Would a time machine make you an outstanding investor? Is it that simple? And if not, why not?

KEY POINTS

• Markets are made up of crowds with complex emotions. Seeing a bold headline with the actual market moves blacked out won’t tell you how to bet, so curb your enthusiasm.

• Market complexity makes short-term movements unpredictable and overconfidence plus the use of leverage can lead to significant losses, highlighting the importance of risk management.

• The poor aggregate showing of the experiment highlights the importance of educating young, aspiring investors in decision-making under uncertainty, and particularly the theory and art of investment-sizing.

👉 Bonus: Below you will find five ChatGPT prompts that you can use to develop your expertise in this area.

Imagine being handed a time machine, or better yet, a crystal ball, that grants a sneak peek into the headlines of The Wall Street Journal before they are printed. Surely, with this powerful tool, you could amass unimaginable wealth by predicting market moves with unparalleled accuracy, right? Wrong. The startling results of the “Crystal Ball Trading Game” reveal just how elusive the promise of easy profits can be, even for those with access to information that, theoretically, guarantees an edge over the market.

In a world where the influence of markets has stretched beyond Wall Street and into the wallets of high-profile athletes turned investors, there are crucial takeaways from this challenge that resonate with athlete investors. With growing interest in financial markets, professional athletes like Magic Johnson, Serena Williams, and Kevin Durant are increasingly looking to diversify their wealth through investments. However, the cautionary tales from the challenge point to fundamental truths about trading and investing that even athletes should take seriously.

The Crystal Ball Fallacy

Victor Haghani, former founder of Long-Term Capital Management, currently runs money manager Elm Wealth with Chief Executive James White. The company espouses passive, low-cost money management for its wealthy clients and has published a number of plain-English studies and experiments to get its philosophy across. The latest is the “Crystal Ball Trading Game.” The idea of the game is to test how players would perform if they were shown Wall Street Journal front pages in advance of market-moving events. Players are given $1 million in play money and are shown 15 Journal front pages following big economic news with a few giveaway details blacked out, such as “stocks soar,” randomly selected over the past 15 years. The game offers a simulated trading environment with real-world implications. Participants could make bets on markets using a pot of $1 million in play money, and leverage those bets up to 50 times.

With such clear, privileged access, the assumption was that most players would easily predict the correct market direction and make substantial profits. However, the experiment produced disappointing results. After 15 rounds of trading, the median wealth of the players had fallen by over 30%, ending at a dismal $687,986. This wasn’t just a case of a few unlucky guesses. Many players saw their fortunes wiped out entirely by bad trades, despite having advanced knowledge of market-moving news.

Why Traders Struggled to Make Money

There are several reasons why even financially savvy players couldn’t turn their advantage into reliable profits:

1. Market Complexity: Financial markets are not simple machines that react to news in a predictable way. While economic headlines like strong jobs reports or Fed rate hikes provide key data, their effect on stocks or bonds can be far from straightforward. Sometimes, good news leads to a market rally; at other times, the same news could trigger a selloff due to concerns about inflation or interest rate hikes. Players in the challenge often found themselves on the wrong side of such moves, even with what seemed like a clear advantage.

2. Overconfidence and Leverage: One of the key lessons from the game is the danger of overconfidence. With access to headline news and the ability to leverage bets up to 50 times, many participants increased their risk exposure. As a result, even a small market move in the opposite direction of their bet could lead to significant losses. While leverage can amplify profits, it also magnifies losses, and this lesson hit home for players in the challenge.

3. Human Emotion and Behavior: Trading is not just about data and logic; emotions play a large role. Participants who saw a bold headline that hinted at a strong market move were often tempted to place large bets, only to see the market take a different turn. Market behavior is often driven by mass psychology, and reacting to news without considering how the rest of the market might interpret it can lead to poor decision-making.

4. Unpredictable Reactions to Fed Announcements: The challenge included several rounds based on news about Federal Reserve rate announcements. While logic might suggest that rate hikes would negatively impact markets, in reality, the impact is far more complex. Investors’ reactions to Fed decisions often depend on the broader economic context, and headlines alone provide insufficient information to make the correct trading decision.

A discussion between Frida AI Fridason (Entrepreneur & Advisor, former S(ai)lor) & Tom AI Tomson (Entrepreneur & Investor, former Mount(ai)n Biker) on the topic:

Be aware that this is one of our AI experiments, so Frida and Tom don’t really exist.

