272: Erik Smolinski - Marine Corps Discipline Crushes the Markets

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So as these random things are popping up, there's no more shell shock like I went through in 2011 when I saw that losing trade just running against me and I couldn't figure out what to do. Being in that scenario is the worst spot to make a logical decision.

Do the rest of us have grit. I think I will coin this as the why grit factor. Our guest today is someone, I believe, who has that why and that grit. His name is Eric Smolinsky. Growing up poor with an alcoholic family member and living in a violent neighborhood, it didn't stop Eric from being self-motivated and curious.

Eric only needed to hear a few words about investing, including the power of compounding from his high school instructor, to light the passion and determination to take immediate action. How many high school kids do you know think about these things and take action? The discipline, responsibility, accountability, and patience he cultivated as a Marine Corps officer Strengthened his ability to stick with his well thought out trading plans and persevere. He has been honing his craft.

for over sixteen years and uses derivative strategies to help him to minimize painful drawdowns while creating consistent long-term market beating returns. You gotta hear this. Ladies and gentlemen, we are so pleased to introduce Eric Smolinsky from San Diego, California.

So, but my mom put up with a lot. And my mom, she's a occupational therapist. So she does make a lot of money. She's a contractor. So she really doesn't have a retirement. And I just remember throughout my entire life growing up, especially as a kid, money was tight. It was palpable. And that's what got me started doing a lot of actually my hobbies now. I think last time we were talking about, you know, like how I'm into cars.

Well, that started because my mom didn't have the money to afford to bring our car somewhere if it needed to get fixed. And she commuted long distances. So my brother and I got good at mechanics. And that's since turned into a hobby. But She did a lot for us. So I always thought that that was going to be something I needed to figure out how to take care of her. So I started working really young. There was a dude that I used to hunt on his property.

And I asked him like, Do you have any work? Do you like essentially just labor? So I started doing things like splitting wood. I used to move shale for him. I loved it. I loved being outside. It was awesome. And then I started doing things like um selling Christmas trees, worked at a bowling alley. I tried to find ways to make money. And that's what I spent a lot of my time in junior high school and high school doing.

a feeder for the actual military, although a lot of us do go that route. And he the organizer for that program knew my brother. So he knew about my circumstance when I was coming in. And he knew that I was working a lot. So he asked, like, what are you doing with this money that you are trying to make? And I told him, I'm saving.

Because that is one thing I learned from my mom. She doesn't have the best spending habits, right? We lived a lot of our life in debt. And it's a lot because not a lot of excess. And then couple that with not great spending habits. So the one thing she did teach me unequivocally, though, is what I refer to as the hustle. She worked. Hard, really, really hard. And there were periods where she would work a full time job, go work a second job for a half shit, like she would hustle.

So he kind of saw me going down that route and he asked me, like, you should look into investing. And then that is literally when my entire life changed, hands down. Like I can pinpoint the exact moment my life went down a completely different trajectory. And it's all because of that man.

And I still refer to him as my stepdad today. There's no relationship between him and my mom, but that's the role he's filled in my life, is like a father figure. I I literally was just talking to him yesterday. And he was one of those pivotal actors in my life that literally just because he shared information with me.

I was fortunate enough to receive that opportunity and go down another path. That's why I love doing things like this, to hopefully share something that could potentially send somebody down a great path.

Compared to the route that he went. But he essentially explained to me that the very common thing, you have to put your money to work. So you should invest it. So from there, I actually went up to our library, which was right above where the ROTC room was, like literally right then, as soon as he said that word. And I talked to the woman behind the desk. She was awesome.

And I I told her I was just like, I'm trying to learn about investing. Can you help me? And instead of, you know, being uh an annoying librarian or anything, she's like, Oh, well, there's the card catalog or whatever, go find it out. She literally walked me over.

And she was like flipping through. She didn't know anything about investing, but she was trying to find good books based on what she could tell. And she was like, Oh, I think this one would be good. This one would be good. And she walked me around and we grabbed like three books and then I started reading. So it literally was him explaining to me.

Two things. One, the idea of compounding returns, right? Having your money work for you. And then the second thing was pointing out the opportunity cost of not doing that. And how it very likely would have me continuing the cycle that my mom was going through, where you work really hard, but you are just keeping afloat. And he was really smart and he knew. That I had a massive motivation to make sure that I was going to be in a position young enough to take care of her.

And he would use that as motivation for me. And he would say, so if you want to be able to take care of your mom, you have to think about these things now. And he was 100% correct.

