PROFESSOR: I think you have to be very honest with yourself about two things. What are you trying to accomplish? What method are you comfortable trying to accomplish that and over what time frame are you trying to do that? And, going back to, are you comfortable with it, like you have to be honest with yourself of what kind of a trader or an investor you are. If you're a trader, you can't force yourself to be a long term investor.
And if you're a long term investor, you can't force yourself to be a trader. And if you're a trader, you can't necessarily force yourself to be a contrarian. There's a million different ways to make money. There's no one way that's correct and no one way that's wrong. And I think the most important thing is to try to figure out and marry your personal style and your personal strengths to how you actually invest the assets. Because if they're in conflict with each other, you're not going to have a good result.
MAGGIE LAKE: In this chapter, we'll focus on you and your investing style. Everyone has different motivation, different life circumstances, different amounts of time to allocate to markets, different risk tolerances, different areas of interest and so on. What makes sense for me probably won't make sense to you and vise versa. Finding your answer to all these different variables is ultimately what's going to dictate the assets you invest in, your time horizon, your risk appetite, your position sizing, really, your entire portfolio construction.
It goes back to the previous two chapters and the need for self-awareness. If your emotions are rising to the surface, that means your current portfolio is likely not suitable for your style. Maybe a position is too big or you don't understand it enough. Any of these and many other factors can make you lose sleep. And that's because something is out of sync with you and your investment objectives.
Let's begin with the most important question, what do you want?
DAN MCMURTRIE: A friend of mine is a financial advisor, very standard stuff. And his whole point when he talks to his clients is, he's like what do you want? Let's have a conversation about what do you want? Is your goal here to risk everything, to get maximally wealthy?
And if so, let's take it to the for what. All right, let's get to the for what question. OK? If you're here because-- if you're investing because you want to provide for yourself and your family and you want to continue the American dream, or you're interested and you want to play the game for a long time, there's a bunch of these motivations that, again, path versus outcome.
Never take path risk that can potentially get really weird just cause you think it's going to slightly tilt your outcome in my opinion. Keep it simple. I just think it's not healthy to be in a position where you feel like you've got to go put all your money in gold or you've got to go lever up and do all this other stuff. If you're actually that convinced that the world is imminently going to end, like you should go find an island somewhere, get some canned goods, get some guns, or go up in the mountains and do that.
I have people I know who have actually built the mountain compound thing. Not what I would do. But I get it. Like that actually makes some sense. But I don't understand why people are doing this. Just try to make good money. Add value where you can.
Save up a diversified portfolio of assets. Grow it over time and achieve your goals. Take care of your family. Take care of the people that you love. Do that type of stuff. Like I just-- that's where my brain goes. So the other people might want to have a view on the dollar or rates or something like that.
That's not the question. The question is what are you ultimately investing for. And you always got to go back to, what is the actual-- what is the outcome set we're going to? What is the motivation? What are your constraints? What are you willing to do and not willing to do and why?
And a big thing in your constraint needs to be understanding the path risk, and also if that path goes rough for a while, how are you going to make decisions under that circumstance? That's what people don't think about.
MAGGIE LAKE: At the end of the day, most of us play the investing game to achieve our financial goals. For some there's a finish line, a goal that once achieved, means they can take their foot off the gas. For others, the goal may be just to grow their wealth as much as they can in the time they have to pass on to future generations. For still others, their goal may be to compete in the markets just for the fun of it. It doesn't
Really matter what your goals are. What matters is that you know what they are and that your decisions match up accordingly. To paraphrase the famous saying, if you don't who you are and what you want, the market is an expensive place to find out. There's no right or wrong answer. We all just need to be honest with ourselves.
There are many other variations of this of course. Which one is you and does that last position you put in your portfolio or life decision you made match with your answer. As Dan said, don't let the view on any asset class become the driving force of your investing if it's not helping you achieve your goals.
Let's try it right now. Pause this video and write down your motivation for investing as well as the last trade or investment you made. Well, do the two match?
Next step is to start thinking about the most suitable investment or trading style to fit your motivation and personality. This is where it gets really personal. Let's hear from Jason Buck and Chris Cole.
