Lesson 8. What Makes a Great Macro Investor?
Hard work. Humility. Self-confidence. A repeatable investment process. Bayesian updating. Probabilistic decision-making. Resilience. Understanding what is priced.
To quote my book, Fed Up!: “To me, the best traders are exceptional decision makers. They’re intensely competitive. They don’t let emotions affect their process. They’re not into excessive risk taking; they’re into smart risk taking. More than anything, they love finding a divergent view that’s not priced by the markets.”
To be a great trader, you need to know yourself. You need to develop a type of multidimensional self-awareness. You need to understand what motivates you, how you’ve been impacted by past events, where you sit on the risk-taking spectrum, what type of decision maker you are, what key blockers are holding you back from peak performance, and how you can create an environment for yourself for optimal performance. And then, you need to constantly improve and get better. And this is all after you’ve spent your 10,000 hours becoming a market expert and honing an investment process or strategy that produces reliable results and is embedded within a prudent risk framework.
The nice thing is that psychologists have become much smarter in many of these categories. You no longer need to be born with some magical combination of these characteristics. Now, you can learn them. Go read about them or find a coach who can get you up to speed even more quickly.
I like to think of these essential practices in my own five-step process:
Spend the time to develop the technical proficiency required to master the markets. This is your price of entry, your 10,000 hours. Construct your own investment process, prove to yourself that it works, and then embed it in a risk framework that will allow you to produce the desired return stream. Most people spend nearly all of their time and effort on this point, but it’s really just the beginning of your journey. Everyone with any success has this. If you don’t, the markets will blow you to bits.
Identify your own motivations, your own core values. Money, power, excitement …or loyalty, creativity, and romance. What are your motivations? Is it the money? Is it learning? Maybe you like to compete and want to be the best? If you deviate too far from your core values, you’re likely to feel unfulfilled and unable to reach the pinnacle. You need to be honest with yourself on this.
Know the cognitive biases or impairments that are impairing your decision making, that prevent you from taking good risk. Maybe you have an anchoring bias or a sunk cost bias. You need to identify them - oh, and hope like hell that you don’t have the Dunning-Kruger bias.
Identify how these items impact your own risk appetite. When are they most likely to seep into your thoughts and impair your ability to succeed?
Create that optimal routine that puts you in the right environment and right state of mind to be a top performer: keeping fit, eating well, staying balanced. It can even be little things. Maybe it’s a lucky sweater on days you get payrolls.
And then, once you’ve done all of this, if you really want to be a master of the universe, you need to develop an entirely new set of skills. You need to learn how to scale and how to build a great business and great teams. Selecting team members, managing them, getting the right mix of skill sets and technical abilities. All of this means less time trading and more time managing.
Many of the early hedge fund guys found their inspiration to go into this business in a guy named Ed Thorp. He wrote a couple of famous books. My first boss gave me one of them early in my career, and it got me hooked. Ed wrote Beat the Dealer, which was the first book to prove mathematically that blackjack could be beaten by card counting, and Beat the Market, which outlined many of the early arbitrage strategies. The guy was (and still is) an incredible innovator in everything from option arbitrage, warrant modeling, convertible arbitrage, index arbitrage, and statistical arbitrage.
His superpower is being an incredible decision maker. He always has clarity. He made his dough in something called statistical arbitrage; he basically invented it. He was able to take his math skills and invent a whole new way of investing.
Everything he does is supported by the odds. They’re always in his favor. This is a hallmark of people who are uber-rational, guys such as Warren Buffett, who always seems to have all of the liquidity, all of the buying power, when other people really need it. Warren knows that one of the easiest ways to make outsized returns is to be the guy who provides liquidity when other people need it…
Investing has a lot of similarities with games such as poker, particularly in times like this. Knowing how to manage your chip stack and when to bet big are important parts of both. But do not confuse investing with gambling. You cannot succeed in the markets if you’re gambling. One of my favorite quotes from Thorp is on this point: “[Slot machines are] the most moronic devices ever, one of the stupidest activities of humankind. People play negative-expectation games. That’s something I’m not willing to do. I’ve never even bought a lottery ticket…In standard gambling games in casinos, you can generally calculate what the casino’s edge is, or if you figure out how to count cards, you can calculate what your edge over the casino is. It’s a fact, a mathematical fact, that if you play a game like this and the casino has the edge, it will eventually collect all your money if you play long enough. On the other hand, if you have an edge, your bankroll will grow and grow and grow.”
In the markets, Thorp only invested when he had a statistically generated advantage, or as he calls it, “an edge.”
“I think inefficiencies are there for the finding, but they’re fairly hard to find. The markets are mostly good at predicting outcomes, but very bad at anticipating black-swan events.” The best macro portfolio managers hone their own process for years and years, and they’re constantly trying to improve the data upon which they’re making their decisions. This process becomes their own edge in the markets.
Moral of the story: Find your edge and make sure the odds are in your favor.
Good luck out there!
