There’s been a few things that have been rattling around in my brain-housing group that I wanted to get down on paper and share with everybody.
What sparked this flywheel of thought is something my buddy and resident systems trader here at MO, ChrisD (@ChrisDMacro) tweeted a few weeks ago. Here it is.
Chris joined our team late last year. I am unbelievably lucky to have him as a partner. Let me tell you why and then we’re going to get to the above tweet and talk about a number of “aha!” moments I’ve had lately.
ChrisD. is no sh*t probably in the top 0.1% of traders in the world. That’s not an exaggeration. It’s not hyperbole. And he’s going to hate this email if he sees it because he’s a modest low-pro type of guy. But it’s absolutely true.
Chris regularly puts up annual returns in the triple digits. He does this not by leveraging to the gills and swinging for the fences. Quite the opposite, actually. He accomplishes it through a maniacal devotion to trading his systems.
You see, Chris has been at this for a while. He’s been trading for two decades. He’s built and managed hedge funds, consulted for quant firms on building systems, and now mostly manages his family office and works with us here at MO while he and his wife fly around the world living out of fancy Airbnbs. He’s an interesting dude, but I digress…
The thing that Chris does better than almost anybody I know, and which I think is a key reason behind his incredible trading success, is the fact that he questions everything. Literally everything… He takes nothing at face value no matter who’s saying it, how many people accept it as true, or how long it’s been touted as wisdom.
He rigorously tests all assumptions. As in, he’ll spend days manually — and I can’t stress the importance of this point enough, the guy spends days living in excel going through charts bar by bar — backtesting ideas, systems, beliefs about the market etcetera…
Now think about most market participants. They tend to be high on opinions and low on supporting evidence, right? There’s not a lack of false confidence out there. You can choke on it if you expose yourself to the Wall st. noise long enough.
Here’s the thing. These people — as in the vast majority of people — never truly try to figure things out. I mean, really truly look into something, interrogate the hell out of it, and chisel down to the core of the matter.
Nah… The modus operandi of the masses is to start with a belief. One that is almost always given to them, not independently formed. And then subconsciously or consciously seek out confirming evidence.
How does one get rich playing in markets they ask themselves?
Well, you do exactly what Warren Buffett did and what all the other 50 million Buffett fanboys around the world try and do every day.
If Buffett’s style of long-term investing isn’t for you then go and try and be George Soros. You know, try and outsmart central bankers by making big leveraged bets against their currencies. Really learn economics so you can talk the language, sound smart amongst your macro peers, and discuss complex things such as the inner-workings of the repo market. That’s how you do it, right?
Over the last couple of month’s I’ve fallen down the Rene Girard rabbit hole — if you’ve been reading my work lately, then you’ve heard me talk Rene and his theories more than a few times.
Rene was a French philosopher who taught at Stanford. His big idea was “mimetic desire”. Mimetic desire states that people only desire things because other people desire them. Basically, we’re hard-wired to imitate others. There’s little true free will or original thinking involved in our decision making. Rather, most if not all of our decisions are driven by our desire to be like someone else and that someone else’s decisions are driven by their desire to be like someone else, ad Infinium.
We want things because others want them. We want to do things because others do them. And then we provide ourselves with post-rationalizations to trick ourselves into believing they were our own desires all along!
This theory has largely been confirmed by brain scan studies, such as this study that was titled “Memetics Does Provide a Useful Way of Understanding Cultural Evolution.” Here’s an excerpt from the report (emphasis by me).
“A common objection to memetics is that it undermines human autonomy and the creative power of consciousness, and treats the human self as a complex of memes without free will. These ideas follow naturally from the universal Darwinism on which memetics is based. That is, the idea that all design in the universe comes about through the evolutionary algorithm and is driven by replicator power. This means that human creativity emerges from the human capacity to store, vary and select memes, rather than from some special creative spark, or power of consciousness (Blackmore 2007).”
Here’s an interesting thought.
This idea that “human creativity emerges from the human capacity to store, vary, and select memes…” aligns with much of the work that is coming out on what top performers from various fields hold in common.
The book Range by David Epstein (one of my fav reads of the year) gives a number of examples that support the idea. Here’s one of my highlights from the book (emphasis by me).
“Scientists and members of the general public are about equally likely to have artistic hobbies, but scientists inducted into the highest national academies are much more likely to have avocations outside of their vocation. And those who have won the Nobel Prize are more likely still. Compared to other scientists, Nobel laureates are at least twenty-two times more likely to partake as an amateur actor, dancer, magician, or other type of performer. Nationally recognized scientists are much more likely than other scientists to be musicians, sculptors, painters, printmakers, woodworkers, mechanics, electronics tinkerers, glassblowers, poets, or writers, of both fiction and nonfiction. And, again, Nobel laureates are far more likely still. The most successful experts also belong to the wider world. “To him who observes them from afar,” said Spanish Nobel laureate Santiago Ramón y Cajal, the father of modern neuroscience, “it appears as though they are scattering and dissipating their energies, while in reality they are channeling and strengthening them.”
