PROTECTING “MENTAL CAPITAL" - Thread on DRAWDOWNS + Risk mgmt in theory and practice - the evolution of my own framework/philosophy driven by LOSSES and fuck-ups - Self-mastery, attitude, discipline, humility, careers, answering Q&A from prior posts. LONG THREAD (10-15 min read).
INTRO/Feedback from prior thread:
“You’re putting effort into these threads that I really should be putting in, but I’m not.” – appreciate older/wiser pros who reached out with some version of this...if you are "real" you can still help the reader by putting your stamp/co-sign on what you deem good advice, doesnt have to be mine, can be anyone. A name/CV plus "co-sign" goes a LONG way in helping readers cut through the noise on here.
For jr analyst DMs, you are asking excellent questions…I was hoping to tweet about something besides markets, but many of you have correctly identified what appear to be gaps in my logic, inconsistencies or contradictions, and I am compelled to answer. (last thread: x.com/gregoryblotnic…).
That, and I also just know that if you get 3 DMs asking about something, there are 30 people who have the same question and didn’t reach out. As for the non-markets material, I will just have to gracefully weave it in..."trading in the key of life," you could say...although anyone with experience in both endeavors knows that they’re really two sides of the same coin.
As always, in the event you disagree with anything written here, “you’re wrong” doesn’t really help the reader...show us what “right” looks like, write up your own philosophy and post it, I will gladly point to yours as superior. Like I said before, I’m bottom 10% of this industry, I KNOW the upper 90% are lurking on here somewhere, and they have wisdom that I need.
But until they surface, we remain firmly in the land of “those who speak don’t know, those who know don’t speak.” Where am I, you may ask? Just as philosopher-king Gerry Rafferty once sang...stuck in the middle with you.
“You’re putting effort into these threads that I really should be putting in, but I’m not.” – appreciate older/wiser pros who reached out with some version of this...if you are "real" you can still help the reader by putting your stamp/co-sign on what you deem good advice, doesnt have to be mine, can be anyone. A name/CV plus "co-sign" goes a LONG way in helping readers cut through the noise on here.
For jr analyst DMs, you are asking excellent questions…I was hoping to tweet about something besides markets, but many of you have correctly identified what appear to be gaps in my logic, inconsistencies or contradictions, and I am compelled to answer. (last thread: x.com/gregoryblotnic…).
That, and I also just know that if you get 3 DMs asking about something, there are 30 people who have the same question and didn’t reach out. As for the non-markets material, I will just have to gracefully weave it in..."trading in the key of life," you could say...although anyone with experience in both endeavors knows that they’re really two sides of the same coin.
As always, in the event you disagree with anything written here, “you’re wrong” doesn’t really help the reader...show us what “right” looks like, write up your own philosophy and post it, I will gladly point to yours as superior. Like I said before, I’m bottom 10% of this industry, I KNOW the upper 90% are lurking on here somewhere, and they have wisdom that I need.
But until they surface, we remain firmly in the land of “those who speak don’t know, those who know don’t speak.” Where am I, you may ask? Just as philosopher-king Gerry Rafferty once sang...stuck in the middle with you.
(1/17) - DRAWDOWNS & MENTAL CAPITAL
"THE SIZE OF YOUR DRAWDOWN IS DIRECTLY PROPORTIONATE TO THE SIZE OF YOUR EGO."
In the 12 or so years I've been on and off twtr...I cannot recall ever seeing a single detailed thread on navigating drawdowns. Doesn’t happen to people on here, I suppose...just not a part of this world.
Offline, I would say that the two best PMs I've ever met... "that guy," x2... avoiding drawdowns is all they focus on. Being the "king of small losses" and never dishonoring stops.
Because THEY KNOW...that the true damage that a drawdown inflicts, its not about the dollar loss...it's what it does to your MENTAL CAPITAL.
A drawdown knocks you off your square. Your psychology, your approach, the frame of mind you’re trading from, all of these are destroyed when you enter a drawdown. You go from opportunistic to defensive, you stop playing to win and you start playing not to lose, and if a “20-hole punchcard” investment popped up, you wouldn’t notice it. You’re busy licking your wounds. The drawdown might only be 5% or 10%, but the opportunity cost could easily be ten times that size.
The true cost of poor risk management is measured in MENTAL CAPITAL, not financial capital.
"THE SIZE OF YOUR DRAWDOWN IS DIRECTLY PROPORTIONATE TO THE SIZE OF YOUR EGO."
In the 12 or so years I've been on and off twtr...I cannot recall ever seeing a single detailed thread on navigating drawdowns. Doesn’t happen to people on here, I suppose...just not a part of this world.
Offline, I would say that the two best PMs I've ever met... "that guy," x2... avoiding drawdowns is all they focus on. Being the "king of small losses" and never dishonoring stops.
Because THEY KNOW...that the true damage that a drawdown inflicts, its not about the dollar loss...it's what it does to your MENTAL CAPITAL.
A drawdown knocks you off your square. Your psychology, your approach, the frame of mind you’re trading from, all of these are destroyed when you enter a drawdown. You go from opportunistic to defensive, you stop playing to win and you start playing not to lose, and if a “20-hole punchcard” investment popped up, you wouldn’t notice it. You’re busy licking your wounds. The drawdown might only be 5% or 10%, but the opportunity cost could easily be ten times that size.
The true cost of poor risk management is measured in MENTAL CAPITAL, not financial capital.
(2/17) - THE PSYCHOLOGY OF DRAWDOWNS
In a drawdown, bad traders and gamblers immediately double down, swing bigger, and “revenge trade” to make up their losses. They all blow up. Some never advance from there.
The ones that do, they learn that “when you’re in a hole, stop digging.” Put another way, “there is no situation so bad that you cannot find a way to make it worse.”
Standard procedure is to cut all your position sizes in half and trade smaller. When you are “out of sync” with the market, which is what a drawdown should signal to you, your hit rate is low. It makes no sense by any measure, even for a Vegas gambler, to add risk. Until you regain the “hot hand,” find your footing and get your rhythm back, you play small ball, waiting for your hit rate to improve as you claw your way back into positive P&L.
In reality, this is much harder than it sounds. It can take two days to enter a drawdown and six months to get out.
WHY?
There is a multiplicative/lollapalooza effect that the brain has difficulty grasping, same way it can't grasp compound interest...
To start with, you have asymmetry in the "math of losses."
20% drawdown, 25% gain to breakeven.
30% drawdown, 43% gain to breakeven.
40% drawdown, 67% gain to breakeven.
50% drawdown, 100% gain to breakeven.
Next, your position sizes are smaller, which means at half the size, you need to be right twice as many times. At the same time, in measuring risk/reward of each trade, you will find yourself artificially truncating the downside. It’s not the true downside, but the “I simply cannot afford to lose any more money” downside, basically a fabricated level with no fundamental backing to it. Drawdowns almost always lead to subconscious deviation from process.
Additionally, time is not on your side. An extended drawdown ruins the morale of you and/or your team, the temptation to deviate from process keeps rising. You are reluctant to put on new positions, since “what you do” isn’t working. Resentment increases, negative thought patterns and harmful feedback loops emerge, and time only exacerbates all of this.
There is also a high chance that the drawdown began with a process breakdown. This might have been flawed risk management, poor sell discipline, incorrectly gauging risk/reward at the position level or correlation at the portfolio level, embedded macro bets, hidden factor bets, overcrowded trades…the list goes on and there are infinite ways to get caught off guard.
Sometimes it is just a truly freak occurrence, where your process was sound but the outcome was poor. However, the vast majority of the time you end up in a drawdown, it’s because you fucked up. This crushes you emotionally and wipes out your self-confidence, causing you to either distrust your own process or distrust your ability to execute on it.
Many, including myself, would argue there’s no such thing as a “freak” incident, a “risk you didn’t see coming” or a “black swan,” because managing risk, by definition, involves preparing for these unknowns. So, there is no scenario where you entered a drawdown and it wasn’t 100% your fault.
This is where the mental, emotional and psychological resilience of the trader or manager comes into play. Winning begets winning, but losing begets losing, and if the mind is weak then a drawdown is the beginning of the end. A poor manager makes drastic changes, takes trades that he shouldn’t, and the drawdown leads to the "game over" screen.
The difference between a 5% drawdown and 10% drawdown isn't 500 bps...its MULTIPLES of that. Loss asymmetry + position sizing + "process risk" + "time risk" + opportunity cost of missed trades + emotional/mental/psychological risk...non-linear, multiplicative, lollapalooza effect.
In my entire career, from what I’ve seen, heard, read or experienced firsthand, there is only one foolproof method for dealing with drawdowns: NEVER ENTER THEM IN THE FIRST PLACE.
That is the reason to be maniacal on risk management. It’s not about financial loss, but about PROTECTING MENTAL CAPITAL.
In a drawdown, bad traders and gamblers immediately double down, swing bigger, and “revenge trade” to make up their losses. They all blow up. Some never advance from there.
The ones that do, they learn that “when you’re in a hole, stop digging.” Put another way, “there is no situation so bad that you cannot find a way to make it worse.”
Standard procedure is to cut all your position sizes in half and trade smaller. When you are “out of sync” with the market, which is what a drawdown should signal to you, your hit rate is low. It makes no sense by any measure, even for a Vegas gambler, to add risk. Until you regain the “hot hand,” find your footing and get your rhythm back, you play small ball, waiting for your hit rate to improve as you claw your way back into positive P&L.
In reality, this is much harder than it sounds. It can take two days to enter a drawdown and six months to get out.
WHY?
There is a multiplicative/lollapalooza effect that the brain has difficulty grasping, same way it can't grasp compound interest...
To start with, you have asymmetry in the "math of losses."
20% drawdown, 25% gain to breakeven.
30% drawdown, 43% gain to breakeven.
40% drawdown, 67% gain to breakeven.
50% drawdown, 100% gain to breakeven.
Next, your position sizes are smaller, which means at half the size, you need to be right twice as many times. At the same time, in measuring risk/reward of each trade, you will find yourself artificially truncating the downside. It’s not the true downside, but the “I simply cannot afford to lose any more money” downside, basically a fabricated level with no fundamental backing to it. Drawdowns almost always lead to subconscious deviation from process.
Additionally, time is not on your side. An extended drawdown ruins the morale of you and/or your team, the temptation to deviate from process keeps rising. You are reluctant to put on new positions, since “what you do” isn’t working. Resentment increases, negative thought patterns and harmful feedback loops emerge, and time only exacerbates all of this.
There is also a high chance that the drawdown began with a process breakdown. This might have been flawed risk management, poor sell discipline, incorrectly gauging risk/reward at the position level or correlation at the portfolio level, embedded macro bets, hidden factor bets, overcrowded trades…the list goes on and there are infinite ways to get caught off guard.
Sometimes it is just a truly freak occurrence, where your process was sound but the outcome was poor. However, the vast majority of the time you end up in a drawdown, it’s because you fucked up. This crushes you emotionally and wipes out your self-confidence, causing you to either distrust your own process or distrust your ability to execute on it.
Many, including myself, would argue there’s no such thing as a “freak” incident, a “risk you didn’t see coming” or a “black swan,” because managing risk, by definition, involves preparing for these unknowns. So, there is no scenario where you entered a drawdown and it wasn’t 100% your fault.
This is where the mental, emotional and psychological resilience of the trader or manager comes into play. Winning begets winning, but losing begets losing, and if the mind is weak then a drawdown is the beginning of the end. A poor manager makes drastic changes, takes trades that he shouldn’t, and the drawdown leads to the "game over" screen.
The difference between a 5% drawdown and 10% drawdown isn't 500 bps...its MULTIPLES of that. Loss asymmetry + position sizing + "process risk" + "time risk" + opportunity cost of missed trades + emotional/mental/psychological risk...non-linear, multiplicative, lollapalooza effect.
In my entire career, from what I’ve seen, heard, read or experienced firsthand, there is only one foolproof method for dealing with drawdowns: NEVER ENTER THEM IN THE FIRST PLACE.
That is the reason to be maniacal on risk management. It’s not about financial loss, but about PROTECTING MENTAL CAPITAL.
(3/17) - RISK MANAGEMENT: INTRO
I will share what I know on this subject, which is some combo of my own fuck-ups, "best practices" I've seen, mentorship I've received, and sentiment from legendary investors.
It is a work in progress on my end, and I suspect it always will be...first, because in a sense, your risk management philosophy is nothing but the sumtotal of your mistakes, the detritus from your aggregate trading losses cobbled together and sculpted into a looming tower of shit...and while I never make the same mistake twice, I can be shockingly innovative when it comes to finding new ones to make.
Second, my opinion is that there is no “one-size-fits-all” when it comes to process…all part of the same philosophical system as before, in that you have to figure out what works for YOU.
As evidence supporting this belief, if you read what ten legendary investors have to say, you will quickly see that they contradict one another on literally everything...say Buffett versus Druckenmiller versus Jim Simons. All three have incredible track records, decades of outcomes which justify their process, but they couldn’t be further apart in what that process entails. There is no “right” answer.
The perfect example lies in this simple question:
“What is risk?”
You have your answer and I have mine, but if you go see what legendary investors have to say, it turns out there is no agreed-upon-consensus…quite the opposite, in that the range of answers is absurdly wide, and many outright contradict one another.
To some, risk is “not knowing what you’re doing”…others, risk means the risk of capital loss… to others, risk is an x% drawdown…risk could be beta, there’s risk of ruin, tail risk, event risk, idio risk, systematic risk, and career risk…some insist risk is a function of volatility, others insist volatility is not risk, and others will specify that risk is defined only as the permanent impairment of capital, ergo, a 50% drawdown is temporary and unrealized, not risk but opportunity, and 50% drawdowns are to be expected as a regular part of equity investing.
What is the “right” answer?
Just as in the last thread, where the “right” model is the one that is both consistent and repeatable in allowing you to GET THE CALL RIGHT…well, the right risk management framework is the one that is consistent and repeatable in allowing you to manage risk.
