Brett Steenbarger (@Steenbab) joined Andrew Swanscott (@BetterSysTrader) on the Better Systems Trader podcast to talk about what successful traders do. Even though the conversation focused on trading, a lot of the big ideas are interdisciplinary. There are three things that makes traders successful, says Steenbarger:
– How to act during the good, bad, and ugly.
– To have unique ideas.
– To leverage your strengths.
How can you and I apply this? Let’s see.
Prepare yourself for the good, bad, and ugly moments of life.
Steenbarger says that there are three situations traders should prepare for; drawdowns, success, and personal problems.
- During a drawdown (bad). Traders should be careful that they don’t become more risk averse and change their thought processes, Steenbarger warns. The problem is, our bodies prepare for bad things and we aren’t aware of it. In The Hour Between Dog and Wolf, Dr. John Coates writes about what happens physiologically when traders take a position:
“Consequently Scott and Logan’s bodies, largely unbeknownst to them, have also prepared for the event. Their metabolism speeds up, ready to break down existing energy stores in the liver, muscle and fat cells should the situation demand it. Breathing accelerates, drawing in more oxygen, and their hearts rates speed up. Cells of the immune system take up position, like firefighters, at vulnerable points of their bodies, such as the skin, and stand ready to deal with injury and infection.”
Hormones are released. Dominos are set to topple depending on what happens.
This all happens naturally, fast, and unbeknownst to us. Steenbarger helps traders figure out how to recognize when this happens, and act correctly. Tadas Viskanta suggested to Jason Osborne we create circuit breakers. If something bad happens, stop. Avoid knee jerk reactions.
We don’t need to be traders to to experience this. The biology is the same for everyone. Maybe your boss calls you into the office. You miss a sale. Your kids drive you crazy.
Osborne said he saw this in his personal life. His newborn daughter had a difficult time sleeping, and would wake up every night. When the witching hour came, he and his wife would try to get her back to sleep – all while being less than cordial to each other. But things changes when the Osborne’s created a plan. If their daugher gets up (before midnight/after a bottle/etc.) then they would (feed her/rock her/change her diaper).
Bad situations will trigger certain hormonal response. This was great for the jungle, less so for the modern world. Our job is to be aware of when this happens, what’s happening to us, and to plan a series of steps for those situations. The best answer for a drawdown, is pre-drawn plans.
- During success (good). In these cases, traders should leverage their strengths. “I help traders become more consistent in applying their strengths so they can extend their profitability,” Steenbarger says.
Tyler Cowen said that he found out his strengths early. Cowen has the ability to drink from the firehose of information, as well as to take time to think about things. He’s built these skills because he straddled the decades of slow learning and fast connections.
When Mark Cuban looks to invest in a company, he looks for something he specifically can help. He has the money to help anything, but he’s really good at helping certain things.
Chris Sacca told Tim Ferriss, “I only get involved in deals where I can personally make an impact.” Tom Rath said that if you can find an area you have a natural talent, you’ll succeed that much faster.
The consistent theme – and what Steenbarger tries to do – is to hone in on the things you do well and do them more.
- During external distractions (ugly). Traders need a work/life balance says Steenbarger. “The biggest lesson I’ve learned, is to have something more important in your life than trading,” he says. If your self worth is tied to your profit and loss fluctuations, then you’re going to blow up.
Your personal life won’t be perfect. Stress from divorce, financial trouble, or lack of sleep can seep in, and Steenbarger teaches traders how to handle it. Brian Koppelman said that marrying the right person was the best decision he ever made. Chris Hadfield wrote that he could never have been an astronaut without his wife. Brett McKay and Rich Roll both run their businesses with their wives.
Find the best people to have in your life. Be ready for some personal chaos, and try to shield your work from it.
Surviving the good, bad, and ugly are all reactionary. If you want to really succeed you need to act, not react. For that you’ll need unique ideas.
Have unique ideas.