I picked a lot of great names. I picked Amazon. I picked Apple. I picked Netflix because I thought that was the coolest thing ever. And I picked, I want to say Pfizer, but I couldn't afford much of any of them because I was so small.

So that that I just look back at that and I think how funny that would be. You always get to see those charts where people say, like, if you had bought ten thousand dollars of Coca Cola back and this is what it'd be worth now, anytime I see one of those, I'm always just like, damn it. Like What an opportunity, but that's what I started with. I started with things that I knew, and I also bought paychecks.

And the reason why I know paychecks is because for whatever reason, um, the guy's name I call him E Man. So E Man's. Mom had stock in paychecks. And he would always say to me that that's doing well. So I was just like, I I don't even know what I didn't even know what it was. But I just like, okay, uh, they're doing it. It's doing well. I'll try that. And it started with long equities like that for not that long, because as most young men, I was known for my patience.

So I immediately was just like, I gotta do this faster. I gotta accelerate this man. Like this is gonna take forever. So then I started looking into other ways you could trade. And I tested a lot of different things, but literally in 2007 is when I also tested things like. Um, foreign exchange. I did try foreign exchange for a little while. I tried binary options for a little while, which were terrible.

I tried regular options and then futures were way too big for me. At that point, we didn't have all these minis and micros. It was all very big products. So it that is essentially how my trajectory led me into derivatives specifically options.

I would literally spend essentially like eighteen hours a day just making videos back to back to back to back to back to back. And that's not a good way to make content, to be very clear. But I didn't know what I was doing and really the motivations for starting YouTube are very different. Maybe we could talk about that later, but I have this thing where I get obsessed.

And I want to see specific progress. I don't care if I've eaten. I don't care if I'm tired. None of that matters to me. What matters to me is the progress. So that's exactly what happened. I saw those first few stocks start to go up. And then that was it. Full in. There I go.

was not by trying to maximize my return potential. I wanted to be able to create a consistent outperformance on average. So at that time I set a target of 15% per year. And then I wanted to limit drawdowns. So then I looked at where that would put me. And then I was like, this still takes too long. So then I started looking at regular savings. So as soon as I realized that, I essentially turned into a monk.

Because I wouldn't spend on anything. And that is exactly what made probably the biggest difference in this whole story is up until my mid-20s. I was so resolute on saving that that is what rapidly built the principle that I could invest with. So that never went away.

So I would use the holidays and my birthday, which were really perfectly timed, because my birthday's in March. Then you have the holidays in December. You can get pretty good exposure with asking for things. And I was really fortunate to have a great family that would always try to help me out where they could, you know, with those kinds of things. But I still remember in my late time in high school and specifically in college.

My family started saying how boring it was getting gifts from me because I'd always just ask for money to invest. I would ask for one of two things. Give me money to invest or give me shares of something so that I can that's all I wanted. And they all really got They liked it, but yeah, they they were like, Well, we wanna like find something for you. But yeah

The the actually the entire reason, the impetus for starting the YouTube channel is because all of my time on active duty in the Marine Corps, I would meet up with my friends, whoever was willing to talk to me, and I would say, Hey, I would love to talk to you guys about investing. Kind of like this obsessive trait that I was explaining to you guys, it applies to a few things. So investing is one of them. Working out is another thing. And I will talk to anybody about either of those.

So I always would hit'em up and say, Hey, can I talk to you guys about investing? I was kinda like a Jehovah's Witness coming to the door. And I found myself repeating a lot of the very basic things. So I literally was like, oh, I'm gonna make a YouTube channel because it was during COVID. It was in I started on May 4th, 2020 on YouTube. And I remember that day because it was during COVID and I was just like, I got him.

All of them are stuck at home. They can't go to work because there is a shutdown. So they can't shut me down. And then I started reaching out to them. So I made videos so that they could watch the videos and then we could have like a more productive specified conversation, but I try to talk to everybody about the positive things I found and the things that have not worked well for me.

to try to help people learn from both sides of it. But I try to talk to everybody about investing. The reason why I laughed when you first brought it up is because my best friend, he's been like my biggest trouble case. to get him to invest. I mean, I offered to trade his account for me. He's looked at all of my stuff. He knows I do well, but he's one of those people that's like really, really difficult. He doesn't like committing to things and he hates making a decision.

