Trading Wisdom for Aspiring Hedge Fund Managers
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Trading Wisdom 18: The Battle is With Yourself
"Years of experience eventually teach you that your main battle, always, is with yourself - your propensity for errors, for rationalizing marginal hands into good hands, lack of concentration, misreading other players, emotional eruptions, impatience, and so on. Your opponents are merely dim outlines that come and go. Few of them ever reach the exalted heights of damage that you can inflict on yourself."
- Larry Phillips, Zen and the Art of Poker
JS Comment:
Many great traders have expressed some version of the opinion, "Your greatest opponent is yourself." Do you agree?
If so, what are the implications?
On the positive side, if "we have met the enemy and he is us," as Pogo once said, what does that say about growth opportunity?
If you had perfect discipline, perfect motivation, and perfect emotional control, how good (or great) a trader could you be?
Buy Zen and the Art of Poker on Amazon
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"Years of experience eventually teach you that your main battle, always, is with yourself - your propensity for errors, for rationalizing marginal hands into good hands, lack of concentration, misreading other players, emotional eruptions, impatience, and so on. Your opponents are merely dim outlines that come and go. Few of them ever reach the exalted heights of damage that you can inflict on yourself."
- Larry Phillips, Zen and the Art of Poker
JS Comment:
Many great traders have expressed some version of the opinion, "Your greatest opponent is yourself." Do you agree?
If so, what are the implications?
On the positive side, if "we have met the enemy and he is us," as Pogo once said, what does that say about growth opportunity?
If you had perfect discipline, perfect motivation, and perfect emotional control, how good (or great) a trader could you be?
Buy Zen and the Art of Poker on Amazon
Get Trading Wisdom via e-mail
I read Zen and the Art of Poker a number of years ago, in part because of a favorable review written by someone whose writing style is remarkably similar to your own...
Excellent little book. I still don't think poker is a particularly good analogue for trading, perthaps because I'm not really a good enough poker player to fully appreciate it, but some of the rules in the book are spot-on.
Here, I'm sure Pogo would have wanted you to have this:
Excellent little book. I still don't think poker is a particularly good analogue for trading, perthaps because I'm not really a good enough poker player to fully appreciate it, but some of the rules in the book are spot-on.
Here, I'm sure Pogo would have wanted you to have this:
That was probably me. I wrote a review of the book on Amazon many many years ago - years before I started playing poker myself. It was lost though in a crazy purge where my Amazon reviews disappeared. Most but not all are back up now.
I've been a poker player for seven years - had a client / friend in '04-'05 who I went out to lunch with twice a week or so. He was a very bright software entrepreneur and heavy asperger's type who naturally obsessed over things. At the time we were hanging out his obsession was poker. The more he talked about it, the more I realized "this sounds a lot like trading," which is why I started playing.
I see poker as more of a mental training ground for trading - in that respect the game is most excellent. I can't think of a more effective means of combining psychology, mathematics, calculated aggression, nuanced creativity, situational awareness, emotional control (handling variance), and risk control.
Trading Wisdom 19: Volatile vs. Smooth
"Conventional economic reasoning says that if two stocks have similar expected future cash flows and similar dependence on the market, we prefer the one that is less volatile. But might we not see some advantage to stock in volatile company A, which has survived many crises, over stock in safe, untested company B? Perhaps A's stresses have allowed evolution of the characteristics that will succeed in the future, whereas B is narrowly positioned for the conditions of the past. In the future, perhaps A's volatility will allow it to move faster into opportunities and away from dead ends, and to evolve as conditions change."
- Aaron Brown, Red-Blooded Risk
JS Comment:
Why does academia assume lower volatility is better?
How many real world instances have you seen confirming that more volatile = more robust, while smooth = over managed, artificial, and possibly brittle?
What are some of the advantages of embracing volatility - managing it versus shunning it?
Buy Red-Blooded Risk on Amazon
"Conventional economic reasoning says that if two stocks have similar expected future cash flows and similar dependence on the market, we prefer the one that is less volatile. But might we not see some advantage to stock in volatile company A, which has survived many crises, over stock in safe, untested company B? Perhaps A's stresses have allowed evolution of the characteristics that will succeed in the future, whereas B is narrowly positioned for the conditions of the past. In the future, perhaps A's volatility will allow it to move faster into opportunities and away from dead ends, and to evolve as conditions change."