“You don’t find generic super-successful traders.” – Brett Steenbarger
Thiel filters people by asking, “what important truth do very few people agree with you on,” and “what valuable company is nobody building?” These questions filter out people who want to iterate. Thiel craves new ideas. Ironically, Thiel iterates the famous Tolstoy line:
“All happy companies are different: each one earns a monopoly by solving a unique problem. All failed companies are the same: they failed to escape the competition.”
When Lewis Howes wanted to be in the Olympics he chose handball. Was it because Howes is a great handball player? No. Was it because his great uncle Lou was a mentor? No. Was it because Howes went to a prep school that featured the “Olympic Sports?” No (Howes played football).
It was because the competition for handball was low. It was a place he could, escape the competition. Howes recalls showing up to play for the first time.
“So I show up, I say hey guys, I’m Lewis Howes from Ohio. I’ve never played handball but my goal is to make the US national team and go to the Olympics. They all laughed their asses off. I was the only American there.”
But Howes persisted, and made the national team. He examined the landscape of sports and saw that his unique idea was to pick up a sport with limited competition.
Steenbarger says “the successful traders are playing a different game, one where they are able to leverage a unique perspective.” Howes took his experience playing college football, with a desire to learn and grown, in a less competitive environment.
When the Golden State Warriors won the 2015 NBA Championship they were applauded for their switching defense. This style of play where any defender can guard any offensive player was critical to their success. Teams that couldn’t switch like the Warriors, were limited to a certain style of defense. The Warriors were not. They had a unique idea (and one that is now being copied by other teams).
Peter Thiel – have a unique business idea.
Lewis Howes – have a unique sport to play.
Warriors – have a unique strategy.
This is all great, but it’s all theoretical if we don’t actually be unique. Ideas are one thing, acting on them is another. Steenbarger proposes two ways to be unique; be adaptable and creative.
A big problem, Steenbarger says, is that traders find an edge and don’t change. This is a bad idea. Traders need to think more like entrepreneurs, he says. “An entrepreneur knows that marketplaces are dynamic.” If you run a frozen yogurt store and people don’t come, you need to change. If you run a trading fund, and profits don’t come, you also need to change. Some traders can’t take this perspective Steenbarger says. But adapting is wonderful.
Mark Cuban invests in life entertainment. In the world of DVR, selfies, and people paying to do things, what’s better than live entertainment?
Maria Popova calls adaptability the “uncomfortable luxury of changing your mind.”
Jason Fried recounts Jeff Bezos as saying, “people who were right a lot of the time were people who often changed their minds. He (Bezos) doesn’t think consistency of thought is a particularly positive trait. It’s perfectly healthy — encouraged, even — to have an idea tomorrow that contradicted your idea today.”
Charlie Munger says a year in which you do not change your mind on some big idea that is important to you is a wasted year.
People don’t think like this, says Steenbarger. They find an edge and stay with it because, “people are averse to effort and there is a certain hope they can get rich quick.” Ramit Sethi noted that people are “cognitive misers.” We like the easy road.
There is no easy road. There’s no hike where you just arrive at the scenic bluff. There is no wave where you get in the barrel and be done. You have to change.
But change for the sake of change isn’t what we want. We want something new and good. For that we’ll need to be creative.
“Creativity,” Steenbarger says, “is a habit.” Now, wait a moment. Brushing my teeth is a habit. Driving to work is a habit. How can creativity be a habit?
You have to look at things from the micro and macro levels, says Steenbarger. If you take time to analyze the small things and take time to synthesize them, you’ll start to make new connections. People who are creative find good problems with unique answers.
Sometimes this means having a mentor or collaborator. Certain people are better off talking about their ideas, says Steenbarger. Seth Rogen and Evan Goldberg explained their writing process this way: “talking, talking, talking.”