So like the pain of making a decision is so oppressive for him that it just leads him to not make one. But this year we actually cracked that code. I'm very pleased to announce. I got them to start uh just buying and holding into the SPY and dollar cost averaging in, which big win there.

So how did you do the first year in 2007? And um did you concentrate mainly and just buy and hold? You mentioned that you experimented with some other uh markets and tell us a little bit more about that.

I had ideas on what I wanted to do, but I don't even like blaming it on like being too immature. I was just too lazy. So I wasn't doing a good job tracking these things. I was saying like, oh, I'll try this for a week and see how it goes. And then I'll try this other variation for a little while.

And as you could imagine, it's next to impossible to do that and then to be able to make a logical decision after you try these different things, especially for really short term periods. You're not getting any usable information about what it comes down to. So my first like three years was just not great. The year two for me, 2008, I was down negative 4.2%, but that greatly outperformed the market. But that's also partly because I was small and utilized.

So there wasn't much I could do. And that was kind of a saving grace for myself as I think back at it.

So a lot of the stuff I was putting out was already risk defined. So that was uh fortunate, uh a a good good luck in that scenario.

So it wasn't up until I started getting into college where I spent a lot of time looking at statistics for my undergrad that I started to do a lot of these different kind of comparisons. And to your point, I definitely started to realize how incredible that was, even to lose money in oh eight, but that much less money than the market, for example. And for something at the time.

that I was actually really pissed off at myself for. I still remember the first year I didn't care. The first year I really had very low expectations. But the second year my goal was to make money. Didn't know how much, but make something. And then I didn't. And I was so angry. And then I started to get the broader context. So overall I felt like that was actually a decent performance. In college is when I actually had the largest percent drawdown on the account.

But I had been killing it up until that point. So it ended up still being a good year. But I that was like the real shot across the bowel for me. I was fortunate in that I've never blown up an account, but I did have over a 30% drawdown essentially in a single day.

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Um, so it was like towards the end of my time there, or maybe it was twenty eleven. Let me look. I can tell you right now. Yeah, it was twenty eleven, perfect. And it was in the rut, which I distinctly remember and it was a 34% drawdown. That was an eye-opening trade. Because it was a really wide iron condor. So for the options traders out there, you'll know what that was. It was a short iron condor. For those that don't trade options, it's essentially a directionally neutral trade.

that we want something to stay in between a range. And for a period of that trade, it had moved outside of the range I wanted it to stay in. And obviously I was way too big, way too big. And it's because I still remember this. I wanted to make$600 on that trade. It was like a three-day trade. I wanted to make$600. I couldn't tell you why. I think that there was a psychological draw to making half a grand. I really think that that's what it was.

And as the trade started to move against me, I realized The statistics when I first put on the trade changed because it was a very high probability trade. The the short strikes were super far out of the money. So anybody that does these, they know you don't collect that much up front. But if you get a move against you, it's massively painful if it's a big move.

And this is exactly what it was. It was a big move. So I ended up closing the trade because I was frozen, actually like completely decision locked, couldn't make a decision. And then when I just saw it keep going against me. I didn't want to go to the max loss on the iron condor because it was big. So I exited the position. I just said, gotta get out. And just because the stock market has an undefeated sense of humor, it's settled almost smack dab in the middle of where I needed it to.

It would have been a 100% profitable trade if I had not gotten shaken out.

didn't know what I was doing. So I was just writing things down and I didn't have an effective system for testing. At that point in time, the rules were grossly inadequate. for what I was trying to do. Because if I had placed that same trade, but I even sized reasonably, it would have been fine. It would have been absolutely fine. But I was so grossly oversized. that it essentially just sent me down this massive emotional path.

that I was not prepared for. Because when I entered that trade, at no point did I even conceive of the possibility of the position being challenged because it was so far out of the money. It was so far away. I was thinking that's not gonna get there. I'm good. I just have to hold this.

So I needed to find a way to make good money because my target was by the time I was in my late twenties, I wanted to make sure my mom was good. She was a lifetime smoker, so I had a very high expectation of medical expenses. So I knew I needed to be in a position, honestly, to do something for her if needed. I love my brother to death. I d I have an older brother, but he's not super great with money. So who where is she gonna go?

So that is exactly why I went to options, is because I wanted leverage.

I also track things like my angel investing in here. I outline how I approach real estate investing. Everything at this point started to get outlined. And like right now it's it's 300 pages long. And it's because I've built on it over time. So the way that it's broken up. right now is I have a bunch of kind of prelim sections. I have who I am. I think about my motivations as a human being, what I think about money.