JASON BUCK: Yeah, I kind of have a thesis that when most people have their entree in the markets they either come from the world of Buffet or they come from the world of Market Wizards and it kind of shapes the way you think about markets. So you reference the turtle traders. Was that kind of your impetus or the way thinking about markets is the unknowns of the Market Wizards and having systematic processes?
CHRIS COLE: When I was young I tried both. So literally when I was working on film sets, I would come home at night and I would do fundamental research because I have a CFA. I was the only person in my Merrill Lynch analyst class with a CFA and an art degree. I was a really weird duck. That's a strange combo to pass all three levels of the CFA and to have this art degree. They just didn't what to do with me.
But I think I put on that value hat back in the early 2000s, which was a great time to be a value investor. And I tried that on for size. I tried a whole range, I read the Larry McMillan's book and tried a whole range of option trading strategies. And then I began to develop my own systematic trading strategies.
So it really at that point in time, I was really open minded. I was trying a whole bunch of different investment techniques to sort of understand what fit best with my personality, my style, and my world view. And obviously systematic trading and vol trading has stuck with me.
JASON BUCK: And you touched on actually my favorite lesson from Market Wizards is that there's a lot of strategies that work. It's finding one that fits with your personality that you can stick to for the long haul is probably the best thing to come out of Market Wizards.
MAGGIE LAKE: There are many investing styles out there but what the guys are talking about is the two broad buckets that many of the approaches fall into. On the one side, the Warren Buffett doctrine of value investing focused on the long term potential of businesses and their fundamental valuation expressed through both the company's stock and bonds. On the other side there are the Market Wizards, from Jack Schwager's books, which include some of the most successful investors throughout the decades.
Even though some of these guys had a fundamental hat on, most were looking at the world with a very strict technical or macro lens. Broadly speaking, this means they're not necessarily interested in the assets they're trading because they're just a means of expressing their macro views or meeting their strict technical roles. Within those approaches and the many shades of gray in between, each investor or trader finds their niche and carves out a framework.
We have an entire series on the platform called Investor Masterclass dedicated to the different frameworks and investing styles of some of the best investors. You should go check that out when you and I finish this journey.
Now, you'll hear the words framework or process many times in this course and also out there in the real world. At first it may seem a little vague so let's demystify that a little bit. A framework or process is simply a set of parameters of how you invest. It can be simple or super detailed. It's entirely up to you. But we suggest starting somewhat simple and evolving as you go.
It all starts with your motivation for investing, which we covered. Other important variables are your preferred time horizon, asset classes, markets, instruments, and your risk tolerance. What does the process look like? Let's hear energy trader Pierre Andurand describe his process.
INTERVIEWER: So what edge do you think that you've had when you've outperformed your peers over quite a long period of time? What is the kind of magic that you think you've now created yourself? What is the edge that you have?
PIERRE ANDURAND: I think what's important is always to take a step back, try to understand the big picture, not be caught in the noise. That's number one. Number two is to only trade liquid instruments where you can get out when you feel it's right, to only be long option. So I never short options. I'm either flat or long options.
And to trade liquid instruments and also to cut losses when things are going badly. That way I survive and live to fight another day.
INTERVIEWER: Also, I think one of the key attributes of what you do versus what most people do is you don't trade a lot. I mean that's a huge thing when you wait for the setup. So many people just trade because they think it's the way to make money.
PIERRE ANDURAND: Exactly. And I think to me to trade very often it's much better to do it with an algo than to do it as a human. Because you end up trading the noise, right? I mean every day, you who knows what's going to buy or sell on that day. Like it can move in any direction. So you have very short-term moves are dominated by the noise. But more medium term moves are dominated by the trend.
So as a fundamental trader, that's what you have to be focused on. And if you want to make money from the noise, then you have to develop some algos that trade that and it will trade it better than you. And it won't be emotionally exhausted from doing it.
MAGGIE LAKE: So Pierre is a mid to long term energy trader who doesn't like to trade a lot. He also prefers liquid instruments like futures that he can exit freely, which allows him to cut his losses quickly. Importantly, he is never short options because of the inherent risks with those positions and the high losses they can cause. It's not that shorting options is bad. It just doesn't fit his approach and risk tolerance.