Clear as mud. So, now that that’s settled, here are one man’s opinions on the subject, along with the long, winding road he took to arrive at them.
I will share what I know on this subject, which is some combo of my own fuck-ups, "best practices" I've seen, mentorship I've received, and sentiment from legendary investors.
It is a work in progress on my end, and I suspect it always will be...first, because in a sense, your risk management philosophy is nothing but the sumtotal of your mistakes, the detritus from your aggregate trading losses cobbled together and sculpted into a looming tower of shit...and while I never make the same mistake twice, I can be shockingly innovative when it comes to finding new ones to make.
Second, my opinion is that there is no “one-size-fits-all” when it comes to process…all part of the same philosophical system as before, in that you have to figure out what works for YOU.
As evidence supporting this belief, if you read what ten legendary investors have to say, you will quickly see that they contradict one another on literally everything...say Buffett versus Druckenmiller versus Jim Simons. All three have incredible track records, decades of outcomes which justify their process, but they couldn’t be further apart in what that process entails. There is no “right” answer.
The perfect example lies in this simple question:
“What is risk?”
You have your answer and I have mine, but if you go see what legendary investors have to say, it turns out there is no agreed-upon-consensus…quite the opposite, in that the range of answers is absurdly wide, and many outright contradict one another.
To some, risk is “not knowing what you’re doing”…others, risk means the risk of capital loss… to others, risk is an x% drawdown…risk could be beta, there’s risk of ruin, tail risk, event risk, idio risk, systematic risk, and career risk…some insist risk is a function of volatility, others insist volatility is not risk, and others will specify that risk is defined only as the permanent impairment of capital, ergo, a 50% drawdown is temporary and unrealized, not risk but opportunity, and 50% drawdowns are to be expected as a regular part of equity investing.
What is the “right” answer?
Just as in the last thread, where the “right” model is the one that is both consistent and repeatable in allowing you to GET THE CALL RIGHT…well, the right risk management framework is the one that is consistent and repeatable in allowing you to manage risk.
Clear as mud. So, now that that’s settled, here are one man’s opinions on the subject, along with the long, winding road he took to arrive at them.
(4/17) - RISK MANAGEMENT: THEORY
If you read my last few threads, you probably can guess where I come down on this topic today, because the attitude, the philosophical system, the tone – right or wrong – is consistent.
“If your process doesn't produce outcomes, shut up about your process…The ultimate arbiter of truth is track/P&L… no days off, no excuses, no emotions, no quarter asked, none given…there's right and there's wrong, and if you're not sure which it is, it's wrong...losers whine about their best, winners go home and fuck the prom queen."
I would probably categorize this attitude as being brutally strict with yourself/severe self-discipline; others may say aggressive, militant, “prick,” “asshole,” or "lighten up, have some fun." I’m okay with all those descriptors, and as for the last request...it may not look like it from the outside, but severe self-discipline has consistently led me to getting what I want out of markets and out of life...to me, that is fun.
On risk, a direct quote from the last thread just about sums it up: “If you are losing money for any reason, you are wrong.”
This puts me in agreement with some legendary investors, and puts me at odds with others. Five years ago, it would’ve been totally different, a flip-flop. Ten years ago it would’ve been different yet again. Five years from today, it could be different, and so as much as I'm writing this long-ass thread to help others, it's also a snapshot in time for myself as a lifelong student of the game. Regardless, after trading markets long enough, you’ve either seen or tried all the different approaches, and you should, at the minimum, have some idea which school of thought you align with.
What is risk?
Risk is losing money. It doesn’t matter why you are losing money. If your P&L is red, you are wrong.
The idea of a 50% drawdown being standard operating procedure is ludicrous, indicative not of a risk management framework, but rather the complete absence of one. In order to be down 50%, you were first down 10% at one point, then down 20%, down 30%, and down 40%, and at each of every single one of those points, you refused to cut losses. At each of those points, you reaffirmed that the market is wrong, that you are right, and that your risk level, your risk limit, is represented by =DIV/0.
It’s volatility, you say, not risk, because risk is the permanent impairment of capital. What others see as a 50% drawdown, you see a temporary and impermanent mispricing, manic market behavior, which is merely displaying itself as an unrealized 50% loss. What others see as red P&L, you see as a stock that has grown fundamentally more attractive. What others see as brazen arrogance, you see as patience, and where others see nonexistent risk management, you see conviction.
Some of you may agree with my sentiment, some may not. One person who disagrees is a guy named Warren Buffett, arguably the greatest investor of all time, who is the source of the “50% drawdowns are a normal part of investing in equities” sentiment laid out earlier. I specifically left out who said what, because doing so would have pre-influenced your opinion and ruined your ability to keep an open mind... which, I assume, was just ruined.
If you are still at the stage where hearing “smart guy X believes this, so I must too,” you haven’t been trading markets long enough.
There are many investors with better track records than Buffett. He is the most well-known, but he is not the greatest, as defined the only possible way: annualized rate of return measured over several decades. To state that someone who compounded at 5% is “greater” than someone who compounded at 50% is absurd and not even up for discussion as the logical premise underpinning it is completely broken. The definition is the definition: the long-term rate at which they compounded capital.
So, out of all these even greater investors, each defines risk differently, and each has a different process. Many “Smart Guys” are at adds with one another. Which view are you supposed to adopt?
It is only with time and experience that you exit the Hero Worship stage. As a young investor, you want to agree with all the Smart Guys, and you live in a hall of mirrors trying to make sure you don’t disagree with any of them, because you’d sound ignorant in doing so. Inevitably, trying to serve fifty masters at the same time will fail you as a risk management framework. You will figure out what does work, and you will gain the confidence to say “his approach may work for his temperament, but my approach is what works for mine.”
So what is the “right” risk management framework? We can expand on the earlier definition: It is the one that is consistent and repeatable in allowing you to manage YOUR risk.
This only leaves one question.
“What is risk?”
There are many valid answers, but I believe there is only one "universally correct" answer: "Depends on your temperament.”
If you read my last few threads, you probably can guess where I come down on this topic today, because the attitude, the philosophical system, the tone – right or wrong – is consistent.
“If your process doesn't produce outcomes, shut up about your process…The ultimate arbiter of truth is track/P&L… no days off, no excuses, no emotions, no quarter asked, none given…there's right and there's wrong, and if you're not sure which it is, it's wrong...losers whine about their best, winners go home and fuck the prom queen."
I would probably categorize this attitude as being brutally strict with yourself/severe self-discipline; others may say aggressive, militant, “prick,” “asshole,” or "lighten up, have some fun." I’m okay with all those descriptors, and as for the last request...it may not look like it from the outside, but severe self-discipline has consistently led me to getting what I want out of markets and out of life...to me, that is fun.
On risk, a direct quote from the last thread just about sums it up: “If you are losing money for any reason, you are wrong.”
This puts me in agreement with some legendary investors, and puts me at odds with others. Five years ago, it would’ve been totally different, a flip-flop. Ten years ago it would’ve been different yet again. Five years from today, it could be different, and so as much as I'm writing this long-ass thread to help others, it's also a snapshot in time for myself as a lifelong student of the game. Regardless, after trading markets long enough, you’ve either seen or tried all the different approaches, and you should, at the minimum, have some idea which school of thought you align with.
What is risk?
Risk is losing money. It doesn’t matter why you are losing money. If your P&L is red, you are wrong.
The idea of a 50% drawdown being standard operating procedure is ludicrous, indicative not of a risk management framework, but rather the complete absence of one. In order to be down 50%, you were first down 10% at one point, then down 20%, down 30%, and down 40%, and at each of every single one of those points, you refused to cut losses. At each of those points, you reaffirmed that the market is wrong, that you are right, and that your risk level, your risk limit, is represented by =DIV/0.
It’s volatility, you say, not risk, because risk is the permanent impairment of capital. What others see as a 50% drawdown, you see a temporary and impermanent mispricing, manic market behavior, which is merely displaying itself as an unrealized 50% loss. What others see as red P&L, you see as a stock that has grown fundamentally more attractive. What others see as brazen arrogance, you see as patience, and where others see nonexistent risk management, you see conviction.
Some of you may agree with my sentiment, some may not. One person who disagrees is a guy named Warren Buffett, arguably the greatest investor of all time, who is the source of the “50% drawdowns are a normal part of investing in equities” sentiment laid out earlier. I specifically left out who said what, because doing so would have pre-influenced your opinion and ruined your ability to keep an open mind... which, I assume, was just ruined.
If you are still at the stage where hearing “smart guy X believes this, so I must too,” you haven’t been trading markets long enough.
There are many investors with better track records than Buffett. He is the most well-known, but he is not the greatest, as defined the only possible way: annualized rate of return measured over several decades. To state that someone who compounded at 5% is “greater” than someone who compounded at 50% is absurd and not even up for discussion as the logical premise underpinning it is completely broken. The definition is the definition: the long-term rate at which they compounded capital.
So, out of all these even greater investors, each defines risk differently, and each has a different process. Many “Smart Guys” are at adds with one another. Which view are you supposed to adopt?
It is only with time and experience that you exit the Hero Worship stage. As a young investor, you want to agree with all the Smart Guys, and you live in a hall of mirrors trying to make sure you don’t disagree with any of them, because you’d sound ignorant in doing so. Inevitably, trying to serve fifty masters at the same time will fail you as a risk management framework. You will figure out what does work, and you will gain the confidence to say “his approach may work for his temperament, but my approach is what works for mine.”
So what is the “right” risk management framework? We can expand on the earlier definition: It is the one that is consistent and repeatable in allowing you to manage YOUR risk.
This only leaves one question.
“What is risk?”
There are many valid answers, but I believe there is only one "universally correct" answer: "Depends on your temperament.”
(5/17) - RISK MANAGEMENT: PRACTICE
At one point or another, I have adopted every single one of those earlier definitions of risk. It’s volatility, not risk. Cut half at 10%, cut the rest at 20%. Risk is the unknown, risk is not knowing what you’re doing, blah blah blah. If I sound dogmatic in my current approach, it is only from having tried all the other approaches first, and any contempt/scorn is directed at myself, or versions of myself that I have discarded.
Here is the path of how I arrived at my current view.
The best PM I have ever met is also the most disciplined PM I have ever met. He was also the most maniacal on risk management, a pure trader who trusted his analysts, and he has one of the better multi-decade track records that I’ve seen. I suspect all these things are connected. Coincidentally, I had the good fortune of working under him, but that changes very little about the message.
His risk management system was to use stops always, or USA. That’s it. Every position has a predetermined stop before it gets put on. He trades hundreds of positions per day, all highly liquid equities, and gets stopped out of most of them. Never blows a stop, never dishonors one when it arrives, for decades on end. Unless you have traded markets for a living, it is difficult to grasp both how much discipline that requires and the compound effect of what “not losing money” does to a track record.
Everyone agrees that “don’t lose money” sounds good on paper, but when you put it into action, you realize it actually sucks. You walk into work, get stopped out all day, and go home. Day after day, year after year, you are either placing stops or getting stopped out, occasionally moving a stop higher for a winning position. All your focus is on risk, on downside, and on NOT DRAWING DOWN. That’s it. This quote from a Smart Guy illustrates the approach:
“The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out. Don't be a hero. Don't have an ego. Always question yourself and your ability. Don't ever feel that you are very good. The second you do, you are dead.” Paul Tudor Jones
As a young analyst, what did I learn from this excellent portfolio manager?
I gotta take you back to the jump real quick, because much of my current attitude was already engrained by that point.
I showed up late to my first day of work, and the message was made loud and clear.
"Greg, this isn't fucking college… and if you EVER show up late again, you are fucking fired."
Message received…I’m genuinely not sure if I’ve been late to anything, ever, since that day... and I feel comfortable putting it on paper - "you ever seen Greg late to anything?" – will leave that open…
Came back to work, drilled again -
"Build me a model for SKS, if a single number is off you're fired."
Bad timing, I was sweating out booze from the night before…many numbers were off. I was fired, begged for my job back, barely got it.
Came back to work, drilled again -
"Here's your CFA level 1 books. If you fail, you're fired."
Fuck…studied, took the test. Came in the day after taking level 1, and I see something on my desk… a big pile of CFA Level 2 books. "Um...I don't get my level 1 results for another 8 weeks?..."
"Did I stutter?…If you FAIL, you are FUCKING FIRED. Start studying."
Right back to it…all my early mentors were somehow like this, I hated them at the time, now I realize I should’ve been paying to work for them... my virtues come from them, my vices are my own.
I very quickly learned to loathe excuses, complaining, poor effort, mediocre work, loser behavior…exercising poor judgment happens, but you better own the fuck out of it after…P&L is the north star, perfection in everything is the goal, this is a 24/7 job and if you aren’t prepared for that, you can get the fuck out, because I have 500 resumes in my inbox and all better than yours.
The seeds were planted. Allow me a brief deviation from this risk odyssey to discuss "TRAITS OF GREAT PMs" - Discipline, Humility, Self-Mastery and more.
At one point or another, I have adopted every single one of those earlier definitions of risk. It’s volatility, not risk. Cut half at 10%, cut the rest at 20%. Risk is the unknown, risk is not knowing what you’re doing, blah blah blah. If I sound dogmatic in my current approach, it is only from having tried all the other approaches first, and any contempt/scorn is directed at myself, or versions of myself that I have discarded.
Here is the path of how I arrived at my current view.
The best PM I have ever met is also the most disciplined PM I have ever met. He was also the most maniacal on risk management, a pure trader who trusted his analysts, and he has one of the better multi-decade track records that I’ve seen. I suspect all these things are connected. Coincidentally, I had the good fortune of working under him, but that changes very little about the message.