All of those things are outlined in the document. Then I have things like market structure. So I go through the background of the stock market, markets as a discounting mechanism, how markets are built. different kinds of market hypothesis, how markets execute from open outcry to the exchange systems. Um, down to economic functions. Then from there I go into things like financial statements, bond markets, option markets, history all the way back to 350 BC, so on and so forth.

So what I wanted to do is have a thoughtware dump. Everything that I'm learning should be able to be referenced. So as I'm learning these things, I'm putting all of it in a document. Then I start making sure I can understand things like option pricing, option Greeks, different pricing models. What is volatility? All of those things are broken down in there. Then I kind of have like the trading sections. So I have a section on portfolio management.

So what's my money management strategy? How do I think about leverage? How do I categorize my returns? How do I think about the use of cash? How do I size according to modified Kelly criterion? That kind of stuff. And then I go into all of my analysis tools. So technical analysis, fundamental analysis, I list.

everything that I've learned. And then I bubble up to the top the primary tools that I use and I highlight what they are. But then on all of these, I force myself to write like three to five sentences outlining the tool. That is just for me to fully synthesize whatever it is so that I have an understanding of what it is. And then from there, I go into the actual strategy.

So I split my portfolio into two buckets, my core allocation and a speculative allocation. And then I have specific strategies and products specifically that I trade for the core allocation. The speculative is a little more open ended. So then I have subsets of the trading plan called strategy outlines. And that's where I outline the strategy. It starts with something like an executive summary, again, to demonstrate that I can succinctly summarize what this thing is, how it operates.

Then I have things like the trade setup. What am I looking for? How does this trade operate? What are the legs? Then I have scanning. What am I looking for specifically for this specific strategy? Then I have management. Then I have tracking. Tracking is a really important thing. So that's where I outline what I think impacts this strategy most, what data points are most important to me. I list those all out and I make sure that they're reflected in my trading law.

So that then I can assess the performance of things and slowly optimize over time. So it is a really big document at this point. But what I tell people otherwise is if you don't have a trading plan. Just start one. Because if you think about the ego that goes behind the idea that you can just remember all of this stuff. And never really have something to reference or hold yourself accountable. And the other thing I offer to people is one of the most impactful parts of creating a trading plan.

It's the preemptive process. It's thinking through things before you come across that situation. It's the same thing we do in the military. As an officer, I have to create what's called a five-paragraph order for any mission we go on. And it's an outline essentially of what we're going to do. It's a plan. Does the plan always accurately reflect what happens?

Rarely so, very rarely, does the actual actions completely reflect the plan. Things happen, curveballs come up, but I have preemptively thought through a ton of conditions. So as these random things are popping up, there's no more shell shock like I went through in 2011 when I saw that losing trade just running against me and I couldn't figure out what to do. Being in that scenario is the worst.

spot to make a logical decision. So I force myself to think through all of it ahead of time through the trading plan.

Oh, I would do X, Y, and Z. Oh, that's interesting. So it's not in the plan. I don't think you're going to do that. Hey, where's this part of your plan? How do you pick between these different products? You say that you're gonna follow the trend to secure profit. What does that actually mean? Are you gonna use moving averages? Are you like it was to that level of detail? It's an insanely documented process.

to force myself to think through things. That's why when I try to get people to make trading plans, I encourage them to find somebody else that's also trying to do this kind of thing and throw it back and forth. Because the way that I think about it is you should be able to put the trading plane in front of somebody.

And they might not be able to trade it perfectly. It's not an automated system. I don't think that's really quite there for retail traders yet in terms of market structure for us to be able to reliably extract alpha that way. But so there's discretion.

But I think you should be able to put your trading plan in front of somebody and they should be able to generally follow it if they know nothing about market.

And then for me, when nine eleven happened, I was still young, but I knew that I wanted to get involved. So that's exactly what I ended up doing after my brother went. I think my brother went that route. probably because he didn't have a lot of choices. Like he wasn't gonna go to college. He wasn't a great student and he needed something and it was perfect for him.