Now think about it. Does a short term currency trade makes sense to Pierre's investment style, no matter how compelling? Of course not. So that's why it's important to start putting some constraints in place that will define the lens you look at markets through. Here are some questions to answer. What's your motivation for investing? What stage of life are you in? People in their 20s that are just starting out can generally afford to take more risks and make more mistakes than people later on in life.
Also if you're busy with a career and raising kids, you'll have less time to dedicate versus other people. What's your time horizon? This will somewhat be dictated by your motivation and stage in life. The range goes from intraday trading all the way to super long term investing for decades ahead. How much money in assets do you have to invest or manage?
What risks wouldn't you take? Do you lean more fundamental or more technical and macro? Do you have any preference in asset classes or instruments? Don't worry if you can't answer those questions. This is what I'm here for. And I'll help you find those answers ahead.
Also it's worth asking, are you even interested in investing if the answer is no, there are plenty of experienced professionals who can help you with that. This course will provide you the language to be able to speak to them. Now you don't have to be rigid in all of this. Once you start getting the hang of it, you'll be able to roam freely within the constraints that some of these questions provide.
And in fact, you probably should. You shouldn't just answer most of these questions once. You should revisit them regularly. For instance, you can have a long term portfolio and a short term trading account. You can also diversify your portfolio through positions with different time horizons. These are things that you'll be able to do as you progress. Let's hear from Tony Greer about how he mixes the short term trading with long term investing.
TONY GREER: In terms of my trading perspective, I have a very-- I run a really tight risk trading book where I essentially-- I call it a shooting gallery. Because I try to shoot big game and put up a big score at the end of every day/week/month. And I would say that the way that I focus on doing that is by sticking to my process, my very simple process of letting the market teach me and show me where it's going. And then I figure out how to get into that move and participate.
And the way that I figure out the way the market is showing me that it's going is I study the closes and the performance across each equity index, each commodity, and all sector ETFs for every daily close I study. I study weekly closes and performance. I study monthly closes and performance. I study quarterly closes and performance.
And so within that information you get a mosaic of what's working against what's not working, what's likely to continue working versus what's likely to not continue working. And that's how I kind of divide my book, by being long what I think is working, what the market is telling me is working and trying to figure out places to actually short some of the spaces if they look like they continue to deteriorate. So that's really the strategy of my equity trading, my specific trading book, which is slightly different than my investment book.
INTERVIEWER: We're talking about two different books? The investment book and the trading book?
TONY GREER: You could call it that, yeah. Because my trading book is really serious about position limits, trading limits, loss limits, things like that. And my investment style is really where I'm kind of looking over my longer term investments and my retirement account quite honestly and sort of a quarterly or like twice a year basis looking at the position based on my trading and what I'm learning from that study. And I kind of shape my longer term investments.
And those are always done sort of incrementally, where if I decide that I've been long technology and I want to get out of technology and then get into more natural resources, over a period of time, I say, OK I'm going to slowly sell this technology, slowly buy into some more natural resources. And so that's more of like a rebalancing function that I have that happens sort of between two and four times a year.
Whereas the trading account is very much bang, bang, bang, shoot to hit the targets, cut losses quickly. Let profits run with trailing stop losses and things like that. And the investment account is kind of letting it morph into the sectors that are going to perform better, having more weight in those sectors and less weight in others.
MAGGIE LAKE: As you can see there's a lot of flexibility in this and Tony is a great example. He trades very actively his short term portfolio, while being consistently invested in his long term one and making periodic rebalancing. So if you hear an idea coming from Tony, the first thing to ask is, Tony, is that for your trading or investing book? At the end of the day, you just need to figure out what game you're playing.
DAN MCMURTRIE: We're not looking for conviction bets in any of this. We're looking for easy bets. So my goal is to keep my overall process, personally, my firm, and my portfolio in a place where I don't need to make these heroic bets. I don't need to make 200% off the bottom last year going all in and risking blowing my fund up. There are funds that have mandates to have that type octane. That's not what I do because I want to play a 50 year game or 70 year game.
MAGGIE LAKE: These are some of the main things you need to consider for your base framework with that and some of the guiding principles we mentioned in a previous chapter, you're well equipped to begin to approach markets knowing you have a margin for error. But there's one more thing.
