What Investors Can Learn from a Year-Long Trading Experiment | Brent Donnelly

[00:00:00] [SPEAKER_01]: So, you have a systematic strategy risking 200 grand. It's now down $2 million at current mark to market and there's no actual price to get out of it.

[00:00:09] [SPEAKER_01]: And then you're like, okay, now what do I do? I actually did an interview with Howard Marks one time and he said the way I think about it is like he said to me, I have a core vet, do you want to buy it?

[00:00:21] [SPEAKER_01]: And it's like, okay, I want to core vet but what's the price? And people don't do that in the stock market. If you're reading a thing on Yahoo Finance, everyone else is reading it too. There's no there's not going to be any edge there.

[00:00:37] [SPEAKER_01]: I think adaptation was probably the most important lesson for me. Is that just however much money you're making today, almost by definition that thing is probably not going to work tomorrow.

[00:00:47] [SPEAKER_03]: So welcome to Excess Returns, where we focus on what works over the long term in the markets. Join us as we talk about the strategies and tactics that can help you become a better, long-term investor.

[00:01:17] [SPEAKER_03]: The idea is dumb mistakes in timeless trading lessons. From February 2022 to May 2023, Brent shared a unique trade with his audience each week through his blog and chronicled the process from the initial idea through to the execution.

[00:01:28] [SPEAKER_03]: The lessons learned from the process go far beyond trading and apply not only in long term investing but also in life in general.

[00:01:34] [SPEAKER_03]: Matt and Brent break down the full experience and what we all can learn from it. I think you will find the lessons valuable regardless of the type of investor you are.

[00:01:40] [SPEAKER_03]: As always, thank you for listening. Please enjoy this discussion with Brent Donnelly.

[00:01:44] [SPEAKER_04]: You're watching Excess Returns on YouTube. I'm your host Matt Ziggler. I'm joined today by the author of, I mean, honestly one of my favorite trading books. I think that Alpha Trader.

[00:01:54] [SPEAKER_04]: This might be like anybody who asks me or says anything they want to trade for a living or thinking making a change or something else.

[00:02:01] [SPEAKER_04]: This book has it all. So we're talking to Brent Donnelly, but we're not talking about this book. In fact, if you want to hear about Brent and his life, we've got another interview over at,

[00:02:10] [SPEAKER_04]: I'm going to read it on the article on theory coming out soon about his life. I meant to reach for the art of currency trading.

[00:02:15] [SPEAKER_04]: I got this book by accident. I recommend you should check that one out if you don't know it.

[00:02:19] [SPEAKER_04]: But today we're talking about this one. 50 trades in 50 weeks. This was a sub stack.

[00:02:24] [SPEAKER_04]: Make no mistake. This is possibly one of the coolest trading books I've ever encountered and whether you're a portfolio manager or an allocator or a systematic trader or totally un-systematic unregimen a disaster of a trader.

[00:02:38] [SPEAKER_04]: Brent did some of the friggin crazy with this. So before you tell us what this book is about or I'm going to talk about today, I want to read a quote from this because I need to establish Brent Donnelly for the people of the world who don't know him. This is a quote from the book.

[00:02:51] [SPEAKER_04]: I put my entire net worth of $25,000 into a day trading account in 1998 and turned it into $350,000 by 2000 and then I spent the next two years spending and losing virtually all of it.

[00:03:04] [SPEAKER_04]: You learn a lot when you blow up by best year I made just over 50 million trading effects in 2008.

[00:03:09] [SPEAKER_04]: I worked at a hedge fund for three years but didn't love it because I couldn't write my best day at Lehman Brothers.

[00:03:14] [SPEAKER_04]: I made more than $5 million. I have lost more than a million dollars in one day on many occasions and lost that much in one hour a few times.

[00:03:22] [SPEAKER_04]: Well, that's just that's a lot. Brent, welcome to the show.

[00:03:25] [SPEAKER_01]: Thank you very much and I'm still alive to tell the tale or the tale.

[00:03:29] [SPEAKER_04]: Tell the tale, tales, plural, write all the books about it. I mean just diamond here like 25,000 into a day trading account in 1998 that you turned into $350,000 by 2000.

[00:03:40] [SPEAKER_04]: That's two years probably less later. What the hell happened then?

[00:03:45] [SPEAKER_01]: So that story is kind of like there's so many lessons in it and I feel like it's a really good example of failing to succeed kind of thing.

[00:03:56] [SPEAKER_01]: I learned so much from my failures at that time that those lessons then served me for the rest of my trading life and also gave me stuff to write about in books and stuff.

[00:04:08] [SPEAKER_01]: But I actually as you know, but as listeners probably don't, I started an infinite set city bank on the FX desk in 1995 and then decided it was like very flow oriented and a little bit too much like dealing blackjack versus like playing poker

[00:04:24] [SPEAKER_01]: and I thought it was going to be more like playing poker. So I quit and went home and I actually my intention was to go home and write a movie script and you know, I had some mild successes there like a TV show for a bit and stuff but this was just like I got 25 grand left and there's this dot com bubble thing happening day trading is like a thing so I'm going to go check it out and I felt like I had nothing to lose.

[00:04:48] [SPEAKER_01]: So I went in and there's basically like a one week trading course which sounds ridiculous but actually it was pretty good. I think the company still exists actually where I traded believe it or not.

[00:05:00] [SPEAKER_01]: It was like one of those day trading operations and it still exists but there was specific things where you could just have an edge at that time so all really that I did was I looked at the level two which shows the bids and the offers and I had my headphones on and in that time there was still an S&P pit.

[00:05:18] [SPEAKER_01]: So I'd be listening to the pit and you could tell when big orders came in and then if you just got on the bid in I only had six stocks up if you got in on the bid in six stocks when the futures were starting to rally.

[00:05:32] [SPEAKER_01]: There was so much back at four deep get given a couple times and like sometimes 30 seconds later you could sell two bucks higher and you know I'm 400 shares that's whatever 800 bucks in.

[00:05:43] [SPEAKER_01]: So it was that kind of thing where it was like a very scalpy kind of trading style but people used to say to me like dude your screen is never read like so if your piano was always green or red based on your active line items and I was like yeah if I'm rad I just get out like basically anything that I did had such a tiny stop loss.

[00:06:08] [SPEAKER_01]: Because a lot of times you were front running big market maker orders or you were front running the futures not front running really but just like going with the futures.

[00:06:17] [SPEAKER_01]: And or you're playing like headlines like Joe Kernan would say in those days coming up after the break this Texas semiconductor company is our trade of the week.

[00:06:26] [SPEAKER_01]: Or whatever and then or and son as you give one more hint like four billion dollar Texas semi whatever so you Google it you figure out what it is.

[00:06:36] [SPEAKER_01]: By the stock and they would literally go up like 6% at Winnie announced it in you know 90 seconds later on CBC it was like completely stupid and there was other things like so many weird things that would happen like.

[00:06:47] [SPEAKER_01]: Because the day trading was such a thing and there's so many amateurs like say what I don't remember the ticker symbol but like say optic networks.

[00:06:56] [SPEAKER_01]: And now it's just take over and the ticker symbol is O PTI but the ticker O PTC would go up like 25% because people bought the wrong stock so you get short that thing.

[00:07:10] [SPEAKER_01]: And then people obviously would realize pretty quick so like it would take 30 seconds for it to go up and then five minutes for it to go back down or whatever there was all kinds of opportunities like that it was so it was like a really good example of.

