Hope is Not a Strategy

I learned an important lesson from trading this year: hope is not a strategy.

If you enter a trade that goes against you, and it keeps going against you, hoping that the position will recover is a losing strategy.

The hope trade may work once, twice, even ten times in a row. Yet each time it works, a bad habit is reinforced. And the one time it doesn’t work, you blow up.

In the recently released “Unknown Market Wizards” book by Jack D. Schwager, trader Amrit Sall shares his experience with a trade that turned into a hope trade:

I realized that I was in a position, hoping for it to work. The second I realized that I was hoping and not trading anymore, I immediately liquidated everything. That lesson has stuck with me to this day. I never want a position where I am hoping that it will work. I had to go through that experience to know the difference between a trade where I have full conviction and a trade where I am hoping.

Defining your risk is a strategy to protect your trade from becoming a hope trade. Know your stop level before you execute the trade. Furthermore, assume your stop will get hit. If the loss from stopping out of the trade doesn’t justify the potential reward, don’t take the trade.

From 0% to >5%

There is an interesting parallel to the business startup world.

Today we live in a world of >5% interest rates. And yet not too long ago, we lived in a “free money” world of 0% rates. A golden time for startups.

In the world of free money, hope was a viable strategy. You hope to find product-market fit. You hope to get enough customers. You hope for growth. You hope for an acquisition.

And while you hope, you can continue to raise money because it’s free.

Unfortunately, a strategy built on hope is no longer viable in a high interest rate environment. And this has real-world consequences.

Freight broker startup Convoy is a recent example. In 18 months the company went from a valuation of $3.8 billion to shutting down. As the Wall Street Journal reports:

Convoy hoped the funding would buy the company time to find a strategic investor or buyer. But the round last year came just as investors were tightening spending amid rising interest rates and economic uncertainty. At the same time, freight demand slowed and shipping rates fell, sending earnings across the freight sector into a tailspin. 

Convoy aimed to disrupt freight brokerage, a fiercely competitive corner of the trucking industry in which middlemen match loads from retailers and manufacturers to available trucks, many operated by small companies and independent truckers. It is a fast-paced business, with profits for brokers coming in the space between the money they charge shipping customers and the rates that truckers charge to haul loads. 

Convoy founders Dan Lewis and Grant Goodale believed that by automating the transactions, similar to the way ride-sharing companies link drivers and passengers, they could take costs out of the process and speed up supply chains.

But Convoy couldn’t figure out how to turn that business into sustained profits.