7 secrets to top level investment performance

 

Topic: Tips for mentoring a trader (or weight lifter)

Executive summary: Focus on the big picture in investing, weight lifting and life: The 7 most important things to consider as an investor

Length: Fairly short

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Big mistake, huge

My biggest mistakes in life are typically associated with suboptimization.

Sometimes I’ve focused on the wrong thing, climbed the nearest hill instead of the right one. Sometimes I’ve tried too hard, sometimes too little.

What I should have done is mapped out the entire landscape, identified the desired area and put in an adequate intense work effort there and sustained the effort for a long time.

Sure, I did pretty well anyway, albeit in my signature ad hoc, haphazard fashion. The hedge fund industry between 2000-2014 turned out to be a good ant hill to climb. And the way I happened to play it was with enough intensity (well, the right colleagues at least) and long-term enough to win The European Hedge Fund Of The Decade award.

But, I could have done better… and faster in the world of finance. I could have provided more value for clients, contributed more to my colleagues; and learnt more and advanced faster, got out earlier (or enjoyed staying).

Not least, I could have done way, way better in the gym by, e.g., sleeping better, eating better, and focused on the big picture (programming, recovery and long term progress), rather than maximum ‘effort’ in every set and workout. ‘Failure’ is just one of the options for a set ;) 

My worst trait is being stubborn

Grit is probably my best

– It’s kind of the same thing

My natural independence has been of great value to me

Whereas my contrarian streak often gets me into trouble

– You get the point

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Big picture thinking

I listen to podcasts every day during my dog walks and weight lifting workouts. My main interests are science, health and economics/finance (as you can tell from this list).

The last few days I’ve been listening to several episodes of Sigma Nutrition Radio (an evidence based exercise and nutrition podcast).

Some of the more important points from episodes 148-153 have concerned big picture thinking, as opposed to being myopic or esoteric.

One thing that struck me – among the information about gluten sensitivity (possibly caused by a poor diet and suboptimal microbiome), the importance or not of drinking water and how to gauge your hydration status, how food composition and timing affects your body composition or health, whether you’re likely to be a hard gainer (no, you’re not), and how dangerous or healthy red meat and coconut oil* really is for you – was the weight to put on applying an 80/20 mindset to what to do and how to do it.

* note: forcing down water seldom is a good idea, and hydration mainly takes care of itself if you drink when thirsty (unless you’re an extreme athlete), food composition and timing hardly matters unless you compete at the national level, red meat usually isn’t the culprit and coconut oil is bad in large and concentrated doses.

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80% machine, 20 % human

What really hit home with me were the following two points 1) Greg Nuckols’ statement about envisioning the entire lift, rather than paying too much attention to parts of it and 2) Giving clients mostly what they need long term, and then a little of what they want to keep them happy short term

Those weight lifting and coaching mindsets can be applied equally well to life in general and investing or trading – whether a mentor/master or apprentice:

1. Health: Eat whole and right 80-90% of the time and more or less whatever you want the rest of the time; as long as your energy intake is what you want and your macros satisfy a minimum required level. Sleep enough. Do compound exercises for an hour or two about every second day. That’s the 20% giving you the 80%.
2. Trading: Be Analytical, Unemotional, Strategic and Patient most of the time (A USP for you and SUPA for Swedes), but do experiment, gamble and have fun some of the time (sometimes a lesson learned, sometimes free money) if that’s what keep you ticking.

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An effective choice of endeavor is more important than efficient task execution

The general idea is to avoid wasting time and energy on unnecessary nitty gritty details, and put quality effort into doing the right things adequately well (instead of aiming for 100% comprehensive scope or detail).

Cutting to the chase, here are 7 things I would have improved, if I had a do-over as an investor. They are all about being systematic, unemotional, mindful and focusing on true value drivers (statistics, learning & people):