[00:07:25] [SPEAKER_01]: If you have a very specific edge and you just keep pounding it you can make a lot of money so like in the 2021 boom there were similar things like calls were under price through options or sorry through earnings.

[00:07:42] [SPEAKER_01]: So like people were making crazy amounts on that or like if you understood the air drops from like Nike on the NFTs and things like are the shit coins and all that there was like amazing edges that were like almost free money.

[00:07:59] [SPEAKER_01]: But then as you know and as that quote kind of suggests eventually it all went away.

[00:08:05] [SPEAKER_04]: So what ends up happening in like in 2000 when you when you lose it when the when the machine comes off like what actually happens and how long tell the story about how long it takes for you to go like.

[00:08:17] [SPEAKER_01]: Craft this is not looking yeah that was painful because it like it's better to burn out than fade away I was definitely a fade away situation so.

[00:08:28] [SPEAKER_01]: Like I said I was kind of capturing spreads on like anticipating market moves capturing spreads on on stocks and the but within those days there were still commission so.

[00:08:40] [SPEAKER_01]: You know you're paying whatever sense per share so the ideal thing was you wanted to do it on very expensive stocks because then you could like buy at 406 and then sell it 4008 and you didn't need very many shares to do that.

[00:08:54] [SPEAKER_01]: If you're trading some micro systems at $4 and 10 cents then you need like 5000 shares and then you'd pay everything away and bro.

[00:09:02] [SPEAKER_01]: And so at the peak so every morning I would print out a thing of stocks over a hundred dollars on the NASAC and like in 99 it was like four pages long and in 2002 was four stocks like so.

[00:09:16] [SPEAKER_01]: The number of stocks that you could actually trade doing what I was doing went down and then at the same time so the absolute value of all the stocks went down so you're just paying way more commission.

[00:09:27] [SPEAKER_01]: But then decimalization happened in April 2001 and that was a killer as well because then instead of trading in eight and quarters and sometimes like even a full point wide everything was jammed with all these like 98 97 as soon as you put in a.

[00:09:45] [SPEAKER_01]: And a sell order at 206 55 and an order would come in at 206 53 like the algorithm started and so the big lesson there so what ended up happening was.

[00:09:58] [SPEAKER_01]: I still was almost net positive every single day but I was paying a lot of brokerage now because I was like instead of flipping 100 buying 200 200 I was buying 2000 selling 2000 and that adds up to a lot so I ended up most days.

[00:10:14] [SPEAKER_01]: I'd be net positive or sorry gross positive and net negative so I'd make foreground and I'd say my commissions would be 4600 or whatever so it was a very very slow bleed.

[00:10:26] [SPEAKER_01]: And the big less excuse me the big lesson that I got from that was about adaptation and regime change because.

[00:10:35] [SPEAKER_01]: We basically entered a completely different regime 2002 compared to 1999 and was like couldn't be more polar opposite in terms of regimes.

[00:10:46] [SPEAKER_01]: And yet I was still sitting there going like I know if I just try harder I can do this like I can keep doing the same thing I was doing and I'll make money and instead of saying like.

[00:10:59] [SPEAKER_01]: I would make the analogy to like poker or magic the gathering or whatever sometimes there's these epic madagame shifts like in poker where it went from like just exploiting bad players to like everyone's playing game theory optimal and you have to play a completely different game.

[00:11:17] [SPEAKER_01]: And you're probably playing Russian bots and all that to at some point so if you didn't change your game then you know obviously you would just slowly bleed out.

[00:11:27] [SPEAKER_01]: And so the big lesson for me which then came you know applied many many times throughout my career was always have first of all like understand the regime you're in and how it relates to your trading style like if you're a breakout trader.

[00:11:41] [SPEAKER_01]: And effects balls is trading at four which is like as low as it gets then your breakout trading styles not going to work.

[00:11:50] [SPEAKER_01]: And so whatever you're doing now pound it and extract as much edge, but always have your eye on the horizon for like okay what what are some new ways I can trade what how's the regime changing like how do I trade when balls here how do I trade when balls there.

[00:12:05] [SPEAKER_01]: Like one very very simple adjustment that some people don't make which is kind of shocking when you see it happening in real life.

[00:12:13] [SPEAKER_01]: Is like bank traders will will be comfortable with a certain as position size like say like someone sitting on a spot desk is comfortable trading 30 years like that's kind of their size.

[00:12:24] [SPEAKER_01]: And then vogue goes from like for the nineteen in covid and they're still trading the same position size which makes like absolutely no sense.

[00:12:34] [SPEAKER_01]: And the factor of how big your position should change like in 2008 say in 2007 you could probably trade like 50 million dollar Mexico as as a spot guy on a trading desk in that was cool in 2008 the volatjusted position size was like three.

[00:12:52] [SPEAKER_01]: So yeah if you were trading 50 you were either going to blow up or just stop yourself out every single day.

[00:12:59] [SPEAKER_01]: And I think people in general and and I was the same are not very good at making.

[00:13:05] [SPEAKER_01]: The adjust position size adjustment to the vol environment but then also the trading style adjustment so like it's kind of the cliche is like do what's working and stop doing what's not working.

[00:13:16] [SPEAKER_01]: And it sounds so stupid but most of the things are pretty obvious and stupid most of the rules of trading it's just actually following them as a hard part.

[00:13:24] [SPEAKER_04]: How much of this did you understand like the decimalization and just the commission structure and how all that was impacting you in their moment.

[00:13:32] [SPEAKER_04]: How much of that did you understand philosophically here was it just the.

[00:13:36] [SPEAKER_04]: The blunt reality.

[00:13:38] [SPEAKER_01]: Honestly yeah I really didn't I think.

[00:13:41] [SPEAKER_01]: My awareness of like what is the metagame what regime are we in how does volatility influence position size how do transaction costs influence.

[00:13:51] [SPEAKER_01]: P and I'll.

[00:13:53] [SPEAKER_01]: I didn't really have a good understanding of any of those like those are all lessons that I learned and like in I think it might be in 50 trades in 50 weeks but it's definitely an alpha trader.

[00:14:03] [SPEAKER_01]: If you run a simulation and just put in realistic transaction cost estimates.

[00:14:09] [SPEAKER_01]: It's pretty mind blowing like even if you're someone who just trades like at a bank trades 20 euros back and forth or like this is the reason why like just translating.

[00:14:19] [SPEAKER_01]: Really good sharps in back test to out of sample sharps of zero often happens because transaction costs are hugely important and also like tend to be underestimated so.

[00:14:33] [SPEAKER_01]: You make some kind of a like assessment of transaction costs but you don't take into account the fact that like sometimes you with on a trade and you just completely miss it or like there's data comes out and you thought you were running like a 15 pips stop.

[00:14:49] [SPEAKER_01]: But then it got to 80 pips and you know funny at the way life works those things tend to always go against you not in your favor.

[00:14:57] [SPEAKER_01]: So I think I learned a lot about like microstructure, vologist and position sizing risk management like seeing the game like I guess like we talked a little bit before you hit record.

[00:15:11] [SPEAKER_01]: About the similarity between trading and like everything I'm talking about is trading I like investing has a lot of similarities but I'm just talking about trading.

[00:15:21] [SPEAKER_01]: Has a lot of similarities but trading has a lot of similarities to like magic the gathering and poker and like Ben has made Ben has made the analogy to chess.

[00:15:30] [SPEAKER_01]: There's there's a lot of like meta game and understanding what game you're playing and then like am I trying to win or am I trying not to lose like in investing that's really important.