So then I was actually going to enlist. That was my game plan because that's what my brother did. I thought it was a decent model. And then that same guy that introduced investing to me, he used that same kind of psychology trick. where he essentially explained to me that if I had enlisted it would have been selfish. And I was thinking, How? How could this be selfish? Like the whole idea is to serve. And what he explained to me is that he felt that I had a certain skill set

that really is beneficial as an officer, which you can then use that skill set to impact more people than you could as an enlisted person. So that was his argument that it essentially would be a selfish use of my skills because I really wanted to go like the more active route. If you think about the name officer, the word office is in it. That's not where I wanted to be. So I that's not where I wanted to go. But the way that he explained it, it felt more

It felt like I could make a bigger impact that way. And I obviously really revere his opinion. He's never steered me wrong. So that's the direction I ended up going. At first it was also not a possibility to go to college. So you have to be a college student in order to go.

in as an officer and then he connected me with a resource, the Marine Corps Scholarship. I didn't know about that. So this individual dude just sharing information with me literally completely pivoted the entire direction of my life.

My aunt's husband, my uncle on that side, then my other uncle got me into kayaking. Like all of these people now had an outsized impact on my life because I was open to it. I didn't have a father figure anymore. So I was looking for it. And I was so fortunate to come across people who just loved me and they cared about me. So yeah, if I am one hundred percent a product of an insanely fortunate experience with people who cared about me.

And then you can have like the person that's interested in things, like, oh, well, I'm curious why the market made its movement today. But at the end of the day. Why the market made its movement today could be helpful peripheral information, but your job as a trader isn't to be able to explain everything that happened in these succinct sentences. It's to be able to trade.

So when I look at my time in the military, specifically as an officer, there are these really frustrating instances where somebody that reports to you, they do something wrong. And then your boss. Is mad at you for it. And you think, how could I have influenced what he did at home? I'm not there. And as a junior officer, you have this like resentful response to that. Over time, you start to embrace it and you understand why it's there. It's because as an officer,

You have to exert a certain amount of control over your environment, the way you raise your people to behave on a day-to-day, the culture that surrounds you. You're not gonna be able to control everything all the time. And like to be clear, your bosses do know that. But they can also still demand. That at the end of the day, you, the leader, are responsible. And the reason for that is in the military we say you can delegate authority, but not responsibility.

I can have some of my guys, I can empower them with authority to make decisions and do things. The outcome of that is me. It's not them. It's me. So in trading, traders all too often forget that they are the only variable you can control. You cannot control what Jay Powell says. You cannot control what the bond market does today. The only thing you can control is yourself.

So the sooner you embrace that fact and you accept ultimate accountability for you as the trader, the person interacting, making the decisions, making the plans, clicking the button. the better off you are. Because then when a trade doesn't go well, you don't hide from it because of our ego doesn't like seeing losing things. We want to avert ourselves from that uncomfortable scenario. And you embrace that scenario.

You say, I put that trade on. I thought it was good. It didn't do what I thought. Why? What could I have done differently? What did I miss? You learn to take accountability for everything around you. And that does nothing but positively impact you as a trader, in my opinion.

But I was already paper trading and testing options. I was still deploying vertical spreads, so small options plays. But yeah, it started oh essentially less than a half a year from when I first started trading.

How did you trade during that high volatility time and did you concentrate mostly on shorting volatility to collect these insanely high premiums?

So you can still trade directional strategies like ratio diagonals. You can be super far in the money on the long option. That's 180 days out in time. So there's little extrinsic value. You're not really paying that much. for the volatility on it, although you are and it's higher than if it would be if volatility was lower, it's still not that crazy. But you're getting movement now. All of a sudden those strategies are killing it.

So for me, anytime I see volatility popping, it's just good days. Now, a lot of the things that work well depend on what volatility regime we're in. And where we're clustering. Because the issue is if you get caught in that transitory phase to your point in 2020 from what the beginning of February. Up until the beginning of March. So out of about a month, the VIX ran from 22 to 85. If you get caught with any strategy.

While volatility is moving like that, if you're on the wrong side, it's painful. There's no safe place there. So when volatility starts creeping up like that, I don't necessarily immediately gravitate to selling strategies. That's a really common misconception, I think, because

When we're selling premium, the idea is to capture at least as far as I trade. When I'm selling premium, I'm trying to capture variance risk premiums more often than not, which is the function that implied volatility tends to be overstated to realize volatility. A lot of times you can capture that the best is in low volatility periods. A lot of people think that that's crazy. The reason why people are really promulgating the idea of selling.

Premium or volatility when volatility is very high is two reasons. Volatility is mean reverting, and that is probably one of the most deterministic functions, and it's a great thing to trade, which I do trade that. The second thing is there's the assumption that as implied volatility expands, that it's more likely to be overpriced, which that is also accurate. So it's a good time to sell volatility, no doubt, but I don't discriminate buying or selling only based on volatility level.

