What if the path to trading and investing success could be boiled down to just two things? Is there a way to do it – to ensure success almost no matter what?
How does one guarantee investing and trading success? Is there a way to do it – to ensure attainment of the goal no matter what?
There are few iron-clad guarantees in life, other than death and taxes. If we look hard, though, we can find reliable principles and truths here and there. Laws of nature, so to speak, that can be made to work powerfully in our favor.
When it comes to succeeding in markets – or succeeding in most anything, really – there are a lot of subtleties. Lists of do’s and don’ts... things to remember... things to recognize.
But what if the path to success could be boiled down to just two things? Two “meta-rules,” let’s say, that don’t cancel out or replace all the important little things, but instead, preside above them all?
There is virtue in simplicity. (That’s why Einstein said, “Things should be made as simple as possible, but not simpler.”) The closer you get to the root of things, the more powerful the insights become. One or two powerful rules can have an impact in countless situations, and act as a guideline for many follow-on decisions – like a ruler’s edge on a piece of drafting paper, making it easier to draw a straight line.
As the title of today’s piece suggests, some recent reading inspired your editor to come up with “the two essentials” of trading and investing success. If you remember these two “meta-rules” (to be revealed below), you will greatly achieve your odds of success in any endeavor.
The Exponential Curve
A few years ago, I had the opportunity to chat with one of the original “turtles.”
The turtles, if you haven’t heard of them, were a group of market neophytes (rank beginners) trained from scratch by the legendary trend-following trader Richard Dennis. (Dennis himself is known for starting with $400 and parlaying it into $200 million.)
Richard Dennis and his partner had a gentleman’s disagreement over whether trading skills were innate – i.e. something you were born with – or something that could be taught. Dennis believed that trading skills could be taught. His partner was skeptical.
To test the hypothesis, Dennis and his partner decided to take on a group of trainees, teach them a set of rules, and give them money to trade. The “turtles” moniker came from a trip Dennis took to Singapore. He saw turtles being grown in vats there and mused that he was going to grow traders the same way.
The experiment was an astonishing success. A handful of the turtle trainees went on to make tens or even hundreds of millions of dollars for themselves and their clients, using modified versions of the Dennis trend-following technique. At least one or two of the original turtles (if not more – they are a secretive bunch) have $1 billion or more under management today.
Going back to the discussion of a few years back, there was one thing said in particular that stuck in your editor’s head.
“Justice,” the taciturn turtle said, “the exponential curve that is trading returns cares more about your ability to stay alive than the absolute rate of the return. If you are good, and stay in this game long enough, everything takes care of itself.”
Sitting by the River
That old exchange came to mind by way of insight from another market sage, Howard Marks of Oaktree Capital Management.
Howard Marks is the founder of a $60 billion fund (that’s billion with a “b”) focused on the high yield and distressed debt markets. He has been a keen observer of markets since 1969. As a result of his longevity, Marks is known in the fund management world for his uncommon wisdom and insight, which he often shares with clients.
In a recent interview, Marks reflected on the concept of survival and its natural tie-in to success:
Sun Tzu said if you sit by the river long enough, you’ll see the bodies of your enemies float by. The key is “long enough.” If you live long enough, you have to be the survivor. When I was a kid, we didn’t have the video games you have today, so we used to listen to comedy records. One of the greatest ones was Mel Brooks doing the 2000 year old man. Carl Reiner says to him, “how did you get to be the world’s oldest man?” And he says, “Simple. Don’t die.” How do you get to be the world’s oldest investor? The answer is don’t crap out.
So if you look at distressed debt where we started in 1988, I could tell you who our number one competitor was in every year through 1995 and not one is a main competitor today. And it’s not because of what we did; all we did is perform consistently. They crapped out. It sounds simplistic to say, but the first requirement for success is survival...
The Two Essentials
And so, to put it in less than poetic terms, one could say the two “meta-rules” for trading and investing success are as follows:
1. Strive for continuous improvement (shun perfection; embrace iteration).
2. Survive at all costs (don’t “crap out”).
It sounds so simple. If you manage to survive, and not just survive but continuously improve, you dramatically increase the odds of getting where you want to go.
The surprising thing about these two rules is not how deep or profound they are, but how widely they are neglected!
When it comes to pursuit of a challenging goal, human nature seems to favor the W.C. Fields approach: “Try, try again – and then quit. There’s no sense making a damned fool of yourself.”
Take dieting habits for example. Statistics suggest that the percentage of successful dieters – those who manage to lose weight and keep it off – is on par with the percentage of successful traders and successful entrepreneurs.
Your editor finds that fascinating. Starting a successful business is hard. Becoming a successful trader is hard. And yet, for those who attempt either of these noble and worthy goals, the hit rate is (roughly) on par with the relatively simple goal of “eat less and exercise!”
What does that say about us? That dieting is a lot harder than looks? That a little self discipline, consistently applied, goes farther than we realize? Or both?
Getting the Tution’s Worth
Besides survival (staying in the game and not crapping out), the other “meta-rule” for success is a commitment to constant and ongoing improvement. There has to be a desire to get a little bit better, a little bit wiser, a little bit smarter or stronger or more efficient, with each passing day.
In poker and in markets, many survivors forget the importance of continuous improvement. They come to the table with the same attitude and skill level, content not to grow – and then they grouse about how their results never get better.
Your editor has witnessed this phenomenon many times. In the poker room in particular, you can find grizzled old hands caught in a permanent time warp. “I’ve been playing hold ‘em for twenty years,” these battle-scarred survivors will tell you. The only problem is, they still play as if they had two years’ experience... repeated 10 times in a row!
Experience is by far the best teacher. But if life is a classroom, we have to be paying attention to benefit from the lessons. Those who seek to continuously improve – to always and everywhere find ways to get smarter, wiser, better – are making the most of the “tuition” that the game extracts as we play. Those who fail to pay attention in the game of life are like the lazy college student killing time at an Ivy League school. Someone is shelling out the big bucks, but the money is being wasted.
Perfection Versus Iteration
When you combine these two things – a commitment to survive and a commitment to keep on improving, no matter what – a sort of alchemy happens.
With the “survive and improve” mindset, short-term setbacks become less grating; instead, they are seen more as learning experiences. When a trading or investing decision is viewed as just one of a thousand decisions, there is less pressure to be “perfect.” When the trading and investing journey is seen as a path many miles and many years long, a gnawing sense of urgency is replaced by more of a zen-like calm.
The market is a good teacher, too, in that it demands the abandonment of perfectionism. There is no such thing as a “perfect” investment or a “perfect” trade. The entry could have always been a little bit better. The exit could have always been a little bit sooner (or later). Or, if the entry and exit were nailed dead-bang on, the position itself should have been larger, and so on.
There is no perfection in trading, only iteration... repeated performance with an eye for subtle improvement in each repeat. Over and over, again and again.
Last but not least, a commitment to survival and improvement above all ensures two things. It ensures you will be back tomorrow – because the markets will always be there, there will always be another day, and you are committed to seeing that day. And it ensures you give yourself permission to experiment, to learn and to make mistakes (because mistakes are invariably the best lessons, as administered by the teacher called Experience).
Put it all together, and you get the eighth wonder of the world working in your favor – compound interest. In this case, it is the compound interest of accumulated knowledge and experience, continuously built on and refined over time.
It is by that means that the turtle’s final words prove true: “If you are good, and stay in this game long enough, everything takes care of itself.”