[00:15:41] [SPEAKER_01]: I think like people spend so much time thinking about like okay I got to have 6% Bitcoin and 7% gold and this and that.

[00:15:50] [SPEAKER_01]: But if you work at a tech company and you're going to be worried about your job the next time there's a 40% correction in the Nasdaq then you shouldn't be long the indexes which are like super all in tech you know what I mean so.

[00:16:04] [SPEAKER_01]: Like the behavioral stuff and knowing and be able to stick during corrections and all that kind of stuff ends up being more important than asset allocation most of the time and there's a lot of evidence that shows like.

[00:16:17] [SPEAKER_01]: People just tend to sell it the lows and buy at the highest because of fear and follow and all that so.

[00:16:22] [SPEAKER_01]: I would say like I had read Mark Douglas's book or books two of his books and I would say those are still that like excellent books but they talk more about like.

[00:16:35] [SPEAKER_01]: If you grew up poor you might not feel like it's justified when you make a lot of money so then you'll blow yourself up subconsciously and like things like that which I think are valid but.

[00:16:48] [SPEAKER_01]: Not things that are more like market related like how does the market behavior.

[00:16:55] [SPEAKER_01]: Influence how you act and like you know are you good and fast markets for example like a lot of people.

[00:17:01] [SPEAKER_01]: Ten to get scared when things are going crazy about when things are going crazy is the best time to make money trading so like all those kind of things adaptation regime change and all that I really had no awareness of any of those things I'd read a bunch of books but.

[00:17:16] [SPEAKER_01]: Similar again to poker you can read all the poker books but until you actually play you have to like read the book play for while read another book play for while and I feel like trading is kind of like that too like.

[00:17:28] [SPEAKER_01]: Everyone can read my books but there's still probably going to make all the same mistakes I mean I guess the hope would be that you see yourself making some of them because you read the right books but it's still I think a lot of it.

[00:17:42] [SPEAKER_01]: Is the pain like the visceral pain of losing money is what really teaches you the game not not like paper trading and reading books.

[00:17:51] [SPEAKER_04]: This is one of my favorite parts about the book about the 50 trades book because I think.

[00:17:57] [SPEAKER_04]: I think my experience in reading this book following along on the subject reading the book was this real time editor it I can never say it's sort of iterative process that you're laying out and maybe we sort of unpack a few of these things because.

[00:18:11] [SPEAKER_04]: I think what you did in this book actually set up the premise for this book set up like all the things you were going to willing to trade all the ways you're going to think about it to set up the premise for well what wasn't even intended to be a book first you just want to say.

[00:18:24] [SPEAKER_01]: Fun blog with a catchy title I guess yeah I actually had no intention of making a book and then a guy that I work with.

[00:18:31] [SPEAKER_01]: Who loved just loves it said dude you got to make this book and I was like yeah why not I mean it's already there so why not.

[00:18:37] [SPEAKER_01]: And it is a nice it's a nice book it's kind of cool actually two as as a years ago are going to pass because it's a bit of a time capsule.

[00:18:45] [SPEAKER_01]: That captures like the late stages of that bubble of like AI and carbon on all that more of the downside part of the bubble when carbon was trading at six bucks and all that but.

[00:18:58] [SPEAKER_01]: But the premise of the book was simply.

[00:19:02] [SPEAKER_01]: Trying to take all the questions that I get asked the most often that are really hard to answer in like a quick way because there's so much nuance.

[00:19:11] [SPEAKER_01]: And the biggest question that I always get is like how do you come up with trade ideas and that's a really hard question to answer because like I have my framework like technical is narrative positioning yet it idea data and like that's a good way you can kind of do like a top down filter and go from macro to micro and like you can explain all that.

[00:19:33] [SPEAKER_01]: But there's so many other things going on with trade ideas and honestly.

[00:19:39] [SPEAKER_01]: The like the real answer of where the trade ideas come from is more by osmosis so I'm reading all this stuff and things just start jumping out and then for me it's always about like having enough planets in line so.

[00:19:53] [SPEAKER_01]: You know the fundamental where are we in the narrative cycle what's a positioning and all that.

[00:19:59] [SPEAKER_01]: But it usually starts with more of like a narrative fundamental kind of thing that's usually what catches my eye and then I got to go through all the other filters.

[00:20:09] [SPEAKER_01]: And then like so another example like one thing I covered in there is like how do you know whether these options or just trade like delta one.

[00:20:17] [SPEAKER_01]: And like again that's not just something you can just fire off an email and say like here's how you do it.

[00:20:24] [SPEAKER_01]: And specifically that one is a weird one because there's so many books about options and mostly they're about pricing and Greeks and things that like honestly.

[00:20:35] [SPEAKER_01]: Depending on what you're doing you don't actually need to know a lot of that stuff like you don't really need to know black shows.

[00:20:43] [SPEAKER_01]: To buy zoom calls before earnings, you know what I mean like he just needed estimate about much it's going to move and how it's the option cost you know you don't really need to know even what your Greeks are you're just anyways so.

[00:20:55] [SPEAKER_01]: I got short all the option trader courses ready before you said that.

[00:20:59] [SPEAKER_04]: Yeah, well yeah.

[00:21:00] [SPEAKER_01]: So I mean I guess the distinction and like the distinction I'm always trying to make in all my stuff is the theory of finance is very well covered as a thing in the world.

[00:21:13] [SPEAKER_01]: I mean you can go to school for it. You can read so many books but then the actual practical like how do I actually do it in real life.

[00:21:20] [SPEAKER_01]: I feel like that is under, um, I don't know whatever under is underwritten about.

[00:21:28] [SPEAKER_01]: Like there's not very many books that will tell you what time like when should I use options when should I use call spreads when should I just be long the stock when should I be long the stock and sell topside like all those kind of different things.

[00:21:42] [SPEAKER_01]: There's books that will tell you the payoff profiles of all those things but not necessarily like the underlying logic of.

[00:21:50] [SPEAKER_01]: Why it makes sense to do one in a specific instance and why it makes sense to do one in another instance so I felt like doing the 50 trades in 50 weeks.

[00:22:01] [SPEAKER_01]: I felt like it was pretty ambitious because like 50 weeks is a long time.

[00:22:06] [SPEAKER_01]: I'll be coming but I felt like anything less sounded felt stupid because like a year is 52 weeks so like I don't know 50 trades in 50 weeks just seemed like a good amount.

[00:22:16] [SPEAKER_01]: So I felt like that would kind of give me like a large enough canvas to go into like 50 different concepts individually and then show like okay this is how it works in the real world.

[00:22:31] [SPEAKER_01]: Now like the big risk I was taking which I tried to cover this as much as possible like with disclaimers and stuff is like I was going into a lot of products where I have no edge so like you know I don't know anything about the underlying fundamentals of curve on or whatever.

[00:22:48] [SPEAKER_01]: But I think everyone understood that what I was trying to do was like in the context of a specific view here's what you would do but I'm not necessarily actually saying that I'm like that I know enough about curve on it to know that I should be shorter long but it more like okay it assuming you are bullish or our bearish and you expect this.

[00:23:10] [SPEAKER_01]: Then how would you go about determining like okay what do I do what's the structure of the trade.

[00:23:17] [SPEAKER_01]: I mean ultimately that's what I'm talking about right is structuring doesn't get written about as much as direction so structuring and risk management are probably more important than.

[00:23:27] [SPEAKER_01]: Making the correct calls like my trading is like 50 50 but then the payout is like 1.8 to 1 on average or whatever so.

