The Naked Sniper... and other lessons on markets and investing

***Enrollment to our Collective ends this Sunday at Midnight. We won’t be running another one for a while, so if you’re interested make sure to sign up. Here’s the link.***I’m drinking some mead from the local meadery here in town, while sitting on my deck overlooking about a quarter-mile of forest and rivers that stretch out to the tip of Anchor Point, AK. From my view here I can see the cone-shaped active volcano that makes up Augustine Island about 30-miles out on the other side of Cook inlet, along with the six others that make up Lake Clark National Park, all of which sits along the Circum-Pacific belt, otherwise known as the Ring of Fire. It’s a little after 9 pm and the sun is just starting to set. The only sounds I hear are the river which runs about 500-yards from where I sit, the slight breeze rustling the pine, and the occasional piping note of a bald eagle passing overhead. It’s 42 degrees, which to be honest, after this past winter, feels like beach weather. I’m wearing flip-flops, jeans, a hoodie and feel great. I heard it was the native Aleutians who named this unforgiving terrain. They called it “Alyeska” which means “The Great Land”.  And indeed it is. Words fail when trying to relate what can only be felt in a place like this, but the best effort I’ve come across is from the naturalist John Muir, who wrote in his 1915 book “Travels in Alaska”:

"The very thought of this Alaska garden is a joyful exhilaration. Out of all the cold darkness and glacial crushing and grinding comes this warm, abounding beauty and life to teach us that what we, in our faithless ignorance and fear call destruction, is creation finer and finer."

…in our faithless ignorance and fear call destruction, is creation finer and finer. That… is a killer line, my friends...This note is meant to be a bit of a freewheeling stream of unedited thoughts on trading and markets. Just gonna drink some mead, give myself an hour, and see what comes out. And tonight I want to talk about the problem of optimizing for the wrong things in markets. It’s an observation of mine that the majority of investors/traders, both professional and piker alike, optimize for the wrong stuff. And this is why they don’t consistently win. To do this I’m gonna first share the story of the Naked Sniper. This story starts about 18-years ago, which puts us back in 2004. I had recently passed the initial selection for Scout Sniper platoon and was in the 6-month training (hazing) weeding out phase, think Buds but with less swimming. 18 of us were competing for just 4 slots to go to sniper school. To be a designated shooter and team leader you had to get one of those slots and then actually make it through the school. These weren’t great odds… Back then Marine Corp’s Sniper School had an attrition rate of over 80%. I knew I was going to get one of those slots though. I was a competitive motherfucker back then. All the guys I was competing with were tough, smart as hell, and driven. But my ace up my sleeve has always been my ability to outsuffer almost anyone and keep a smile on my face while doing so. That ability doesn’t come from a super healthy place, I now know, but that devil on my shoulder drove me to lengths and I leaned all the way into it during my military service. Which I kinda had to because I was never anywhere close to being the most athletic or physically fit of the bunch. So I compensated in the ways I could.During the 6-months of constant thrashing, we were training in the critical skills needed to be in a sniper platoon and to make it through school. So it was a lot of shooting, stalking (dressing up like a bush and moving slowly), reconnaissance and intelligence collection, etc… There’s a lot that goes into the job. Not all of it is sexy either, there’s a ton of plain grunt work involved. Can you guess what the absolute hardest thing was? Most people say shooting. And, yeah, shooting out to a 10-inch diameter target from a kilometer away is tough, sure. But only about 20% of those who make it to school get dropped for shooting. The fact is, if you’ve made it far enough to get to sniper school, you’re already an excellent shot.The real killer is stalking. Everybody struggles with stalking. It’s a bitch. A complete kick in the nuts when you’re first starting out. We all sucked at stalking during training. I especially sucked. This scared me. I, like all the others, knew the stats. Snipers from the Seals, Green Berets, Secret Service, foreign special forces groups, what have you, would come to our Sniper School, cause it was the best. And most would fail. They’d get sent home early with their pride knocked down a few notches. All because of stalking.The objective in stalking is pretty straightforward. You have what’s called a stalk lane. This is usually a piece of vegetated