novaspeculation

Five transformative years have passed – five years of learning and some earning trading stocks.

I’m talking voracious learning.

Who knew that coming up the way I did would lead me to setting down this path? I certainly didn’t. A desert rat degen who went through all the teenage angst-filled stages of attempting to embody edgy subcultures is now COMMITTING to embracing the life of an equity trader. What an awesome and variable life we have the chance to live. But that commitment and need to spend most of my unallocated time to digesting thousands of hours of information about markets in the last five years runs much deeper than just equity trading.

Entrepreneurship. Investing. Risk management. Startups. Capital allocation. Monetary policy and its connection to geopolitics. The full stack of business development: angel, seed, series, private equity, publicly traded, bankruptcy, corporate welfare and bailouts. All of these topics were so foreign and out of reach to me as someone who was born into a lower middle-class legacy. Valuations, multiple expansions, interest rates, arbitrage, GAAP – I mean there are seemingly thousands of new-to-me concepts that bring me more and more joy and intrigue as I continue my quest to trade profitably and consistently. At this point it has fully sunk in that this endeavor is a lifetime commitment. And there is more to be learned out there than there is time to comprehend in a single lifetime.

For some reason this fact is thrilling to me. When I heard that Charlie Munger said “Any year that passes in which you don’t destroy one of your best-loved ideas is a wasted year” it genuinely felt like time slowed a little as I started to understand a large part of what drives excitement in my life. This, and many other pieces of sage advice from some of the leaders in each thread of the capitalist’s tapestry have significantly warped my worldview for the better. I’ll share more of those gems as we go. But substantial learning happens on (and often past) the edge of failure or by reversing a long-held bias in our lives. There is nothing to fear about this and, in fact, it appears that I have been infected with the same thrill-seeking desire to destroy a best-loved idea as Charlie Munger was.

Okay, okay. Enough preamble.

So one of the absolutely huge learnings I’ve taken from these last five years is: while I’m super interested in all facets of the markets there is a significant need to compartmentalize what I have learned about these topics if I want to trade effectively and profitably. By the way, this applies to you too if you are a retail trader. I will continue to learn and probably write a little about the other topics listed above just because I can’t hold back the swell. I don’t think I really want to either. BUT. That being said – a trader’s edge in the market is often discreet and (with a short enough holding period and great risk management) does not necessarily need to be informed by all aspects of market dynamics.

Compartmentalize. Let’s construct robust and well-defined systematic trading strategies together. As a whole, the equity markets are an opportunity generating machine. I want to embrace my heritage as an American and take advantage of those opportunities. I mean advantage in the holistic sense of the word. To the novaspeculation community: I will always try and be thoughtful with my word choices and not use some politically charged or misappropriated variation of language. We’re talkin’ dictionary and encyclopedia definitions here. I won’t harp on this in other posts as much either but it felt like it was worth mentioning here at the outset.

Without compartmentalization we invite too many opportunities to muddy our strategies with unnecessary inputs or unperceived bias. We also invite too many opportunities for analysis paralysis and second guessing some fact that we think we know but is probably irrelevant to the cold and moment-to-moment nature of market behavior.

So let’s put up some guardrails. Guardrails that will bring clarity to yourself and your trading. I’ll ask some questions and think about how they apply to you and your situation. This will take some time, and maybe and existential crisis or two on the front-end of developing a strategy but significantly minimize any confusion or blurred-lines down the road. With a few years of flat to slightly profitable trading experience it has become apparent to me your situation is your edge. The markets are dynamic and filled to the brim with humans and machines that are situationally different. Retail trader is not a demeaning label. Hedge funds aren’t the only people who support themselves and their community with profitable trades. The ambiguity, dynamism, and opportunity of our highly meritocratic markets are things we can use to our advantage.

Building a Robust Trading Strategy

Really think about this stuff, maybe even write down the answers:

• Who are you?

• What are you good at?

• What are the best and worst sides of your personality?

• How deep into my trading journey am I and do I need to step back and rethink my strategy from first principles?

• What do I know about the repeatability and the profitability of my system?

• What asset class are you going to trade? What asset class are you NOT going to trade?

• What are my expectations about the time needs and capital needs of my strategy? Am I ground-truthing these expectations in anything that is proven?

• Is my approach sustainable and does is mesh well with my lifestyle? We are in this for the long haul.

• Am I overcomplicating my strategy and what steps am I taking to manage my short term and long term risk? (We’ll have plenty more conversations about risk management in future posts. Its much more of an interesting topic than the name would suggest) ¯\_(ツ)_/¯

• How does my strategy account for the volatility and directionality of the market? How are my positions correlated with these market dynamics or sector-specific dynamics?

• What are the sources of information I am seeking to inform my trading system and my own knowledge of trading? Are these trusted and well-studied people with a proven track record? How might they be biased in their approach?

• What is my edge? This one may be the hardest question of the bunch.

We’ll be building a ground-up, first principles trading system here with you. Feel free to join in, comment with questions, hold me accountable, or fact check my assumptions in the comments. In this post and all future posts as well.

Rapid iteration and failing small and fast are key tenets of success and building a positive feedback cycle into our trading systems. Trust the process. We’re in it for the long haul here.

-ns