His risk management system was to use stops always, or USA. That’s it. Every position has a predetermined stop before it gets put on. He trades hundreds of positions per day, all highly liquid equities, and gets stopped out of most of them. Never blows a stop, never dishonors one when it arrives, for decades on end. Unless you have traded markets for a living, it is difficult to grasp both how much discipline that requires and the compound effect of what “not losing money” does to a track record.
Everyone agrees that “don’t lose money” sounds good on paper, but when you put it into action, you realize it actually sucks. You walk into work, get stopped out all day, and go home. Day after day, year after year, you are either placing stops or getting stopped out, occasionally moving a stop higher for a winning position. All your focus is on risk, on downside, and on NOT DRAWING DOWN. That’s it. This quote from a Smart Guy illustrates the approach:
“The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out. Don't be a hero. Don't have an ego. Always question yourself and your ability. Don't ever feel that you are very good. The second you do, you are dead.” Paul Tudor Jones
As a young analyst, what did I learn from this excellent portfolio manager?
I gotta take you back to the jump real quick, because much of my current attitude was already engrained by that point.
I showed up late to my first day of work, and the message was made loud and clear.
"Greg, this isn't fucking college… and if you EVER show up late again, you are fucking fired."
Message received…I’m genuinely not sure if I’ve been late to anything, ever, since that day... and I feel comfortable putting it on paper - "you ever seen Greg late to anything?" – will leave that open…
Came back to work, drilled again -
"Build me a model for SKS, if a single number is off you're fired."
Bad timing, I was sweating out booze from the night before…many numbers were off. I was fired, begged for my job back, barely got it.
Came back to work, drilled again -
"Here's your CFA level 1 books. If you fail, you're fired."
Fuck…studied, took the test. Came in the day after taking level 1, and I see something on my desk… a big pile of CFA Level 2 books. "Um...I don't get my level 1 results for another 8 weeks?..."
"Did I stutter?…If you FAIL, you are FUCKING FIRED. Start studying."
Right back to it…all my early mentors were somehow like this, I hated them at the time, now I realize I should’ve been paying to work for them... my virtues come from them, my vices are my own.
I very quickly learned to loathe excuses, complaining, poor effort, mediocre work, loser behavior…exercising poor judgment happens, but you better own the fuck out of it after…P&L is the north star, perfection in everything is the goal, this is a 24/7 job and if you aren’t prepared for that, you can get the fuck out, because I have 500 resumes in my inbox and all better than yours.
The seeds were planted. Allow me a brief deviation from this risk odyssey to discuss "TRAITS OF GREAT PMs" - Discipline, Humility, Self-Mastery and more.
(6/17) - RISK MANAGEMENT: DISCIPLINE AND SELF-MASTERY
I need to take you into the mind of someone who is maniacal about risk, and explain why they operate the way they do...and how this all extends beyond trading and into life, although the two are almost always linked.
Many traits that appear to be weaknesses are actually strengths, indicators of high self-control, discipline, and self-mastery, and these traits are seen in high-performing managers. Meanwhile, what many portray as strength is really the opposite. These paradoxes will help you accurately gauge not just traders, but the character of people you meet.
From the perspective of attitude and mindset, the reason why great PM’s trade with stops is from a place of humility and self-mastery.
In a market crash or a crisis, emotions take over and interfere with process. This applies for 100% of traders, no exceptions… but it is only the rare few who incorporate this into their risk management.
The best PM’s or traders have a strong mind solely because they know that their mind is weak. Read that twice. This self-awareness is exactly what allows them to create a winning risk management framework.
This is the paradox, strength through admission of weakness. You will see it turn up where you least expect it. One of our generation’s true philosopher-kings, David Goggins, a discipline freak, openly states “I have a weak mind.” Everything in his worldview is about toughening up and eliminating this voice, crushing all excuses, callousing one’s mind.
Other than these rare few, you will note that almost nobody is comfortable saying that they have a weak mind. However, the takeaway is clear. All humans have weak minds, minds that deceive us. There are those who are aware that they deceive themselves. There are also those who aren’t aware they deceive themselves. But in total, there is no human who has ever existed that does not live in a perpetual state of self-deceit.
Throughout all human experience, in every major religion, across 2,000 years of history…what you see is that man, or the little we know about him, is expressed most clearly in the Fall of Man. It should be well understood by anyone who has two brain cells that perhaps the ONLY things we know about man with certainty, are that he falls prey to every temptation and desire, he will repeatedly commit sins despite being told not to, he frequently disobeys direct orders from God, and in all things appears to have zero discipline.
In my view, you cannot distrust yourself enough. I do not believe “too much discipline” exists. There is no such thing, and I have found only a linear progression, all aspects of my life improving in tandem as my self-discipline improves.
As with all things discipline, in risk management, you must assume your mind is a wild, untamed beast, and that if not whipped into submission constantly, it will either lead you astray or just prevent you from reaching your potential.
Trading markets requires sustained effort and focus, making decisions in a rapidly-changing backdrop with high pressure and high stakes. One poor decision, or failure to make a decision, ends your career. You cannot afford to have your mind interfering at the worst possible time.
In trading, this distrust would express itself as follows.
“During a crisis, I know I will not be thinking clearly, because nobody thinks clearly in a crisis. Thus, I will always trade with stops, to ensure that the size of my losses is defined in advance of any crisis scenario.”
You’re protecting yourself against yourself. This yields another paradox, which is that in the middle of chaos, the only people you can trust are those who have a healthy distrust of themselves. They’re the only ones who took precautions! One could argue self-mastery is the better term than distrust - its not personal, just a humble recognition that some flaws are inherent in all humans, and we must take steps to counteract these flaws.
You would think more humans would take note of this. The evidence is overwhelming that we are internally unreliable and can only be "fixed" through self-discipline.
Instead, the opposite occurs. Discipline is rare. An intentional distrust of oneself signals self-mastery, strength rather than weakness, whereas blindly trusting oneself signals ignorance and a lack of self-mastery. In a trading scenario, many assume they will act rationally in a crisis... and instead they completely lose control.
I need to take you into the mind of someone who is maniacal about risk, and explain why they operate the way they do...and how this all extends beyond trading and into life, although the two are almost always linked.
Many traits that appear to be weaknesses are actually strengths, indicators of high self-control, discipline, and self-mastery, and these traits are seen in high-performing managers. Meanwhile, what many portray as strength is really the opposite. These paradoxes will help you accurately gauge not just traders, but the character of people you meet.
From the perspective of attitude and mindset, the reason why great PM’s trade with stops is from a place of humility and self-mastery.
In a market crash or a crisis, emotions take over and interfere with process. This applies for 100% of traders, no exceptions… but it is only the rare few who incorporate this into their risk management.
The best PM’s or traders have a strong mind solely because they know that their mind is weak. Read that twice. This self-awareness is exactly what allows them to create a winning risk management framework.
This is the paradox, strength through admission of weakness. You will see it turn up where you least expect it. One of our generation’s true philosopher-kings, David Goggins, a discipline freak, openly states “I have a weak mind.” Everything in his worldview is about toughening up and eliminating this voice, crushing all excuses, callousing one’s mind.
Other than these rare few, you will note that almost nobody is comfortable saying that they have a weak mind. However, the takeaway is clear. All humans have weak minds, minds that deceive us. There are those who are aware that they deceive themselves. There are also those who aren’t aware they deceive themselves. But in total, there is no human who has ever existed that does not live in a perpetual state of self-deceit.
Throughout all human experience, in every major religion, across 2,000 years of history…what you see is that man, or the little we know about him, is expressed most clearly in the Fall of Man. It should be well understood by anyone who has two brain cells that perhaps the ONLY things we know about man with certainty, are that he falls prey to every temptation and desire, he will repeatedly commit sins despite being told not to, he frequently disobeys direct orders from God, and in all things appears to have zero discipline.
In my view, you cannot distrust yourself enough. I do not believe “too much discipline” exists. There is no such thing, and I have found only a linear progression, all aspects of my life improving in tandem as my self-discipline improves.
As with all things discipline, in risk management, you must assume your mind is a wild, untamed beast, and that if not whipped into submission constantly, it will either lead you astray or just prevent you from reaching your potential.
Trading markets requires sustained effort and focus, making decisions in a rapidly-changing backdrop with high pressure and high stakes. One poor decision, or failure to make a decision, ends your career. You cannot afford to have your mind interfering at the worst possible time.
In trading, this distrust would express itself as follows.
“During a crisis, I know I will not be thinking clearly, because nobody thinks clearly in a crisis. Thus, I will always trade with stops, to ensure that the size of my losses is defined in advance of any crisis scenario.”
You’re protecting yourself against yourself. This yields another paradox, which is that in the middle of chaos, the only people you can trust are those who have a healthy distrust of themselves. They’re the only ones who took precautions! One could argue self-mastery is the better term than distrust - its not personal, just a humble recognition that some flaws are inherent in all humans, and we must take steps to counteract these flaws.
You would think more humans would take note of this. The evidence is overwhelming that we are internally unreliable and can only be "fixed" through self-discipline.
Instead, the opposite occurs. Discipline is rare. An intentional distrust of oneself signals self-mastery, strength rather than weakness, whereas blindly trusting oneself signals ignorance and a lack of self-mastery. In a trading scenario, many assume they will act rationally in a crisis... and instead they completely lose control.
(7/17) - HUMILITY & SELF-CONTROL
What you may start to notice is that all the “rules” in my philosophy, which may appear harsh, crude, and somewhat violent, are actually driven by humility.
Humility that the market is right and I’m wrong.
Humility that in a high-pressure situation, I may not act rationally.
Humility that in the face of temptation and desire, the mind will always be weak.
Humility that my emotions can sway my judgment without me being aware of it, that self-deceit is a cunning serpent, that 95% of all brain activity is subconscious and that 80% of communication is nonverbal… in essence, the vast majority of the time you aren’t aware what you’re thinking or why you’re thinking about it.
A maniacal focus on risk management stems from recognizing that self-control, in the truest sense, doesn’t really exist.
This mindset applies for all things discipline in all facets of life.
The people I know with the strongest discipline are the ones who will tell you flat out, “I know my mind is my enemy, it is not to be trusted, and it must be disciplined or it will run wild.” Same paradox, strength thru admission of weakness.
Note how these people behave towards others… think about the most disciplined person you know, although David Goggins probably works.
You will never see a disciplined person comment on someone else’s lack of self-control. Every day, you’ll see ten people crash out or do something they shouldn’t, because self-control is hard. When you see people laughing or pointing fingers, it tells you everything you need to know about the person doing the pointing.
Why? Because discipline isn’t automatic, it’s not unconscious, it’s never fully engrained or on autopilot. It is sustained self-control. The guys you see who appear to have ironclad discipline, they have the exact same weak mind as everyone else, and they are simply exerting far more effort through each day than the average human.
This paradox is one you will see in the form of weak men masquerading as strong. A man who mocks self-control in others, is one who has no understanding of it himself. This holds true in many areas; an entrepreneur will never laugh at a business failure, an author will never laugh at your book, a trader will never laugh at your losses…when you hear the comments, you know immediately they’re coming from people whose opinion is to be discarded...file under "how to deal with criticism."
As far as discipline, nobody understands self-control, or struggles with self-control, as much as someone with strong discipline. They live it.
I'll go as far as making an axiomatic statement: "The most disciplined person you know is at war with themselves from dawn til dusk."
I have found this to be true in both observed and lived experience, and I will finish it off with one of life's strangest paradoxes. Severe self-discipline, which is a violent and never-ending war with self, is also, by far, the best path to a serene and tranquil mind.
What you may start to notice is that all the “rules” in my philosophy, which may appear harsh, crude, and somewhat violent, are actually driven by humility.
Humility that the market is right and I’m wrong.
Humility that in a high-pressure situation, I may not act rationally.
Humility that in the face of temptation and desire, the mind will always be weak.
Humility that my emotions can sway my judgment without me being aware of it, that self-deceit is a cunning serpent, that 95% of all brain activity is subconscious and that 80% of communication is nonverbal… in essence, the vast majority of the time you aren’t aware what you’re thinking or why you’re thinking about it.
A maniacal focus on risk management stems from recognizing that self-control, in the truest sense, doesn’t really exist.
This mindset applies for all things discipline in all facets of life.
The people I know with the strongest discipline are the ones who will tell you flat out, “I know my mind is my enemy, it is not to be trusted, and it must be disciplined or it will run wild.” Same paradox, strength thru admission of weakness.
Note how these people behave towards others… think about the most disciplined person you know, although David Goggins probably works.
You will never see a disciplined person comment on someone else’s lack of self-control. Every day, you’ll see ten people crash out or do something they shouldn’t, because self-control is hard. When you see people laughing or pointing fingers, it tells you everything you need to know about the person doing the pointing.
Why? Because discipline isn’t automatic, it’s not unconscious, it’s never fully engrained or on autopilot. It is sustained self-control. The guys you see who appear to have ironclad discipline, they have the exact same weak mind as everyone else, and they are simply exerting far more effort through each day than the average human.
This paradox is one you will see in the form of weak men masquerading as strong. A man who mocks self-control in others, is one who has no understanding of it himself. This holds true in many areas; an entrepreneur will never laugh at a business failure, an author will never laugh at your book, a trader will never laugh at your losses…when you hear the comments, you know immediately they’re coming from people whose opinion is to be discarded...file under "how to deal with criticism."
As far as discipline, nobody understands self-control, or struggles with self-control, as much as someone with strong discipline. They live it.
I'll go as far as making an axiomatic statement: "The most disciplined person you know is at war with themselves from dawn til dusk."
I have found this to be true in both observed and lived experience, and I will finish it off with one of life's strangest paradoxes. Severe self-discipline, which is a violent and never-ending war with self, is also, by far, the best path to a serene and tranquil mind.
(8/17) - MODERATION
Final piece on "traits"...there is no room for moderation.
This is an opinion, of course, but one that dovetails with discipline and humility. It applies both for trading and for life.