but not too vegetated terrain. It typically takes the shape of a rectangle about 100m wide and 1km or so in length. You, the sniper, start at one end of the rectangle. The spotters (sniper instructors) are your targets. They typically sit high up on the roof of a humvee with very expensive optics at the other end of said rectangle. Your job is to get within 200 meters of the spotters and fire off two shots (blanks) at the target, without being spotted. The spotters get three tries to walk on your position (there’s an instructor on the stalk lane with a radio who the spotters give directions to try and walk onto you). If at any time you’re spotted and walked on, you fail. If you don’t get within 200-meters and take your shot within the allotted time (usually 2-4 hours), you fail. If you get within 200m, take your two shots, don’t get walked on, but can’t perfectly identify, three small cards the spotters hold up above their heads, you fail. Okay, so now you get the drift of what stalking is. Now let me tell you why I sucked so badly at it during initial training. At some point in my earlier years, I had watched the 1992 blockbuster “The Patriot Games” starring Harrison Ford. It was a Jack Ryan story where Ford was some CIA agent who at some point visits a stalk lane in progress. The sniper on the lane takes some shots, you have no clue where the shots are coming from, and then all of a sudden the sniper stands up revealing that he was only 20m away looking just like all the other tall grass on the ground. This movie fucked my head up, royally. Mine and all the other snipers in training (we were called PIGs, Professionally Instructed Gunmen who were training to be HOGs, Hunter of Gunmen). Because of this movie and others like it, we PIGs thought stalking was tying a bunch of vegetation into our ghillies and then moving painstakingly slow across the lane. Just like in the Jack Ryan movie. Little did we know, that that is not how you stalk. I mean, it’s part of it. But it’s not how you really do it. It’s not the meat of it, the essence.None of us knew that yet, though. Especially not me. And I was getting worried because, towards the end of our 6-months, I had gotten word that I would get the first slot for school. But I had only gotten marginally better at stalking by then. I would still bust out about 60% of the time. This was not okay. I had to improve and improve fast. So I went to the best stalker out of all my seniors, the guys training us. His name was Desy. He was a ghost on the stalk lane. You couldn’t ever find his ass. I asked him his secret. But the problem with stalking is that the instructions are really simple; use cover and concealment, good terrain management, and burn windows through the vegetation using your scope. This is essentially all that Desy could tell me about his “secret”. It’s not that he wasn’t trying to help. It’s that stalking is an art form and it’s one thing to be able to recite the instructions and another to really know them. But what saved me, what completely and immediately flipped my conception upside down, was what Desy told me next. He told me a funny story. A story he had been told by the instructors when he had gone through the school years earlier. It was the story of the naked sniper. Now, I don’t know if this is lore or legend but I’d heard it retold by plenty of others over the following years. The story is about some guy who had gone through sniper school long ago. And this guy was invisible on the stalk lane apparently. He didn’t bust once while in school, which is unheard of. He was cocky too and on the last stalk before graduation, he bet the instructors a night of drinks, that he could do a perfect stalk on them, butt ass naked. Not only that but he’d do it only wearing a bright orange road vest and boots.He drank for free that night…When I first heard this story fucking fireworks went off. Everything changed for me. You know why? Because right then is when it clicked. I knew that my previous uninformed conception of what stalking was and how to do it had gotten in my way of learning what it actually is, and how to do it well. It really was just the simple instructions of cover and concealment, good terrain management, and burning windows using vegetation. You see, I was trying to be what I thought a sniper was. Which wasn’t a sniper at all but a fucking Hollywood portrayal of one. I thought stalking was about being a slow-moving bush. But that’s only a very small part of it. It’s not the secret. The secret is that sometimes you need to move fast, when you can. When you have clear cover. You move fast so you can really move slow later if you need. The secret is that it’s less about your camouflage than it is about your terrain management, you’re skill at putting things in between you and the spotters. It’s less about moving within 20-meters looking