The Price of Admission – Volatility

Account volatility runs wild for most people during bear markets. This is not a pleasant experience for the average investor. Humans are creatures of routine and habit. It is in our nature to avoid volatile situations and return back to a safe, secure and steady state environment. But unfortunately for us, the investing game doesn’t reward those who can’t take on volatility. Instead of fearing and dreading volatility, we need to accept that it is part of the game and learn to cope with it. The strongest investors learn to actually embrace it.

We love this quote from Morgan Housel’s twitter feed:

The “price of admission” Morgan refers to is the psychological pain that comes with volatility. He’s talking about the difficulty of dealing with drawdowns and account swings. But if you can handle this volatility, you can usually earn higher returns, assuming a positive edge.

The graph below shows various Kelly bet systems. A Kelly bet is the optimal bet size an investor should place in order to achieve the largest return potential for a given investment strategy.


Source: Euan Sinclair Volatility Trading

It’s clear the Kelly bet is optimal in terms of returns. It makes far more money than making half a Kelly bet. But the “admission price” or volatility you have to endure with the full Kelly is MUCH higher than any other bet size. And few investors can stomach it. The fluctuations become impractical. Can you imagine waking up every day to watch your nest egg pop or drop by 7%?

We know that losing and volatility are painful. But we also know that the more volatility we endure, the more money we can make in the long run. This is of course assuming our investing process has positive edge.

So how can we pay the cheapest “price of admission” possible to suffer the least amount of pain, for the best long term outperformance possible?

Let’s start by addressing the volatility in losing investments.

Over the years we’ve found that the best way to help cope with downside volatility is to define it in advance. By defining losses, we cut out the negative emotions that tend to creep in with losing trades. Each of our trades has a set risk point where we exit for a small loss no matter what.

Using risk points in this manner makes defining losses in advance easy. We can calculate our total portfolio losses if every risk point were to hit simultaneously anytime we want. We can also see how this potential loss would change from adding or subtracting new and old positions. Comfort comes with this level of certainty.

This differs from standard stock picking or asset allocation because those approaches don’t define risk. They just keep track of how much their portfolio will likely fluctuate within a given year.

Now let’s look at the volatility that comes with winning investments.

With winners, it’s much easier to deal with volatility because you’re in the green. The fluctuations are all within the unrealized profit for your account. You don’t have to deal with thoughts of losing your base capital and going into the red. For this reason, we enjoy the volatility in our winners and hold on to them for as long as possible.

Refuse to accept downside volatility and embrace upside volatility. This is the formula we use to lower the “price of admission” in trading. We do this by setting risk points in advance, and letting our winners run. This is our coping mechanism.

How do you deal with the “price of admission” in your trading and investing process?



Can you solve this old floor trader’s riddle? They used to use it to assess mental speed for aspiring traders back in the old option pits. Email us for the right answer!

A pot contains 75 white beans and 150 black ones. Next to the pot is a large pile of black beans.

A somewhat demented cook removes the beans from the pot, one at a time, according to the following strange rule: He removes two beans from the pot at random. If at least one of the beans is black, he places it on the bean-pile and drops the other bean, no matter what color, back in the pot. If both beans are white, on the other hand, he discards both of them and removes one black bean from the pile and drops it in the pot.

At each turn of this procedure, the pot has one less bean in it. Eventually, just one bean is left in the pot. What color is it?



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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.


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.