I would encourage you to think about every time you’ve heard someone say “everything in moderation.” In my experience, it is ALWAYS in defense of some bad habit, and it comes paired with self-deceit. Always about drinking too much, being lazy, eating poorly…doing things you know you shouldn’t be doing…deceit in both the behavior and the magnitude of the behavior.
Underneath all addictive behavior, whether drugs, sugar, excuses, or social media, you will find the same thing: lies. If this is too uncomfortable to apply to yourself, apply it to others and you’ll see it hold true; self-deceit first about the magnitude, followed by excuses made to others about the behavior itself, all usually performed the guise of moderation.
I will put out another axiomatic statement, one which, like pretty much everything in this thread, will ruffle some feathers and piss people off. Moderation is synonymous with broken discipline, and it signals a weak mind, as in a truly weak mind with no self-control....and moderation, in its simplest form, represents an inability to keep the promises you make to yourself.
Just like in the last thread, study greatness at all levels, and tell me how much moderation you see. I see none. I consistently see a maniacal focus on perfection, people who are over-the-top obsessive-compulsive on every single detail, who view process as binary, absolute and objective...to use simpler language, they are people who never, EVER break discipline. There is no room for subjective thinking, and to allow room for moderation, in many ways, just allowing room for mediocrity.
The final extension of these concepts is in changing one’s habits and lifestyle.
From my own lived experience, as far as removing bad habits, adding new ones or making wholesale lifestyle changes… the best results come from making every single change, cold turkey, at the exact same time. Overnight, the switch is flipped, you rip out all the fucking wires then hurl all vestiges of your old identity into Savonarola’s bonfire.
This is best done VIOLENTLY and with SEVERE SELF-DISCIPLINE. The more fully you can discard your old identity, the more abrupt the change is, the more likely everything is to stick.
“I’m not someone who drinks or does drugs.” Pick any "bad habit," substitute it there...any "investment process," any "risk philsophy," you can set it on fire and start new. They are things you once did, habits of an old version of you in his past life. Today, you’re just not someone who does those things. The years begin to pass as your old worldview becomes a faint memory, nothing but ancient history.
You can discard everything completely, or devote daily headspace to your old identity and your old habits. For me, nothing good has ever come from that, and devoting time and energy to "old habits" creates pressure that will burst like a dam. Things like counting days, celebrating milestones, they never worked for me...external validation never works. It has to be internal or it won't stick.
Most importantly, and to wrap this section up, at some point you discover that internal validation brings far more fulfillment than external validation, and it is the only sustainable source of motivation.
What you find is a deep sense of fulfillment in setting your mind to something, shutting out the universe, and quietly tinkering away until you’ve gotten exactly what you dreamed of. This could be creating something tangible, or just creating a new lifestyle and set of habits for yourself. There are few experiences as blissful as consistently getting what you want out of life, the recognition that you can tear down and rebuild parts of yourself or your worldview at will, change your habits, buff out flaws, polish strengths, over and over again...driven only by willpower and discipline.
But in all things... NEVER look back, and let nothing linger. There is NO subjectivity and there is NO moderation...NO DAYS OFF (thread: x.com/gregoryblotnic…)...as always, do your own due dili.
Final piece on "traits"...there is no room for moderation.
This is an opinion, of course, but one that dovetails with discipline and humility. It applies both for trading and for life.
I would encourage you to think about every time you’ve heard someone say “everything in moderation.” In my experience, it is ALWAYS in defense of some bad habit, and it comes paired with self-deceit. Always about drinking too much, being lazy, eating poorly…doing things you know you shouldn’t be doing…deceit in both the behavior and the magnitude of the behavior.
Underneath all addictive behavior, whether drugs, sugar, excuses, or social media, you will find the same thing: lies. If this is too uncomfortable to apply to yourself, apply it to others and you’ll see it hold true; self-deceit first about the magnitude, followed by excuses made to others about the behavior itself, all usually performed the guise of moderation.
I will put out another axiomatic statement, one which, like pretty much everything in this thread, will ruffle some feathers and piss people off. Moderation is synonymous with broken discipline, and it signals a weak mind, as in a truly weak mind with no self-control....and moderation, in its simplest form, represents an inability to keep the promises you make to yourself.
Just like in the last thread, study greatness at all levels, and tell me how much moderation you see. I see none. I consistently see a maniacal focus on perfection, people who are over-the-top obsessive-compulsive on every single detail, who view process as binary, absolute and objective...to use simpler language, they are people who never, EVER break discipline. There is no room for subjective thinking, and to allow room for moderation, in many ways, just allowing room for mediocrity.
The final extension of these concepts is in changing one’s habits and lifestyle.
From my own lived experience, as far as removing bad habits, adding new ones or making wholesale lifestyle changes… the best results come from making every single change, cold turkey, at the exact same time. Overnight, the switch is flipped, you rip out all the fucking wires then hurl all vestiges of your old identity into Savonarola’s bonfire.
This is best done VIOLENTLY and with SEVERE SELF-DISCIPLINE. The more fully you can discard your old identity, the more abrupt the change is, the more likely everything is to stick.
“I’m not someone who drinks or does drugs.” Pick any "bad habit," substitute it there...any "investment process," any "risk philsophy," you can set it on fire and start new. They are things you once did, habits of an old version of you in his past life. Today, you’re just not someone who does those things. The years begin to pass as your old worldview becomes a faint memory, nothing but ancient history.
You can discard everything completely, or devote daily headspace to your old identity and your old habits. For me, nothing good has ever come from that, and devoting time and energy to "old habits" creates pressure that will burst like a dam. Things like counting days, celebrating milestones, they never worked for me...external validation never works. It has to be internal or it won't stick.
Most importantly, and to wrap this section up, at some point you discover that internal validation brings far more fulfillment than external validation, and it is the only sustainable source of motivation.
What you find is a deep sense of fulfillment in setting your mind to something, shutting out the universe, and quietly tinkering away until you’ve gotten exactly what you dreamed of. This could be creating something tangible, or just creating a new lifestyle and set of habits for yourself. There are few experiences as blissful as consistently getting what you want out of life, the recognition that you can tear down and rebuild parts of yourself or your worldview at will, change your habits, buff out flaws, polish strengths, over and over again...driven only by willpower and discipline.
But in all things... NEVER look back, and let nothing linger. There is NO subjectivity and there is NO moderation...NO DAYS OFF (thread: x.com/gregoryblotnic…)...as always, do your own due dili.
(9/17) - RISK MANAGEMENT: HERO WORSHIP
Meanwhile, about a decade ago I was at war with myself, a mind full of discord and agita, hopelessly trying to answer the question:
“What do I actually believe?”
After watching great PMs in action, managing risk on a day-to-day basis, my takeaway was fairly simple.
“I should start trading with stops.”
So I’d put them in, sometimes… because other Smart Guys said you should learn to take pain and absorb volatility. I was reading a lot of Buffett and Munger at the time. The market transfers money from the impatient to the patient, wrote Buffett himself. He also said to be greedy when others are fearful, to make Mr. Market your slave and not your master, and so that means you gotta be willing to buy more when you’re down.
“How do I put in a stop-loss without going against Buffett?”
Shit.
Maybe I shouldn’t trade with stops. Plus, I’m a fundamental analyst, so yes, the P&L may be red, but what kind of fundamental analyst would let that get in the way of his views? Where in my Excel model does the P&L determine my probability-weighted price target, 50-50% derived P/E and EV/EBITDA, with a toggle for a third table incorporating FCF Yield % just as extra mental masturbation? But I couldn’t reconcile two opposing views, one, that risk is to be managed and losses are to be cut, but two, why I should sell a position in a high-quality business where the risk/reward is only improving in my favor?
This was the first time, but not the last, that I was stuck in a Hero Worship circular reference error. For many years, way longer than I should have, I wanted to be all the great investors and traders at the exact same time. Instead, I was able to find perfect mediocrity in the middle, doing nothing right by not wanting to box myself into one style.
In this case, I split the difference…if it’s a trade, I’ll add stops. If it’s a fundamental investment, no stops. The criteria for determining which is which was “I’ll figure it out.”
Those were the rules for a while. Call it 50-50 stops versus no stops. There’s “north star” and there’s “hard and fast,” and I went with “north star.”
In short order, I took a ~40% drawdown in my PA shorting levered equity stubs in basic material/energy stocks. They were fundamental investments, not trades, I had incorrectly surmised. The bonds were trading at 30 cents on the dollar, thus the equity was worthless, I implored those who would listen, worthless, but it still had market cap.
How could a lunch get any more free than that? How often do you find a market cap of $0, as indicated by the ALL-KNOWING BOND MARKET, available for short sale at valuation of $150m?
Buffett said the best thesis is always simple. This was too. Bond price < par, equity = donut. Sign me up, and give me some of those free money puts as well, because the stock is worth $0, but the puts have 0.11 cents of free money sitting there, with vol of 176% but when
Anyway, it turns out that bonds trading at 30 can go to 40, and when they do, the equity will come along for the ride, despite my insistent pleas that it was still worth $0.
Basically, I was short a naked call option with no stop loss, and long a put option that appeared to be free lunch, but wasn't. After realizing that I was wrong, I ate the loss, the ratio of stops-to-no-stops went up to 60-40, and I and decided “never short anything, ever again, without a stop.”
That rule would’ve saved me a lot of money if I had only kept it to the first three words:
“Never short anything.”
Meanwhile, about a decade ago I was at war with myself, a mind full of discord and agita, hopelessly trying to answer the question:
“What do I actually believe?”
After watching great PMs in action, managing risk on a day-to-day basis, my takeaway was fairly simple.
“I should start trading with stops.”
So I’d put them in, sometimes… because other Smart Guys said you should learn to take pain and absorb volatility. I was reading a lot of Buffett and Munger at the time. The market transfers money from the impatient to the patient, wrote Buffett himself. He also said to be greedy when others are fearful, to make Mr. Market your slave and not your master, and so that means you gotta be willing to buy more when you’re down.
“How do I put in a stop-loss without going against Buffett?”
Shit.
Maybe I shouldn’t trade with stops. Plus, I’m a fundamental analyst, so yes, the P&L may be red, but what kind of fundamental analyst would let that get in the way of his views? Where in my Excel model does the P&L determine my probability-weighted price target, 50-50% derived P/E and EV/EBITDA, with a toggle for a third table incorporating FCF Yield % just as extra mental masturbation? But I couldn’t reconcile two opposing views, one, that risk is to be managed and losses are to be cut, but two, why I should sell a position in a high-quality business where the risk/reward is only improving in my favor?
This was the first time, but not the last, that I was stuck in a Hero Worship circular reference error. For many years, way longer than I should have, I wanted to be all the great investors and traders at the exact same time. Instead, I was able to find perfect mediocrity in the middle, doing nothing right by not wanting to box myself into one style.
In this case, I split the difference…if it’s a trade, I’ll add stops. If it’s a fundamental investment, no stops. The criteria for determining which is which was “I’ll figure it out.”
Those were the rules for a while. Call it 50-50 stops versus no stops. There’s “north star” and there’s “hard and fast,” and I went with “north star.”
In short order, I took a ~40% drawdown in my PA shorting levered equity stubs in basic material/energy stocks. They were fundamental investments, not trades, I had incorrectly surmised. The bonds were trading at 30 cents on the dollar, thus the equity was worthless, I implored those who would listen, worthless, but it still had market cap.
How could a lunch get any more free than that? How often do you find a market cap of $0, as indicated by the ALL-KNOWING BOND MARKET, available for short sale at valuation of $150m?
Buffett said the best thesis is always simple. This was too. Bond price < par, equity = donut. Sign me up, and give me some of those free money puts as well, because the stock is worth $0, but the puts have 0.11 cents of free money sitting there, with vol of 176% but when
Anyway, it turns out that bonds trading at 30 can go to 40, and when they do, the equity will come along for the ride, despite my insistent pleas that it was still worth $0.
Basically, I was short a naked call option with no stop loss, and long a put option that appeared to be free lunch, but wasn't. After realizing that I was wrong, I ate the loss, the ratio of stops-to-no-stops went up to 60-40, and I and decided “never short anything, ever again, without a stop.”
That rule would’ve saved me a lot of money if I had only kept it to the first three words:
“Never short anything.”
(10/17) - RISK MANAGEMENT: PROCESS MEETS OUTCOME
After that, year by year, I would see “smart fundamental guys” get carried out, over and over and over. “Stocks can trade at any price” – a legendary quote, instantly enshrined in Canton, and one that I recall being in tandem with a Baby Buffett cover...say what you want about the man, to bounce back from that as he has (VRX) is the stuff only legends are made of...hat tip, respect and admiration.
Over time, it also became clear that “something unprecedented just happened” doesn’t really hold water as an outlier. Every single day in markets, something unprecedented happens.
It also became abundantly clear that with rare exceptions, the market is always right. You rarely know why you’re down 10% or 20%...and the market will eventually fill you in on what you’re missing, but only once you’re down 50%. In Smart Fundamental Guy language, "I sell when my thesis breaks" - the mkt told you it was broken down 20%...the "confirmation" only arrives down 50%.
More than anything else, experience and reps help organically mold your philosophy on risk. The ferocious efficiency of the market, and how swiftly careers come to an end, the arrogance of repeatedly averaging down on a fundamental view…you watch firsthand and recognize that you need to tighten up and avoid certain behaviors.
After about a decade of trading markets, I had my process and risk management pretty tight, with stops in probably 90% of my positions…physical or mental, when they’re in, I honor them. But as a framework, it was still “north star” versus hard and fast.
The rules I put in, I’d follow them, but you never want to make the rules too rigid…for all rules have exceptions, or something like that. Some Smart Guy investing maxim.
