Interview With Brett Steenbarger: Masters in Business (Audio)

been reading him for many, many years. We've swapped emails over the years, but it was the first time we actually met and had a conversation, and I found it really quite fascinating. It the idea of performance coaching turns out to be somewhat different than you than you might have imagined. It's certainly different than is depicted and shows like Billions and and all the drama all the rest

of that sort of stuff just isn't realistic. As he describes in the conversation, it's a lot of basic block and tackling and a lot of work on on fundamentals. Enhancing the positive minimizing the negative probably doesn't make for a fascinating uh television show, but the proof is in the pudding and the firms that hire him show an actual improvement not only in the process and the satisfaction level of traders, but ultimately in their P and L

and that that seems to be the bottom line. What he does works uh for firms that have humans who have discretion over deploying capital. So if you are an investor, a trader, or someone who's just interested in human psychology, I think you will find this to be an interesting conversation. So, with no further ado, uh, my interview with Dr Brett steam Barger. This is Masters in Business with Barry Ridholts on Bloomberg Radio. This week on the show, we have

Dr Brett steam Barger. He is a clinical psychologist and a trading coach, and he has worked with such storied firms as Kingstree Trading and Tutor Investments. Dr Brett stein Barger, Welcome to Bloomberg. Thanks for having me, Barry. So, you

have a really interesting background. You graduate with a b a. In psychology from Duke and seventy six, You get your pH d from the University of Kansas two and then you begin what looks like a pretty typical academic career in clinical psychology New York City, Courtland, Cornell, Syracuse, and then all of a sudden you end up at a trading shop. How did how did that shift come about? Yeah? It, actually, Barry, looks more like a radical shift than it was in reality.

I began trading myself in the late nineteen seventies while I was in graduate school, and so it was a parallel interest to the psychology and it helped keep me afloat as a poor, starving graduate student. And I maintained that interest throughout my training and throughout my early career as a psychologist. So what was the event that led

you to start coaching traders. Well, up to that point, I had been doing counseling with college students at Cornell and with medical students and residence at SUNNI Upstate in Syracuse. So my main area of focus was working with very bright, very motivated students, professionals under who are under pressure and helping them perform to their maximum. When I started interacting with trade leaders, I noticed similar dynamics to the medical

students and residents that I worked with. Not not a big leap that it was psychologically in terms of working with them as a psychologist. It was not a leap at all the same exact techniques that were helpful. Let's say to a surgical resident who's working eighteen hour days and working under pressure, not different than working with a portfolio manager, let's say at a macro hedge fund. So let's um, let's talk about some of the errors that

traders make that are fixable coachable. I don't even know what what's the right phrase to do that? What? What are the typical problems that you see amongst traders, Well, there are quite a few, and some of them are

trading problems and some of them are psychological problems. One of the things I emphasize with the traders and the portfolio managers I work with is keeping score, keeping score of what they do well, keeping score of what they do that needs improvement, so that they are always learning from their experience, always recognizing the mistakes they can correct. One of the greatest big picture mistakes that traders can

make is the failure to adapt to changing markets. They hope that they have an edge, probabilistic edge in the markets. They hope that that edge will last in perpetuity, and in fact, markets change, and just like any business, what worked at one time can become obsolete at another and failing to innovate is one of the greatest problems. Failing

to innovate. Just describe how individual traders innovate. They innovate by tracking patterns in markets, tracking what moves markets, and developing new and different ways of monitoring that and taking

advantage of that. So, for instance, an example would be as computers, as algorith big trading systems became more dominant in the marketplace, we found more traders, both short term traders and portfolio managers employing some quantitative techniques to help them understand some of the forces that we're moving markets. That's an evolution, that's adaptation. So let's talk about when you shifted, Um, is it fair to call at full

time as a trader coach? Was it two thousand four Kingstreet Trading, who for people may not be familiar with them, at one point in time they were of all the futures trading at the Chicago Mark. They recruit you, Um, yes, to be the head of trader development. Is that that's right? That's right. So I had written my first book, The Psychology of Trading, and one of their traders had discovered the book and convinced the owner of the firm to

bring me in to work with the traders. That went very well, and they hired me on a full time basis. I left the Ivory Tower and went full time to working at a crazy trading firm in Chicago with people I loved. So I would imagine a lot of people who are listening to this might be familiar with the idea of a trading coach from the showtime show Billions. Have you seen it? Does it doesn't ring true? Or is it just a Hollywood dramatization of that sort of relationship.

I can tell you that there's a lot less drama in my work, and I don't think the nuts and bolts of my work would make it into TV drama. A lot of the improvements that traders make are nuances that it's the block crement, yeah, incremental, it's the blocking and tackling, so to speak, learning to do things better, identifying mistakes made, where to and how to best execute a trade, how to wait evidence in, deciding upon an

idea to invest in. Those are the kind of nuances that end up making a big difference in performance, but are not particularly traumatic to work on. You hinted something that I had that raises another question in my mind. When you evaluate how well you're doing, is it just a function of the trader's P and L or are you looking at process more than outcome? Great question, and you have to look at both. You know, at one level, what a affirm hires me. We have to look at