1. Start a commonplace book for investment decisions
   1. List of best practices
   2. List of mistakes
      1. why, what “happened”
      2. what you could have done (before and during)
      3. Be quick to realize and remedy mistakes
         1. That doesn’t necessarily mean “tight stop-loss levels”, but regarding fundamental mistakes in logic or turn of real world events
      4. See if the lesson can be formulated as a best practice
   3. List of wins
      1. why
      2. was it luck or skill – be brutally honest
      3. what you could have done even better (before, during and exiting)
      4. Best practice?
   4. Read the notes regularly
      1. always check your best practices before an investment
      2. keep updating best practices with new insights
2. Read more books and articles, less sell-side research reports
   1. Take and keep notes of actionable investment wisdom
      1. distill best practices check lists for research, for investing, for interviewing, for discerning causal relationships
   2. Read book notes regularly
      1. repetition
      2. new insights
   3. Read research reports (only) for very specific purposes
      1. to poke holes in your own thesis and conclusion
      2. to find new ideas (but then you need to research them yourself as if from scratch)
      3. searching for data series for certain (proprietary) variables
      4. enable further questioning of analysts or company management
      5. gain new perspective (read reports with different conclusions from yours)
3. Think more about thinking, think ahead, be proactive
   1. Prepare what you want to get out of a model, meeting or conference before going
      1. all too often I would go to meetings and just react
      2. sometimes I started on a model with no plan and continued and finished it purely driven by homeostasis
   2. Spend at least 1-2% of the time (1h/week?) on strategic planning, structuring and streamlining your work in a systematic fashion (commonplacing)
4. Be more systematic and evidence based (statistics) when inferring causal correlations
   1. Document exactly why I think a certain correlation is meaningful
      1. fundamentally (causal), or short-term market-wise 
      2. is the covariation large and stable enough to matter
      3. regularly re-check if the correlation still holds
   2. Define a maximum of maybe 5 variables for forecasting, e.g., sales, and move on to more important things
      1. Don’t get bogged down updating detailed information that hardly matters
   3. Forecast only what you can reasonably have an idea about
      1. be clear about what you don’t know
      2. forecast very wide ranges for unknowable factors, if need to forecast at all
      3. make sure your forecasts are expressed as ranges reflecting the actual underlying uncertainty
   4. Use your intuition by all means, but only as a starting point. You still should do the research from scratch, using your best practices list
5. Less “face time” and showing off
   1. Focus only on what matters (very different whether you’re a PM or a sell side analyst)
      1. PM: investment decisions
         1. understanding value drivers
            1. “fundamentals”, including allocation flows, ownership structures etc.
            2. technicals (widely defined)
         2. not time at the office
         3. not memorizing facts to appear knowledgeable
      2. Sell side analyst: getting more commissions
         1. appearing clever
         2. keeping PMs happy (take blame, give praise, let them win arguments and in golf)
         3. keeping clients
         4. being a good host at trips and conferences
   2. Deep work: Work when work. Relax when relax
      1. Clearly define which is which, and what the purpose is.
      2. There is still room for mingling, partying, gossipping, team building – just know when you do what and why
      3. Be systematic; assign time slots using Deep Work and Pomodoro techniques
   3. Do nothing
      1. Block off your calendar for meditation, walks and serious mobility exercises
      2. Regularly take several days and weeks off from the financial markets
6. Meet more people
   1. The right people, not wasting times on lunches and cocktails unless for pure unadulterated fun, team-building or similar
   2. Discuss matters IRL instead of over e-mail or just reading reports
   3. Move during meetings, preferably walk outside in natural surroundings
7. Ask more ‘stupid’ questions
   1. Disregard everybody else, e.g., during a telephone conference.
   2. Ask “why” 3-5 times in a row to get to the root cause
   3. Make sure you understand, instead of trying to appear clever
      1. Ask again; if they can’t explain it clearly there is probably something fishy going on
      2. If needed, go back and research the topic, look up the definitions, then ask again

KISS

ONE thing I actually did do really well was using increasingly simple models for forecasting sales, profits and cash flow. Since you can’t know the variables and outcomes in any detail anyway, that’s just not where you should spend most of your time, unless you’re an analyst trying to impress your boss or client.

Keep

It

Simple

Stupid

If you’re a PM or private investor you need a minimum of modelling for a ball park estimate of the development, in order to gauge if things are going as planned or not. Depending on your position you might need a little more nuance if the SEC or a higher level director demands it.

If you’re a buy side analyst you might need a lot of details to be able to ask any kinds of questions from bosses, authorities and clients.

Finally, if you’re a sell-side analyst there is no end to how big and detailed models you can build to impress everyone in your ecosystem – the only snag is it won’t help you make better investments. Make sure you remember to change your style to something more practical should you advance to a PM position.

• Start a commonplace book
• Read more books
• Think more about thinking
• Be more systematic
• Less face time
• Meet more people
• Ask more stupid questions

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Continue reading about my views on systematic and patient investing in this article (posted October 31, 2016)

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