Newsflash: This letter’s audience has lots of professional and retail investors. There are also lots of aspiring traders or just people who want to supplement their income with “alpha” from the markets.
So I commonly get asked for advice on trading for oneself. “I have a $250k account I’ve studied A to Z…etc”
Many of the backstories are impressive. Y’all impress me. I got a non-rigorous econ degree that only required 8 core classes. And those catered to my strength — bullshitting on blue-lined pamphlets. I limp into a stellar firm that knows how to teach trading and decision-making just as it’s hiring its largest cohort ever. I’m a product of those I was lucky to be surrounded with. If I was good at anything it was assimilation. More practical than heroic ultimately.
So when a smart, bushy-tailed go-getter asks me about prospects for succeeding as a retail trader I’m torn. Trading is a hard way to make a living even when you’re sitting in the F-16 cockpit of a prop firm. Seems like it should be impossible for retail. On the other hand, I’m not built of the best stuff so who the heck am I to piss on the grit-factories that email me.
I got one of those emails on Monday. Sharing my responses(italics) here:
A few thoughts:
1. This thread from Lily is spot on
2. Listen to this interview with Darrin
Reader: What would your advice be to someone who loves markets and trading more than anything and doesn’t look at this as a chore, but rather a passion? Is it still a fool’s errand to not just DCA into QQQ and SPY and go find another interest?
Me: 99% of people should probably look elsewhere but that’s true of anything that is exceptionally hard. There still will always be the 1% who do not take no for an answer. Nobody can tell you who you are. You ultimately seize who you are. If you fall to the level of your weakest strength, you can still decide if that’s your resolve or something else.
Reader: I know about all of the time in the market > timing the market, the Buffet bet, all of it — but maybe I am just irrationally stubborn?
Me: If you listened to the Will England interview you can hear him say that a lot of the neutrality guardrails are in place because nobody trusts anyone’s ability to time. Vol traders can’t even time vol and I’m talking about the best vol traders in the world. If this is what you think the edge is nobody is going to buy it. You will need to prove it with your own $. That said, timing is not really the edge most try to have. This interview might be helpful to expand your thoughts on it.
Reader: I guess I have seen some of my mentors trade very, very well, but maybe I am just not able to allocate as much time and attention via a full life elsewhere. Are there any resources you would recommend to explore further ideas? There are people way, way smarter than me that just say DCA into low cost interest ETFs and go take a walk, but is there anything worth anybody’s time when it comes to more active stuff?
Me: I didn’t up in this biz on my own like say Darrin did. I don’t know how those people do it, I can just listen to their stories. I’m pretty much in the camp of “get a job where you can do this full-time if you really want to”. If you can’t do this but still want to explore strategies, then fence out some capital to play/learn/experiment. For the rest of your assets stick with some kind of permanent portfolio implementation depending on your risk tolerance. You can follow folks like Corey Hoffstein, NomadicSamuel, Jason Buck, Lily for that stuff. InvestResolve guys too. All these tweet about it too and it’s all quite solid. I recommend this series by the InvestResolve team.
In general, my advice, which sounds hard but is probably easier than trying to trade for a living: get a high-paying job.
All this focus on trying to make your money work for you is totally secondary to the biggest muscle movement — make more money with your skills or with a business. I came to the internet around 2015 to learn about investing because I already had a lot of savings, a house etc. So I was like “now what to do with the money”. Most of my option traders friends have no process or framework for investing. In fact, most of them find it to be a waste of time to give it a lot of thought. I don’t fully agree with them on that, but I was like that myself. Instead, we all focused on — “I want to make so much money that it doesn’t matter if I just stuck it in t-bills”. It’s a pretty jarring answer compared to conventional thinking and it’s not fully right — but there’s truth in the instinct. When I look at people who have built more wealth in the past decade from investments than income I think — “that looks fragile”.
Everyone wants to feel like they slayed the investing dragon and were great at making their money work for them. Meanwhile, there’s a bunch of folks out there who want to focus on what they’re good at, have hobbies and be f’n happy on the weekends not researching the next investment or managing rental properties. They out there just thinking — I’m gonna go get paid seven figures a year on a W2 working for an elite organization.
I added this later in a tweet and it’s just straight talk if someone is sweating lots of financial success:
Be special enough to get pedigree
Or
Be special enough to not need pedigree
In other words, this reduces quite easily to things that are very hard. Invoking the “Why would it be otherwise” line.