do the traders make use of the resource? That's one level. Are are they satisfied with it? Do they feel they've benefited from it? So satisfaction is one criterion. The second criterion is a process one. Are they actually doing something different as a result of the meetings? And then the third criterion would be the profitability. Does doing something different translate into better overall performance? I'm very Rihults. You're listening

to Masters in Business on Bloomberg Radio. My special guest today is Dr Steam Barger. He is a clinical psychologist and professional trading coach. Let's talk a little bit about the process of coaching traders and investors. Where does that process begin. The process begins with self observation, and this is true of any psychological change. We have to become aware of our patterns before we can make changes in those patterns. So typically, I will observe a trader and

what they're doing. I will have I will give them exercises to help them with self observation, and will begin to observe patterns and what they do, some successful patterns, some patterns that get them into trouble. What what's what

do these exercises look like? That sounds interesting? Well, the most basic exercise that people associate with coaching of traders would be keeping a journal, so people, day in day out, will track the decisions they make and how they made them, why they made them, and the success of those decisions. They may track certain things in their personal life as far as their mood, their energy level, and so forth, and we start to look at the patterns that appear

in the journal entries. So, what are some of the bad habits you see that traders engage in. Some of the bad habits that traders engage in is are an inability to turn it off, so to speak. Explain that a little bit, Yes, so they take the problems home with them. They really don't get a chance or give themselves a chance to renew themselves. And they justify that by saying they're so devoted to their trading and so devoted to markets when in fact they're in the process

of burning themselves out. Sometimes you have to take one step back to go two steps forward. Well, take a step back, but also a lateral step. What the psychological research tells us is that people perform best when they have a healthy amount of positive emotional experience of their lives. And that experience could come from relationships, it could come from deeply meaningful activities, it could come from physical exercise.

And so what people become overly immersed in trading, they often shut off some of these other positive avenues and that's part of what helps burn them out. What what about work satisfaction? What happens when a person's work satisfaction falls. Do they find themselves in a downward spiral that becomes challenging to break? They can, And that kind of downward spiral can become a slump, and many traders are familiar

with that phenomenon. When people draw down in their trading, as happens to all of us, it's important to have other areas of positive focus. So, for instance, one of the things I work with the raiders on if they work within a team, is how they can build their team processes and how they can be more successful, more productive.

As a team, we work on refining their trading processes and learning from the draw downs so that they always feel as though they're moving themselves forward, even when their accounts aren't necessarily moving forward. So let me ask you the opposite question. I always ran into trouble as a trader, not when I was having trouble, but when I was on a hot streak, when I felt whatever I touched

turned to gold, and that invariably ended badly. What do you do when you have somebody who's just on fire and you want to rein them in without you know, reigning on their parade. It's very easy for confidence to become over confidence. Let me give you an anecdote. With several traders that I worked with a few years ago, we took a look at their profitability as a function of their level of risk taking, and so when they were taking relatively little risk, they were consistently profitable. Their

hit rate on trades was very good. When they were taking the most risk, which is when they were most confident, they were actually losing money because their confidence had become over confidence. So what we did we created computer arized alerts that told people when their risk taking was getting into the red zone as a way of monitoring possible over confidence. What we were really saying to them is when you're taking this amount of risk, historically, you don't

make money. So the baseball analogy is the difference between just getting wood on the ball and getting on base versus swinging for the fences and striking out. That's right, that's right, fair way to look at it, and and my goal as a coach is to make people aware of those patterns, help them become mindful of those patterns, not tell them how to trade. So how often are you sitting down with traders? Is this a weekly thing, a daily, a monthly? What what is the usual time

frame for someone like? It varies tremendously. When I've worked full time at trading firms, then it was not unusual for us to touch base to meet several times a week. There are traders even now that I meet with who will send me their journal entries on a daily basis as a way of getting quick feedback. But others times it's a monthly process. In some cases it's as wanted as needed, So it really depends on the urgency that

the trader feels in terms of need for change. So there's a related question to that, the feeling the need for change, which is what makes somebody coachable if that's the right word, And the corollary, are some traders just uncoachable the coach doable? The coachability factor partly depends on

the capacity for self observation. People who would be really uncoachable probably never seek out a coach to begin with, But clearly if someone is more defensive than open minded to the things that they're doing wrong, that's going to make it a difficult situation for coaching. So I one of the questions I had tied up, which you kind of answered, but I have to go back to it, is how much do you need to know about trading

to be an effective trading coach? And maybe a better way, now that I know you've been trading for thirty plus years, maybe the better way to ask that question is what's the ratio between psychology and trading when you're coaching people? It's a mixed ratio because, as I mentioned before, sometimes trading problems create psychological frustrations, and sometimes psychological issues can interfere with good trading decisions, and a big part of what I do is try to tease apart the causality.

Is this a trading problem that's having psychological effects, or is it a psychological issue that might be affecting their entire life that's influencing their trading. It's very helpful as a coach to have familiarity with trading, with making trading decisions. I have long contended that my greatest credential as a coach is not the three letters after my name. My greatest credential as a coach is that I have made every mistake that all of the traders I work with

have made. I'm Barry Hults. You're listening to Master's in Business on Bloomberg Radio. My guest today is Dr Brett Steambarger. He is a clinical psychologist and a trading coach who graduated from the University of Kansas with a PhD. In Let's jump right into some of the things you do coaching traders. How does a firm go about deciding we want to work with the trading coach. We think there's some gains to be had from that. Often the initial request or demand will come from the traders or the

portfolio managers themselves. Maybe they have known someone who has worked with me, maybe they've read my trader feed blog, or they've read one of my books, and so they will bring it to the attention of management. Then I'll typically go into a firm and do a talk for the traders and talk with them about trading, talk with them about psychology, talk about working on performance, and they make a decision from there. So someone decides they want to work with you, And at that point, isn't mandate?