[00:23:38] [SPEAKER_01]: I'm not as concerned with being right all the time it's more like I'm looking for structures that can monetize 50% the 50% of the time that I'm right so.

[00:23:49] [SPEAKER_01]: The idea with the book or with us it was the sub stack originally was to each week kind of pick something and then just go like way into the weeds on like okay here's how I do it and then.

[00:24:02] [SPEAKER_01]: The interesting thing actually about it that that I enjoyed was that I was kind of writing it for news like that was kind of my like.

[00:24:11] [SPEAKER_01]: I don't know my like no year audience when you're writing something that was kind of my my audience was.

[00:24:17] [SPEAKER_01]: People that are pretty new to the market but tons of people who like our you know 45 year old hedge fund professionals.

[00:24:25] [SPEAKER_01]: That are my clients told me after like hey I read that 50 trades of 50 weeks and that was really cool I learned a lot from like 32 and 37 and what I'm like oh that's cool like I think this guy's a better trader than I am and he's reading my book to learn new ideas so that was nice.

[00:24:41] [SPEAKER_04]: Well there's the whole process element of it because you're literally 50 times and 50 weeks you're saying here's where this idea is coming from.

[00:24:51] [SPEAKER_04]: Here's like what you want to get across with it and then.

[00:24:55] [SPEAKER_01]: When loser draw like here's here's the way this this played out like here's the logic really brutally on the whole thing and that was a fun part of it too was.

[00:25:04] [SPEAKER_01]: Like I tend to not do this as much as I should but like I think a good trader will do like a good postmortem on major like trades when you put a lot of capital into something or a lot of energy into something.

[00:25:19] [SPEAKER_01]: As opposed to just saying like whoops and that going to the next thing because I think that's where you discover.

[00:25:26] [SPEAKER_01]: And you can you don't have to do it on individual trades if you're more high frequency you can do it you can batch it and say like okay in in September I'm down 170 k.

[00:25:36] [SPEAKER_01]: Like what is going on if I go through my trades what's what's the story here and maybe you'll see like okay we're in a mean reverting market and.

[00:25:46] [SPEAKER_01]: You know all I'm doing is running break out trades in in your $1 and we've been trading one away 11 for four months or whatever.

[00:25:54] [SPEAKER_01]: But I feel like the postmortem aspect was a kind of a fun part because because I was doing it in and writing it I had to do a good job of the postmortem and I mean I refer to this book all the time simply because.

[00:26:09] [SPEAKER_01]: Like referring to market wizards or remnants of a stock operator whatever just feels boring because like everyone knows about it but the psychology of intelligence analysis.

[00:26:21] [SPEAKER_01]: By the the Richard here who was like a CIA guy goes through like basically how to analyze.

[00:26:28] [SPEAKER_01]: And it's an intelligent situation but it applies to markets and one of his big things is postmortem because otherwise you just keep making the same mistakes over and over.

[00:26:38] [SPEAKER_01]: And so I kind of got that from that book primarily I think was like oh yeah that actually makes a lot of sense because.

[00:26:46] [SPEAKER_01]: You can have the most rigorous process in the world but if your process is raw like is shitty and you're just going to have a very rigorous 45% hit rate that pays 0.5 and loses one or whatever so.

[00:27:02] [SPEAKER_01]: And I think doing the postmortem I think can yield some some useful information.

[00:27:09] [SPEAKER_01]: Then the only thing is though then there's a balance because like for me you also have to let things go so like when you lose money on a trade and you thought it was like a five star.

[00:27:18] [SPEAKER_01]: And you know you told all your friends about it and everyone lost money the all you want to do is kind of move on.

[00:27:26] [SPEAKER_01]: So I feel like it I try to like very be segmented about it like okay do the trade do the postmortem and then just flush my brain and move on because otherwise it can kind of create this like.

[00:27:39] [SPEAKER_01]: Say say you were I don't know whatever short Tesla and that all those things happen and it kind of feels like you haven't some emotional attachment to the trade.

[00:27:50] [SPEAKER_01]: Then you know another five start set up comes in again is short Tesla and you just like he sort of gag when you want to when you think about doing it and you end up not doing it because your process said you should do it but you had some emotional reaction because of like PTSD from the last time so.

[00:28:08] [SPEAKER_01]: The one good thing about or there's some good things about being like more high frequency is that you just do so many trades that you don't really have like this huge emotional attachment to any trade like that's how I feel like.

[00:28:21] [SPEAKER_01]: Oh, I lost money again oh well like you know I'm losing money on half my trade so it just over as years pile up.

[00:28:29] [SPEAKER_01]: The emotional impact of losses kind of has diminished for me and I feel more robotic about just like okay okay you know I'm here I'm getting in here my stops here if it gets to the stop then you know the gods have spoken.

[00:28:45] [SPEAKER_04]: Any to is the is the writing of the post mortem one of the most effective ways to do the brain flush for you.

[00:28:56] [SPEAKER_01]: I think for me the brain flush became easier like I said more time passing because you just get used to it but also collecting data on my trading over years really started to help me understand like.

[00:29:14] [SPEAKER_01]: Even in like I look at the path of a really good year there's just so much variance in trading that.

[00:29:22] [SPEAKER_01]: It's you know some I don't know there's a lot of like good decision about how come happening all the time I think right and so.

[00:29:29] [SPEAKER_01]: I think having data and seeing like okay in my best year I still lost money five days in a row three times and I lost money four days in a row three times.

[00:29:40] [SPEAKER_01]: Makes it less visceral the in the future when you lose money five days in a row you just kind of understand like okay as long as as long as I'm not like something weird is not going on in my life and that's the reason like an externality.

[00:29:52] [SPEAKER_01]: I can just say okay well you know that's happening before it's going to happen again and that's why like once if I post some view on Twitter and someone says like and I'm wrong someone says how how you're wrong is like.

[00:30:04] [SPEAKER_01]: Dude I've been wrong so many times here if I don't feel bad now I'm not going to feel bad because you tweeted about coming.

[00:30:10] [SPEAKER_04]: I feel like it's one of those things that I know it's a cliche thing but I think about I think about baseball players.

[00:30:15] [SPEAKER_04]: I think about the hitter and even like the 250 hitter let me 300 hitters just like yeah this is going to suck more than half of the time this is not going to go well.

[00:30:24] [SPEAKER_01]: Well you know that's what Billy being said differentiated Lenny Dyke's stuff from him so.

[00:30:30] [SPEAKER_01]: Billy being I think had more like raw talent or whatever but Dyke's drill was just like a goldfish he just.

[00:30:36] [SPEAKER_01]: He struck out and then he got back up the next time and thought I'm the best hitter in the world I'm going to hit a like I'm going to hit home run if he struck out again the next time he got up to bat is like I'm the best hitter in the world I'm going to hit home run.

[00:30:47] [SPEAKER_01]: And you know there's a lot of value to that where his Billy being was always questioning himself and you know I mean he did find that.

[00:30:53] [SPEAKER_04]: Yeah you got to have that again it's another example of understanding sort of like the metagame that you're playing let's put let's bring a couple of these words down and I'm just curious in the way you define them so when you talk about.

[00:31:05] [SPEAKER_04]: Understanding like narrative and you understand a narrative in terms of looking for a trade or thinking throughout trades progressing.

[00:31:12] [SPEAKER_04]: What does that word mean to you I'm not going to hold you to this definition just riff on it for a second.

[00:31:18] [SPEAKER_01]: Yeah I mean it's sort of like there's this dance between price and narrative and positioning so like.