And as far as being methodical about the original question of trying to earn a return on $250k, John has said it well:
One of my favorite writers, Venkatesh Rao, just published an incisive climate posture post [paywalled]. It has this amazing passage that can be ported from climate contexts to people’s need to trade (bold is mine):
The narrative web of the climate discourse is very hard to map, but one thing is clear: Almost everybody is an NPC in the current situation, and is primarily desperately solving for how not to feel like an NPC. This is an important point. Humans have a strong tendency to confuse a psychologically satisfying amount of agency with a materially effective amount. A broad culture of what we very-online people call cope rules everything around us when it comes to climate. It is a deep-rooted tendency, and an understandable one. Much as we might intellectually desire such laudable goals as the survival of almost everybody through a planetary crisis, our sense of meaningful existence is tied to individual agency. We’d rather stride grim-faced with a gun across a devastated post-apocalyptic landscape, masters of our own fates, than feel helpless within a world that’s largely doing fine and even providing for us.
What. A. Line:
Humans have a strong tendency to confuse a psychologically satisfying amount of agency with a materially effective amount.
Don’t just stand there, do something, right?
But also…
A trader pinged me saying:
There is a false dichotomy between 100% passive and 100% active. I feel like with the right mindset/education/strategies, there are ways to meaningfully add value to one’s portfolio via lower touch strategies and this can be done in addition to one’s day job.
Like in the guys email, one of his first questions was whether it is a fool‘s errand to not just DCA into SPY. I feel like the investment education landscape is so distorted that DCA SPY is the baseline. I would almost argue it should be quite easy to outperform buy and hold, especially on a risk adjusted basis without having to spend hours of screen time.
Ultimately, questions like this are ones without tidy answers.
This is where I shake out on it for now:
My gut feel is return-stacking/permanent portfolio for long-term DCA is probably the efficient frontier of work/return/risk triple axis.
But there’s no doubt that many people want to put their hands on the wheel and that has innate personal value (and that’s true whether it’s misguided or not). So in short I think it’s a tree:
- DCA permanent portfolio variant if you want autopilot
- If you want to put your hands on the wheel what does that efficient frontier of effort/return/risk look like where return also includes some illegible component of DIY satisfaction?
This is related in a weird way but one of my favorite interviews was with Professor C. Thi Nguyen, author of Games: Agency As Art. It’s a penetrating twist of how art or creation is a form of agency — games allow players to take on different agency roles. To step outside themselves in a low-stakes way.
The pragmatic view of investing/trading is and should be for profit. But whether partitioning some of that mental and monetary budget to satisfy agency needs might say something about whether you are getting enough of that in other endeavors. Investment as agency?
I’ve been reading Ed Thorp’s autobiography with my 10-year-old (very slowly I might add — between myself and the boys we are simultaneously reading 5 books. Sympathies to Yinh who is surrounded by broken brains). We are about to start the second half of the book where Thorp leaves gambling (after the casinos tried to kill him by jamming his car’s accelerator!) and sets his sights on the world’s greatest casino — Wall Street. But despite being on the Mount Rushmore of investors, Ed left the game content to invest his fortune with other managers, seeing more to life than the day-to-day of this particular game.
An interesting side-note was Ed and Claude Shannon were good friends and accomplices in devising the world’s first wearable computer (which they used to break roulette). Claude was also a wildly successful investor. Both of these men saw investing as an interesting puzzle. Money was a byproduct. They didn’t seem to care too much about money other than its evidence of their hypothesis.
There’s a line in Tomorrow, and Tomorrow, and Tomorrow where celebrated video game designer describes a (less than mentally healthy) scene from his youth:
They were in her car on the way back from a math competition in San Diego, and Sam was giddy with the feeling of being better than everyone else at something that he didn’t care about at all.
I have several option trader friends who are misfits — amongst the smartest traders out there getting paid big bucks at the firms you know. They could care less about investing but find trading fun. This is just a game that pays way too much for what it requires of them. They have all these other nutty interests and would sooner off themselves than read an investing book. Me, I’m just a normie pragmatist. I did it for the money, not because I love the game. In fact, one of these friends has told me he thinks I’m totally f’n weird because I don’t love the trading part, I love the conceptual parts, the building parts — which is the exact opposite of his position.
My ability to pull any useful insight from this is strained. But it’s probably just some cliche — think deeply about what you’re good at and what you want…and the conversation that’s hardest to have with yourself — why do you want it? The answers are always laden with some amount of insecurity, but I think that’s what keeps us alive. And abolishing insecurity probably isn’t a reasonable or even respectable goal. Coming to agreeable terms with it strikes me as more human.
It must be nice to find that thing that’s in-demand that comes really easy to you. I wonder what an emphasis on finding that would look like rather than preaching the grit catechism.