Flying Too Close To The Ground

It’s not how close you get to the ground, but how precise you can fly the airplane. If you feel so careless with your life that you want to be the world’s lowest flying aviator, then you might do it for a while — but then a great many former friends of mine are no longer with us, simply because they cut their margins too close. ~ Bob Hoover

Bob Hoover was known as the “pilot’s pilot” — one of the greatest to have ever flown. He learned his skills as a fighter and test pilot for the Air Force and is best known for revolutionizing modern aerobatics.

As a crack flyboy, Hoover understood risk better than most. And it was this firm grasp of calculated risk-taking that allowed him to become one of the best aerobatic pilots in the skies and still live to the ripe old age of 94.

There’s an old trading adage that goes “There are old traders, and bold traders, but no bold old traders.” Like the pilots that “cut their margins too close”, markets are constantly claiming the accounts of those who recklessly risk their capital in search of easy profits.

Here’s a rule of thumb to live by: Your margin of risk is dependent on your experience. But no matter how deep your experience, never cut your margins too thin that you risk hitting the ground.

First and foremost, trading is about survival. And to survive, you need to protect your capital.

Many traders, especially inexperienced ones, fly way too close to the ground. This makes their blow up an eventuality.

Bruce Kovner said, “My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.”

Newer traders don’t respect risk because they haven’t gotten burned badly enough… yet. On average our team at Macro Ops risks a fraction of 1% per trade.

A good trader is a good risk manager above all else. Everybody should follow Buffett’s two rules of investing, “Rule number 1, don’t lose money. Rule number 2, don’t forget rule number 1.”

This will not only protect you from fighting the powerful headwinds of negative compounding, but it’ll keep you alive and in the game. Stay alive and you can continue to grow. Continue to grow and maybe someday you’ll acquire the skills to become an ace.

I got my tail clipped roughly ten years ago. Getting your tail clipped is when they cut off the tail of your shirt after your first solo flight (the photo is of me after my successful landing).

First Solo Flight

My first solo was supposed to take place a week earlier than it did. But it was cancelled. As I was going through my pre-flight checklist that morning, there was a horrible crash on the runway.

Another student working towards his pilot’s license botched his landing. Unlike other students flying slow and easy Cessnas, he insisted on learning to fly in a P-52 Mustang. The difference is like learning to drive a Toyota Camry versus a drag racer.

He was learning on a powerful machine… like a trader learning to trade while using too much leverage.

When coming in to land, he knew he wasn’t going to stick it, so he tried to do a pass through. A pass through is when you push the throttle and climb back into the air to circle around and try again. He put his throttle all the way in — on a Cessna this is fine — but on a P-52 Mustang the engine is so powerful that the torque flipped the plane over. The pilot stuck the landing on his head. The crash was fatal.

As traders we’re not dealing with anything as serious as our lives — it’s just money. But to make it in this game, you need to take the preservation of your capital just as seriously.

Paul Tudor Jones said, “… at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control.”

Keep your margins wide. Stay well above the ground and carefully calculate risk. Only press the leverage as you gain the experience.

If you want to learn how our team at Macro Ops manages risk, then check out our Trading Instructional Guide here.

 

 

Flying Too Close To The Ground

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.