MICHAEL GREEN: Now, one of the things that you and I talk a lot about is this idea of the mental game and positioning yourself to take advantage of different market environments, decision making, et cetera. And you and I have actually been spending a lot of time talking in the last year about exactly this, right? This idea that, as you put it, you want to identify the baseline of decision making.
What are the conditions under which you as an individual are being forced to react to information and how does your fitness, your diet, your heart rate, et cetera, respond to that. I'd love for you to just talk a little bit about what brought you into that space. What made you start thinking about this idea of how am I reacting as an organism within a system?
MAGGIE LAKE: So much of our energy and investing is focused on idea generation and trying to figure out what and when to buy or sell. We'll obviously cover that topic in detail in the coming parts of this journey. But what's also critical is our overall framework for decision making. And that doesn't start with a checklist of how to make good decisions.
It starts with a holistic approach to investing, which includes a big focus on the physical and mental nature of decision making, how lack of sleep, poor health, diet, and strained relationships can cause us to make bad decisions. Chasing investment gains and business success is all well and good, but they're only one part of the jigsaw. And neglecting the other variables usually leads to problems.
PROFESSOR: So health and nutrition is another thing of course. And this kind of bleeds into a bigger conversation. One of the books we recommend is called Oikonomics. It's like $3. It's a tiny little thin read on money. Skip all the chapters. But read the one chapter on what he calls the five capitals. That is kind of like my philosophy for--
STUDENT: Can you give us a quick--
MICHAEL GREEN: Yeah I will basically his point is listen most people focus on one area. So he breaks it down is there's financial capital, like we're talking about. How do you make Money Yeah but then there's your physical capital. There's your intellectual capital, like what is your capacity to continue to learn and retain knowledge? How is your body doing, your health? Relational capital, relationships, and then spiritual capital in terms of the actual state of your soul.
STUDENT: You got to feel good about yourself.
MICHAEL GREEN: As a wise man once said, what does it benefit someone to earn the world but forfeit their soul. But I think what we see, why are the wealthy so miserable? Statistically speaking, high suicidality rates, depression, anxiety among the wealthy. Why? I would argue it's because they have sacrifice the other capitals for financial capital.
STUDENT: Right.
MICHAEL GREEN: Their relational capital, multiple marriages. The children hate them, these types of things. So keeping those things in proper perspective or how many people deteriorate their physical health, either too much stress, too much work, or then they pacify themselves with unhealthy other habits, drugs and alcohol.
I mean the list could go on. And I'm not a psychologist. But I'm saying that has been a really healthy way that we kind of talk even, it's really Brandon and myself, about saying like, well, OK, if we're not making new highs in financial capital, are we learning more? How's our intellectual capital?
How's our relational capital? You can look at this even in terms of if you run a business, like what's your network? Are you growing in contacts and those types of things? Obviously you should be looking at in terms of your important relationships. But that's also kept me going, even in periods to say especially early on.
People, they throw in the towel too early on anything by the way. I don't care what the business is so just kind of looking at things a little bit more holistically helps you keep things in perspective. We're not going to get into the spiritual capital as I said. But I'll leave that to, if people want to press me more on that, happy to talk about that as well. But I think to just focus on one, is potentially a mistake.
MAGGIE LAKE: This idea of looking at your life holistically is extremely important for long term success in almost any field. Sure, you can push through for some time. But unless the whole flywheel is working properly, eventually things will break. Dan McMurtrie dives even deeper into the topic. Let's hear from him.
DAN MCMURTRIE: As an emerging manager I'm obviously interested in the subject and I've spent a lot of time studying why different hedge funds risk takers of really not just finance but all different fields succeed and fail. And there's this obsession with the individual decision that leads to the end of a firm or a great failure. When you actually decompose what happened, what you find a lot is you'll see really brilliant people, multiple PhDs, however you want to say it, Olympic athletes, who will make catastrophically bad decisions.
And there's this belief that those people are just so stupid that in that moment they made a decision that a high schooler could tell you is asinine. So I got really fascinated with why is that happening. As I've watched other people who've attempted to build risk taking businesses, regardless of what form they're in or be high level athletes, when you see them make those terrible decisions, often it's because they're in a position where they're unable to make a good decision.
