals, this change in strategy resulted in a bad loss for the Gold Kings.

Life is inherently unfair

We can respond to the unfairness and try to get even, but in the long run that generally results in only getting further behind in the actual game. One the other hand, we can let the unfairness pass and get on with the game. Usually if we do this we can ultimately become winners of the game in spite of the unfairness along the way.

These stories could be stories of the market as easily as they were stories of sports, biology, or politics. The markets are inherently unfair. Any trader who has some history of trading has experienced the unfairness of trading. That unfairness may be as simple as slippage, losing a few points between where you ordered and what price your order got filled. The unfairness may be as colossal as limit moves against you. Certain markets, by rule, can only move so far in one day. If I have a long position in cattle (and therefore want the price to go up) and there are several limit moves down in a row, it makes it impossible to liquidate my position. It is not inconceivable that such price action could cost me several thousand dollars per contract, far exceeding my accounts ability to absorb the risk. This is not fair, but it happens.

Although it may feel like it, the reality is that the markets are not out to get you. Markets are neutral and could care less about your measly $1,000. Today "slippage" may have cost you $200 in profits. Tomorrow the "slippage" might go the other direction, netting you an unexpected $250. In the long run, markets are inherently fair and efficient. That is not to deny the choppiness that exists in the short run.

The good trader is a good sport. If the trader begins to focus on how unfair the market has been, if the trader tries to get even, if the trader plays tit-for-tat, the trader will lose in the long run because the trader has lost sight of the game and is only looking at the infraction.

Justice Isn't Just

In this sense, the archaic name for this virtue: Justice, is misleading. There is nothing just about this virtue. The virtue has to do with knowing how to allow injustice to happen without getting all shook up. Instead of revenge there is a sense of passive acceptance built into this virtue of being a good sport. It's not so much about justice as it is about getting along.

Being a good sport requires a great deal of humility. Bad things will happen and the trader simply has to brush those things aside and stick to the plan. Focusing on the injustice rather than the plan will almost always cost the trader.

If the virtuous trader can learn to be a good sport, in the long run, the macro-justice of the system will win out and the trader has an excellent chance of success. The virtuous trader may screwed here and there along the way, but in the long run he or she will win.

Next: Fortitude, the Virtue of Guts