Is voluntary to people? How do people start filling up your calendar? How does that work? Totally voluntary? This is something that is available to traders, but not required of them. What I typically find is that in the beginning there are the early adopters, and then there are a few tire kickers along the way, And as the results come out and it goes well, then more people here about it and get interested, and so the interest can grow over time. So we talked earlier about hot and cold streaks.

But the question I have you is, Hey, sometimes you flip a coin and you get ten tales in a row. How challenging it is it to tell the difference between someone whose process has some issues and someone who, hey, sometimes you know the dice, just don't don't go your way for a while, and eventually that will turn around

on its own. It's a very important distinction, and obviously, Mary, it's one of the reasons why risk management is one of the most important psychological tools for traders, because there are going to be random streaks of losing trades and you have to be able to survive that risk of ruin. What we typically look at or two things when someone has a series of losers. The first is have markets themselves changed? Is there something different about the market that

we need to adapt to? The second is has your process changed? Are you doing something differently than when you were winning? And those two questions usually will help us figure out whether we need to take adaptive action or whether it's just bad luck. So you mentioned winning and losing, and I'm gonna go off script a second ask you a question that I've always been fascinated by, which is you're looking around Wall Street and the traders that are there.

Forget the algorithms, but the actual human traders historically have come from a um collegiate athletics background that seems to be rifle of Wall Street any thoughts on that. I think that's common. I I think it's far from always the case, especially lately. People with athletic backgrounds or backgrounds in performance fields in general tend to be competitive, tend to be interested in winning and losing, and so it's

a natural transition in that respect to trading. Uh. That being said, I believe that trading is a much more analytical game now than it was let's say, twenty years ago, and so we see people who have some of the analytical background going into financial markets a little bit different than when it used to be mostly the jocks. Makes sense. Let's let's talk a little bit about ego. How important is it to have a healthy ego and when can

that run them up. You have to have some ego to believe that you can outperform all of these other motivated, talented participants in the marketplace, and you have to have an ego to be resilient to the inevitable periods of losing. It's when the ego becomes dominant when people feel the need to make the big calls. In a sense, it's about them being right rather than them following what markets are doing. That traders can run into some real problems.

That's funny you say that. A few weeks ago in a column I referenced a Ned Davis book whose cover I love. The title I loved, which was being right or making money? And it's just well, you can choose you Is it the ego or is it the P and L that matters? Yes. The way I sometimes have put it is that if you're engaged in a dance with the market, you have to let the market lead. I like that. I like that a lot. So what is more to follow up on the athletic theme. What's

more important? Offense or defense? Well, clearly both are important. Um, if you don't have good defense, you simply don't stay in the game. And so what we typically find is beginning traders often their greatest problem is overtrading, becoming too eager and trading way too much and not managing their risk. Well, I'm Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Dr Brett steam Barger. He is a clinical psychologist and trading coach who has

worked with some legendary firms and traders out there. Let's let's talk about the modern era of trading, we've seen a number of traders replaced with effectively software. High frequency trading has made it much more challenging. How much more difficult is it to be a trader today then when I began twenty five years ago, Well, when you began over thirty years ago, it is more difficult and more complex in a number of ways. And I'll mention too. The first is the respect that you are talking about.

There are an increasing number of market participants, particularly algorithmic that are making decisions upon high frequency data. What's being bought, what's being sold each transaction, is it occurring nearer to a bid price, nearer to an offer price, and it's quickly aggregating all this information to tell them our buyer's dominant, seller's dominant, and making rapid decisions. And so a lot of the market movement is not occurring because of quote

unquote fundamental reasons. Traders of old would look at the world. They would look at a company and its earnings and predicate their decisions on that basis. An increasing amount of market movement is coming from other directions. So that's the first way in which trading is challenging in the modern era. The second way, as you and I know, the world is a much more global place, and it's no longer the case that the major influences on markets occur only

during New York hours. So much is happening in Asia, so much is happening in Europe. Headlines from over there, events from over there, um, global economic conditions from over there really affect how assets in the US behave, and so that's created a complexity that traders have had to adapt to. That's that's interesting. Let's let's talk about something that hasn't changed, and that's human emotions. How can you

teach people to keep their emotions in check? What I work with traders on is not simply controlling their emotions, which is helpful, but using a emotions as information, becoming more mindful, more aware of one's emotional reactions, because many times there can be information in what we process emotionally. The old joke about George Soros's back there you go, acting up when he was in a position. As soon as he got out of a bad position, the back

ache went away. There's information in that back ache, and and that's true for many people. They experience emotions and that it's information about what's happening in markets and what's happening to your portfolio. There's one portfolio manager I work with, for instance, who uses his emotional reactions to gauge the likely emotional reactions of other participants, and so expand on that. So how does how does one's own emotional reactions help

you gauge other people's emotionally? If the market sells off and he starts to feel some panicky emotions, the first thing he thinks about is, that's interesting, maybe other participants in the market are feeling this kind of panic and what does that mean? And how has that market behaved when we've gotten into panic times. So he's aware of his emotions, but he's not being reactive relative to those emotions.

