Tuesday, July 13, 2010

By cunning and craft

Some time ago I saw a book of this title, if I recall correctly on fiction writing. I wasn’t drawn to the book, but the title stayed with me. Because, I thought, the only way to make consistent, sizable money in the markets is by cunning and craft.

Neither cunning nor craft alone is sufficient. It’s the combination that is so powerful. But first let’s define the two terms since they are often used interchangeably, which would defeat the whole point of this post.

I use the word “cunning” to encompass a range of its more positive meanings: craftiness, wiliness, keen insight. By “craft” I mean skill or proficiency.

Let’s start with the latter quality. A good craftsman learns his trade and continually hones his skills. If he’s a cabinetmaker he has to be precise in his measurements and skilled in his use of tools. He has to practice joinery over and over again. In time he may truly become a master craftsman. He’s unlikely, however, to become a billionaire.

We are often told that to become successful in trading we have to master the craft. Well, yes, but is this enough? I don’t think so. One reason is that the markets are dynamic and to a large extent random. The craftsman may occasionally be confronted with new tools and new design plans. Sometimes he even has the indecisive client who keeps changing the specs over the course of a job. But a good craftsman doesn’t normally use his saw with consistent skill and get inconsistent results. The skilled trader does.

Here’s where cunning must enter in—invoking craftiness or wiliness to find those trades or investments that will exploit market inefficiencies. What sets the likes of Paul Tudor Jones apart from the merely skilled trader? For one thing, cunning. Jones considers himself a premier market opportunist. What sets Warren Buffett apart from the skilled investor? Once again, at least in part cunning. These men are not merely master craftsmen; they are uncommonly shrewd. They leave average opportunities for average traders and investors and attempt to zero in on the best. And they believe in their own cunning because they commit wads of money to their best ideas.

This theme could be developed at much greater length, but let me cut it short and perhaps inspire some dialogue. My bold pronouncement of the day: The trader or investor who is all cunning and no craft is doomed to failure; the trader or investor who is all craft and no cunning is doomed to mediocrity.

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