Can Amateur Traders Beat the Pros? (w/ Dr. Gio Valiante)
MAX WIETHE: That brings up a question, I, myself, I'm not a trader. I don't pretend to be a trader, but I dabble. I have a day job here at Real Vision and I'm fortunate enough that it involves talking to traders, talking to investors, following the market. In a sense, my day job is related to a lot of the things that a hedge fund or a portfolio manager has to do. There are people out there, I'm sure a lot of our subscribers, who don't do this for their day job but still are trying to manage their own money and to trade the markets. I think I'd love to hear you speak to the difficulty of having a day job, which you're super focused to and trying to compete, trying to outperform the major indices when you're not devoting full time effort to trading and to finance, it seems to me that it's something-- even in my own experience, with all this knowledge that I have at Real Vision, it seems like something that's almost an insurmountable effort. Any trader who it's not their day job who's able to succeed, I have tremendous respect for, I assume that there must be some of those naturals that you're talking about, because there really isn't enough time in the day. GIO VALIANTE: That's a really good question. I would advise to don't lose hope, and that's not the right mindset. I don't think it's impossible to make money in the markets if you're not a professional and doing it every day, because there's so much volatility. There's so much money. There's so much movement and you're coming at it with fresh eyes. One of the things that's a real disadvantage, and it's part of the reason why I'm trying to broaden the client base with which I work, is you become very insular. If you're working inside a very narrow space, there's an old saying in academia, Carol Gilligan, who's a professor at Harvard in women's studies, showed that theory blinds observation, theory blinds observation. The idea being when you have a worldview, as a belief system, it filters out a lot of opportunity. Institutional investors, insiders on Wall Street have a particular mindset, but it's really valuable to be able to come at the markets with fresh eyes as an outsider. Sometimes that vantage point is a really valuable. Think of the movie and the book Moneyball, Michael Lewis, Moneyball. You come at the game of baseball, hundred years of tradition, with fresh eyes and analytics and you impose this process on the game, all of the sudden, it becomes more efficient. I think having an outsider's perspective is extremely valuable. In fact, me for instance, when I came into golf, I knew a bit about golf. My father grew up playing golf, but I was an academic. I came at the game from a theoretical perspective that just wasn't being applied to golf and started getting the results really quickly. I was an outsider. If you're an investor, but not a professional investor, and you're managing your own money, there are some things you do have to be careful of. Whilst there's a lot of money in the market, there's a lot of ways to make money in the market, and I know people who do this and have a strategy and a differentiated view, and they make money. What you have to be careful of is when you're on your own, you don't have the reference points, you can't triangulate. You don't have the collective view and sell side, I guess you can get the documents. It's easy to miss the elephant in the room as it were. The other thing you have to be careful of is the crisis of confidence. It's easy to lose confidence when you're alone. There's this insight out of religious circles where they say that God will never give you anything that you cannot handle. The argument I heard from this theologist was, that's not true. God gives people a lot of things they can't handle. Life is really, really hard, but God will never give you anything that you as a community can't handle. In other words, distributed suffering, shared concern. If you're at home and you're trading alone, it's easy to get lost in your head and panic and capitulate and that's where you blow up your money, because it's your money. When you have a community of people to rely on, to go for a walk with, Lev Vygotsky, the Russian psychologist talked about the synthetic function of language. The idea being that if we have a thought partner, Crick and Watson, who discovered the structure of DNA, as the story goes, individually, they were both very average scientists but together, they were brilliant. They're collective. Tom Brady and Bill Belichick. Bill Belichick got fired from the Cleveland Browns. Tom Brady was not a good college quarterback. Together, there's genius. The one thing I always try to encourage people to do is to make sure you have good sounding boards, what I call good mirrors. That's why individual sports like golf have become team concept. There's no longer an individual golfers, the golfer with his coach, and caddy and sports psychologists and wife and agent. It's like a team thing, because you're bouncing ideas off people and all of a sudden, triangulating ideas. If you're an investor at home, even though it's you versus the markets, it's important to have a thought partner, which is sometimes the role that I play, or a colleague or a friend who's in the industry so you can bounce ideas off so you never go too far down a bad path. MAX WIETHE: That actually brings up another question about the difference in psychology between managing your own money and managing money on behalf of a fund, a hedge fund. It's not your money and there's a completely different psychological connection between some nest egg that you've built up over years and years and years of your effort versus a $500 million portfolio that Steve Cohen hands you fresh out of college. It's a really different experience and I'd love to hear your take on what the difference is between maybe somebody who's managing their own money and somebody who's doing it professionally on behalf of other people. GIO VALIANTE: Yeah, and that's great question. One of the foundational features in performance psychology in achievement domains is you have to know your why. I just wrote this about Kobe Bryant. Kobe knew his why. All the great ones know their why. Why are you doing what you're doing? What you come to find is people tend to bifurcate on that question. Sometimes the why is for myself, indri and objectivism. The individual, Adam Smith in the markets, and in Wealth of Nations participate in the markets in your own best interest and through that competitiveness, it escalates competition and productivity. Then there's the other mindset, and this has shifted really in the NFL, it's play for your teammates, play for others. What we've come to find out is that when you're playing for someone else, instead of just yourself, we learned this with the dream team in the NBA for the Olympics, you had five of the best individual players in the world, on the USA team and we got beat by the worst team because there's no team mentality. There's everyone playing for themselves, and it ruined the team. The question becomes you're investing your own money versus investing money on behalf of other people's but that changes the why. What I'm always fascinated by, and this is what good leaders like Steve Cohen, like Ken Griffin do, is they make people want to succeed for them. The way I think about it is an antinomy even though it's a bifurcation, you're either doing it for yourself or doing it for others, the reality is should be a blending of both. Urban Meyer, the historically great college football coach, just left Ohio State, has a great saying. He says do your job. Take care of yourself, and take care of your teammates. What he's saying is you can't help your teammates if you're not doing your job, but if you're the offensive lineman, you knocked somebody down, then go look for someone else to knock down but take care of your business first. I think the best dynamic, or the best way to think about it is you go from managing your own money. When you're managing your own money, you're not you're not responsible for someone else so it's your loss alone. What I found is when you start taking other people's money, one would think that there's a freedom that comes with that because, hey, it's house money. It's Steve Cohen's money. It's Ken Griffin's, not my money. That's not what happens in real life. In real life, what happens is you care about people because we're all human. If someone's willing to trust you and give you their money, there's that next level of responsibility. If you're managing institutional money, this is families, these are retirement money. There's another level of responsibility. I've found, ironically, really, paradoxically, that there's a heavier burden when you're managing other people's money than your own. You would think it'd be the opposite because you would think it's house money, so they don't care, it's the opposite. People managing institutional money have such a burden. Therein lies the psychology because when you think that hey, I just lost $20 million. This is meaningful money to people, people are on the hook, they trusted me and gave me their money. I'm going to have to give half that back knowing that they trusted me. That's real burden, real responsibility. I think that having a psychology to handle that is excessively important.