Then, in 2020, I drew down hard, came to the juncture of “smart fundamental guy” versus “risk manager,” and made the SAME call that has taken every single investor out of the game, EVER… “the market is wrong and I am right.” As soon as you say that, you have signed your own death warrant. One phrase actually came to mind, “The whole point of having rules is knowing when to break them,” and I don’t know why, because it came to mind as something you actually hear all the time, like, bandied about as if it was prudent grandmother wisdom. If you hear someone say those words, run away - they are symptomatic of a wretched mind.
In hindsight, that one decision to start fighting the market was the most impactful one by far, in that it was the top of the waterfall, serving to create a series of bad decisions below it. I could write a book full of all the bad trades, bad decisions, times I've ever excised poor judgment...I've published two books already full of them, and STILL haven't come close to covering it all...but as for this thread, here is why the decision was wrong.
One, by breaking the rule that you should avoid changing process on the fly to begin with, and you should NEVER do it in the middle of a drawdown. This is trading 101, but in a fast tape or a market crash you always run the risk of “this time its different” thinking. Drawdowns wreck your mental capital.
Mistake two, when you officially declare war on the market – ie you say “I’m a fundamental analyst now, and not a risk manager” - your entire process completely inverts.
Before, “red P&L means I’m wrong.”
After, “red P&L means fundamentally cheaper, so I’m even more right.”
You might have positions with stops, but mentally, you’re no longer trading from that frame of mind...you have no stops, no protection...you’re exposed.
Risk no longer exists, and the veil of Maya has been pulled over your eyes.
After that, year by year, I would see “smart fundamental guys” get carried out, over and over and over. “Stocks can trade at any price” – a legendary quote, instantly enshrined in Canton, and one that I recall being in tandem with a Baby Buffett cover...say what you want about the man, to bounce back from that as he has (VRX) is the stuff only legends are made of...hat tip, respect and admiration.
Over time, it also became clear that “something unprecedented just happened” doesn’t really hold water as an outlier. Every single day in markets, something unprecedented happens.
It also became abundantly clear that with rare exceptions, the market is always right. You rarely know why you’re down 10% or 20%...and the market will eventually fill you in on what you’re missing, but only once you’re down 50%. In Smart Fundamental Guy language, "I sell when my thesis breaks" - the mkt told you it was broken down 20%...the "confirmation" only arrives down 50%.
More than anything else, experience and reps help organically mold your philosophy on risk. The ferocious efficiency of the market, and how swiftly careers come to an end, the arrogance of repeatedly averaging down on a fundamental view…you watch firsthand and recognize that you need to tighten up and avoid certain behaviors.
After about a decade of trading markets, I had my process and risk management pretty tight, with stops in probably 90% of my positions…physical or mental, when they’re in, I honor them. But as a framework, it was still “north star” versus hard and fast.
The rules I put in, I’d follow them, but you never want to make the rules too rigid…for all rules have exceptions, or something like that. Some Smart Guy investing maxim.
Then, in 2020, I drew down hard, came to the juncture of “smart fundamental guy” versus “risk manager,” and made the SAME call that has taken every single investor out of the game, EVER… “the market is wrong and I am right.” As soon as you say that, you have signed your own death warrant. One phrase actually came to mind, “The whole point of having rules is knowing when to break them,” and I don’t know why, because it came to mind as something you actually hear all the time, like, bandied about as if it was prudent grandmother wisdom. If you hear someone say those words, run away - they are symptomatic of a wretched mind.
In hindsight, that one decision to start fighting the market was the most impactful one by far, in that it was the top of the waterfall, serving to create a series of bad decisions below it. I could write a book full of all the bad trades, bad decisions, times I've ever excised poor judgment...I've published two books already full of them, and STILL haven't come close to covering it all...but as for this thread, here is why the decision was wrong.
One, by breaking the rule that you should avoid changing process on the fly to begin with, and you should NEVER do it in the middle of a drawdown. This is trading 101, but in a fast tape or a market crash you always run the risk of “this time its different” thinking. Drawdowns wreck your mental capital.
Mistake two, when you officially declare war on the market – ie you say “I’m a fundamental analyst now, and not a risk manager” - your entire process completely inverts.
Before, “red P&L means I’m wrong.”
After, “red P&L means fundamentally cheaper, so I’m even more right.”
You might have positions with stops, but mentally, you’re no longer trading from that frame of mind...you have no stops, no protection...you’re exposed.
Risk no longer exists, and the veil of Maya has been pulled over your eyes.
(11/17) - RISK MANAGEMENT: PRESSURE IS A PRIVILEGE
What you previously saw as risk, now you only see volatility.
The soothing relief of bagholder quotes...
“Volatility is the friend of the long-term investor”...risk is only permanent capital impairment…this is just Mr. Market being manic and offering you discounts…the margin of safety has only increased, a voting machine and not a weighing machine, transferring money from the impatient to the patient.
Meanwhile, as soon as the market corrected in 2020, the very first thing Buffett did was aggressively puke all his airlines and all his banks. He is still the greatest, and from a process perspective, it was the correct call…he was out EARLY, he got great fills and probably cut his risk better than most L/S PMs despite being a billion times larger. While the outcome was wrong, if he makes that exact same call 100 times, he’s correct on 99 of them. But again, this is how new investors get killed by blind hero worship.
Buffett is an ice-cold bond trader at heart, a shark with legendary pattern recognition skills…not in “buy and hold forever,” but in high-pressure situations, his ability to calculate risk/reward and deal terms in a matter of minutes… ones that set up a “heads I win, tails you lose” outcome, and then pick up the phone, call three people and commit $100B of capital. The payoff profile, within two years his upside is to $160B, his downside is to $98B, and if the downside case occurs, he instantly acquires 75% of JPMorgan Chase Bank, structured using exotic derivatives, swaps and warrants so that his cost basis is $0.01. Everything Buffett does is not far off from that scenario.
Beyond that, the duration of his capital is not the duration of your capital, he has fresh inflows and you don’t, his temperament is not your temperament, he has damn near inside information on everything through his private holdings, he can acquire entire businesses, partial equity stakes, or just rip people’s throats out all the way up and down the cap stack…and if he doesn’t like what’s available, he can have a custom tranche designed for him at usury rates.
Point being, the folksy stuff sounds good, but is not at all how he operates. For all the good I can say about Buffett, I also believe that blindly following his advice, from a risk management perspective, has caused financial ruin for many people.
Using the Smart Fundamental Guy framework, there is no such thing as risk management.
Why?
Because there is no risk to manage. Remember, volatility is not risk...the only risk is permanent capital impairment.
I will get ahead of the obvious question.
Q: “How do you know if it’s a permanent capital impairment or not?”
A: You don’t.
This idiotic and arrogant logic has led to more “game over” screens than anything else, even more than 0DTE options, because while the option autist knows he’s a degenerate gambler, the smart fundamental Buffett zombie genuinely believes that he’s smarter than the market…there is no possible scenario where he’s wrong…it never once crosses his mind, and he will fight the market all the way to zero. Everything Buffett says should be applied to the S&P 500 and nothing else.
As far as my own risk management, or lack thereof, the problems have always stemmed less from following the framework than from having the WRONG FRAMEWORK to begin with. I was taught to USA – use stops always – and decided to USAA instead, almost always…except for when I don’t feel like it, or for super high-conviction fundamental ideas.
This might work up until you are in a high-pressure situation, a 40+ vol tape, managing external capital, entering a drawdown…but that’s when the market exposes the flaws in your process, personality, or both.
You practiced when it was sunny out, when its easy to adhere to process… but you forgot to practice for Foxborough in January.
What you previously saw as risk, now you only see volatility.
The soothing relief of bagholder quotes...
“Volatility is the friend of the long-term investor”...risk is only permanent capital impairment…this is just Mr. Market being manic and offering you discounts…the margin of safety has only increased, a voting machine and not a weighing machine, transferring money from the impatient to the patient.
Meanwhile, as soon as the market corrected in 2020, the very first thing Buffett did was aggressively puke all his airlines and all his banks. He is still the greatest, and from a process perspective, it was the correct call…he was out EARLY, he got great fills and probably cut his risk better than most L/S PMs despite being a billion times larger. While the outcome was wrong, if he makes that exact same call 100 times, he’s correct on 99 of them. But again, this is how new investors get killed by blind hero worship.
Buffett is an ice-cold bond trader at heart, a shark with legendary pattern recognition skills…not in “buy and hold forever,” but in high-pressure situations, his ability to calculate risk/reward and deal terms in a matter of minutes… ones that set up a “heads I win, tails you lose” outcome, and then pick up the phone, call three people and commit $100B of capital. The payoff profile, within two years his upside is to $160B, his downside is to $98B, and if the downside case occurs, he instantly acquires 75% of JPMorgan Chase Bank, structured using exotic derivatives, swaps and warrants so that his cost basis is $0.01. Everything Buffett does is not far off from that scenario.
Beyond that, the duration of his capital is not the duration of your capital, he has fresh inflows and you don’t, his temperament is not your temperament, he has damn near inside information on everything through his private holdings, he can acquire entire businesses, partial equity stakes, or just rip people’s throats out all the way up and down the cap stack…and if he doesn’t like what’s available, he can have a custom tranche designed for him at usury rates.
Point being, the folksy stuff sounds good, but is not at all how he operates. For all the good I can say about Buffett, I also believe that blindly following his advice, from a risk management perspective, has caused financial ruin for many people.
Using the Smart Fundamental Guy framework, there is no such thing as risk management.
Why?
Because there is no risk to manage. Remember, volatility is not risk...the only risk is permanent capital impairment.
I will get ahead of the obvious question.
Q: “How do you know if it’s a permanent capital impairment or not?”
A: You don’t.
This idiotic and arrogant logic has led to more “game over” screens than anything else, even more than 0DTE options, because while the option autist knows he’s a degenerate gambler, the smart fundamental Buffett zombie genuinely believes that he’s smarter than the market…there is no possible scenario where he’s wrong…it never once crosses his mind, and he will fight the market all the way to zero. Everything Buffett says should be applied to the S&P 500 and nothing else.
As far as my own risk management, or lack thereof, the problems have always stemmed less from following the framework than from having the WRONG FRAMEWORK to begin with. I was taught to USA – use stops always – and decided to USAA instead, almost always…except for when I don’t feel like it, or for super high-conviction fundamental ideas.
This might work up until you are in a high-pressure situation, a 40+ vol tape, managing external capital, entering a drawdown…but that’s when the market exposes the flaws in your process, personality, or both.
You practiced when it was sunny out, when its easy to adhere to process… but you forgot to practice for Foxborough in January.
(12/17) - RISK MANAGEMENT: ENDGAME
That gets us to my approach today, which may be right or may be wrong depending on which Smart Guy you worship.
The first principles of this risk management philosophy, to put it gently, are “I don’t give a fuck”…meaning, for every single position, there is a price at which I know I’m getting out. When that price arrives, I don't give a fuck about the market or about anything fundamental – I am OUT. When P&L and fundamentals conflict, 100% of the time the P&L wins out, end of story...I simply don’t care.
The mindset at all times is:
1. Protect the P&L
2. Don’t draw down
3. Preserve mental capital
That is it. Everything else is basically meaningless. This is all that I have ever seen a high-performing PM focus on, it is all I focus on, and rather than mimicking them earlier, I let the Smart Guys influence how I thought about risk… when the reality is that they don’t think about it at all, or view risk as something nebulous like “risk is not knowing what you’re doing” or “risk is ignorance” or “risk is not preparing for the unknown” or “high-quality fundamentals are the best defense against risk.”
If your risk management framework doesn’t have a single number in it, you don’t have a risk management framework. This is being addressed as we speak, the existential L/S crisis from the last tweet, due to pods replacing words with numbers and process with outcomes.
I may sound like I'm trashing single-mgr L/S at times, when its anything but...most of my closest friends/contacts run small firms like this... I'm rooting them for them with all my heart and soul, but reality is a motherfucker, and the bid has fallen out for all airy-fairy speak.
If your risk management framework has loopholes, exceptions, subjective situations…if it’s 99% automated and 1% discretionary…your shit is busted. It’s only 1% discretionary when the sun is shining. When the shit is hits the fan and you go into a drawdown, it’s not 1% discretionary…sharp drawdowns scramble your brain, by definition. My mind is weak. Drawdowns fuck my brain up, always have, always will. The difference between rookies and veterans is that veterans acknowledge this and manage risk in preparation for ALL SCENARIOS.
Rookies think they’ll be fine, veterans know that NO ONE is fine and that you need to automate as much as possible, removing emotion from the process...if you somehow caught off-guard, “the first cut is the best cut,” period. To cut gross down 3% as opposed to down 6%, it doesn’t sound like much financial capital, but that cut in mkt-neutral L/S is the difference between a 1-2 month drawdown vs a 3-6 month drawdown...MENTAL CAPITAL, not financial.
As for my journey to this mindset, the biggest influence has been watching an endless stream of smart fundamental guys - all of whom are legitimately 150 times smarter than me - all get blown the fuck out for the exact same reason: they refuse to entertain the possibility that they are wrong. There is no exit plan. The exit plan is “I’m right and the market is wrong,” and a guy who takes a 50% drawdown has made it clear that he is ready to take 90%.
My biggest mistakes always stem from the mental or emotional, process-driven, straight up incorrect thought patterns...specifically, leaving the door open for fundamental equity analysis to play ANY role in risk management.
That door, I’ve quietly been closing it for years, realizing if the job is “trader + analyst,” or risk mgr vs fundamental mgr, the trader/risk hat is what will determine if you succeed or fail. But I never wanted to slam the fundamental door shut, because, first, I’m fundamental L/S, so, like...really? You’re fundamental but you’ll blow out of any position on the drop of a dime? Plus, you’re going against the Smart Guys, going against Buffett.
Now? Complete and total abdication, slammed and locked. This isn’t to say abandoning the practice of fundamental analysis; it’s the realization that risk manager vs fundamental manager, these two approaches are polar opposites, they cannot ever coexist, you are trying to stand up and sit down at the same time. So whether it’s 90% to 10%, or 99% to 1%, you have created a mentally incongruent philosophy... the market will eventually force your hand and crash you out.
