I Don't Need a Coach by Jake Vincent, MBPsS
It was March 2016 and my p&l was showing a second consecutive monthly loss. Somehow, I had been sucked into chasing a paid front-end fixed-income view, only to see my whole month wiped out by yet another dovish Federal Reserve. I looked down at my notepad of core views and saw “global disinflationary pressure” right near the top. What was I doing? How had I been sucked into this narrative when it clearly wasn’t representative of my own views? I felt lost, confused and disappointed in myself. What was my process? Why was it not working? I turned to former client, long-time friend and process guru, Stephen Duneier, as I’d done at other challenging times in my career. He offered to take me on as a client, but I was worried how it would be viewed by my firm for me to be spending money on trading help so soon after starting there. Besides, I felt my “process” was fine. It just needed some time, so why pay for coaching? Turns out, success leads to arrogance shockingly fast. With failure comes humility, and reassessment. Eventually, I signed on.
Well, That's Different
What I discovered very quickly is that Stephen’s approach is different from all the others I’d encountered from coaches and psychologists.
For him, it isn’t about you, it is about your decision-making process. His focus is on how you make your decisions. Every one of them. Not just the big ones, and not just those you make at work, but how you approach every decision-problem you face.
He uses what we’re learning from the research in the cognitive sciences to understand where we are most vulnerable, and then he creates these unique supports, markers and guides to help steer us around our flaws. He doesn’t just fix the problems for you, though. Instead, he makes you aware of the mistakes, he educates you so that you can become more self-aware, and best of all, he takes the time to understand you, your tendencies, your strengths and weaknesses.
Rather than forcing unwieldy adjustments that you are unlikely to implement, he identifies the marginal adjustments you can make that will have the biggest impact on your results. Some things we all need help with, others were specific to me. He’s particularly adept at identifying the areas to target, and helping you discover them for yourself. Stephen approaches decision making as a science, not an art. A solid decision making process is built on a foundation of data and evidence, not belief. Therefore, data must be collected. However, in his approach, the focus is on the process, not the results. The data he insists on collecting relates to the components of your decision-making process, not monthly returns. To build a database of this kind, you must define the data you want to collect and do so in a consistent, objective way. This is why everyone eventually writes trading plans for every single position they put on, every single time. It feeds the database, but it also delivers far more. It forces you to employ what he calls, cognitive strain, to specifically state what you are doing and why.
A More Evolved Version of Me
My style involved taking medium-term views while trading occasionally on short-term opportunities. It quickly became apparent that writing a trading plan was going to get in the way of trading the short-term, fast developing opportunities. Turns out, when we looked at the data, they weren’t positively contributing to the p&l anyway. I stopped what he called my “impulsive” trading, to focus exclusively on developing my edge.
There were times when I would possess views with great conviction, but the risk reward available for expressing them weren't attractive. Stephen pointed out that this wasn’t wasted work. Rather, I was building a stable of potential trades depending on the future paths of market. For instance, if I felt a specific structure would work best only if oil traded down to $40, I shouldn’t throw it out just because we were trading at $50. Instead, I should take the time to identify the factors that must be in place, and those that must not, in order for the trade to be viable should spot eventually trade down there. If we get to that level, so long as the signals remain in place, I will enter the trade.
Over time I ended up with execution plans for moves in various directions, and clear reasons why each view should change. Signal drove my investment process, noise became the opportunity for attractive entry and exit. My mind, and life, became less frenzied and far less stressful.
I thought I was set when Stephen threw a comment in one day that blew my fragile little mind: we are nearly all trained to look for moves and trends, but options trading, like I was doing, allows you to express “the absence of moves” as well. In other words, we’ve been trained to believe that directional moves are necessary to deliver performance. After all, the overwhelming majority of position takers do so via cash. Cash positions typically require a move in order to generate profits, but not so with options. As an example, we might position for a rate cut when in reality our expectation is simply that rates won’t go up. They may sound the same, but the field of profitability on the latter can be far wider making the odds of profitability significantly better. Not to mention, more reflective of my view. Instantly, by making just a slight adjustment to my perspective, he’d dramatically expanded my investment arsenal.
Ease, Strain and Stress
At the heart of Stephen’s teachings is the theory that the human mind is, well, lazy. It seeks to achieve a maintain a state of “cognitive ease.” We’re all REALLY good at this. It’s easier to procrastinate, skip writing a trading plan and go with your gut. Inertia is a powerful force. Unfortunately, it often leads to a moment of stress, when we are forced to confront urgent problems. It’s known as firefighting.
In those moments, we become reactive, making us even more likely to just go with our natural instincts, to use mental shortcuts. The problem is, many of our natural tendencies are driven by unfounded beliefs, not solid evidence and sound decision-making practices. We don’t tend to consider the full picture, the impact on a portfolio, and so on. Instead, we focus solely on relieving the pain.
The objective behind inviting “cognitive strain” up front, when we may not feel it’s necessary, is to reduce the potential for stress to occur in the future. It involves putting the work in up front, to avoid having to react to the stress later. When trading, this means really thinking about all the potential events that can impact your trade, and what you would do in response, with a calm, objective mind, not a panicked, reactive one. It comes down to distinguishing signal from noise in a moment of lucidity and objectivity. I would wager that almost every reader can think of a time when you said to yourself “if this gets to X level I’m buying it,” and yet when it got there everything felt horrendous and you didn’t pull the trigger. Then it bounced shortly afterwards and you kicked yourself for not following the “plan.” The problem is, it wasn’t a plan, it was a feeling, and in the moment, the distinction between noise and signal became difficult to decipher. When you do the work ahead of time, convert an idea into a plan, including an execution order, it becomes far less likely that you will screw it up. Do the work. Set the plan. Execute.