[00:31:24] [SPEAKER_01]: Generally like there's a story and then people get on board and then positioning gets bigger and bigger and then people get married to the to the idea.

[00:31:33] [SPEAKER_01]: And confirmation by sets in and then at some point the news flow starts to change but people won't recognize it because they're married to the position and they probably made a lot of money at that point.

[00:31:44] [SPEAKER_01]: And then eventually the price turns and then the narrative accelerates the true story that was probably bearish at the highs starts to accelerate and then.

[00:31:55] [SPEAKER_01]: People are forced to to accept the reality when the price goes down so like the price then forces the positioning to exit and I think for me now a lot of my edge comes from that because I just talked to a lot of people so I kind of have a good idea of.

[00:32:13] [SPEAKER_01]: Like where the sort of visceral and emotional side of the market is.

[00:32:19] [SPEAKER_01]: Whereas like positioning data will tell you something like it'll give you an idea of like okay here's a raw positioning statistics or whatever but a lot of times it doesn't really tell you.

[00:32:30] [SPEAKER_01]: Like where we are in the cycle and I feel like you know this simplest thing was like in 1999 I remember a friend of mine calling me and he was a consultant I think he worked at like Accenture or whatever.

[00:32:43] [SPEAKER_01]: And he was like dude everyone's buying these oracle products the oracle is going to be absolutely huge I bought Oracle stock or whatever and it was like.

[00:32:52] [SPEAKER_01]: Very late in the dot com bubble and so there is a massive disconnect between like he was buying the story and that was it like they've the simplified Peter Lynch thing when people don't understand what Peter Lynch did is just like buy what you know okay like I like this restaurant I'm going to buy the stock.

[00:33:09] [SPEAKER_01]: But you're buying at a certain price right and so like the way I actually did an interview with Howard Marx one time and he said the way I think about it is like he'll he said to me I have a core vet do you want to buy it.

[00:33:24] [SPEAKER_01]: And it's like.

[00:33:26] [SPEAKER_01]: Okay, like I want to core vet but what's the price and people don't do that in the stock market they just go like oh Nvidia's an awesome company I love you know graphics chips or I love AI I'm going to buy it.

[00:33:39] [SPEAKER_01]: But you're just like not even considering what the price is like obviously many people do consider the price but like the very first derivative way of look at the market is like I like the company I'm going to buy the stock and.

[00:33:51] [SPEAKER_01]: You know since stock prices varies substantially.

[00:33:55] [SPEAKER_01]: You just like that makes absolutely no sense you're buying Oracle just because everyone's you know it's already up 20x in 1999 so.

[00:34:05] [SPEAKER_01]: Trying to understand like for me what I'm trying to understand is the second derivative so like okay I know what the narrative is.

[00:34:12] [SPEAKER_01]: There's an equilibrium price currently based on all the known information in the world and how is new information going to impact that price.

[00:34:21] [SPEAKER_01]: And when new information comes out can I react faster than other people to understand the implications of it so like.

[00:34:29] [SPEAKER_01]: Simple things sometimes can be like Nvidia beats earnings and the stock goes down like that's a really clear towel that.

[00:34:36] [SPEAKER_01]: Something's wrong you know like that's a really basic you know good news bad price kind of set up.

[00:34:42] [SPEAKER_01]: But a lot of people will be like this is stupid in the video beat in the sucks down.

[00:34:47] [SPEAKER_01]: But you know that's more like a second derivative thing like okay probably because everyone already bought it the day before earnings on all the upgrades or whatever so.

[00:34:56] [SPEAKER_01]: I'm always trying to think of like where we are in the cycle and there's that simple sort of chart that's like that little roller coaster up and down.

[00:35:05] [SPEAKER_01]: That that goes around then I think is a pretty good heuristic for like what the narrative cycle is and if you have a good understanding of where we are in that cycle.

[00:35:15] [SPEAKER_01]: Then when new information comes out you can react accordingly and so that might mean like okay I think we're early and there's tons of skeptics and the things got up 40% and now this bullish news comes out and that's going to convert all the skeptics and this thing's going up another 100% or like.

[00:35:33] [SPEAKER_01]: The things already up and the news is bad but people aren't really reacting and it just made a new all time high and then now close below.

[00:35:43] [SPEAKER_01]: And I know people are nervous about it because people added on the break to the new all time high and so what does that all mean well maybe the narratives actually tired may the last buyer has bought.

[00:35:54] [SPEAKER_01]: And you know now we're we're going down and the next piece of bad news is going to be like a 20% down day because everyone kind of knows this the game's over but like I said a lot of people.

[00:36:07] [SPEAKER_01]: We'll not actually react until the price forces them so I mean that's part of why like price drives narrative because then once a price goes down.

[00:36:16] [SPEAKER_01]: Then people are like oh yeah there is some pretty shitty news flow here and then you know that the media covers it more because there's a big move and you know so there's like these feedback loops between the price and the narrative that I'm always kind of trying to be conscious of.

[00:36:31] [SPEAKER_04]: What about edge and his edge just sort of like the manifestation of understanding these feedback loops and just how to interpret them.

[00:36:41] [SPEAKER_01]: I mean that can be one source of edge the really good edge is.

[00:36:46] [SPEAKER_01]: You understand exactly what's happening in some very micro part of the market like there was a great Twitter.

[00:36:53] [SPEAKER_01]: Um.

[00:36:55] [SPEAKER_01]: Thread in 2022 that someone had basically figured out the the FTX rebalancing and how they rebalance their their leverage tokens or whatever it was so they knew at like nine 15 UTC.

[00:37:09] [SPEAKER_01]: If the thing was up FTX was going to come in and buy the thing and so they bought it nine 13 UTC and so that nine 19 UTC like that's real edge.

[00:37:20] [SPEAKER_01]: Um, and like that's more systematic obviously but I think you can also incorporate like systematic ideas like that into a more discretionary framework.

[00:37:29] [SPEAKER_01]: So to me like ultimate edge in trading is more like being an absolute expert in one thing and knowing exactly how it works and then being able to know what kind of like whatever one's doing.

[00:37:43] [SPEAKER_01]: And being one set by had everyone else.

[00:37:46] [SPEAKER_01]: Um, but then I think there can be other edges like this simplest one for someone that's been trading for a long time is pattern recognition like unbiased pattern recognition, which is the hard part because you know we're so.

[00:37:59] [SPEAKER_01]: So built to see patterns everywhere but a lot of times you can say like.

[00:38:06] [SPEAKER_01]: The way that this is moving reminds me of X Y Z and then it gives you an incentive framework and if you're wrong, you know, like okay the last time this happened.

[00:38:17] [SPEAKER_01]: The next three days we're all down days. So if the next day's up, then you know okay my analog is wrong, but if it's down, you know you short if it's down one day, you know, kind of hold on for at least three days maybe this feels similar and.

[00:38:31] [SPEAKER_01]: You know obviously you can do that with computers, but I think also you can do it with.

[00:38:36] [SPEAKER_01]: With just like human pattern recognition the hard thing is to be unbiased so you can say like right now when this is airing and what is it September 23rd 2024 you can say oh this feels a lot like 1995 soft landing, you know they're cutting into a bull market or you could say this feels a lot like 2007 you know, I could give you 15 metrics that all are like.

[00:39:00] [SPEAKER_01]: 2007 and being able to make that distinction I think a lot of times comes down to bias because there's a core group of people in the market that just are biased bearish all the time.