And that can be due to something going on in their body, something going on in their minds, something in their social situation, it's the preconditions for the decision making. And I think there's a sort of macho thing, in particularly finance, but a lot of other fields, that your solution to all problems is just to work harder. I was raised Irish Catholic. And so the only ethic was if you fail it's because you didn't apply enough effort.
And what I started reading into was how your decision making got changed based on the conditions you're in. And what I found was that when your body is exposed to certain things for very extended periods of time, your ability to make even basic decisions is completely impaired. And that's a really complicated topic because as you mentioned, it can come into your health. It can go into your social circle. It can go into what your current level of risk is, what's going on in the market.
So the worst case is your stress so then you go eat something and then you don't go to the gym. And then you're not great with your friends or your significant other. And it starts to spiral and then things get bad. And what you start to see a lot with people that are having trouble. And I've done this before and I tried to structure my life to where people kind of hit me over the head if I'm doing it is, when you start to go through a hard time start to self isolate.
So on a given day, one of things we started tracking was how many inbounds we have, how many out bounds we have, how many conversations we're having. One of the things you'll notice during times of extreme stress for money managers or really anything else is that number will drop by 60%, 70%, 80%, sometimes more. And when you start to see people self isolating, all of a sudden, you don't realize you're giving up ways you put off stress.
And so all of a sudden you have more stress. And then you start to maybe eat more or do other things like that. And so one of the first things we kind looked at was heart rate data and stress. And one of the things we found was that essentially if you elevate your heart rate for more than 15 minutes, my pet theory is that your brain really, we don't understand any of this stuff happening behind us. None of the modern world makes any sense to our biology.
When your brain's feeling stress it thinks ultimately a physical altercation or something similar, scarcity, something like that is happening. It's partly why some people have stress eating responses. I'm one of those people. But if you elevate your heart rate, your brain kind of thinks, OK, this is the fight that I must have been waiting for.
And all of a sudden you have a big mental mood reset in your ability to tolerate stress. And so no matter what is happening that day, I have to do 15 minutes of light cardio. It doesn't matter if I just get on an elliptical and listen to an audio book or something like that. I just have to do that minimum 15 minutes which I can do really no matter what. I have to force myself to do that.
But once you start doing that, once you get to minute 16, it's insane. Your mental state completely changes. And all the sudden, you're, wait a minute. I can do a full workout. All of a sudden, the way you're viewing the world just completely changes. And so looking at that and looking at sleep were kind of the two big things, really prioritizing sleep, that extra two, three hours of work at night, when you're in a judgment role. If you're an analyst at a bank, it's a very different thing.
MAGGIE LAKE: This holistic approach to investing is another foundational principle that will help you on your journey. What you want is to be able to invest from a place of stability and security. The more stress you have in your system, the worse the outcome will be. We're not striving for brilliance here. Consistently good decisions compound and tend to lead to good outcomes. Especially in the worst moment being able to make an OK decision and move forward is priceless.
Apparently Napoleon thought the definition of a military genius is the man who can do the average thing when everyone else around him is losing his mind. Kipling also talked about the importance of keeping your head when everyone around you is losing theirs. Whatever you do, whatever framework you go for, make sure it fits with your core motivation for investing and allows you to make good decisions when it really matters.
MICHAEL GREEN: On that front, I mean going back to the very beginning, and we're going to wrap it up on this point, which is, when you engage in behavior to put yourself back in that baseline, right? When you do something like take on excess leverage, you're effectively putting yourself into a position where you can be forced to trade. You can be forced out of a position.
And more frighteningly you can force your family into very difficult circumstances. So if we go back and you read books like Reminiscences of an Operator, a Stock Operator, or you look at candidly what individuals like myself do, I very regularly attempt to de-risk by putting assets into very, very low risk components so that my family is protected in the event that my income becomes extraordinarily variable. Mortgaging your house on a conviction bet for something you read on Twitter, little frightening that people would even consider that.
MAGGIE LAKE: Protecting the downside in making sure you and your family will be all right in a downturn should be top of mind for all investors. Surviving is essential in this game. Knowing that the downside is covered no matter what also allows you to take big calculated bets when the opportunity arises. But we'll come to that later on. And no, we won't ask you to mortgage your house for something you read on Twitter.