That that that's quite fascinating. Here's another example. Sometimes when in my own trading, I'll have a series of winning trades, the sort of the way you described when you're on fire, and I'll have the thought I've got this figured out. How you laugh because you know what happens? Okay, Well, I become aware of that overconfident thought, and I realize that that's a warning signal. So the mindfulness, the awareness

of your emotional reaction can help you trade better. It's funny when I started on a trading desk, the head trader who was a former Marine jungle combat instructor, so I'm not a guy to mess around with. Occasionally, would someone would have their ego get a little unchecked and and his responses, Hey, you don't want to piss off the trading gods, and it was it was a good way to say, all right, to take it, take it

down a notch a little bit. I read a nice quote recently that said, for proper perspective, every person should have a dog that adores them and a cat that ignores them. That puts confidence in humility in the right perspective. Absolutely, so that raises a really interesting question, how do you prevent people or repair it when it happens from learning the wrong lesson from a positive experience or theoretically from

a negative experience. One of the things we emphasize and working with traders is the idea of this too shall pass. Trees don't grow to the sky and losses don't continue forever, and so we try to approach markets with fresh eyes, fresh thoughts from day to day, week to week. Markets have no memory is that the thinking or well the thinking is that a risk reward the opportunity set typically changes over the course of time, and we want to

recalibrate ourselves with respect to that altered risk reward. So, for instance, we're investing in a stock of the stock moves our way, Well, it's not necessarily the same value that it was when we first put on the position. Is the risk reward compelling here? And now? If this were January one and I had no position in this name,

would I be taking along position right here? That really, those kind of questions recalibrate us so that we don't allow the past, either the gains of the past or the losses of the past, to unduly color our current judgment. What about superstitions, I recall a number of I want to spreak out the myths from the superstitions. We we keep referencing sports, but uh, certain people would not change their socks or wear the same hat, or you still

encounter that sort of stuff. Where have we moved past that? Now? Every so often you definitely encounter that where people feel it's like certain things are lucky and certain things are unlucky. Um, but I think it's still a common practice as it was years ago. If you come up behind a trader who's made money and you packed them on the back and say you're doing great, they will look at you as if you're trying to jinx them and and get away from me, Get away from it. So I think

that touches on some superstitions. How do you force people to be rational and evidence based? Do you ever bump up against the situation where the data is overwhelming but the trader just doesn't want to pay any mind to it. We all have blind spots, myself included, and you can't force anyone to make a change. But what you can do is process the information as thoroughly as possible and encourage people to look at the information with fresh eyes

from different perspectives. So it's not an uncommon, for instance, in a conversation with a trader, that they'll mention to me they're along the dollar, and so I'll mention positioning and sentiment data that suggests that lots of moody managers are along the dollar. Out of trade, it's a crowded trade. Do you still like it? What? What? What makes you

think that it's going to continue? Now? I'm playing Devil's advocate as a way of getting people to look at new information and make sure that they're making decisions for the right reasons. I always love the argument of inversion. Make the case for me for the other side of the trade, because it's a two sided trade. What is the other person thinking and what might they know that you're unaware of or or what is what is coloring their views that you might not have considered a great point.

I think it's very helpful to do what if scenario planning and what if news comes out this way? What if the stock moves against us in that way? What would how would you respond? What would that mean to you? What would tell you your idea is wrong? Criteria A, B, C, D. And mapping that out in advance so that if those

things should unfold, you're prepared psychologically to take property. We've always discussed what is the line in the sand you have to have any time I've had a conversation with somebody, and this tends to be true with the gold bugs and the fed haters, and there's a whole ideology behind the trade where you say what would make you wrong and they say nothing. I know there's a person whose career in trading is soon to come to an end. That's right. If nothing can make you wrong, then you're

not basing this. Would you really want to entrust your capital with that person? Right? For sure? And the question that pops up every now and then, we've been talking about process. But something that's a little related is and you hinted it this earlier, is a routine. You mentioned the trading diary or a trading lock. What sort of routines are healthy for traders or investors for that matter. One of the important routines that successful traders engaging and

are routines of preparation. When markets are open, they need to be prepared for the different possibilities that may unfold. We've been speaking with Dr Brett Steambarger discussing all things coaching and psychology regarding traders. If you enjoy the conversation, be sure and check out the podcast extras, where we continue chatting about all such things related to trading. Check out my daily column on Bloomberg View dot com or follow me on Twitter at rid Halts. I'm Barry rid Halts.

You've been listening to Masters in Business on Bloomberg Radio. Welcome to the podcast. Um Brett, thank you so much for doing this. I have been reading you for a long time, and you and I have been swapping emails over the years, but this is really the first time we've ever met. That's right, so thank thank you for

doing this. I find this stuff endlessly fascinating, and I was taking notes, which I normally don't do, because so many of the things you said touched on just just jo memories from my own personal experience when I started on a trading desk, and I just have to go through some of them. Um, you said, one of the portfolio managers you work with, UM monitors his own reaction to the market in order to anticipate other people's restrections. One of the things I started to take note of.