Does red P&L present risk or opportunity?
Your answer determines your risk framework that you should be bound by.
Pick your side and stick with it. You cannot say “both,” you cannot have a position-specific framework, discretionary, “I’ll figure it out as I go,” switching from hat to hat…I’m telling you, your wires are crossed. It might work today, but in a fast tape you will get killed.
If you believe red P&L presents risk, then 100% of the time, you trade with tight stops and you cut positions as they move against you. There is room for discretion on how tight the stops are, or how fast and how deep you cut, but there is no deviation from the mindset...the hat you wear, what you’re scanning for...red P&L getting worse, cutting off losses, avoiding drawdowns, protecting mental capital. In a drawdown, crash, whatever, you’re going to survive with this risk mgmt framework...all positions have stops, and while there are fundamental views, everything is P&L driven.
"Why did you sell XYZ down 5%?"
"That was my risk limit."
"You loved it yday? Did your thesis break? Did something fundamentally change?"
"No - I DONT GIVE A FUCK."
That about sums it up for me today...you will struggle with the "fundamentals vs P&L" mental incongruence until you pick a side. I dont care about looking stupid, I no longer care about whether this is reflective of "pure fundamental analysis"...I simply do not give a fuck, I care ONLY about living to fight another day. As I have seen and experienced over and over in my career, it only takes being wrong ONCE to knock you out of the game.
As for the fundamental approach to risk, I just don’t know what to say…to show up every morning, stare at a bunch of positions down 20-50% and write it all off as “volatility, not risk” or “risk is not knowing what you’re doing.” Not many guys have earned the right to be that arrogant. How’s this for a definition: “risk is not even entertaining the possibility that you could be wrong?” I think that’s a pretty good definition, but what do I know.
Bottom line: volatility may not be risk, but the two are indistinguishable ex-ante...More often than not, they’re twin sisters...And more often than not, the outcome is a Smart Guy in a body bag.
Q&A/pushback, then closing thoughts...
That gets us to my approach today, which may be right or may be wrong depending on which Smart Guy you worship.
The first principles of this risk management philosophy, to put it gently, are “I don’t give a fuck”…meaning, for every single position, there is a price at which I know I’m getting out. When that price arrives, I don't give a fuck about the market or about anything fundamental – I am OUT. When P&L and fundamentals conflict, 100% of the time the P&L wins out, end of story...I simply don’t care.
The mindset at all times is:
1. Protect the P&L
2. Don’t draw down
3. Preserve mental capital
That is it. Everything else is basically meaningless. This is all that I have ever seen a high-performing PM focus on, it is all I focus on, and rather than mimicking them earlier, I let the Smart Guys influence how I thought about risk… when the reality is that they don’t think about it at all, or view risk as something nebulous like “risk is not knowing what you’re doing” or “risk is ignorance” or “risk is not preparing for the unknown” or “high-quality fundamentals are the best defense against risk.”
If your risk management framework doesn’t have a single number in it, you don’t have a risk management framework. This is being addressed as we speak, the existential L/S crisis from the last tweet, due to pods replacing words with numbers and process with outcomes.
I may sound like I'm trashing single-mgr L/S at times, when its anything but...most of my closest friends/contacts run small firms like this... I'm rooting them for them with all my heart and soul, but reality is a motherfucker, and the bid has fallen out for all airy-fairy speak.
If your risk management framework has loopholes, exceptions, subjective situations…if it’s 99% automated and 1% discretionary…your shit is busted. It’s only 1% discretionary when the sun is shining. When the shit is hits the fan and you go into a drawdown, it’s not 1% discretionary…sharp drawdowns scramble your brain, by definition. My mind is weak. Drawdowns fuck my brain up, always have, always will. The difference between rookies and veterans is that veterans acknowledge this and manage risk in preparation for ALL SCENARIOS.
Rookies think they’ll be fine, veterans know that NO ONE is fine and that you need to automate as much as possible, removing emotion from the process...if you somehow caught off-guard, “the first cut is the best cut,” period. To cut gross down 3% as opposed to down 6%, it doesn’t sound like much financial capital, but that cut in mkt-neutral L/S is the difference between a 1-2 month drawdown vs a 3-6 month drawdown...MENTAL CAPITAL, not financial.
As for my journey to this mindset, the biggest influence has been watching an endless stream of smart fundamental guys - all of whom are legitimately 150 times smarter than me - all get blown the fuck out for the exact same reason: they refuse to entertain the possibility that they are wrong. There is no exit plan. The exit plan is “I’m right and the market is wrong,” and a guy who takes a 50% drawdown has made it clear that he is ready to take 90%.
My biggest mistakes always stem from the mental or emotional, process-driven, straight up incorrect thought patterns...specifically, leaving the door open for fundamental equity analysis to play ANY role in risk management.
That door, I’ve quietly been closing it for years, realizing if the job is “trader + analyst,” or risk mgr vs fundamental mgr, the trader/risk hat is what will determine if you succeed or fail. But I never wanted to slam the fundamental door shut, because, first, I’m fundamental L/S, so, like...really? You’re fundamental but you’ll blow out of any position on the drop of a dime? Plus, you’re going against the Smart Guys, going against Buffett.
Now? Complete and total abdication, slammed and locked. This isn’t to say abandoning the practice of fundamental analysis; it’s the realization that risk manager vs fundamental manager, these two approaches are polar opposites, they cannot ever coexist, you are trying to stand up and sit down at the same time. So whether it’s 90% to 10%, or 99% to 1%, you have created a mentally incongruent philosophy... the market will eventually force your hand and crash you out.
Does red P&L present risk or opportunity?
Your answer determines your risk framework that you should be bound by.
Pick your side and stick with it. You cannot say “both,” you cannot have a position-specific framework, discretionary, “I’ll figure it out as I go,” switching from hat to hat…I’m telling you, your wires are crossed. It might work today, but in a fast tape you will get killed.
If you believe red P&L presents risk, then 100% of the time, you trade with tight stops and you cut positions as they move against you. There is room for discretion on how tight the stops are, or how fast and how deep you cut, but there is no deviation from the mindset...the hat you wear, what you’re scanning for...red P&L getting worse, cutting off losses, avoiding drawdowns, protecting mental capital. In a drawdown, crash, whatever, you’re going to survive with this risk mgmt framework...all positions have stops, and while there are fundamental views, everything is P&L driven.
"Why did you sell XYZ down 5%?"
"That was my risk limit."
"You loved it yday? Did your thesis break? Did something fundamentally change?"
"No - I DONT GIVE A FUCK."
That about sums it up for me today...you will struggle with the "fundamentals vs P&L" mental incongruence until you pick a side. I dont care about looking stupid, I no longer care about whether this is reflective of "pure fundamental analysis"...I simply do not give a fuck, I care ONLY about living to fight another day. As I have seen and experienced over and over in my career, it only takes being wrong ONCE to knock you out of the game.
As for the fundamental approach to risk, I just don’t know what to say…to show up every morning, stare at a bunch of positions down 20-50% and write it all off as “volatility, not risk” or “risk is not knowing what you’re doing.” Not many guys have earned the right to be that arrogant. How’s this for a definition: “risk is not even entertaining the possibility that you could be wrong?” I think that’s a pretty good definition, but what do I know.
Bottom line: volatility may not be risk, but the two are indistinguishable ex-ante...More often than not, they’re twin sisters...And more often than not, the outcome is a Smart Guy in a body bag.
Q&A/pushback, then closing thoughts...
(13/17) - Q&A 1 - Berkshire Versus Pod L/S
To answer a DM from a junior here, which was totally fair ...
Q: How are you telling us to read Buffett, but also telling us that calling quarters is important?
Excellent question, and at first, it absolutely sounds like a contradiction.
The best answer I can give, is the answer that was given to me over a decade ago by a Finance Twitter legend named Ed Borgato. He was a Buffett cultist, but at the same time, very sharp PM, keen market sense, firm believer in reading the tape…all sorts of shit that Buffett doesn’t subscribe to.
His view was that Buffett is the “north star,” meaning you should always default to him and his style, fundamental analysis should be your core, and what Berkshire advocates is generally sound process backed by decades of outcomes. However, he also believed in being a market pragmatist. Just because something is your north star, that doesn’t mean you abide hard-and-fast to every word they say…you can, should, and will deviate.
On the “north star” point, what I say is basically repeating his advice verbatim.
At the same time, everything about calling quarters and pods is 100% accurate.
There’s theory and there’s the cold hard reality of life.
This is the danger of Hero Worship, closed-minded thinking, when the truth is that many things can all be true at the same time. There are people who have track records better than Buffett, but who built that record by short-term trading… shorter than calling quarters. There is no right and wrong, they’re both right. Jim Simons has the best track record of all time, which he built by being trading migratory bird patterns while Mercury is in retrograde, and the truth is probably even more bizarre than that. His process is one that is consistent, repeatable, and creates outcomes that have blown everyone else away for three decades. Should you be trading migratory birds, no, neither should Buffett or anyone else. Both can be great at the same time, no overlap, and what works for YOU will be different than them.
On the quarters, your job, as in what you do for work to pay the bills, is not going to be “LO Equity PM at Berkshire Hathaway.” You are going to work at a place that calls quarters (L/S), or a place that says they don’t but actually do (everyone else). The industry is 99.9% short-term, everything is 12 months or less, and if you want to have a long and successful career, being able to consistently make short-term calls that are accurate or at least indicative of sound process, that is your optimal path.
Finally, the pod skillset is not different from any other fundamental job. The short-term stuff is INCREMENTAL. Every pod analyst can do a deep fundamental pitch, Buffett-style, waxing poetic about favorable LT industry tailwinds, a SWOT analysis, talk about how you see it compounding at 15% in perpetuity, how the “variant view” is the width of the moat, the duration of their CAP (Mauboussin), a long-term bet on management’s capital allocation skills. These are MUCH easier pitches to write, because as you’ve noticed, there’s no numbers. When there’s no numbers, there’s nothing to push back against.
At a pod seat, it is understood that you know all this stuff, that it’s stored somewhere as a “north star,” but you are expected to identify short-term mispricings and monetize them, navigating each catalyst on the way to your long-term view playing out.
The pod analyst knows his industry at a deep fundamental level, far deeper than any other equity research analyst on earth… because he’s given billions of dollars in research to play with. You are the “first call,” you pretty much have direct access to literally anyone.
When you have a bigger research/data budget than everyone else, you are the smartest guy in the room on fundamentals. Not that hard to grasp. This is “non-consensus” on twtr, but clear and obvious to all involved, and logical to understand for everyone else.
To answer a DM from a junior here, which was totally fair ...
Q: How are you telling us to read Buffett, but also telling us that calling quarters is important?
Excellent question, and at first, it absolutely sounds like a contradiction.
The best answer I can give, is the answer that was given to me over a decade ago by a Finance Twitter legend named Ed Borgato. He was a Buffett cultist, but at the same time, very sharp PM, keen market sense, firm believer in reading the tape…all sorts of shit that Buffett doesn’t subscribe to.
His view was that Buffett is the “north star,” meaning you should always default to him and his style, fundamental analysis should be your core, and what Berkshire advocates is generally sound process backed by decades of outcomes. However, he also believed in being a market pragmatist. Just because something is your north star, that doesn’t mean you abide hard-and-fast to every word they say…you can, should, and will deviate.
On the “north star” point, what I say is basically repeating his advice verbatim.
At the same time, everything about calling quarters and pods is 100% accurate.
There’s theory and there’s the cold hard reality of life.
This is the danger of Hero Worship, closed-minded thinking, when the truth is that many things can all be true at the same time. There are people who have track records better than Buffett, but who built that record by short-term trading… shorter than calling quarters. There is no right and wrong, they’re both right. Jim Simons has the best track record of all time, which he built by being trading migratory bird patterns while Mercury is in retrograde, and the truth is probably even more bizarre than that. His process is one that is consistent, repeatable, and creates outcomes that have blown everyone else away for three decades. Should you be trading migratory birds, no, neither should Buffett or anyone else. Both can be great at the same time, no overlap, and what works for YOU will be different than them.
On the quarters, your job, as in what you do for work to pay the bills, is not going to be “LO Equity PM at Berkshire Hathaway.” You are going to work at a place that calls quarters (L/S), or a place that says they don’t but actually do (everyone else). The industry is 99.9% short-term, everything is 12 months or less, and if you want to have a long and successful career, being able to consistently make short-term calls that are accurate or at least indicative of sound process, that is your optimal path.
Finally, the pod skillset is not different from any other fundamental job. The short-term stuff is INCREMENTAL. Every pod analyst can do a deep fundamental pitch, Buffett-style, waxing poetic about favorable LT industry tailwinds, a SWOT analysis, talk about how you see it compounding at 15% in perpetuity, how the “variant view” is the width of the moat, the duration of their CAP (Mauboussin), a long-term bet on management’s capital allocation skills. These are MUCH easier pitches to write, because as you’ve noticed, there’s no numbers. When there’s no numbers, there’s nothing to push back against.
At a pod seat, it is understood that you know all this stuff, that it’s stored somewhere as a “north star,” but you are expected to identify short-term mispricings and monetize them, navigating each catalyst on the way to your long-term view playing out.
The pod analyst knows his industry at a deep fundamental level, far deeper than any other equity research analyst on earth… because he’s given billions of dollars in research to play with. You are the “first call,” you pretty much have direct access to literally anyone.
When you have a bigger research/data budget than everyone else, you are the smartest guy in the room on fundamentals. Not that hard to grasp. This is “non-consensus” on twtr, but clear and obvious to all involved, and logical to understand for everyone else.
(14/17) - Q&A 2 - Mauboussin/ROIC Versus Pod L/S
Similar question as far as mentioning Mauboussin/ROIC etc in this vein – why does that matter if you’re calling revenue growth on quarters?