- Aaron Brown, Red-Blooded Risk
JS Comment:
Why does academia assume lower volatility is better?
How many real world instances have you seen confirming that more volatile = more robust, while smooth = over managed, artificial, and possibly brittle?
What are some of the advantages of embracing volatility - managing it versus shunning it?
Buy Red-Blooded Risk on Amazon
Lower volatility is better because the assumptions required for such a conclusion are much "less strong" than the assumptions needed to conclude that there's some sort of evolution that eventually leads to a stronger outcome. This is, in fact, confirmed by basic statistics, and not just in the world of finance. Even in zoology (Earth is a vastly superior ecosystem than the market and the economy), survival is rare (overwhelming majority of all species that ever lived are extinct). This surely implies that the "survival through evolution" outcome isn't very likely at all, everything else being equal.
For firms, intuition would suggest that higher volatility causes the probability of survival to fall. There are some academic papers that provide empirical evidence that this is, in fact, the case. For example, see here: http://www.anderson.ucla.edu/documents/areas/fac/finance/1987-1.pdf
Fair enough, and of course there is going to be a body of evidence as to why academia has chosen the lower volatility route.
At the margins, though, I would argue things look more intriguing, and that conclusions generalized across a data set may not serve as well on a case-by-case basis or special case basis.
Obviously an investment strategy where one chose the more volatile investment ceteris paribus would not necessarily work well.
But in terms of looking at individual business models, or making highly individualized choices - such as, say, a career path, or where intrinsic volatility or placidity can be sourced to specific characteristics of the investment - the generalized logic can be turned on its head.
Take, for example, the career path of becoming a trader vs that of becoming a dentist. One is going to be far more volatile than the other, with a far greater risk of failure. One could argue that, for the general population, dentristry is obviously a saner and safer choice.
But on the individual level? Not necessarily, and not so much. Some of us would die of boredom as dentists, and are equipped with skills and temperaments that greatly improve our chances of success with the more volatile endeavor. And then too, when it comes to volatile vs smooth careers, one has to take self-sufficiency and portability of skills into account. Maybe the trader, through hard training and experience, has learned to support himself in all types of market environments, thus becoming more self reliant, whereas the dentist is exposed to potential competition glut and finds his practice failing, forcing him to deal with volatility he never trained for.
The same applying to individual investments, again on a case by case basis. General Electric in the Welch era was the king of smoothed earnings and artificial placidity - until it all went over a cliff. Cioffi and Tannin of the Bear Stearns credit funds went 40+ months in a row with steady 1% type returns before blowing up.
In contrast to that, you can find individual investments where earnings drivers appear to be quite volatile, but the business itself is quite robust - a survivor.
And, too, there is the question of generating outsized returns. Venture capitalists manage deliberately embraced volatility through diversity of bets. Or as Soros has said, the type of returns Quantum pursued in its glory days would not have been possible without significant volatility at times. Which then circles around to another question: Is the less volatile manager truly "safer?" Or is more volatility coupled with higher returns and more effective risk management in terms of cutting off mortality tail risk better?
All in all point being, there is certainly an academic case as to why "low volatility is better," in a very broad sense of generalizing across the data set. This is a given.
But the question gets interesting at the margins imho, for those individuals who recognize they are not like all the others, do not have to think like the masses or make decisions like the masses, etcetera.
(This also relates to a pet peeve of mine with academic studies. In so many instances, studying a generalized population of hundreds or thousands etc. is completely inappropriate, when what is attempting to be measured has a discretion-based selectivity component. The worst are studies that attempt to "disprove" technical analysis, by, say, looking at 5,000 head and shoulders top formations as defined by the study creator. Such is the height of uselessness.)
I completely agree. I am sure that it's precisely this point that Aaron was making (I haven't read the book). All I was saying was that, by default, without any a priori information, high volatility is worse for survival. There are certainly going to be specific cases where high volatility increases chances of survival and vice versa.
Tidbits17 and 18 Are very cool as seen by the first authors I introduced in this thread: WJO'N and Dodd and Granville.
In reverse order of introduction of ideas. WJO'N came up with EPS and RS. The older principles were H1 and H2 and their PM. (See Granville)
Making money is better done without the CW based emotional set. So lets lose the emotions of the OP.
The cycle of making half the volatility is about 4 to 6 days.