like tall grass and more about putting yourself behind multiple thick pieces of vegetation and exploiting the fact that since you're closer to this vegetation than the spotters, you can burn a hole (peer through it) with your scope better than they can, since they’re at a further distance.That’s the fucking magic sauce right there. The secret is that there was no secret. Just a true understanding... An embodiment… A burning away of misguided ignorance.Once that light switch flipped for me, it went from night to day. I was unstoppable on the lane. I went to Quantico sniper school and graduated with honors and as top stalker. That class had two Seals, two Secret Servicemen, two Norwegian Coastal Ranger Commandos, two Singaporean Special Forces, and a bunch of hard-charging Marines, making for a total of 32 that started. Only two officially finished. Me and my partner Spence. I say officially because when some Full Bird heard that only two of us were going to graduate, he put his foot down and demanded they graduate more since the war was just getting going and everything. So they lowered the bar and 8 others were given the HOGs tooth. 90% of the others failed because of stalking. Because they never had their aha!’ moment. They were optimizing for their misconceptions of the world. They were trying to be a Hollywood movie sniper. This prevented them from learning the first principles of what stalking were. What being a scout sniper was actually all about.A long-winded story, I know. Hopefully, I’m not boring you. But I think this is a very important point. And I’m going to bring everything together now, and tie this into investing. You see when I first got started in markets many years ago now. I started off by reading all the books, quite literally hundreds of them. I wanted to know the secrets, you know the inside info and superpowers that made the Soros’, Kovners’, and Druckenmillers’ all so great.And I quickly became annoyed because all any of these books ever talked about were what sounded like empty platitudes and tired adages. The trend is your friend…risk management above all… strong opinions weakly held… price is king… ride your winners and cut your losers…  yada, yada, yada…This didn’t tell me how to pick a winning stock or how to know when to bet against the pound and break the fucking Bank of England, book billions, and sow fear in the hearts of central bankers across the world! I wanted to know how to do that. I wanted to know those secrets.I carried misconceptions about what trading was really about. And these prevented me from learning about how things actually were. I wish I could tell you that I remembered my lightbulb moment as a sniper and immediately went to thinking about first principles. But that didn’t happen… I spent years floundering. Blowing up accounts. Losing money. Cursing the market Gods. Quitting trading for good. Coming back 2-weeks later hell-bent on becoming the next Market Wizard. This sad period went on for about 5-years… And, if I’m being honest, it lasted closer 7-years.I, like most people, was optimizing for the wrong things. I was optimizing for my misconception about trading and investing. This prevented me from learning what the actual sauce was all about. I thought it was about finding good trades. How do you pick a good stock? How do you know when a currency is going to go up/down? How do you know when to short the housing market or to back up the truck on gold? Do you see all that’s wrong with this? These were the sexy narrative things… The things punters believe there are secrets behind and being able to figure these things out before everyone else would show how smart and amazing you are. And then finally you’d get the respect that you didn’t get in high school and your parents would love you more, so you too could have a cult gathering in middle America every year where you spout hand-wavy masturbatory nonsense and get celebrated for it.I paid a few Harvard-sized tuitions until the lightbulb finally clicked for me. And when it did, just like on the stalk lane, my world flipped and it was like the reality of trading came into focus for the first time. And this is what I now know. This is the not a secret, secret sauce of trading. Trading (and investing) is not about knowing things. That’s like maybe 10% of the game if I’m being generous.You know what’s a more apt descriptor of a successful trader? An UNcertainty manager. Someone who can successfully manage not knowing things. Someone who can make money over a full cycle, while knowing that he only knows maybe 30% of everything that’s critically important to his trade or investment successfully working out. Being a successful trader isn’t in fact about knowing the inner workings of central banks, advanced monetary plumbing, finding indicators that tell you where price is headed, or modeling out what a