[00:39:13] [SPEAKER_01]: And that gets fed by like negativity bias in the media and you know just everything that's negative like if I put something on Twitter that's negative it'll get three times as many likes as something that's positive so.

[00:39:27] [SPEAKER_01]: There's this whole like machinery that's feeding this negativity bias and so if you can look at 2007 and 1995 and beyond biased and have some insight into like okay this is more like 95.

[00:39:40] [SPEAKER_01]: Then oh seven which is what I think in this case then those kind of things can be an edge as well, but I guess the difference between those two types of edges like one so measurable and one is like this nefarious sort of or not nefarious what's the word I'm looking for like.

[00:40:00] [SPEAKER_01]: Like like a cloud that dissipates what's the word for that.

[00:40:03] [SPEAKER_04]: Okay we're both going to suffer on this level.

[00:40:05] [SPEAKER_01]: Okay whatever anyway like this sort of like amorphous that's a more.

[00:40:09] [SPEAKER_01]: There we go.

[00:40:10] [SPEAKER_01]: More fist thing where you think you have an edge, but the so the difficult part is that it's kind of like always changing like this pattern recognition is like yeah, okay, you could be right but can you really measure it.

[00:40:23] [SPEAKER_01]: Whereas like some kind of microstructure or systematic edge you can measure it and then it's easier to know okay like this thing doesn't work anymore whereas like if you're.

[00:40:32] [SPEAKER_01]: If you're bread and butter is correlation trading and you look at what golden yields are doing and then try to trade FX based on that which is what that was my bread and butter in the 2000s.

[00:40:44] [SPEAKER_01]: And then the algorithms start doing that and you lose your edge in that it takes you like three years to figure it out which is what happened with me is like took me about three years from 2010 to 2012 to realize okay like.

[00:40:58] [SPEAKER_01]: If yields go up and Dalyan hasn't gone up which should be bullish Dalyan by the time I'm getting involved the algos have already bought so actually now it's bare still again or whatever so.

[00:41:08] [SPEAKER_01]: Depending on what your edge is and the measure ability of it, I think it becomes more difficult to like know what your edges which makes it harder so like I think that's why somebody who's like a fall expert who is really good at selling events in the ball market.

[00:41:26] [SPEAKER_01]: That's like a really defined edge and like that's just I don't know that's a sexier edge to me then like macro pattern recognition and that kind of thing so I think for me.

[00:41:40] [SPEAKER_01]: What I try to do is like I have this sort of macro pattern recognition thing but what I'm trying to do is drill down and use some more specific things that I know about FX to then.

[00:41:50] [SPEAKER_01]: Like fine tune entry points and have more of an edge like so maybe I have this like tiny edge of pattern recognition and experience and all that.

[00:42:00] [SPEAKER_01]: But then my real edge is like knowing how FX is trading relative to different things and knowing okay that's really weird that the Mexican pace so should have rallied on that but it didn't.

[00:42:11] [SPEAKER_01]: And so then that will give me information that a lot of people wouldn't get because they don't know the relationships between you know Mexican pace so in azi and or whatever.

[00:42:22] [SPEAKER_01]: So I don't know is that I don't know if I answered the question but edges I guess it's like this amorphous thing but.

[00:42:28] [SPEAKER_01]: If you don't know what your edge is that's a really bad sign I would say because like I mean that's why retail investors.

[00:42:36] [SPEAKER_01]: Generally underperform a lot is obviously transaction costs but also like you just don't really have an edge like if if you're reading a thing on you who finance.

[00:42:46] [SPEAKER_01]: Everyone else is reading it to there's no there's not going to be any edge there like if you work in that industry and you know that product's amazing and people have a recognized it yet like that's an edge.

[00:42:57] [SPEAKER_01]: So I would say like I guess it's kind of like the the sucker cliche from poker like.

[00:43:03] [SPEAKER_01]: If you don't really know what your edges then you do not have an edge.

[00:43:08] [SPEAKER_04]: This is why I stay off the yacht cover page just drilling those message boards.

[00:43:14] [SPEAKER_04]: For all my always the.

[00:43:18] [SPEAKER_04]: This comes out in the book in a really interesting way because I think one of my favorite parts of the book is how fabulously wealthy you got off this experiment.

[00:43:30] [SPEAKER_04]: How we're having this call you're sitting on your private island now.

[00:43:34] [SPEAKER_04]: What happened at the end of the book was the takeaway with this immaculate edge over all these different areas.

[00:43:39] [SPEAKER_04]: Well I do it's very yes.

[00:43:41] [SPEAKER_04]: I know you're a spread down on you.

[00:43:43] [SPEAKER_01]: Yeah, I know you're you're trolling me but basically the the trades broke even which is kind of honestly what I expected like.

[00:43:51] [SPEAKER_01]: And like I said the whole point of the exercise was to go through the methodology of like okay I don't really know much about Ford stock but if I was buying it.

[00:43:59] [SPEAKER_01]: And this was the path I expected it to take then I would definitely do call spreads not dealt to one and here's why so that was kind of like the philosophy.

[00:44:10] [SPEAKER_01]: And yeah, so in the end it was I mean it was basically a push there were some amazing trades in there and one of the most amazingly bad ones was a bearish carbon a trade that's why I mentioned that and I think I think it was bearish carbon a bullish roblox.

[00:44:26] [SPEAKER_01]: And carbon a they're both out 40 and carbon a went to five and now it's at like 200 and roblox is that like 32 or something like that so.

[00:44:39] [SPEAKER_01]: And if anything I'm just proving the point that like random tourists in random markets have no edge.

[00:44:46] [SPEAKER_04]: At the same time though, and I'm not expecting you to be able to read this page in front of me but like you broke down the piano by like the different types of things you traded.

[00:44:55] [SPEAKER_01]: I think the my low stuff actually did okay right I honestly don't totally remember but I'm pretty sure the macro stuff was all right yeah which I keep track of like in my writing.

[00:45:05] [SPEAKER_01]: I put trade like specific trade ideas in am fx which is my daily and I do track that because I feel like.

[00:45:14] [SPEAKER_01]: I mean that was why I did it in this too I kind of knew the results wouldn't be amazing because like I'm doing a lot of stuff where I don't know what I'm doing.

[00:45:22] [SPEAKER_01]: Like in that product specifically like I know the structuring stuff but I don't know like the ins and outs of Ford stock or whatever.

[00:45:29] [SPEAKER_01]: But part of the reason I felt like I wanted to run the piano and why I do it with my trade wrecks and am fx is.

[00:45:37] [SPEAKER_01]: There's this whole thing like if anyone's read super forecasting I think that's one of the best books to read to understand while straight because.

[00:45:45] [SPEAKER_01]: There's like a whole industry of making predictions with no stop loss and an infinite time horizon and then if you're right you keep pounding the table on it like if you're always bullish gold.

[00:45:58] [SPEAKER_01]: And it goes up you keep saying yeah look at gold's up again today as expected or whatever and then if it goes down you just talk about you know GM stock that day or whatever so there's like.

[00:46:09] [SPEAKER_01]: I mean it's a form of survivor bias essentially survivorship bias is essentially like and I'm in the newsletter business too so like I mean it's part of the way it works is like you stop out of bad trade so you don't talk about them so there's some.

[00:46:22] [SPEAKER_01]: And I've like honestly there but also like if you go way out that's spectrum to like economists a lot of times they're just making predictions with with no like no chance of switching just like here's my bullish spx forecast and if spx goes up by a just if i a percent higher spx goes down i just if i a percent lower whatever so like there's a lot of and then if you connect.