And you know, sometimes the patterns are evident after they beat you over the head a hundred times. I noticed if when I was on the cell side, if I would bring up a stock that was wildly out of favor and for whatever reasons, I thought was really attractive, and the general reaction of anybody I showed the name to was that's just, oh, what a piece of junk. Why would I want to that is now a giant flag.

And when you you see that, right, like back in the days when Apple was fifteen with thirteen cash, when that new fangled iPod came out, Oh they're going out of business. That toast. Why would I everyone to own that? I wish I was more sensitive to what a great contrarian indicator that that is. You are so right, Barry. And once in a while I'll write a blog posts or tweet something and it may have a bullush or a bearish tinge to it, and immediately the haters come out.

And the more defensive the reaction, the more I developed confidence in that view, because people don't get defensive if they are secure with their view, right. It's when they're nervous and it's starting to go against them and they become the wishful thinking pops up. There's there's no doubt about that. By the way, I kept coming back to the athletes on trading desks. I have a pet theory. I'd love to I'm gonna get on your couch and you could you could psychoanalyze some of my own foibles.

But the pet theory with that has been, you know, if you're a college athlete and you're playing Division one or Division two or even Division three. Pick a sport, baseball, football, Um, basketball almost doesn't matter. The skill level is high enough that other than whoever won this year and whoever was in the pits last year, pretty much any team on any given Saturday can beat any other team. Um. It's only the real powerhouses that go fourteen and one or

whatever that are that are almost unbeatable. And even them, uh, someone eventually comes along and beats them. Uh what. I can't help but notice that very often it's a lucky bounce, a surprise call that went the wrong way the officiating, where the outcome is somewhat random, and despite having a work you off all season all week, you lose on the weekend, and then Monday you gotta get up and start all over again, fresh and put the loss out

of your mind and look forward. That seems to be pretty parallel to trading, and sports have that similarity, although I certainly could just be making something up after the fact. Well, there are definitely random and lucky influences in any of these endeavors. So, for instance, with trading, one trader may hit their best ideas relatively early in the year, during January, another trader will go through a draw down during the

first weeks of the year. The first trader, now has banked some profits, has some cushion, feels more confident in taking risk. Later on, the second one is afraid of digging too deep a hole because they don't want to be fired, so they restrain their risk taking. So that random period of January performance ends up potentially shaping a year's worth of performance. I had a conversation with a friend who runs a hedge fund who had three or four pretty mediocre years, flat years, I want to say,

July or August. Last year, he's up high, double digits, almost triple digit returns. And I sent him, why you still here? Why don't you close up shop? You know? And and which, by the way, I don't know if that would have been good advice or bad advice. His portfolio looks very different than mine. But you're up nineties something per cent ring the bell. Call it a year, and and right, and and take the next four how much more do you think you're you're gonna have to

to gain? And his thoughts were, listen, I've had these positions on for three years. They're finally paying off. I'm not. I have to see this to its end. And I was kind of surprised by that. What so, So, what would you say to somebody who's like, Nope, uh, I died bond it last year, I'm living on it this year, and I'm I'm going to run it out. Well. I

would applaud the staying power, that's for sure. But the question I would ask that trader is, Okay, you're up N how much of that N do you want to put at risk right here, right now to make how much more? What is the risk reward right here, right now? And how much do you want to make sure you go home with at the end of the year. So I would encourage them to think of risk taking fresh, not keeping it all on, not taking it all off, but recalibrating that that makes perfect, perfect sense. And and

you referenced keeping Score. I'm moving some pages. You referenced Keeping Score. I was at a sell side firm that had, um, you know, a thousand plus employees, and I think it was something like six or eight hundred bro ers and I was the market strategist and I used to have brokers come to my office and say to me constantly, you know, I have all these winners, but I can't figure out why my portfolios are down. Well, you know,

it's a simple spreadsheet analysis. What do you mean you have all these winners, Well, I have X y Z, and I have ABC, and I have one to three And so I would get a print out of their entire book and I would say, well, you have these winners, but your ABC is your biggest winner, and it's your fourteenth position. You know, X y Z is your second

biggest winner, and it's your nineteenth position. You have a whole lot of stuff that's flat or maybe up marginally, and look at position number two and number seven and number nine. These are big losers. So I was always astonished that people didn't do a And again, you know, as a trader, you get a you get a daily P and L. So you know exactly by the way, when I be and it was sneaker net, you would download your it would export the trading program to the spreadsheet.

You downloadload that to a three point five floppy and you would have to walk it into the head traders office. And so you can engage in fraud for three days, but eventually the trade wouldn't clear. It would kick out. I always thought that was like a really deeply flawed methodology, but I think that I guess the thought process was, hey, we have three days for you know, before the trade bounces,

how much havoc? And can anybody anybody reek um? But that keeping score side, I'm astonished that more people don't do that. It really is astonishing, and it's astonishing how much can be learned by keeping score and tracking the

various elements of your trades and your decision making. But one of the patterns I think you're referencing is that many times people will be profitable on a majority of their trades, but the losers go too far, and so the average size of their losing trades becomes much larger than the average size of the winners, and that drags them down. So it seems like they're winning, they have more winning trades and losing trades, but in fact the

pan l is not winning. That conversation is what led me to the world of selective retention, selective perception, and and just the wait, how do you not recall you have this giant, flaming whole in your portfolio because they're conscious or subconscious has suppressed it and they don't even want to. It's too painful to think about amazing people only only remember the winners. Which leads me to an

interesting question. Have you ever worked with any individuals who were not professionals with just UH investors or or private UH I don't want to say private traders, but family all. It's just things like that where it's essentially a non professional managing their own assets. How have you done much

of that? I haven't done much of that, And many times with the non professional, the ratio of what's a trading problem and what's the psychological problem becomes skewed, and they make many more trading problems precisely because they're not professionals. And so what they really need, in my view, typically is mentoring. They need someone to teach them the ropes about financial markets and decision making rather than a psychological coach.