H1 and RS go together to set the rules for getting the trading Universe. 3 Beta or better is the result for each element of the Universe.
If a person then insists on the creme de la creme in elements he adds in the EPS measure. Now we have a list that is smaller and also has high volatility.
The trading team vets the initial one click immediately selected lists by sweating through building file foldrs that show the money making "repeatbility" requirement.
there have been no tidbits on repeatability. Our test is five cycles in 6 months. # beat means moves over 20 %.
Use tidbit A the Baruch Rule of taking th middle 50% of a profit move. He meant simply enter late and leave early. This is how to ditch the CW emotions.
So you make 10% plus every 4 to 6 days by entering late and leaving early.
We saw DH's evaluation of 62 trdes in 3 months as about 1000% a year. The beginner used a single click to get a list and sitting around putting files in folders (printing the 30 minute and daily charts) after appraising 3 Beta stocks to see if they were repeatable.
A hot list emerges based on H2 and the one pager entitled "Unusual Volume".
Selling is done when a stock slows in money velocity and buying is done when a stock increases in money velocity.
There are two lists: "Owned" and "Hot". Taking profits is done with one and taking offers is done with the other.
Tidbit B is the name of this type trading: "Crossover Trading".
Darvas wrote a book as requested by a research organization. He explained the "box". It was so long ago that he had to trade on information found in foreign english versions of newspapers.
Tidbit C is what the position paper is called that was named by the users: Tomorrow's Newspaper Today". This type of trading called PVT an app of PEP is like getting the paper a little early.
On any morning you see FRV right on the open and then you only have 1 1/2 hours before you take the price ride. Emotionally it is neat to know that you know before the Herd knows.
Whats the 20th letter of the alphabet? Count back from Z if you know how many letters are in the alphabet.
So why do the beginner stock traders stop trading stocks? LOL.... Google frying fish; focus on better fish sections of articles.
this stuff is referred to as the empty page stuff in this thread LOL....
In reverse order of introduction of ideas. WJO'N came up with EPS and RS. The older principles were H1 and H2 and their PM. (See Granville)
Making money is better done without the CW based emotional set. So lets lose the emotions of the OP.
The cycle of making half the volatility is about 4 to 6 days.
H1 and RS go together to set the rules for getting the trading Universe. 3 Beta or better is the result for each element of the Universe.
If a person then insists on the creme de la creme in elements he adds in the EPS measure. Now we have a list that is smaller and also has high volatility.
The trading team vets the initial one click immediately selected lists by sweating through building file foldrs that show the money making "repeatbility" requirement.
there have been no tidbits on repeatability. Our test is five cycles in 6 months. # beat means moves over 20 %.
Use tidbit A the Baruch Rule of taking th middle 50% of a profit move. He meant simply enter late and leave early. This is how to ditch the CW emotions.
So you make 10% plus every 4 to 6 days by entering late and leaving early.
We saw DH's evaluation of 62 trdes in 3 months as about 1000% a year. The beginner used a single click to get a list and sitting around putting files in folders (printing the 30 minute and daily charts) after appraising 3 Beta stocks to see if they were repeatable.
A hot list emerges based on H2 and the one pager entitled "Unusual Volume".
Selling is done when a stock slows in money velocity and buying is done when a stock increases in money velocity.
There are two lists: "Owned" and "Hot". Taking profits is done with one and taking offers is done with the other.
Tidbit B is the name of this type trading: "Crossover Trading".
Darvas wrote a book as requested by a research organization. He explained the "box". It was so long ago that he had to trade on information found in foreign english versions of newspapers.
Tidbit C is what the position paper is called that was named by the users: Tomorrow's Newspaper Today". This type of trading called PVT an app of PEP is like getting the paper a little early.
On any morning you see FRV right on the open and then you only have 1 1/2 hours before you take the price ride. Emotionally it is neat to know that you know before the Herd knows.
Whats the 20th letter of the alphabet? Count back from Z if you know how many letters are in the alphabet.
So why do the beginner stock traders stop trading stocks? LOL.... Google frying fish; focus on better fish sections of articles.
this stuff is referred to as the empty page stuff in this thread LOL....
Tidbit D wil be how to measure money velocity.
Tidbit E will be the pinwheel charts using MLR.
Tidbit E will be the pinwheel charts using MLR.
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