Read Less, Be Smarter
Stephen presented me with a powerful argument regarding research. The CIA did an experiment using horse racing handicappers, better known as bookies In the interest of space, I’m including the link to the full piece, and a summary of the conclusion. Essentially, we need less information than we think. It’s about quality, not quantity. At a certain point, additional information actually produces negative marginal utility. (And that point is far closer than you might think.)
Key findings from this research are: • Once an experienced analyst has the minimum information necessary to make an informed judgment, obtaining additional information generally does not improve the accuracy of his or her estimates. Additional information does, however, lead the analyst to become more confident in the judgment, to the point of overconfidence (impacting sizing). • Experienced analysts have an imperfect understanding of what information they actually use in making judgments. They are unaware of the extent to which their judgments are determined by a few dominant factors, rather than by the systematic integration of all available information. Analysts actually use much less of the available information than they think they do.
The conclusion is that the approach to research and information gathering should follow the same pattern as all other decisions. Put in the effort up front to identify which sources add value (signal) and which ones actually muddy the picture (noise). If you don’t make the distinction ahead of time, it will be nearly impossible to do so in the moment. Just as it is for trade management. Determine what matters, what sources add value, and what problem you are attempting to solve, and then limit your information gathering to read less and only well-filtered and high-quality work. How do you acquire different intelligent thoughts rather than repeats of the same noise, providing unintentional confirmation bias? Bija publications, as an example, tend to be different. They are focused on larger themes and offer thought-provoking pieces on how to think about and interact with developments. That’s what I found to be the case, at least.
Working with Stephen became a kind of decision therapy, as well. We might examine a trade that had been eating away at me the previous week. What I found so interesting is that he didn’t judge my decisions by the outcome, but rather by the process itself. On the one hand, he might tear apart a trade that had knocked it out of the park, detailing the litany of mistakes I’d made, while simultaneously praising decisions related to a trade that turned out to be incredibly painful. That’s not something you encounter very often.
His philosophy is simple. If you repeatedly make solid, objective, evidence-supported decisions more often, the odds of generating better returns, more consistently over time, goes up. Focus only on what you can control. That approach changed everything for me. It dramatically reduced the volatility of my psychological state. I found it to be cathartic, and encouraging of good habits.
In addition, every week there seemed to be a minimum of one thought provoking question that would linger, and spark a week’s worth of contemplation. One of the first I remember is this exchange:
Stephen: ‘Why did China become so important to markets?’
Me: ‘It’s huge and has a lot of people!’
Stephen: ‘It’s always had a lot of people, and been big. Why does it matter now?’
Me: ‘Erm, hmmm. Well the industrialization…’
Stephen: ‘Urbanization. People are being moved to cities from rural areas at an unprecedented pace, changing the economy and behaviors, rapidly. It is population growth on steroids, in the most populated country on earth, but it doesn’t show up in the statistics everyone monitors.’
It’s that simple question, “Why,” that he’s constantly asking. Like a three year old tugging on his mother’s skirt, “Yeah, but why?” Only, you can’t stop his queries with, “because I said so!” He forces you to go on record, to own your decisions, to put in the hard work and both be accountable for your actions, and understanding of the nature of a game of probabilities. Rather than a haphazard cycle of reading, talking, structuring, and trading, Bija helps you develop a scientific approach to investment management, one that is repeatable, dynamic, and allows you to evolve. That has been my experience, and that of many others Stephen has worked with over the years, both at work, and in life.
"While everyone else is scrambling to answer who, what, where and when, Duneier is focused on explaining the 'why'."
About the Author For more than 15 years, Jake Vincent has put his education in psychology to work as an institutional investor specializing in global macroeconomic analysis, portfolio management and trade structuring.
In 2007, Mr. Vincent joined the newly launched Comac Capital, where he ultimately served as Head of Strategy, helping the fund grow to $6.5 billion in AuM, thanks in large part to 30%+ returns during the financial crisis.
Following Comac's transformation from hedge fund to private family office, Mr. Vincent left to become a Global Macro Portfolio Manager at Balyasny Asset Management. While there, he developed a disciplined, process-driven approach to investment and portfolio management as a result of his work with Bija Advisors, and specifically, CEO Stephen Duneier. The innovative applications of decision architecture and other techniques borne out of the cognitive sciences resonated with Mr. Vincent, given the direct link to his studies in Psychology and Philosophy at Durham University in England, and as a member of the British Psychological Society.
As a Senior Advisor at Bija Advisors, Mr. Vincent draws from his experience as a sell-side strategist at Standard Chartered, Merrill Lynch and Credit Suisse in New York and London, and experienced hedge fund manager. He delivers his own unique brand of insight on global macro themes, behavioral investment process, and trade ideas through Bija publications. In addition, Mr. Vincent is responsible for constantly improving the Bija client experience and curating our rapidly growing community of clients and subscribers. Mr. Vincent is a former board member and current advisory board member for non-profit Mentor Me, and is currently launching a new non-profit aimed at improving education for financial and retirement planning.
Bija Advisors LLC In publishing research, Bija Advisors LLC is not soliciting any action based upon it. Bija Advisors LLC’s publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, Bija Advisors LLC does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Bija Advisors LLC’s publications only. All forecasts and statements about the future, even if presented as fact, should be treated as judgments, and neither Bija Advisors LLC nor its partners can be held responsible for any failure of those judgments to prove accurate. It should be assumed that, from time to time, Bija Advisors LLC and its partners will hold investments in securities and other positions, in equity, bond, currency and commodities markets, from which they will benefit if the forecasts and judgments about the future presented in this document do prove to be accurate. Bija Advisors LLC is not liable for any loss or damage resulting from the use of its product.
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