So in 2020, it still was a lot of directional trades and it definitely was a lot of volatility capture strategies because I was trying to trade the mean reversion. So I was trading things like short straddles, short strangles. Those are kind of my go-to for volatility pure plays. I used to spend a lot of time gamma hedging around those, but then I did a lot of studies on that. And it helps.

But not that much. So I just sized them very carefully. So hands down, the most prevalent strategies in 2020, ratio diagonals. Short straddles, short strangles. And then the strategy I almost always have exposure to is the covered strangle that is essentially always out in some capacity.

And I literally allocated a small amount of the portfolio and I said I will never sell these. So I still have'em and I'm never not gonna not have'em. I I bought'em So I I want to say I bought them sub ten. So they were doing great. And then obviously now they're not doing great. They're doing fine. Um, but I'm never gonna sell those. In that instance, I was too gun shy to trade personally.

And the reason why I wasn't trying to capture that is because it was an anomaly. I'd never seen it before to your point. I hadn't studied it before. And at this point in my trading career, specifically my late twenties. This is down to like a business for me. I have very specific thresholds that I go through as I'm testing, deploying things. And I can see something like that and definitely know it's a money-making opportunity.

At that point in my trading career, I was already at a pretty good spot with what I was making that I wasn't super concerned if I missed out on that opportunity. So it was fascinating for me to watch. I still own shares of both AMC and GameStop literally because I said I would. And I will hold those into perpetuity literally because I said I would. But otherwise, it was just a really fun exercise to watch it.

Are there any IVs that are high enough for you to say, okay, I've got to take advantage of this opportunity? Um, and assuming it's not a biotech.

And it also tells me it's moving a lot if historic volatility is high. So then if I'm trying to sell and capture that elevate elevated implied volatility, it's actually going to be a more painful experience because of that. So for me, I actually care far more about tracking variance risk premiums, which is exactly the relationship between implied and historic as compared to raw implied.

In one of your videos, you also had a chart where you showed the explosive rise in the amount of zero days to expiration options traded starting in 2020. And my question is, why have traders recently suddenly flocked to this strategy. What's so special about it?

viewed them as a slightly less risky lottery ticket, which unfortunately is just not the case in that video. And I have a couple videos Um, that talk about the phenomenon more and more in depth because I trade zero DTE options. It's a very small subset of my overall portfolio, but I still do trade them. And there is great opportunity there. But like most things in trading, it's not quite what people think it is on the surface level.

Whereas a lot of people get into it with these expectations of, oh, I'm gonna YOLO whatever I got from this STIMI check into this Friday expiration and hope it works. as just not a great way to make money in markets. However, we definitely can see the market does struggle to price now with the advent of zero DTE expirations and something like SPX all throughout the week.

You can see that they still are struggling to dial in the IV for those. So there's a lot of opportunity. It's come down meaningfully since they were launched. And that's because of people like me that are just arbing it out or just starting to add more and more volume to it that decreases the edge. We're essentially pricing the market, that's one of the functions of all the participants.

So it's still there though. It's a very well documented phenomenon. You can check out a bunch of those studies actually from that video. I Always tell people I'm very data minded. I spent a lot of time on that in my undergrad and grad degree. And I track my own data sets. I have a stack at my house that I can query against with Python. I'm not a coder. I actually had one of my nerd friends that I played rugby with.

Uh, which is a hilarious combination to me. He's a big giant dude, but he's a coder. I had him teach me and you know, kind of like the rudimentary things. So I track all this data myself. But I always tell people, don't take my word for it. I am just a dude on the internet. You should not trust random people on the internet.

Look at the studies that I try to share people. You go to SSRN and you can look up tons of great free studies on these phenomena. And that is one of them, zero DTE. But yeah, the the explosion in them. Is fascinating. And if you look at the cost associated with it and whatnot, it's massive. It's really interesting stuff to me.

So some of these guys have a very different mind on how they approach markets. And for me, I was really focused on a reliable, consistent way because going all the way back to the sob story about my mom. Uh it was a no failure scenario for me. That's the way I thought about it. I was like, I there is there is no failure here. I have to figure this out. So I wanted to find a balance.

And one of the things as I was working through that compound growth calculator, I quickly started to realize that you can pretty modestly outperform the market. If you just about keep up with it when it's up, but you don't participate with it anywhere near as much when it's going down.