Takeaways for Athlete Investors

For athletes venturing into the world of investing, the lessons from the “Crystal Ball Trading Game” are invaluable. Unlike day traders or market speculators, athlete investors tend to focus on long-term wealth preservation and growth. The results of the challenge provide a timely reminder that trying to time the market, even with seemingly perfect information, is a high-risk strategy. Here’s what athlete investors can learn from this experiment:

• The Importance of a Long-Term Perspective: One of the key takeaways from the game is that short-term market movements are difficult, if not impossible, to predict consistently. For athletes who are used to playing the long game—whether in sports or in investments—this aligns well with the principle of long-term investing. Patience and a focus on long-term gains, rather than short-term profits, can lead to better outcomes.

• Avoid Overconfidence and Leverage: The temptation to maximize gains by using leverage or making large bets can be dangerous. For athlete investors, who may be new to financial markets, taking on too much risk without fully understanding the potential downsides can lead to significant losses. Instead, diversifying investments across asset classes and avoiding highly speculative strategies can help preserve wealth over time.

• Stay Calm in Volatile Markets: The volatility of financial markets can be nerve-wracking, especially for those accustomed to the adrenaline of competition. However, as the “Crystal Ball Trading Game” showed, reacting emotionally to market news or headlines can often lead to poor decisions. Athlete investors should take a disciplined approach, relying on data, professional advice, and a clear investment strategy rather than gut reactions to market swings.

• Trusting Experts vs. DIY Investing: While the game was designed to test individual decision-making, it highlights the importance of relying on expert guidance. Athlete investors should recognize that financial markets are complex and that partnering with experienced advisors can be crucial to navigating these challenges effectively. Just as athletes rely on coaches and trainers, trusting a team of financial experts can lead to better decision-making.

Elm’s Conclusion

Was Nassim Nicholas Taleb correct in his conjecture that “if you give an investor the next day’s news 24 hours in advance, he would go bust in less than a year”? While their experiment didn’t test his statement precisely by and large they think Taleb is right. His counterintuitive proposition is both insightful and instructive.

The financial industry is replete with individuals and organizations constantly working to develop their own proprietary crystal balls. Elm hopes that the experiment and results described herein convince crystal ball makers that sensible investment-sizing is essential to realizing the value of what they are trying to build.

The poor aggregate showing of their in-person experiment with 118 financially-trained participants highlights the importance of educating young, aspiring finance industry professionals in decision-making under uncertainty, and particularly the theory and art of investment-sizing. I would like to add here that this training and education is even more important for athletes in business, as their knowledge of financial markets is usually not as in-depth and it is important for them to be empowered to ask their advisors essential questions.

5 PROMPTS THAT ATHLETES CAN USE TO DEVELOP AND BUILD EXPERTISE

• How can I create a long-term investment strategy that aligns with the principles of wealth preservation and growth, while minimizing risks like overconfidence and leverage?

• What are the key financial principles and market trends I should understand as an athlete transitioning into business and investment?

• Can you explain how diversification across different asset classes works, and how I can apply this strategy to preserve my wealth over time?

• What lessons can I learn from successful athlete investors like Magic Johnson and Kevin Durant, and how can I avoid common pitfalls in business and investment?

• How do professional investors handle market volatility, and what techniques can I use to stay calm and make informed decisions during financial market fluctuations?

👉 Check ChampionsChat GPT for your prompts.

The Bigger Picture: Understanding Market Uncertainty

The results of the “Crystal Ball Trading Game” serve as a powerful reminder that markets are unpredictable, even when armed with seemingly advantageous information. For athlete investors, the lesson is clear: success in investing comes not from chasing short-term profits or trying to outsmart the market, but from adopting a disciplined, long-term approach.

As professional athletes continue to diversify their financial portfolios, embracing strategies rooted in patience, diversification, and professional advice will serve them far better than attempting to predict market moves. The allure of beating the market with a “sure thing” is a myth, as demonstrated by those who participated in the game. Instead, building wealth over time requires the same focus, discipline, and teamwork that athletes have cultivated throughout their careers.

In the end, while a peek at tomorrow’s headlines might seem like a ticket to easy money, the “Crystal Ball Trading Game” reveals that, much like in sports, there are no shortcuts to success in investing.

👇

I really appreciate you reading my note today.

Best,

Irg

Irg’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. This work may feature assets and entities in which the author has invested.

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