Trading: The Odyssey

I have always been enamored with the story of Odysseus. During his epic journey home to Ithaca from the Battle of Troy, Odysseus travels through Greek Islands and encounters cyclopes, Gods such as Poseidon and beautiful women like the Sirens. Such a tale obviously appeals to the imagination of any young lad with an adventurous streak.

While revisiting this heroic classic recently, I was struck by several parallels with trading. So much so that I vowed that if I ever launched my own fund it would have to be called something like Odysseus Capital! Several recurrent themes arise during Odysseus’ journey that bear lessons for us as traders:

• discipline and temptation

• destination and journey

• perseverance and hurdles

• hubris

Temptation and Discipline

Discipline and temptation stood out to me the most in The Odyssey. The most striking example is Odysseus’ encounter with the Sirens, beautiful women atop clifftops whose alluring singing renders sailors insane and lures them to crash their ships and perish. Odysseus had heard that the Sirens’ song was the most beautiful sound known to mankind. He badly wanted to hear it for himself, but was wary of the risk that their song would send him and his entire crew to their deaths.

To get around this, Odysseus asked his men to stuff beeswax in their ears to block the Sirens’ song. He left his own ears clear but asked his men to bind his hands to the mast of the ship and resist his pleas to free him once he heard the Sirens’ song. This clever ploy is known as a “Ulysses Pact” (Ulysses is the Latin name for Odysseus, which is his Greek name).

A Ulysses Pact is a voluntarily made decision that is designed to bind you in a future situation where you may become incapable of rational thought. It is intended to prevent you from generating a sub-optimal outcome. It has applications in a variety of contexts, such as writing a will while in a healthy state if one is at risk of dementia, automatically setting aside funds in an investment account immediately after getting paid to avoid overspending, not buying chocolate while grocery shopping to avoid eating it all once home, etc).

A Ulysses Pact is a voluntarily made decision that is designed to bind you in a future situation where you may become incapable of rational thought

Adopting a systematic approach to trading (which I am a fan of, as viewers can read about here) is a great example of a Ulysses Pact. When it comes to trading, numerous studies have documented that the we are our own worst enemies. Most of us tend to sell our winners far too early and hold on to losers for far too long. A clever way around this is to adopt a rules-based approach to trading, such as trend-following. This will go some way to avoid falling prey to temptation when a trade moves against you. Instead of making an irrational decision when you’re feeling the stress of losing money, stick with a systematic, rules-based approach. This can help you avoid bias as often the most profitable trades are the hardest to make. Indeed, trading systems can even be developed to exploit human bias.

If sticking with a trading system is difficult for you, you could pay a rules-based manager to do so for you as a means of binding yourself à la a Ulysseus Pact. Another approach is creating a blog or using a forum to post your trading returns in real-time or use a public and independent, third-party website such as www.fundseeder.com to keep you publicly accountable.

Apart from Odysseus crafting a way to hear the Sirens without going insane, there were numerous other examples of temptation in The Odyssey. However, in these other instances temptation was not overcome. The consequences – as they are in trading – were dire. While in the land of Polyphemus (the cyclopes), Odysseus and his men gave in to hunger and decided to raid the cyclopes’ food stash. This led to the death of many men and a period of captivity. Another example is when Odysseus’ crew failed to resist the temptation of opening the bag given to Odysseus by Aeolus, which unleashed a severe storm while they were at sea. Again, many men died and those that didn’t were blown all the way back to Aeolia, leaving Odysseus alone without a crew.

Temptation is always there when trading. Succumbing to it generally leads to sub-optimal outcomes, such as profiting too early or holding on to losers for way too long. As Odysseus reminds us, having something like a Ulysses Pact is a powerful way to try and get what you want when you know your willpower will be diminished in the heat of the moment.

Destination and Journey

The Odyssey is all about a journey. It is the long passage from the Battle of Troy to Ithaca that makes up the story, not the final destination of Odysseus arriving home that makes us continue to recount this epic tale thousands of years after it was written.

As traders we are often so focused on the destination when we should be focused on the journey. In other words, we often tend to focus on the outcome of a trade when we should be concentrating on our process. Trading is all about having a sound and robust process. A good process can yield a bad outcome the same way a bad process can yield a good outcome. But a good process should yield a good outcome over the long-term and that makes us profitable. As traders we cannot control any given individual outcome of an application of our process, but we can control the process. This is true of life as well – it does not help to worry about things outside of your control. Therefore, we should focus on having a sound process and not stress about the outcome of an individual trade.

We often tend to focus on the outcome of a trade when we should be concentrating on our process. Trading is all about having a sound and robust process

Another interesting point is that Odysseus journey to Ithaca took much longer than he thought. In fact it took him 10 years! Similarly, with trading, it is unlikely that you are going to get rich overnight. It takes time to allow the power of compounding to generate wealth and like for Odysseus, it is probably going to take longer than you think.

Perseverance and Hurdles

Odysseus is continually tested during his journey home to Ithaca. At every step of the way is another test, another battle. His perseverance is legendary. He spent 10 long years at the Battle of Troy and another 10 long years making his way to Ithaca. It is not just Odysseus who is tested, but also his wife Penelope and son Telemachus, who is 20 years of age when Odysseus arrives home.

Trading is similar in many ways. Every day, it will test you. It will test your intestinal fortitude. It will test your commitment, as the market does not care if you are sick, if your daughter is in the school concert or if it is your wife’s birthday. It is going continue to move regardless of your circumstances. So you better make sure you are ready to persevere if you’re in this game. Odysseus didn’t let being detained for 7 years by Calypso, his men being turned into pigs by Circe or being captured by a cyclopes stop him from getting home.

Hubris (it’s Greek like Odysseus)

While being a great and cunning warrior, Odysseus was also known for hubris. The most noteworthy example was during his encounter with the cyclopes. The cyclopes had captured Odysseus and his men after they raided his cave, but Odysseus managed to escape by stabbing the cyclopes in the eye. Blinded, the cyclopes was unable to tell who had stabbed him. As he sailed away in his ship, Odysseus taunted the cyclopes by shouting “If anyone asks you who blinded you, tell them that it was Odysseus, sacker of cities, son of Laertes, whose home is in Ithaca!” Odysseus’ arrogance in this situation created many subsequent challenges for him, as the cyclopes passed on Odysseus’ identity to Poseidon, the God of the Sea, who wreaked havoc on Odysseus during his sea voyage.

So Odysseus got a little cocky and the adrenaline got to his head after stabbing the cyclopes. He paid for it. Markets can do the same thing – you have a hot streak, your trading system goes for several days in a row making large sums of money and you start to think you’re the next Stanley Druckenmiller or David Shaw. So you dial up more risk just in time for some reversion-to-the-mean on your profits. It literally pays to stay humble. Learn from Odysseus’ mistakes.

Final Remarks

Odysseus journey is truly an epic tale that will be sure to captivate your attention. If you have kids it is a great story with many life lessons. Or if you’re looking for a break from the markets, it’s an enthralling, heroic and adventurous tale that is interesting enough to help you switch off. But if you’re like me, once you’ve read it you will undoubtedly be making links back to markets and trading!

Read more of my work here: https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=2439824