When Rogen and Goldberg teamed up with Sam Catlin to write Preacher all they did was talk. At first this was odd for Rogen and Goldberg, but they followed Catlin’s lead. This is how we did it on Breaking Bad he told them.
For other people, creativity will come from introspection. “It’s why so many of our insights will come at seemingly random times,” says Steenbarger, “like when we’re taking a walk or taking a shower.”
Walking has long been a form of fostering creativity.
In, Daily Rituals, Mason Currey writes about the habits of many creatives and one consistent theme is the daily walk. For example, “Promptly at 2:00 (Charles) Dickens left his desk for a vigorous three-hour walk through the countryside or the streets of London, continuing to think of his story and, as he described it, ‘searching for some pictures I wanted to build upon.’”
Or about Soren Kierkegaard “Typically, he wrote in the morning, set off on a long walk through Copenhagen at noon, and then returned to his writing for the rest of the day and into the evening. The walks were where he had his best ideas, and sometimes he would be in such a hurry to get them down that, returning home, he would write standing up before his desk, still wearing his hat and gripping his walking stick or umbrella.”
What you want, says Steenbarger, is to leave yourself open to moments of serendipity. Sanjay Bakshi said that he finds this on his Kindle. Paper books are nice, Bakshi says, but a Kindle lets him search, and sometimes those results have ideas he had forgotten.
A.J. Jacobs is the author of the books, Drop Dead Healthy and The Year of Living Biblically and says that a lot of his projects begin this way. “You’ve got to seize serendipity,” Jacobs says, “a random thing that might seem small, you’ve got to grab it and follow it for a while.”
When Adam Carolla showed up at a radio station one day looking for a job, he didn’t expect to meet anyone. This was before smartphones, so rather than looking down, scrolling up, or swiping right – he talked to people. He met a guy and they hit it off. It was Jimmy Kimmel.
If you want to be creative and have unique ideas you need to schedule the time for it. You should have unstructured free time, Steenbarger says, working-working-working won’t work. Ryan Holiday says he learned one of his best productivity tips from Robert Green. Swimming. “Why? Because it requires total isolation: no music, no phone, no possible interruptions. Just quiet, strenuous exercise.”
Leverage your strengths.
“You really want to study your strengths and reverse engineer your successes.” – Brett Steenbarger
For creativity, are you a talk-it-out person, or a be-alone person? Figure it out says Steenbarger, because you want to lean on your strengths.
Once you study your success and failures and develop unique ideas, you need to leverage your strengths. Steenbarger is a proponent of inherent strengths. “People trade the market through their personality,” Steenbarger says, and you want to capitalize on our strengths. Arthur Samberg said “your passion is your competitive advantage. Gary Vaynerchuk said this too.
Steenbarger’s strength was pattern recognition. He noticed that the faster the trading, the more pattern recognition mattered – and he was great at that.
Steenbarger says driving skills and trading skills are similar. “Make the rules as automatic for trading as they are with driving.” How?
1. Create a thesis. When Scott Adams wanted to get healthy he changed his diet. I can eat as much as I want, Adams reasoned, so long as it’s healthy. That was his thesis.
2. Implement your thesis and note what happens. A lot of time we make changes, but don’t note them. Shane Parrish writes about the value of decision journals. Other times it’s easier – like for Adams, who noticed that he had more energy and less weight.
3. Figure out the role of luck. In everything we do there is some component of luck. Michael Mauboussin said that luck is more important when skills converge. Winning the NBA championship requires some luck. Winning the YMCA championship requires more skill. The goal is to tease out when you were lucky, and when you were skilled.
4. Habitualize it. Once you figure out what you do well, double down on it. “There are many successful traders with different personalities,” Steenbarger says, “but the successful ones leverage their personality strengths in the market.”
It won’t be easy, (“people are averse to effort”) but it can be done.
“Figure out who you are when you are at your best,” Steenbarger says. That’s the person you should try to replicate. The results may even surprise you.
Thanks for reading, I’m @mikedariano.
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