So that's what I started to look at. How can I create an approach to the market that allows me to generally pace the upsides or when it starts coming down to not participate or even to take the other side of those trades? So when I look at how we can succeed in trading, you can either ramp up your returns as much as possible, you can decrease your drawdowns. And my approach,

as per usual, is a combination of both. I don't think you have to specialize in one or the other. So for me, I'm very careful about the risk that I carry. I always have offsetting beta weighted deltas. Because you never know when the market is gonna capitulate in one way or another. And I am very quick. To follow a trend. So as soon as I'm proven wrong, if I'm in a directional strategy, for example, uh before I enter any single directional trade.

I'm gonna have what I call an allocation. How much money do I give to this trade in total? What is the initial outlay? How much am I gonna enter with up front? How am I going to scale into this position over the lifecycle of the trade? And then I always have. Where am I wrong?

If this does not do X, Y, or Z, I know I'm wrong and I get out. So the beauty of doing that is if I put on 35 trades and I get kicked out of 30 of them, that's not a great time. That's a lot of losing positions, but it tells me something. If I'm getting kicked out of that many, the market is probably capitulating to some degree. So then I'm not immediately jumping into more trades. I'm now cautious and I will wait to see how it behaves before I allocate more money to the market.

So I aim especially to avoid significant drawdowns, especially after my good old experience back in 2011. That was a pretty big eye-opener, to be honest.

Than something else. And that's exactly why I made that table the way I did. Because a lot of people go through those kinds of cycles where they'll have really good years. But the power of a drawdown is massive. And really the goal there is to share at least my psychological approach to markets because I also do make very clear when a trader is interacting with markets.

You have to align with your psyche because somebody like Matt, he doesn't like to trade the way I trade. He'd rather wait for his pitch. And he'll watch. He'll watch for a year if he has to, before he'll start putting on positions and doing his thing. Whereas that's not the way that I work. So the whole idea of that graph is to show exactly that, that you can still perform very well if you limit drawdowns and maintain good, not necessarily superb, good performance.

a lot of the negative, not ideal components, and I'll focus on the good part. In trading, it's the exact opposite. My entire objective is to look at a position and to identify why does this trade earn my money? And unless there's a clear reason why this trade earns my money, it doesn't get my money. So it's not a function of could I conceivably put a trade on in this or even could this trade conceivably work out?

That's not what I'm looking for. I'm looking to take in all of the evidence in front of me. And if that waiting is so overpowering that I think there is a clear opportunity, then that is something I essentially cannot say no to. Because the risk to reward in that scenario is so attractive to me that it would be irresponsible to not gain exposure to it. Otherwise, if that's not there, I'm not interested.

If you're paying attention to things, especially if you read the normal news, it's so polarizing. I don't want to look at it, man. It's like everything's burning. This person hates that person. I I don't care about any of that. The coolest part about markets is if you look through it through the market lens, they care about money. They don't care about the rest of it.

So, you get to lose a lot of that other nonsense and you get to stay up to date with so many cool things. You get to learn about upcoming products, upcoming innovations. I am a naturally fascinated person. I am intellectually curious about everything. I actually make the joke that I spend most of my day listening to YouTube videos, to podcasts, I probab and listening to audiobooks.

I probably ingest around six hours of not just general content, not like uh, you know, he said, she said podcast, literally educational content essentially every day. And sometimes I'm learning about the International Space Station. Sometimes I'm learning about the way that Vice was reviewing there is like some halfway house and they put somebody through it. And I'm learning how that works in another country. Like I'm just learning about a lot of different things, different markets.

But the stock market. The way that it teaches me about the world and the way that it functions is so intellectually stimulating. And it is very rewarding when you can start connecting dots and building a thesis off of it that you can then make money. But I mean, and I'm very open about this with my audience over the past year, specifically this year, I moved a bunch of my money into commercial real estate that I started investing with some partners.

So we procured things. There's a ski resort that we bought, student housing, a couple golf courses. And it's it's a business decision. So a lot of people are like, wait, you you trade. Why would you move your money from this to that? I'm not so egotistical to think that what I do today is guaranteed to work in ten years from now. Do I believe it will? Yes, I do believe it will, but it might not.

So part of it is just a diversification of wealth. The other thing is to create uncorrelated returns. I do that within the stock market. I do that outside of the stock market.

So the way that I approach my money management is very much business. That's the only thing I care about.

