Memorial Day

Thinking about risk management and traders who blow up...

This is a bit of a deviation from our regularly scheduled programming. I’ll be curious to see if you guys enjoy it. Let me know in the comments.

Having such a volatile week leading into Memorial Day has me waxing philosophical. I’ve seen so many people go broke in gambling and trading, and I’ve had a few messages from readers lately about how they are beginning their investing/trading journey. I want you all to avoid the pitfalls.

I started this Substack because, ever since I was a little kid who bought $100 worth of Toys R Us stock with my Dad’s help, I’ve loved stocks and markets. There has always been something appealing to me about the idea of making a prediction, betting your money, and reaping a reward (or suffering a loss!).

I got derailed from following that passion when I read the seminal book A Random Walk Down Wall Street and bought into the efficient market hypothesis. What a mistake that was, though it led me down an interesting path into the poker world. I’ll write about that someday.

There are a lot of parallels between trading and poker, and the parallels go much deeper than most would think. For one, in both cases, you have to always be on the lookout for what’s going on internally. Both are forms of gambling, and the truth is no matter how steely your emotional control is you’re always vulnerable to losing your mind a little.

I’ve seen more professional poker players lose their mind than keep it.

Sanity

I wrote another version of this post that was structured more as a series of specific pieces of advice, but it felt preachy so I deleted it. I’m still young, I still make all the mistakes I’ve made throughout my career (though less often now), so I’m hardly in a position to prescribe a solution to anyone. I’m just going to talk a bit about how I look at things.

There is a Nietzsche quote I’ve always loved (please don’t hold that against me):

If you gaze for long into an abyss, the abyss gazes also into you.

You can’t interact with the markets, or with gambling, without them affecting you. It’s a two way street. As you stare at numbers on your screen, and watch your portfolio rise and fall accordingly, you will change.

And the preceding line:

He who fights with monsters must take care lest he thereby become a monster.

You must not let the battle with variance, the struggle to win, unduly change you. Do not allow yourself to become a hedonic monkey. We can’t base our identities on winning, lest we become a monster whose only self worth is built on winning, something we can’t control.

In Dune the Bene Gesserit say they try to filter the humans from the animals. They are looking for the rare humans that have the self awareness, and self control, to master their emotions.

What’s in the market? Pain.

They use the Gom Jabbar as a sort of test. It’s a box of pain. The Gom Jabbar has always struck me as a great allegory for the markets (though something tells me Frank Herbert was not a trader).

In the book, the Gom Jabbar is a test of your ability to endure pain without it breaking you.

The markets are a similar test. No matter how good you are, you will win for a while, and then you will lose for a while. If you’re good the winning outweighs the losing, but one thing is certain.

There will be pain.

The rewards lie in suffering through the pain, not letting it change or break you, and in the end defeating it.

One quick history lesson before you go.

In the Roman Republic a Triumph was a celebration given to Generals who had accomplished some great victory. The victorious General, or Triumphator, would ride a chariot in a parade through the streets of Rome, lined and cheered on by the populus Romanus, the people of Rome. A slave would stand next to the Triumphator, holding a laurel wreath above his head and repeatedly whispering to him “memento mori,” remember that you are mortal. The Romans understood that in the hour of the Trimphator’s greatest achievement he should be mindful of the fact that he was still just a mortal man, lest the power and success go to his head.

This Memorial Day weekend take a minute to think about all the traders and gamblers who have blown up, some of them from the highest heights of success, many much smarter than any of us. Go outside, touch some grass. Spend time with your loved ones.

Memento Mori, remember that you are mortal. And remember…

As you stare into Trading View, Trading View stares also into you.

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Please also always remember... none of this is financial advice. I’m not a professional. I quite literally don’t know what I’m doing. I’m just a guy, with a keyboard, who scored high enough on some standardized tests to think I can beat the market.