That that's really interesting. I gave a presentation at this point, it's now years ago, called Romancing Alpha and Forsaking Beta. I won't mention the organization, but they're not. They claim to have a huge wealthy base of clients, but they're notoriously cheap about um about paying outsiders to come in and present. They like they dangle. Look, here are billions of dollars. Come give a speech, um, But was what was fascinating was the beforehand. I did some research about

all these people with thirty million dollars minimum massets. What are they investing in and how well have they done? And everybody could tell me we have this much private equity, we have this much hedge funds, we have this much venture capital, and none of these people could give me an actual forget audited, how have you done relative to your benchmark? Not a single person can answer that question. So that's where where the phrase romancing alpha forsaking beta

came from. If you are so busy chasing out performance but you have no idea what your actual benchmark is, it's astonishing. And to me, that's an individual era. I can't imagine any institution could tolerate that sort of basic flaw for very long and and business true. And as you know, in the professional world of finance, we look at risk adjusted return. How much are you making per unit of risk that you're taking? And it says something

about professionalism when someone can't can't answer that question. Answer the question right if if if you are unaware of forget risk adjusted returns. If you're unaware of your relative performance, what are you doing? And and that's before you get into and what are you paying in fees for this relative performance or under performance? It's really um, it's really fascinating. So do you you reference mentoring? That's one of the standard questions. Um, we talk talk about what why don't

we jump right into that? Did you have any early mentors, either on the trading side or on the psychology side. Well, definitely on the psychology side. In graduate school, give us an uh. One of the clinical supervisors I worked with who has since passed on was Dr Thomas Riley, and he taught an approach that was not common at the

time but has become more so recently. That looks at how the different approaches to psychology and psychotherapy are doing things in common rather than being different for each other. On the surface of what a Freudian does and what a behaviorist does quite different, But in fact he was looking at the common elements and helping mentor graduate students by making the most of the common effective ingredients of psychology.

You can tell me they're still Freudians. There still are Freudians. Absolutely. I was unaware that that's right there, there definitely are and um, that was a big influence on me. So in other words, fine, what what the common ground is that works, regardless of the ideological silo it may have come from. Yes, So, for instance, a common effective ingredient across different approaches to therapy would be the quality of the helping relationship. We find that what what is the

helping relationship? Helping relationship is as a psychologist, your relationship with the client and how you engage and how you interact with them, and whether you're using a behavioral approach or a cognitive approach or a psychoanalytics approach, the quality of that relationship ends up being the best predictor of outcome. And so by focusing on those common ingredients, we can become more effective whether we're using approach A approach, B approach, c.

So that was a big influence on me. In graduate school of psychology. In terms of markets and trading, a big influence on me was around the year two thousand when I began inter acting with the UM fund manager Victor Niederhoffer and education of a speculator there you go, yes, and he really introduced me to a more quantitative and

scientific approach to markets. And it was as a result of interacting with him that I began conducting my own studies and supplementing the discretionary decision making that I had done with more quantitative information. So what's fascinating about him is he's a guy who who amasses a fortune and then blows up regular every cycle, like regularly. I don't

know how he manages to do it. Um. There was a very infamous Malcolm Gladwell column in The New Yorker that he was the I think, I'm sure I'm missing remembering this, but he is the um, the foil on the other side of the trade from not seem to lab if if if I am, I'm remembering that correctly. Yeah, I do recall something sort yes, So two totally different styles. One is taking very little risk other than the insurance premium for the outside black swan performance, and the other

is capturing the rent and hoping the house doesn't burn down. UM. So when one's losing the others, they very much a mirror images of each other's um trades, or at least way back when they are exactly exactly uh. And it's a shame that he's become known for those blow ups, but he's been wildly successful. I mean, he's a squash champion. I believe he was a chess prodigy, and maybe he

has multiple talents. He's a renaissance sort of guy, isn't he? Yes? Yes, And I was just going to mention that that one of the things I learned from him was that you can learn a lot about markets by studying areas that have nothing to do with market. So he would look at ecology, he would look at, you know, the world politically, and he would be able to derive patterns and of human behavior that he could apply to markets. And and so it broadens my thinking in many ways that that

makes perfect sense. Um, is he still trading? Is he's still active? I believe his own capital. I'm not familiar with what he's doing commercially. Um. I think you're right from from what I've heard through the grapevine, but always been fascinated by him. I think he's one of these guys that are just so multifaceted. I find that intriguing. Yes, Um,

