At ChatWithTraders.com, we are able to listen to wonderful interviews of successful traders and investors done via podcasts. It is an invaluable source of insights and a great asset to many of us actively involved in the markets!
One particular interview that stood out to me was the podcast with Jack Litle from Mercenary Trader. In this interview, we find out more about the perspective of investing and the markets from an astute and experienced global macro investor.
The interview was extremely insightful for me and I have learnt the following important takeaways:
(I) Continuously educate yourself broadly and observe others:
Jack educated himself on the financial markets and read literally hundreds of books when on his investment journey, educating himself about everything ranging from macroeconomics and finance to statistics and human psychology. He also mentioned that he learnt by observing other traders throughout his career, and went through a long process of iterating his personal investment philosophy and methodology.
(II) Adopt a probabilistic view of the world and when anticipating events:
In the podcast, Jack emphasized that there are many similarities between macro trading and the game of poker. A professional poker player operates in an environment where information is limited, but he/she nevertheless has to make difficult decisions with whatever variables that are available. The player has to adopt a probabilistic mindset or modus operandi in order to survive rounds of poker. This sounds strikingly similar to an investment professional, who is always trying to figure out the pieces and understand what could happen in the markets.
Understanding this, Jack reiterates that adopting a probabilistic view of the world is practical to a macro trader. Forecasts (and operating with a forecast) do not make sense in a dynamic environment of ever-changing variables and with non-linear outcomes. Viewing the environment and events with a probabilistic mindset allows one to keep an open mind and change views when needed (not to mention lowering the odds of confirmation bias). Making money in the markets is not about making predictions. Quoting George Soros’ idea of ‘fallability’, Jack mentions that once we know that we can’t really predict with certainty, scenario-building and anticipating events with a probabilistic perspective would help us in navigating the financial markets.
(III) Vary your position size according to your conviction level:
Jack also pointed out that the financial markets tend to distribute profits in a “lumpy” manner, and research has shown that the returns of the markets tend not to fit in a ‘bell-curve’ – essentially not normally distributed. This means that there tend to be a higher amount of outlier events than what most people expect. Knowing this, a trader hoping to be successful in the markets must know when to increase his/her trades when the time is right or on higher probability trades that are worth the risks.
Basically, successful investors know not just how to play a good defense but also a great offense. Think about Warren Buffett, George Soros, Sir John Templeton and many more successful investors – they have once or more, bet big on certain investments in their careers.
A note of caution here: your conviction has to be based on objective factors and variables. Highly-seasoned discretionary traders/investors would probably have developed a sharp sense of intuition that would allow them to process information quickly and scale up their bets in a manner that would otherwise look like a hotshot riverboat gambler to beginners.
You can learn a great deal – I highly recommend this podcast and other podcasts from ChatWithTraders.com!