[00:46:46] [SPEAKER_01]: All the forecasts made with the results generally like there's no relationship they just the forecast follows spot so I feel i felt like for intellectual honesty.

[00:46:58] [SPEAKER_01]: I have to track my predictions and put finite time time horizons on them and put a stop loss and to take profit so that it's real or it's real life you know and it's not just.

[00:47:12] [SPEAKER_01]: You know qe is going to cause inflation they were saying in 2010 and then the inflation like there was literally people in 2022 that said see like qe laid the groundwork in 2010 or ever like.

[00:47:23] [SPEAKER_01]: Come on yeah cash for clockers did that we got it so I guess it's an accountability.

[00:47:31] [SPEAKER_04]: I think that's just an unbelievable book yeah super forecasting fill tech like all his stuff is exceptional in this space of people and check that out to the.

[00:47:44] [SPEAKER_04]: This idea and I couldn't help but thinking about this over and over again with with a lot of your work is when we think about judging other managers or really think about capital allocation for clients and think of through stuff like that stuff I do in my day job.

[00:47:57] [SPEAKER_04]: Is this is also really useful too because you start to understand how managers are wired how they're going to allocate resources and allocate capital.

[00:48:06] [SPEAKER_01]: And kind of judging when they're off their mark and if it's for the right reasons of the wrong reasons right yeah so like I think one thing that a lot of hedge funds hate is style drift where.

[00:48:16] [SPEAKER_01]: You come in saying you're going to be doing one thing and that like your liquid macro and then you're doing like European dividend strips or whatever 10 to be frowned upon so yeah and I think also.

[00:48:29] [SPEAKER_01]: I'm there's just it's obviously you have to judge people by their results but there's so much work been done like by mowbison all that and even you can just run a simulation of like.

[00:48:40] [SPEAKER_01]: Okay, I make money 50% of the days and my winners pay 1.71 and I'm risking 50 grand on every trade and run that 100 times there's years where you still lose money so like variance is so significant and then there's also like this embedded.

[00:48:59] [SPEAKER_01]: style that can produce really good sharps but like it's like the nassim to lab thing where like it produces a great sharp and tell you blow up.

[00:49:08] [SPEAKER_01]: And I mean that's kind of like the the cautionary tale of like need or hofer and and remiss of a stock operator in that is that like there's certain trading styles that are like give you a lot of glory.

[00:49:22] [SPEAKER_01]: But then have like an infinite downside because you can't manage the risk and so I think if you as an allocator whatever if you understand someone's process and they're following it.

[00:49:36] [SPEAKER_01]: I mean the first thing you just want to know is like is there an embedded short option in the strategy.

[00:49:42] [SPEAKER_01]: And is there enough liquidity to get out if the person's wrong and do they have a methodology for getting out when they're wrong because.

[00:49:50] [SPEAKER_01]: You know selling us in people it's is the greatest chart trade of the last 100 years but barely anyone survive doing it because when when the shit hits the fan unless your name's Warren Buffett.

[00:50:02] [SPEAKER_01]: You just end up blowing up so like short ball in general is like that it's it requires like obviously there's a lot of money to be made short ball but if that's your process then.

[00:50:15] [SPEAKER_01]: If you have a three or four year track record the track record just means nothing so I think as an allocator you can look at a track record and compare it to the process.

[00:50:26] [SPEAKER_01]: And then go like okay is this the American Gale situation where like the person's going to make more money like you know like the amaranth kind of thing or whatever we you make a billion then least six billion.

[00:50:39] [SPEAKER_01]: Or is this like a replicable thing and honestly like if I were an allocator I'd be looking for a process that looks like a call option where.

[00:50:49] [SPEAKER_01]: You know the person's going to lose any of that's what like the pod funds generally look for is like okay if this person sucks when they're going to lose 4% and if they do well they're going to make 10 and.

[00:51:00] [SPEAKER_01]: And a couple people are going to make 20 and you put 50 of those together and you have a really good hedge fund.

[00:51:06] [SPEAKER_01]: But I think the thing that is hard sometimes to extract unless you have very detailed information about the process is how much embedded short optionalities in there like.

[00:51:18] [SPEAKER_01]: Because a lot of interest rates strategies for example like roll down and stuff like that are you know you're risking 20 to make six or whatever to make risk and 20 to make five.

[00:51:29] [SPEAKER_01]: But then sometimes you're risking like 23 to make two and nobody really knows but you managed to squeak it out 15 times in a row.

[00:51:37] [SPEAKER_01]: So I think understanding like what a good process looks like and then saying okay does that person have a good process.

[00:51:48] [SPEAKER_01]: And then seeing their track record you put those three things together and then you can I think you're avoiding like okay this person's the king of the coin flippers and there's something more to it because I think just looking at like sharp and returns.

[00:52:02] [SPEAKER_01]: And so it's so superficial and must you got a lot more data underneath it I think it's really hard to make any assessment.

[00:52:10] [SPEAKER_04]: Well that kind of goes back to that whole thing of you can go take a course on that you can study that you can get your CFA certification and a bunch of other things and say do diligence.

[00:52:21] [SPEAKER_04]: But that's still different than understanding what the practice is of talking to somebody who is trained to sell strategy or train to sell it right right that's the whole thing right is that.

[00:52:32] [SPEAKER_01]: And all the time you'll get people like emailing you or or just like asking for money or whatever saying like look at this strategy like it performed this well in the back test and even like out of sample it looks like this.

[00:52:46] [SPEAKER_01]: And you're like yeah but like there's one two three things in real life that are going to make this a lot more difficult like you can't borrow that stock or like it the borrows 80% or whatever you know all those all the realities of.

[00:53:00] [SPEAKER_01]: The actual strategy being in production that was a big thing actually that I learned just to go on a small tangent but we did some some systematic stuff over the years and it's absolutely shocking going from like and I knew what I was doing it's like FX trades based on time of day patterns and stuff like that.

[00:53:20] [SPEAKER_01]: So I knew exactly what I was doing and I had a pretty good idea of like transaction costs and FX that's all I've been doing my whole life.

[00:53:27] [SPEAKER_01]: And the friction of going from testing to production in a system is just mind blowing like there's just so many things that happen that you just can never have guests like you're in Norway has no like in in 2015 there was one point where we're short you're in Norway.

[00:53:44] [SPEAKER_01]: And there was literally no offer on the screen like it was just and there wasn't it wasn't like Norway.

[00:53:51] [SPEAKER_01]: You know there wasn't like a nuclear explosion in Norway it was just like a risk of version of an and everyone was already long Norway and that's if anyone that knows FX like there's about six times in my entire 20 whatever 28 years that price in FX has ever been like no bit or no offer it's just like it's a thing that doesn't really happen.

[00:54:10] [SPEAKER_01]: So you have a systematic strategy risking 200 grand it's now down two million dollars at current mark to market and there's no actual price to get out of it.

[00:54:20] [SPEAKER_01]: And then you're like okay now what do I do.

[00:54:24] [SPEAKER_04]: It's like it's like real estate or something.

[00:54:26] [SPEAKER_01]: Yeah, I was bizarre.

[00:54:28] [SPEAKER_01]: There's there's always like these weird I mean that's just fat tails I guess you know in real life but but not just fat tails or transaction costs and then like the person who's agreed to back you actually backing you when you're in drawdown is another thing like the the meta game of the organization that you work for and you say like okay I got this great strategy.