company will earn in 3 years' time. These are all part of the game, sure. Useful knowledge to know, depending on your strategy, absolutely. But it’s not the IT, it. It’s not the meat. Not the essence.The meat is full-heartedly accepting your ignorance, embracing your fallibility. And then designing a system, a process, that gives you an edge. An edge that tilts the odds in your favor. And then ruthlessly hitting that edge over and over and over again. And there are a number of things that are foundational to building out and executing on an edge. These are the “empty” platitudes and “tired” adages… risk management above all else… respecting the tape and being humble… not wedding yourself to an opinion, etc… It’s one thing to hear these things. It’s an entirely different thing to know them. To embody them. I was chatting the other day with a Market Wizard. An OG trader who got his start at the iconic Commodities Corporation (CC). To this day, CC holds the record for being the single greatest producer of trading talent ever. I’ve written about its storied history here. Anyways, he was telling me that when he first visited CC’s Princeton HQ, he was nervous as hell. He was walking into the trading equivalent of the 98’ Yankees dugout. He thought he would be challenged with brainy questions on weather patterns affecting that season’s cocoa crop,  what the Fed was signaling, the implications of the US current account deficit, etc….But what he quickly realized, was that yes, these guys paid attention to those things. But it was more background supplemental to the real work. The majority of what they did was study charts, look at positioning, develop a feel for sentiment, and ruthlessly manage their risk.Skillfully managing uncertainty was the real work. That was the sauce. That’s what made them great. One last example. The Chandler Brothers. The greatest investors you’ve never heard of. I wrote about them here. You read their story, and like every other story about a successful investor, you think that they’re just these really smart guys who can see the world differently and have the cojones to bet big on their convictions.But that is not at all the truth. That’s the Hollywoodized sexy but untrue version of their success. These narratives highlight all the wrong things. I’m fortunate to know two traders who used to PM for the Chandler brothers. One of them is a fellow Collective member. And he’s told me all about their “secrets” and “special” skills in how they turned a couple million into billions of dollars. And you know what these secrets are? They were pros in managing risk… NEVER letting the market dig too deep into their pockets. They kept strong opinions weakly held. They’d talk high conviction on an investment but when a key data point changed, they just as quickly changed their minds, and their positioning…  These fundamental value investing legends known for making big high conviction bets would study charts and they respected price above all else. They actively managed around positions, reducing their size when certain technical levels were hit or when they felt they didn’t have a good grasp on what was driving the action. Simply put, they excelled at the basic and boring fundamentals of trading. That’s their secret!Okay, I’m running up on my hour now so I’m going to finish this off. Here’s the main takeaway I want you to have from this piece. Truth: Most people don’t think for themselves. They don’t think in first principles. Instead, they regurgitate buzzy soundbites without ever truly understanding what it is they're saying.Their unconscious misconceptions stand in the way of they’re knowing what actually is and getting to where they want to be.This is even more true amongst the professional class where status-seeking trumps truth-seeking. And it’s infinitely true within fields that deal with complex systems (trading and investing being prime examples).So ask yourself, what is your “Patriots Game”? What are your beliefs about what’s important in markets? Where do you truly focus your energies? If you can really think that through and truthfully answer those questions. Perhaps you’ll have your aha moment and you’ll make it to the other side.Perhaps you’ll run the lane naked and drink for free…If you’d like to join us in our market adventures then click the link below and sign up for our Collective. We are in one of the most engaging macro environments in over a decade. There will be a LOT of money to be made and lost if you don’t know when to hedge your risk and cash your chips. Enrollment to our group closes this Sunday at midnight. So if you’re thinking about joining the team, make sure to do so before then. Hope to see you in there and happy hunting!

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Give me a holler if you’ve got any questions or comments.In the meantime, stay frosty.