So the sooner you get over that threshold, the sooner you can then accept that fact and figure out what you need to do in order to create your future wealth. Maybe it's from trading with really aggressive saving tied into it. So I view that essential picture and I just expand it out so that as I'm at a point now where I'm successful financially, very thankful for that. And I have different buckets around. It decreases the risk of anyone failing and then me losing that potential source of income.

And that's when I tried to get people to take the leap of faith from win rate to expected return or expectancy. Because to me, that's what matters. The really tricky part with a high win rate is who doesn't want that? Again, the subconscious drive of your ego. We don't like conflict. We don't like being confronted. We don't like being wrong. All of these things are subconscious to us.

So when we have a really high win rate, you don't have to encounter being wrong that frequently. Our ego loves that. That is fantastic. The problem, however, is that in all things trading, there is give and take. And what I can almost guarantee you Not impossible, but super improbable. People with really high win rates tend to have much smaller average wins.

And then if you look at the inverse side, you can have a very low loss rate. But if those average losses are big, you now have a negatively expectant strategy. So one of the worst possible issues with win rates. is that they're so misleading. They feel good. Your ego likes it. You think you're making a bunch of money because you're winning most of the time. You want to continue doing that. But then if you actually look at the math, more often than not, you are losing money.

It is what it is. It's an uncomfortable thing. People hate hearing that, but it's my hope to try to red pill people into opening their eyes and accept the fact that a high win rate is an awful benchmark. And what you were talking about in terms of the disposition effect, it leverages that exact concept where retail traders have a disposition effect where we like to realize winning trades, which leads to us holding winners too briefly.

And we avoid losing trades, which leads us to tend to allow losses to expand massively. And again, don't take Eric's word for it. This is from the behavior of individual investors by Barbara and O'Dean from the University of California. They go through all of these things. And that is exactly what's happening with a high win rate. You get to enjoy the disposition effect, which unfortunately is not a great way to make money.

it is of the expected outcomes going forward. But you take that side of the equation, kind of the win size, and then you look and compare it against the loss side. So your loss rate as a percentage and then your average loss size. So at the end of this, you're essentially not just taking win rate in a vacuum. You're actually taking a couple other really important data points, your trade sizes.

And then you're seeing how something can perform. And again, you can take this in individual trades. You could say, I'm trading a vertical spread. Ah, I hate vertical spreads. I'm trading a short put. And in that short put, you look at either just the option probabilities or you have a probability forecasting tool. Some platforms have that. And you can say the probability of this thing expiring in the money at expiration is 30%.

Okay, now we have some data that we can work with. And you can even turn this expected return concept into a non-binary outcome where it's Yes, I make full money. No, I lose full money. And you can actually adjust the mass so that it's a gradient based on probability. And what this does is gives you a much higher fidelity view of the performance of a strategy. So then if you want to forecast it going forward, I'm actually going through my end of year review right now.

So I look at all of the different strategies that I run and I calculate the expected return for all of them. I look at those metrics for the strategies as I deploy them. And then you can run a Monte Carlo simulation if you're so inclined to forecast how it could perform the next year.

Or you can look at a large data set that you build over time and continue to build on that then gives you a pretty clear picture on what works in what scenario. But for me, expected return is the guiding force. It's not win rate. I simply need to know does what I do make money? And is it more likely to make money in the future than not? That's what I care about.

I love the way he views risk and I'm not quite there yet. I have embraced it. Like I said, I would probably say compared to most traders, I am way more accepting of risk, but I still have work to do there for sure.

So that is hands down my primary goal. When it comes to like my personal investing at this point, it is it's autopilot. I I have all of this stuff systematized to a point where I still get to enjoy the experience of applying my discretion. I already know what I'm doing in most scenarios. And I'm at a point financially where the return that I target.

is super low, but I still do not allow myself to ease up on opportunities when I see it. Like I was telling you guys via our our email chain, this will be my my best year to date. For sure. Like right now, I think I'm at like a 64% return on the account, which is insane for me. My previous best year was low 50s.

And all of that is because I'm still looking for opportunities. I find that very intellectually stimulating. So I fully intend to continue that going forward. I like the idea of spending so much over 16 years. owning this craft and now just getting to the point where like I can really deploy it, like really get it out there.

And I just enjoy the benefit of having a mentor that got me started on this stuff early. So I'm in my early thirties now and I get to enjoy a lot of the the benefits of it still.

single individual will pick up what single thing that can then change their route. So I am really, really stoked and so happy to have been here with you guys. Thank you for having me.