[00:54:52] [SPEAKER_01]: You know it's gonna make $5 million a year with $2 million dollars to draw down and then on the third day the Fed goes 50 when they were supposed to go 25 and you lose $1.6 million but the strategy still fine does the manager let you keep doing it you know like those kind of meta game things there's so many things that come in to real life when you're trying to go from like XLS to actual like trading something in real life tell your story of.

[00:55:21] [SPEAKER_04]: I want to say it's it's 2007 was 2007 the really terrible no good awful very bad year that turned in 2008 which was a very good year so I'm spoiling the story a little bit but.

[00:55:33] [SPEAKER_01]: Oh trading wise yeah I was thinking markets wise I was like you know it's kind of the opposite so.

[00:55:39] [SPEAKER_01]: Yeah, you know seven there was like a bubble in carry and it was really the first time I had ever seen a bubble since 99 2000.

[00:55:48] [SPEAKER_01]: So and I was still like relatively young at that time so wasn't like super experience but it was kind of my second cycle I guess and so there was like carry ETFs coming out.

[00:56:00] [SPEAKER_01]: These funds were doing like long carry and then selling options against like in the same direction like Texas hedging their long carry to extract more carry and it was just so obvious that it was a bubble.

[00:56:13] [SPEAKER_01]: And even like retail people were doing carry trades and like Japan everyone was just it was like a carry bubble but there was kind of a good reason like New Zealand rates were at like 9% in Japan was at zero and actually US was pretty low.

[00:56:27] [SPEAKER_01]: People were doing like Icelandic Corona was like 14%. So around like early March and also some of the this up prime stuff was starting to happen I think the bear stones funds had blown up so it was kind of like there's some bad stuff in the narrative.

[00:56:44] [SPEAKER_01]: Everyone's long carry it's basically a bubble so I wanted to be short carry and they probably started in like February 2007 and there was one huge blow up in 07 but because of like some various things like being on I was on holiday for one week of it so I came in and everything was already down a lot so it kind of struggled to get involved.

[00:57:04] [SPEAKER_01]: But then also I was losing a lot of money because being short carry is expensive if you're not right so I was sitting there just bleeding every day.

[00:57:13] [SPEAKER_01]: So then by the time these bloops would happen in 07, I was like my position size was smaller because I was already down on the year and all this.

[00:57:22] [SPEAKER_01]: And I remember so I was basically trying to scratch to like be flat on the year which is horrible as a market maker like you know I had a pretty good desk a pretty good seat at Lehman so like probably like $4 million was like.

[00:57:37] [SPEAKER_01]: Kind of like an expected number and I was down on the year and I scratched scratched all the way back and then I had two things so like two weeks before there's no error books at Lehman so.

[00:57:49] [SPEAKER_01]: So someone a salesperson made a mistake in my currency which I have to wear which was like a $600,000 loss so I went from like plus 300 to down 300 and all I wanted to do is be up.

[00:58:00] [SPEAKER_01]: And so I got up again up like 250 grand on December 31st and one of our like more adversarial clients came.

[00:58:10] [SPEAKER_01]: And like just loved me with like I don't know 300 million Aussie at a really horrible rate and I ended up losing it and being down on the year and I remember writing an email to my wife that day saying like this is bullshit I can't do this anymore.

[00:58:23] [SPEAKER_01]: I got it like I got a freaking move to British Columbia and like you know do vertical farming or something I don't know.

[00:58:31] [SPEAKER_01]: And I remember like I remember all that so clearly because then I walked out of Lehman which was in Times Square and everything was all set up for New Year's Eve and so like they had all the people there and everyone's like,

[00:58:44] [SPEAKER_01]: And I was like why are these people also happy and and then eventually you know I just I guess that one big lesson there there is like emotions have a time lapse or like have the time decay as well, you know so.

[00:58:58] [SPEAKER_01]: You know a couple days past before the New Year started and I came back in and then anyways long story short 2008 was my best year ever to that point actually was my best year ever to this point too.

[00:59:10] [SPEAKER_01]: So just kind of like the lesson at that point which I've faced other times where I'm like borderline like do I really want to do this anymore.

[00:59:18] [SPEAKER_01]: And so I'm just like grinding and and just saying like okay one day at a time come back into work the sun still came up I'm going to do my best and you know I can't.

[00:59:29] [SPEAKER_01]: Get down on myself all if I do my best and you know and then everything always kind of worked out after that.

[00:59:35] [SPEAKER_04]: It's 2008 not too bad year for you.

[00:59:38] [SPEAKER_01]: Yeah so 2008 was actually my best trading year ever but I did work at Lehman Brothers so there was some so there was that negative.

[00:59:46] [SPEAKER_01]: The boy issues yeah well not really because like the way it happened I didn't have to worry about my job but.

[00:59:53] [SPEAKER_01]: There were other aspects of it that we're stressful actually the weird thing was I was trading dollar and and this the correlation to dollar in was Lehman stock at that in September.

[01:00:03] [SPEAKER_01]: Oh, a people were watching Lehman stock to determine what to do in dollar and and I was trading dollar and at Lehman Brothers it was like the ultimate like reflexive loop it was crazy.

[01:00:12] [SPEAKER_04]: That is that is what I want to ask this is like a standard closing question for access returns and just based on all this experience based on all these things.

[01:00:21] [SPEAKER_04]: I'm going to give you some of the time.

[01:00:23] [SPEAKER_04]: Tie the book and tie the tie the mean reversion of pain enjoy into this if you want but take it anywhere you want to teach one lesson to the average investor.

[01:00:32] [SPEAKER_04]: What would it be one one lesson?

[01:00:35] [SPEAKER_01]: I think adaptation was probably the most important lesson for me is that just however much money you're making today.

[01:00:41] [SPEAKER_01]: Almost by definition that thing is probably not going to work tomorrow because that's the way markets work is they hunt for things at how high sharps and then push those sharps to zero.

[01:00:53] [SPEAKER_01]: And then also.

[01:00:55] [SPEAKER_01]: No trading style really works forever and so I think having the ability to adapt to different regimes and not be like I'm a breakout trader or like I'm a value guy or whatever.

[01:01:08] [SPEAKER_01]: Just be adaptable to the environment and kind of try to do what's working and what's not which I know is kind of like easier said than done but I think ultimately that was probably like the biggest series of lessons that I learned.

[01:01:21] [SPEAKER_01]: And then the other one is just don't blow up because I think you know no matter how good you are and there's many traders that are excellent.

[01:01:30] [SPEAKER_01]: But that blew up and then it just makes your life very difficult you know like it's means you can't trade anymore or a starter to find a job.

[01:01:38] [SPEAKER_01]: And also you're not doing what your stakeholders have asked you to do which is like be a good steward of capital so I think avoiding blowing up.

[01:01:48] [SPEAKER_01]: And adaptation have been the two keys for my like longevity and trading.

[01:01:54] [SPEAKER_04]: Well, I think those are two great keys to wonderful tools to have in the toolbox I think 50 trades and 50 weeks another hard plug alpha trader too we got all the books are going to take up all the space here these are both awesome.

[01:02:05] [SPEAKER_04]: And I'll be thank you so much for the time today. Thanks for joining us.

[01:02:09] [SPEAKER_02]: All right. Thank you. Talk to you again soon. Thanks back. This is Justin again. Thanks so much for tuning into this episode of excess returns.

[01:02:16] [SPEAKER_02]: You can follow Jack on Twitter at at practical.

[01:02:19] [SPEAKER_02]: You follow me on Twitter at JJ Carbano. If you found this discussion interesting and valuable please subscribe and either iTunes or on YouTube or leave a review or a comment we appreciate.