Everything is tied together. The market is efficient, even on quarters. Stocks move on ROIC and FCF, and not on what they appear to be moving on. A company will do a deal where EPS goes up, but the stock goes down, because the market sees that value was destroyed…things that only appear on the balance sheet and cash flow statement. The market being “short-term” oriented is a myth, Mauboussin writes extensively on this. It is efficient beyond belief.
Here is why calling quarters ties logically. When a company beats on revenue growth, revenue is the most important driver for the entire P&L. That higher revenue expresses itself in higher ROIC and higher FCF. That’s what is being reflected in the stock price, not the revenue itself, and not “pod boiz,” not retail traders or anything else…it’s fundamentals, period.
Everything done at all pods is consistent from a data perspective, a fundamental equity perspective, research perspective, and if a variable appears to be isolated and targeted, it’s because this variable, in this method, is proven to generate x% of the alpha. The focus is on ROIC and on FCF, always…we want those to go up as much as they can, so we get paid…but the best path is to figure out what is THE most important variable, just one variable, that drives these. Then let’s spend 250 hours trying to develop a variant view on this one variable that that pushes the odds and risk/reward in our favor.
If our 250 hours of work gets us to 55-45% odds, where we make 20% if we’re right and lose 10% if we’re wrong, that’s a great setup.
Long $50M into the print, and if it works out, great, if not, great…if we take 10,000 bets exactly like this one, same odds, same payoff profile…we WILL make a fortune. Let’s go find another one.
That is the mindset, pretty much…I don’t want 30 variables, I want the most important one (usually revenue) and then I want to try and be the smartest guy in the room on it. If I can get odds in my favor, shoot, repeat forever and pray.
Everyone talks about how the market is so silly and inefficient on quarters…I mean, if you’re going to say that, you have to post hog. If it’s so inefficient, where is your P&L, where’s your track, where are your “calls” on these prints… Where is ANYONE consistently capturing these obvious inefficiencies? If they were, they’d run $10B tomorrow. This is a canard…the market is efficient on quarters, highly efficient, and I will tell you why.
Quarters are the only time where NUMBERS come into play. The stock price reconnects with cold, hard fundamentals.
The true inefficiency is between quarters, when shit is just wiggling around based on flows, rumors, factors, politics, migratory bird patterns, random newsflow...intra-quarter is MISERABLE for a fundamental analyst.
This is why pods love quarters, because as an analyst, you are paid well and expected to do the deepest fundamental work in the entire industry, which should help you forecast earnings…quarterly results are where you monetize all this research. Earnings are the reality check. This is all so incredibly obvious, logical and straightforward that I feel stupid typing any more (fundamental analysts do fundamental analysis, news at eleven)...I give up. You either get it or you don’t.
If you do deep, differentiated modeling work, every three months is when you have a chance to get paid. Those four days, the four quarterly earnings reports each year, those are the ONLY four days of pure fundamentals. Every other day, you risk just randomly losing money for no reason...the stock SHOULD “do what it should do,” sometimes it does, sometimes it doesn’t.
Sometimes you put a position on a month before earnings, it trades down 20% in a straight line into earnings, they report, you nail the call perfectly, it goes up 8%. Now you’re down 12% on a great call because it traded down 20% before earnings. Why did it go down 20%? You’ll never know. Now you sit here for three months and hope the wiggles go in your favor before the next print, which you have a strong view on, but where is it going to be at that time…who knows.
If you are a fundamental L/S analyst, with ANY time horizon, this same logic applies. If you have a three-year view, you have 12 days that will generate the bulk of your P&L if you’re correct, and if a thesis "breaks," it'll be one of these 12 days. The majority of the alpha comes on quarters, and the long-term is just a series of short-terms...so even the people who say "I don't call quarters," yes, you do...any high-level qualitative fluffy thesis can be quantified in this manner...even debates on LT biz quality/moat/ROIC duration are arguments over 2030-2035 cash flows or discount rate. Every pitch, every thesis, is a call on one of two things: earnings or multiple. Cash flows or discount rate. Either the business will earn more than you expect, or the biz quality is higher than current mkt perception. Every pitch is constrained within those two dimensions, and every "stock is worth more than today" is a call on one, or both of those variables.
Does the industry try to "over-quantify" things today, yes, but it is much better to err in this direction than the other.
Similar question as far as mentioning Mauboussin/ROIC etc in this vein – why does that matter if you’re calling revenue growth on quarters?
Everything is tied together. The market is efficient, even on quarters. Stocks move on ROIC and FCF, and not on what they appear to be moving on. A company will do a deal where EPS goes up, but the stock goes down, because the market sees that value was destroyed…things that only appear on the balance sheet and cash flow statement. The market being “short-term” oriented is a myth, Mauboussin writes extensively on this. It is efficient beyond belief.
Here is why calling quarters ties logically. When a company beats on revenue growth, revenue is the most important driver for the entire P&L. That higher revenue expresses itself in higher ROIC and higher FCF. That’s what is being reflected in the stock price, not the revenue itself, and not “pod boiz,” not retail traders or anything else…it’s fundamentals, period.
Everything done at all pods is consistent from a data perspective, a fundamental equity perspective, research perspective, and if a variable appears to be isolated and targeted, it’s because this variable, in this method, is proven to generate x% of the alpha. The focus is on ROIC and on FCF, always…we want those to go up as much as they can, so we get paid…but the best path is to figure out what is THE most important variable, just one variable, that drives these. Then let’s spend 250 hours trying to develop a variant view on this one variable that that pushes the odds and risk/reward in our favor.
If our 250 hours of work gets us to 55-45% odds, where we make 20% if we’re right and lose 10% if we’re wrong, that’s a great setup.
Long $50M into the print, and if it works out, great, if not, great…if we take 10,000 bets exactly like this one, same odds, same payoff profile…we WILL make a fortune. Let’s go find another one.
That is the mindset, pretty much…I don’t want 30 variables, I want the most important one (usually revenue) and then I want to try and be the smartest guy in the room on it. If I can get odds in my favor, shoot, repeat forever and pray.
Everyone talks about how the market is so silly and inefficient on quarters…I mean, if you’re going to say that, you have to post hog. If it’s so inefficient, where is your P&L, where’s your track, where are your “calls” on these prints… Where is ANYONE consistently capturing these obvious inefficiencies? If they were, they’d run $10B tomorrow. This is a canard…the market is efficient on quarters, highly efficient, and I will tell you why.
Quarters are the only time where NUMBERS come into play. The stock price reconnects with cold, hard fundamentals.
The true inefficiency is between quarters, when shit is just wiggling around based on flows, rumors, factors, politics, migratory bird patterns, random newsflow...intra-quarter is MISERABLE for a fundamental analyst.
This is why pods love quarters, because as an analyst, you are paid well and expected to do the deepest fundamental work in the entire industry, which should help you forecast earnings…quarterly results are where you monetize all this research. Earnings are the reality check. This is all so incredibly obvious, logical and straightforward that I feel stupid typing any more (fundamental analysts do fundamental analysis, news at eleven)...I give up. You either get it or you don’t.
If you do deep, differentiated modeling work, every three months is when you have a chance to get paid. Those four days, the four quarterly earnings reports each year, those are the ONLY four days of pure fundamentals. Every other day, you risk just randomly losing money for no reason...the stock SHOULD “do what it should do,” sometimes it does, sometimes it doesn’t.
Sometimes you put a position on a month before earnings, it trades down 20% in a straight line into earnings, they report, you nail the call perfectly, it goes up 8%. Now you’re down 12% on a great call because it traded down 20% before earnings. Why did it go down 20%? You’ll never know. Now you sit here for three months and hope the wiggles go in your favor before the next print, which you have a strong view on, but where is it going to be at that time…who knows.
If you are a fundamental L/S analyst, with ANY time horizon, this same logic applies. If you have a three-year view, you have 12 days that will generate the bulk of your P&L if you’re correct, and if a thesis "breaks," it'll be one of these 12 days. The majority of the alpha comes on quarters, and the long-term is just a series of short-terms...so even the people who say "I don't call quarters," yes, you do...any high-level qualitative fluffy thesis can be quantified in this manner...even debates on LT biz quality/moat/ROIC duration are arguments over 2030-2035 cash flows or discount rate. Every pitch, every thesis, is a call on one of two things: earnings or multiple. Cash flows or discount rate. Either the business will earn more than you expect, or the biz quality is higher than current mkt perception. Every pitch is constrained within those two dimensions, and every "stock is worth more than today" is a call on one, or both of those variables.
Does the industry try to "over-quantify" things today, yes, but it is much better to err in this direction than the other.
(15/17) - Q&A 3 - Modeling
I'm going to be somewhat of a dick here, and in many ways, I'm talking to the early-20's version of myself who built ugly-ass models…too many of you are trying to avoid DOING THE WORK.
I see it, because I had that same revulsion at first...the mind searches for excuses on why this isnt a prerequisite…and if you weren’t professionally trained, you must teach yourself, which is daunting.
Modeling, in a sense, is the consummate "shit test" for this business. It wasn’t by accident that I ended most tweets with "if you're interested in this, go spend thousands of hours building models."
If you aren't willing to do that, though, you don't want it bad enough. It’s a test of technical proficiency, but also a test of your ATTITUDE… the younger generation has a bad rap for being entitled already, and if this knocks you out, let it knock you out and find another career path. It turns out that building models from scratch, quickly and efficiently and with zero errors, this represents the basic blocking and tackling.
In a way, what I am saying is prepare for someone to say "go do something that absolutely sucks for a few thousand hours and come back." The answer to any request like this has to be "yes sir" or "yes ma'am" followed by doing it flawlessly.
Does this apply beyond finance, probably…all I know is that behind closed doors if you were to ask a PM “what do you want in a junior,” the basic answer is “someone who will sit down, STFU, and build perfect models.” Once you prove you can do the little shit, they will trust you with the big shit.
As far as getting good at models, I say a lot these days that “greatness is achieved in a dark room alone.” Bad things are found there too, like drug addiction and crime, but all the wonderful things like reading, writing, creating and building shit, developing yourself…these are all solitary activities, and generally, equity analysis is a pretty solitary career. It’s quiet, lots of time to get blissfully absorbed into work that, if you love it, doesn’t feel like work.
If disappearing into Excel all day to build models and learn new companies is not for you… neither is this business.
I would also add that models are the language of this industry. This wasn’t clear to me at first, but the more you speak in numbers and the less you speak in words, the more direct everything is…estimates vs street, bps of growth, % variance from consensus…anything and everything should be quantified when possible, this is the #1 thing you notice in bad stock pitches – it’s all words and vague descriptors, “the company will expand quickly, good business, strong earnings growth,” a good one makes that point using numbers in 1/4^(th) the space and twice the clarity.
This becomes more and more true every day as data proficiency becomes table stakes for even a pure fundamental L/S seat. Everything is numbers, everything is computer, and if you believe yourself to be talented, all of this works in your favor….as a book I read recently put it, “the only 100% pure source of truth, in this entire universe, are the multiplication tables.”
Finally, if you don't understand financial statement accounting at a mastery-level, it WILL come to light at some point in your career. This will 100% happen to people who use AI as a shortcut. It’s a language you have to be fluent in…if there is a gaping hole in your knowledge of the three statements, you will be met with a room of blank stares… like, "really dude?"
Anyway…if someone says “if you want to work as an equity analyst, go build a shitload of models” … and then you don’t build any models, and use the time asking other questions instead…you don’t want it. And if you don’t want it, nobody’s got time for ya…we’d rather help the people who DO want it.
I'm going to be somewhat of a dick here, and in many ways, I'm talking to the early-20's version of myself who built ugly-ass models…too many of you are trying to avoid DOING THE WORK.
I see it, because I had that same revulsion at first...the mind searches for excuses on why this isnt a prerequisite…and if you weren’t professionally trained, you must teach yourself, which is daunting.
Modeling, in a sense, is the consummate "shit test" for this business. It wasn’t by accident that I ended most tweets with "if you're interested in this, go spend thousands of hours building models."
If you aren't willing to do that, though, you don't want it bad enough. It’s a test of technical proficiency, but also a test of your ATTITUDE… the younger generation has a bad rap for being entitled already, and if this knocks you out, let it knock you out and find another career path. It turns out that building models from scratch, quickly and efficiently and with zero errors, this represents the basic blocking and tackling.
In a way, what I am saying is prepare for someone to say "go do something that absolutely sucks for a few thousand hours and come back." The answer to any request like this has to be "yes sir" or "yes ma'am" followed by doing it flawlessly.
Does this apply beyond finance, probably…all I know is that behind closed doors if you were to ask a PM “what do you want in a junior,” the basic answer is “someone who will sit down, STFU, and build perfect models.” Once you prove you can do the little shit, they will trust you with the big shit.
As far as getting good at models, I say a lot these days that “greatness is achieved in a dark room alone.” Bad things are found there too, like drug addiction and crime, but all the wonderful things like reading, writing, creating and building shit, developing yourself…these are all solitary activities, and generally, equity analysis is a pretty solitary career. It’s quiet, lots of time to get blissfully absorbed into work that, if you love it, doesn’t feel like work.
If disappearing into Excel all day to build models and learn new companies is not for you… neither is this business.
I would also add that models are the language of this industry. This wasn’t clear to me at first, but the more you speak in numbers and the less you speak in words, the more direct everything is…estimates vs street, bps of growth, % variance from consensus…anything and everything should be quantified when possible, this is the #1 thing you notice in bad stock pitches – it’s all words and vague descriptors, “the company will expand quickly, good business, strong earnings growth,” a good one makes that point using numbers in 1/4^(th) the space and twice the clarity.
This becomes more and more true every day as data proficiency becomes table stakes for even a pure fundamental L/S seat. Everything is numbers, everything is computer, and if you believe yourself to be talented, all of this works in your favor….as a book I read recently put it, “the only 100% pure source of truth, in this entire universe, are the multiplication tables.”