The main conclusion of work that took years of studying scientists and engineers, all of whom were regarded by peers as true technical experts, was that those who did not make a creative contribution to their field lacked aesthetic interests outside their narrow area. As psychologist and prominent creativity researcher Dean Keith Simonton observed, “rather than obsessively focus[ing] on a narrow topic,” creative achievers tend to have broad interests. “This breadth often supports insights that cannot be attributed to domain-specific expertise alone.”
I don’t think Epstein, or anybody else I’ve read, has made the connection. But don’t these two ideas fit nicely together.
If the evolutionary algorithm underlies all of the universe and is driven by replicator power. And human creativity is born not from original thought pulled from the ether but rather emerges from the combining of knowledge teased from the collective consciousness. Then wouldn’t it make perfect sense that one of the most statistically attributable commonalities amongst all top performers be that they’ve dabbled in a wide range of fields; often disciplines that have no apparent connection to their own.
Isn’t the combining of memes really just reasoning by analogy? Johannes Kepler, the father of planetary motion, wrote in his personal journal “I especially love analogies… my most faithful masters, acquainted with all the secrets of nature… One should make great use of them.”
When Kepler was working on his grand scientific breakthrough of “action at a distance”, the theory which spawned astrophysics. He routinely turned to analogistic reasoning (aka relational thinking) to help him stitch together his theory; using available ideas around odor, heat, and light to magnets and the current a boatman draws while steering through a canal to help him dream up a theory about how the planets revolve around the sun.
Okay, now let me bring this wide arcing circle back to our original topic; trading and investing.
Suppose that mimetic desire is real, which I believe it is — and the 40,000+ “contrarians” who travel every year to Omaha to worship at the feet of their Guru pretty much confirms that it is so. Shouldn’t we take a serious step back and ask ourselves what we’re chasing. I mean, really think about what exactly it is we desire?
If our desire is to be a successful investor like Buffett then I have a counterintuitive thought for you.
Don’t follow the herd and try to be like Buffett.
You know why? Because Warren Buffett didn’t start out trying to be like Warren Buffett. He became successful because he learned what he could from Graham and then paved his own path, no doubt utilizing relational thinking from his wide-ranging studies to help him arrive at truth.
He wasn’t trying to imitate anybody, that’s the point. This liberated him to focus on being someone who makes a lot of money from the market precisely by doing what no one else was.
Do you catch my drift? Are you picking up what I’m putting down?
If you try to imitate, you’ll end up average. Like everybody else, because that’s exactly what they’re doing. The market is literally made up of averages. If you’re reading this, I’m guessing you don’t want that to be you. Because why spend your Saturday’s reading my ramblings if you’re just going to make the return of the S&P?
Now back to Chris and his habit of questioning everything.
You can think of the commitment to not taking anything at face value, of examining everything for its utility or lack thereof to your goals, as a kind of way to channel and leverage your mimetic desiring cognition.
Instead of trying to be like someone else and blindly following what you think they do. You can instead, state a goal and then work backward. Think of it as a kind of reverse engineering to get you to where you want to go — which in the markets, should be making high risk-adjusted returns.
Trading great, Ed Seykota once said: “Win or lose, everybody gets what they want out of the market.” That quote baffled me for the longest time. I just didn’t get it, who the hell wants to lose? But now it makes perfect sense.
For most people, being like somebody else, trading or investing like how they think their idol trades and invests, is more important to them than making money — plus it’s a LOT easier to not have to think for themselves
Would they ever admit that to themselves? Not likely. It’s a painful truth to have to accept. But an absolutely necessary one if you want to break the chains of mediocrity, climb out of the cave of ignorance, and burst free from the confines of the muddling masses.
And that’s been my big “AHA!” from working alongside ChrisD over the last six months. At times I’ve felt like Neo after having taken the red pill. I’ve been forced to reinspect and subsequently tear down many of the false idols I once clung to.
I’ve refocused my effort on eschewing conventional wisdom, spending more time on thinking exactly what it is I’m trying to accomplish, and then creatively (using relational thinking) testing out various ways and means to get there.
The late Bertrand Russell once said “In all affairs, it’s a healthy thing now and then to hang a question mark on the things you have long taken for granted.”
I’m curious, what things do you think you’ve “long taken for granted” and should perhaps “hang a question mark on”?
You’ll be surprised by the results once you start seriously exploring this path of inquiry. It’s a deep-deep rabbit hole, my friend. But one that is certainly worth falling down.