all right, so we we discussed your psychology and trading. Uh, mentors, what investors influenced your approach to trading and what investors have impacted the way you look at the world psychologically. Probably the greatest impact on my practice has not been

from an investor. It's been from philosophy. Um Early in my college career, I read the novel The fountain Head by Iron Rand, and what struck me about the novel was the portrayal of a character as an ideal who was doing something unique and special with integrity and making the most of who he was. And my immediate thought when I read that novel was what if psychology could help people not just deal with mental illnesses and problems, but what if psychology could help people become what they're

capable of becoming. And that influence ended up steering my work with medical students and residents when I did counsel with them, and then subsequently with traders and portfolio managers. The fountain Head, well, yes, and and the not is why, I asked, because that's the one that comes up so frequently, and I fountain Head was yeah. The fountain Head was

the first book of hers I read it. I did read Atlas Shrugged and others, but what really inspired me was the portrayal of an ideal, and I sometimes refer to my work now as therapy for the mentally well, that I'm trying to help sense help normal people, people like you, like me, who may not have diagnosable mental disorders, but who are capable of becoming much more than they are. And so that was a major influence on me. That's interesting. Yeah,

I read un Ran backwards. I started with Atlas Shrugged. Hated it. It's like a nineties seven page speech in the middle that's long and tedious and pedantic. And I should have, in hindsight, if I go back in time, I would have started with fountain Head, and maybe I'd have a different perspective. Most of my criticism of her is from Atlas Shrugged, and I know people love that book. I just like, oh my god, this is Warren Peace,

only not as interesting. But but you know, I respect people who have of a totally different take on it, and maybe, uh maybe maybe I have to revisit it when I have time. For eleven I believe it was like eleven pages memories. It's a huge book. And one of the takeaways the positive takeaways for me about that book is outlining the philosophy in terms of the importance

of respecting objective, reality, objectivity, self reliance. I mean I I certainly recall there's a lot of positive positive don't wait for the government to rescue you, don't wait for the community to save you. There are a lot of things in there that certainly are applicable to traders. Hey, if you're waiting for a bailout, unless you're you know, City bank, it's coming. So so that was certainly an

interesting thing. Since since we um any other investors we want to talk about as as being influences or we want to jump right into the book segments of a book, portion of art. Well, well, I'll mention one of the investors. I have worked for a number of years at Tutor Investment for Tutor Jones, Yes, who founded the firm famous for calling the seven crash and trading. There's a video

somewhere out there of him. Actually I don't recall if it was the day of Black Monday, it was basically him all right, this has gone far enough, let's start buying him here. And I think people look at him like he has two heads with that, but really really interesting guy, really interesting background, and he certainly has evolved over that time period. But has been an inspiration for

many traders. But one of the things he said to me early on during my time at Tutor that really resonated was if it's not in your calendar, it's not part of your process, meaning meaning meaning that if something truly is part of your process and what you do, then it has a place in your calendar, in your life, in your daily skin. Yes, that our processes, when they're

developed to the fullest, really are positive habit patterns. There are things we do repeatedly in the same way with fidelity, and so by putting something in the calendar, you're cementing it as part of your process. And that resonated with me because many times people have good intentions, they set a goal, they write in their journal New Year's resolution, yes, but they never get down to the specifics of implementing

it on a day to day basis. And so that was a piece of advice and a perspective that I've found very helpful at working with traders. So so let's talk about books a little bit. You mentioned on Rand's fountain Head as a book that positively influenced you. What other books do you enjoy, be them fiction, nonfiction, market related or or anything else. Well, certainly, like many traders, I've found UH influence and inspiration from Jack Schweger's Market

Wizard's Books. First first book I was ever given as a trader, and I reread it every five years. YEA, love it, love it. And what it really cemented for me was that there was no one formula for success. That many of these very successful traders were successful because they had unique, distinctive skills and they found a way

to implement those skills in financial markets. And so that led me to a strengths based approach where I tried to figure out what are the trader's greatest strengths and how could they make the greatest use of those strengths in the trading they're doing. Interesting? What what else? Tell me?

What else? You've really enjoyed reading UH books in general in the field of what's called positive psychology, and of course, the the first researcher, the first writer who started all that was Abraham Maslow, whose sty of Needs studied what

he called self actualization. But in recent i'd say in the last ten fifteen years particularly, there's been an emphasis on studying mental health, on studying the positive aspects of human behavior and performance understanding strengths, and there have been some very thought provoking pieces of research that have been

conducted under this rubric of positive psychology. Martin Seligman is a key resort, key researcher in that area who has looked at strength and how those impact physical health, how those impact emotional well being. Uh So, those are some of the directions that I've found from recent reading. Has Seligman put out a book or is it most as a number of them? Yes, he give us the one

that you think people might find accessible. Um, I would say there is probably the most accessible is there's a website on positive psychology and if you google positive psychology you'll find it and it summarizes his works in addition to the works of other psychology researchers, and that's a great way of finding an introduction to the field. Any of the books you want to mention before we move on to the to the next few questions, No, I

think I'm ready for the next question. Um. So, since you've joined the industry as a trading coach, what what's changed? What do you think of the most significant changes? Um? Since you became a coach, one of the biggest changes, particularly in the hedge fund world, has been altered risk tolerance among investors in the post two thousand eight world,