Finally, if you don't understand financial statement accounting at a mastery-level, it WILL come to light at some point in your career. This will 100% happen to people who use AI as a shortcut. It’s a language you have to be fluent in…if there is a gaping hole in your knowledge of the three statements, you will be met with a room of blank stares… like, "really dude?"
Anyway…if someone says “if you want to work as an equity analyst, go build a shitload of models” … and then you don’t build any models, and use the time asking other questions instead…you don’t want it. And if you don’t want it, nobody’s got time for ya…we’d rather help the people who DO want it.
(16/17) - Q&A 4 - Life, Careers, "The Game."
Many DMs of like - I’m 20-something years old or early 30’s…in xyz seat…dead end, stuck, lost, not sure what to do next.
Your question, in many ways, is the same question we all have: “What should I do with my life?”
There is no answer. Actually, here’s the correct answer.
I asked my first mentor this same question a few years ago. His reply was “Only you know the answer to that.”
That is THE answer…there is no other.
With that said, my answer to everybody who asks on career stuff, without hesitation, is “go get a top 10 MBA.” Stop DM’ing me, order GMAT books now, allow 6 months to take the test twice…3 months the first time, 3 months the second time, you’ll probably need both to make sure you break 700…then spend all of next summer doing your apps, and apply in fall 2026.
Even if you don’t know what you want to do next, graduate school gives you two years to figure it out. You can start fresh if you want, you can try and rebrand yourself…I don’t want to waste too much ink on this – can of worms, the land of opinions - but the hard truth of this world is that pedigree, brand names, “stamps”…they all matter. Personally, I wish it didn’t. But it always has and always will, it’s human nature, none of this shit is changing in our lifetime, and so you must “trade the market you see in front of you.”
Be careful who you ask for advice, a guy with no degrees will always tell you degrees are worthless. Ask someone who went back to business school if it was worth their time and effort…you’ll get a “yes” rate close to 100%…go hit the GMAT books chief, get off twtr, stop asking internet strangers what to do with your life, and take the steps to further your education…you’ll be glad you did.
On DMs from people either in, or post MBA who want a L/S seat…the hard truth is that you are totally on your own.
It’s not personal, it’s the level of competition.
First, the (very few) funds that used to hire MBAs are dead or dying.
Second, you are up against 1,000 guys who just got booted from a L/S role. They’re “warm,” so to speak…current on sector coverage, plug-and-play, ready to go. You’re ice cold.
This same rationale applies for all “how do I get an L/S seat” questions, even if you’re currently in some other investing role. You’re still relatively cold. You might cover that exact sector, but you cover it under a different mandate or strategy…why would they hire you when they could hire someone who is “day one” ready?
If it isn’t obvious, like, there’s no welcome party lol, no banking-style training programs…your entire team, at any given moment, is always just ONE week away from blowing the fuck up and getting fired. Sometimes every single person on the team gets all their calls wrong during earnings season…just miserable luck, you blow up on every print, 3-4 times each day, the entire team goes into a drawdown, all of your “best ideas” are broken and your future is bleak.
With that in mind…does anyone want to train you, for even a single day? Fuck no. Day one, show up, build your 50-60 models as fast as possible, work long nights and weekends and start generating ideas.
I say this to give you the hard reality of "The Game."
The industry is massively oversupplied and I don’t see how it doesn’t get worse. If you are dead set on this career, I don’t know what to say besides you have to be absolutely fucking exceptional.
Does an MBA open any of those doors for you, no. It gives you two years to make YOURSELF exceptional, in a way where YOU can start opening those doors for yourself.
If you don’t have that level of self-study, passion, and drive…if you don’t, as my first mentor put it, “eat, sleep, breathe and shit markets” …find a different career, the competition is too fierce.
Final DM, on “how do I go from a SM to a pod,” I genuinely have no idea how the hiring process works, I got a call from an independent recruiter out of the blue who set up the interview…If the call had come a year earlier, I would’ve gotten dinged, I needed to botch another 50 interviews first.
Strange but genuine advice incoming…there’s a reason I’m a huge advocate of pain, suffering, loss, and rejection…because every single redeeming quality I have, it came directly from those four teachers lol.
If you’re not where you want to be from a talent and attitude perspective, God has a plan for you…the via dolorosa, failure, humiliation, embarrassment…pitching stocks, getting laughed at and crashing the fuck out of interviews…over and over and over.
Sometimes you just haven’t suffered enough in life to get what you want, as strange as it sounds. You’re not humble yet and it shows. Your personality has some edge that needs to be smoothed out, and it can’t be faked…have to let life kick your teeth in. “sorry, you’re just not good enough… your models are embarrassing….we’ve decided to go another way with the hire…thanks but no thanks…”
dues must be paid, mon frere. All of those opportunities, you will have to create them for yourself through monumental effort and sheer willpower…losers whine, winners go fuck the prom queen.
If you REALLY want it, you will run through walls to make it happen, and if you do, you will learn that the energy you put out always comes back around…the universe finds a way to help the man who helps himself.
Many DMs of like - I’m 20-something years old or early 30’s…in xyz seat…dead end, stuck, lost, not sure what to do next.
Your question, in many ways, is the same question we all have: “What should I do with my life?”
There is no answer. Actually, here’s the correct answer.
I asked my first mentor this same question a few years ago. His reply was “Only you know the answer to that.”
That is THE answer…there is no other.
With that said, my answer to everybody who asks on career stuff, without hesitation, is “go get a top 10 MBA.” Stop DM’ing me, order GMAT books now, allow 6 months to take the test twice…3 months the first time, 3 months the second time, you’ll probably need both to make sure you break 700…then spend all of next summer doing your apps, and apply in fall 2026.
Even if you don’t know what you want to do next, graduate school gives you two years to figure it out. You can start fresh if you want, you can try and rebrand yourself…I don’t want to waste too much ink on this – can of worms, the land of opinions - but the hard truth of this world is that pedigree, brand names, “stamps”…they all matter. Personally, I wish it didn’t. But it always has and always will, it’s human nature, none of this shit is changing in our lifetime, and so you must “trade the market you see in front of you.”
Be careful who you ask for advice, a guy with no degrees will always tell you degrees are worthless. Ask someone who went back to business school if it was worth their time and effort…you’ll get a “yes” rate close to 100%…go hit the GMAT books chief, get off twtr, stop asking internet strangers what to do with your life, and take the steps to further your education…you’ll be glad you did.
On DMs from people either in, or post MBA who want a L/S seat…the hard truth is that you are totally on your own.
It’s not personal, it’s the level of competition.
First, the (very few) funds that used to hire MBAs are dead or dying.
Second, you are up against 1,000 guys who just got booted from a L/S role. They’re “warm,” so to speak…current on sector coverage, plug-and-play, ready to go. You’re ice cold.
This same rationale applies for all “how do I get an L/S seat” questions, even if you’re currently in some other investing role. You’re still relatively cold. You might cover that exact sector, but you cover it under a different mandate or strategy…why would they hire you when they could hire someone who is “day one” ready?
If it isn’t obvious, like, there’s no welcome party lol, no banking-style training programs…your entire team, at any given moment, is always just ONE week away from blowing the fuck up and getting fired. Sometimes every single person on the team gets all their calls wrong during earnings season…just miserable luck, you blow up on every print, 3-4 times each day, the entire team goes into a drawdown, all of your “best ideas” are broken and your future is bleak.
With that in mind…does anyone want to train you, for even a single day? Fuck no. Day one, show up, build your 50-60 models as fast as possible, work long nights and weekends and start generating ideas.
I say this to give you the hard reality of "The Game."
The industry is massively oversupplied and I don’t see how it doesn’t get worse. If you are dead set on this career, I don’t know what to say besides you have to be absolutely fucking exceptional.
Does an MBA open any of those doors for you, no. It gives you two years to make YOURSELF exceptional, in a way where YOU can start opening those doors for yourself.
If you don’t have that level of self-study, passion, and drive…if you don’t, as my first mentor put it, “eat, sleep, breathe and shit markets” …find a different career, the competition is too fierce.
Final DM, on “how do I go from a SM to a pod,” I genuinely have no idea how the hiring process works, I got a call from an independent recruiter out of the blue who set up the interview…If the call had come a year earlier, I would’ve gotten dinged, I needed to botch another 50 interviews first.
Strange but genuine advice incoming…there’s a reason I’m a huge advocate of pain, suffering, loss, and rejection…because every single redeeming quality I have, it came directly from those four teachers lol.
If you’re not where you want to be from a talent and attitude perspective, God has a plan for you…the via dolorosa, failure, humiliation, embarrassment…pitching stocks, getting laughed at and crashing the fuck out of interviews…over and over and over.
Sometimes you just haven’t suffered enough in life to get what you want, as strange as it sounds. You’re not humble yet and it shows. Your personality has some edge that needs to be smoothed out, and it can’t be faked…have to let life kick your teeth in. “sorry, you’re just not good enough… your models are embarrassing….we’ve decided to go another way with the hire…thanks but no thanks…”
dues must be paid, mon frere. All of those opportunities, you will have to create them for yourself through monumental effort and sheer willpower…losers whine, winners go fuck the prom queen.
If you REALLY want it, you will run through walls to make it happen, and if you do, you will learn that the energy you put out always comes back around…the universe finds a way to help the man who helps himself.
(17/17) - FINAL THOUGHTS
Some may disagree when I say that “the way you do one thing is the way you do everything,” but I’ve never met someone who disagreed with it and traded markets profitably.
What I’ve seen hold true above all else – in myself and in others – is that when people aren’t doing the little things right, they will never be able to do the big things right. Throughout the day, you can press yourself using that framework:
”If you don’t have the discipline to do THIS, how do you expect to ever do anything great?”
I say it all the time, because there’s no flaws in the logic.
Everything comes back to discipline, always. Risk, trading, getting what you want out of life, even peace of mind...severe self-discipline is the path to get you where you want to go.
As far as risk, I’m not sure I’ve ever met a successful PM who had a “flexible” risk management framework, and every single time I’ve seen someone blow up, myself included, it was either from having no rules or from making exceptions to their rules...that’s what "moderation" gets you.
Trading shows you who you are...“The market is a mirror," and “if you don’t know who you are, the market is a very expensive place to find out.” How you operate in life echoes in markets, and your P&L always reflects back your defects of character.
To wrap this all up...however you feel about everything I threw out there, take what is useful and discard the rest. The “correct” system for YOU is the one that manages YOUR risk. What that means is you can have your way, I can have mine, we can disagree, and yet both be “correct” at the same time. There is no perfect answer, only opinions. I am always open to updating my beliefs and ask only that you post the entirety of your framework in response, just as I have posted mine.
Whether you agree with my attitude or not, it is one that has the hallmarks of a sound philosophical system. It is crude and blunt, but sturdy, adaptable, useful both in trading markets and navigating life, and it slices through Gordian knots to reveal the path forward. It is an approach to the world that is all-encompassing, refined by years of experience, shaped by the pain of losses, and built with war in mind. Above all, it is internally self-consistent. What does that mean? Put simply, there is never any doubt that the following will hold true: the way I do one thing, it’s going to be the exact same way I do everything.
A process without outcomes is worthless...losers whine, winners bring home the prom queen...there is no room for moderation or subjectivity...everything is 100% your fault, all accountability starts here and ends with you, full ownership of past, present, and future...there is right and there is wrong, and if you're not sure, it's wrong...there are no excuses, no emotions, no days off, no quarter asked, none given, and the ultimate arbiter of truth is your P&L.
What is risk?
Risk is LOSING MONEY...FOR ANY REASON...PERIOD.
Good luck trading.
Some may disagree when I say that “the way you do one thing is the way you do everything,” but I’ve never met someone who disagreed with it and traded markets profitably.
What I’ve seen hold true above all else – in myself and in others – is that when people aren’t doing the little things right, they will never be able to do the big things right. Throughout the day, you can press yourself using that framework:
”If you don’t have the discipline to do THIS, how do you expect to ever do anything great?”
I say it all the time, because there’s no flaws in the logic.
Everything comes back to discipline, always. Risk, trading, getting what you want out of life, even peace of mind...severe self-discipline is the path to get you where you want to go.
As far as risk, I’m not sure I’ve ever met a successful PM who had a “flexible” risk management framework, and every single time I’ve seen someone blow up, myself included, it was either from having no rules or from making exceptions to their rules...that’s what "moderation" gets you.
Trading shows you who you are...“The market is a mirror," and “if you don’t know who you are, the market is a very expensive place to find out.” How you operate in life echoes in markets, and your P&L always reflects back your defects of character.
To wrap this all up...however you feel about everything I threw out there, take what is useful and discard the rest. The “correct” system for YOU is the one that manages YOUR risk. What that means is you can have your way, I can have mine, we can disagree, and yet both be “correct” at the same time. There is no perfect answer, only opinions. I am always open to updating my beliefs and ask only that you post the entirety of your framework in response, just as I have posted mine.
Whether you agree with my attitude or not, it is one that has the hallmarks of a sound philosophical system. It is crude and blunt, but sturdy, adaptable, useful both in trading markets and navigating life, and it slices through Gordian knots to reveal the path forward. It is an approach to the world that is all-encompassing, refined by years of experience, shaped by the pain of losses, and built with war in mind. Above all, it is internally self-consistent. What does that mean? Put simply, there is never any doubt that the following will hold true: the way I do one thing, it’s going to be the exact same way I do everything.
A process without outcomes is worthless...losers whine, winners bring home the prom queen...there is no room for moderation or subjectivity...everything is 100% your fault, all accountability starts here and ends with you, full ownership of past, present, and future...there is right and there is wrong, and if you're not sure, it's wrong...there are no excuses, no emotions, no days off, no quarter asked, none given, and the ultimate arbiter of truth is your P&L.
What is risk?
Risk is LOSING MONEY...FOR ANY REASON...PERIOD.
Good luck trading.
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