![]() ![]() Why didn’t the trade work out? If the reasons you entered the trade are convoluted or inconsistent with a total process, well then good luck finding out what actually went wrong. This leads to trading and investing disaster. Reduction does more than just filter signal from noise, it is also tremendously helpful when it comes to evaluating trading results.Ī process filled with too many variables, contingencies, and undefined areas results in an inability to accurately measure results. As a practitioner, the goal is singular, and that is to produce outstanding risk-adjusted returns. It may sound fancy or make you look smart, but that is not the goal here. ![]() If you do not know exactly how a particular area of your process contributes to the bottom line, toss it out. Leave the fancy theories for the cocktail parties when you are away from the quotes and your money is not at stake.Ī profitable process is something that is actionable, understandable, and easily measurable. We want to ruthlessly reduce this flow into actionable ideas instead of creating elaborate theories on why an asset should move up or down. Information flow itself is not much of a edge anymore, but organizing information flow is. We can’t help but be inundated by chart lines, indicators, real time news feeds, twitter feeds, talking heads, newsletters, etc. Complexity always creeps into market analysis because there is so much free information available these days. We need to ruthlessly reduce any complexity that shows up in an investing process. There are two mental models we can use to assist us with staying on the right track. So how can we make sure we are acting like a street hustler instead of an intellectual? ![]() He is in the game to make money and that’s it. The pool contractor could care less whether or not his investment thesis is analysed and praised on CNBC. While the academic, analyst, consultant, or keyboard warrior is looking for intellectual acceptance among a community or peer group, the street hustler practitioner is mining for one thing and one thing only -a profitable investing process. “Win or lose, everybody gets what they want out of the market.” -Ed Seykota Take Taleb’s observation and consider it in conjunction with this quote from one of our favorite market wizards: “For, alas, though those who risk their own funds put a premium on simplicity and practicality, others-academics driven by “rank” and status, management consultants, economic “experts”, and finance analysts-have an incentive to indulge in complexity and muddle.” – NNT It actually makes sense when you look at this phenomenon a little more closely. While the professors were scratching their heads as to why their ultra complex model failed, an unknown swimming pool contractor turned his original $10,775 into $18 million between June 1998 and December 1999. Long Term Capital Management’s blow out in the late 90s is a classic example of academia gone wrong. It will take the complex, highly involved PhD thesis and spit it right back into your face in the form of a giant loss or even worse, a completely blown out trading account. The market doesn’t care about fancy complexity and therefore tends to reward the practical street hustler over the high level academic. The market teaches this lesson the hard way. A desire for higher marks meant creating more pages of writing, more conclusions, more assumptions, more models, more complexity, more and more. Yet when we exit the sterile classroom and apply that approach to the real world in search of profits, it often translates into less success, not more. Complex approaches usually fizzle out, whereas simple ones, combined with basic common sense and perseverance, tend to bring home the bacon. In the classroom we were constantly praised and awarded for complexity.
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