meaning decreased risk, much decreased risk tolerance. If you read the market Wizard's books, it was not unusual for people to have double digit losses and then they have double digit and triple digit returns. No One, no one, no one talks in those terms anymore. The focus is much more on risk adjusted returns than absolute returns. And if someone is risking only a few percent and can make five to ten percent, they're happy with that, particularly in

a zero interest rate world. So the demands of investors have changed, and that has altered the risk mandates for traders, and that has affected coaching because it's no longer about making as much as you can. It's as much as as you were saying before, it's as much about the defense as the offense. That that that's really uh, that's

really quite interesting. I I have a friend, a different friends from the one who was you know, up um, who every time he gets a major clients redemption or a series of inquiries and questions, and you know, like a lot of hedge funds, they're gated. He says, typically when a position I've had on that has been making money or has been losing money, Um, but is still sound when there's like a crescendo of redemption, he says.

Back to the response from other people, he goes, invariably, that's the nature of the trade and it's all upside from there, he goes, I've had redemptions every few years. Is I'll hit a streak like this and I'll send money back. And so my answer is always questioned him, is always, well do you let them know, hey, by the way, you missed an extra note. Once they redeem they're gone and there's no reason for me to rub um, you know, add insult to injury. Not only did they

not make money, but they missed the upside. That's right, that that's pretty fascinating. UM. So we talked about the changes, the risk of justed changes. What do you see as the next shifts that are coming along. I think the next shifts are going to be a continuation of what we've seen recently in UH longer term investing investing through UH maximizing returns from different factors as opposed to active

timing of markets. So you're talking more factor investing in smart beta than management as opposed to the active trading. I think there will always be a niche for active traders and for people who are talented at active trading. But as you alluded earlier, it's difficult to justify the fees when the performance is not exceeding the average performance of the more passive asset management approaches. So you keep referencing the algorithmic side of it, and software is eating

the world? Are our traders are endangered species? Is Are we going to ever get to a point where it's just computers trading or or is there always going to be a slot for for humans exercising judgment to try and figure out a way to to capture some profits. Yes, and I think already we've seen, particularly with respect to market making, that the lions share of that business has gone to the machines. They're simply able to process more

information quit more quickly than human participants. Now, as we widen the time frame and we go from higher frequency trading to investment, then I believe there will continue to be a role for human judgment algorithmic trading. At the root of it is science. It is studying the historical patterns and financial markets that recur and profiting when those

occur in in the present. At certain junctures, the future becomes unlike what it's been in the past, and the algorithms, by definition, only know the past and the patterns from the past. I think there is a role for human judgment in determining when a unique future is occurring, but I do believe that's becoming a more specialized world and and the issue is machine learning. Theoretically, these machines can identify when when the market structure or the conditions change,

that's right. What I'm finding is that many of the most successful discretionary portfolio managers are ones that have quantitative aspects to what they do. So it's not all machine and it's not all subjective judgment. It's using the machine for enhanced information and then making better decisions based on the information provided by the machine. My analogy for that would be a fighter pilot who has all sorts of computerized equipment on board and is able to gauge very

quickly weather conditions and where the enemy is located. But at the end of the day, it's the pilot who ends up making a decision about attacking not attacking. So what do you do to keep mentally fit as a traitor and as a psychology what do you do outside of the office for relaxation. How do you you referenced earlier the balance that's needed. How do you personally make sure that, uh, you don't become overly um either burnt

out or overexposed to anyone aspect of your job. Well, And to get back to what I was mentioning earlier, in terms of the psychological research on positive emotional experience, uh, those four areas of positive experience. Happiness doing things that you have fun with, Satisfaction doing things that are deeply meaningful to you, Energy doing things that are stimulating, maybe intellectually, maybe physically. And affection doing things that bring you closer

to the people that matter. Give me those four again, Happiness, happy, satisfaction, energy, and affection, and those are the four big drivers of positive emotional experience. And so I want to be firing on all those cylinders every week out of the year.

And I want the traders I work with to be firing on those cylinders, to be doing some activities that bring them happiness, to be doing some activities that bring them fulfillment, to do some energizing activities, to do some activities that bring them closer to people that they want to be close to, and that keeps people fresh, It keeps them alive and energized, even when the profits aren't coming. I'm gonna go off script from my my usual ten

favorite questions to to bring something up. The past year, I've read a million articles about meditation and traders meditation on Wall Street. How much of that is hype and how much of that is is real? Do you do you see a lot of traders meditating. Yes, you do, Yes, you and you find it valuable. Yeah, I've seen it be very helpful to traders. And the way in which it's helpful is that it induces a state of calm focus.

So it's a way of gaining self control, and in a meditative state, people are able, for instance, to mentally rehearse different what if scenarios to prepare for the day ahead. When you've meditated day after day, week after week, you become very good at those skills. And so during the trading day you can take some deep breaths, get yourself very centered, very focused, and it helps with making more dispassionate decisions. I reference the jungle combat instructor I worked with.

There was another former Army range year I worked with. And one of the things I found fascinating because I was always curious, Hey, tell us about some missions, tell us what I was always fascinated about the prep work they did. And one of the things that I learned from them was it wasn't just UM, what's planned, B, what's plans? CE, what's planned D? There was there was always that. It was the process of envisioning your emotional

response to when things go wrong. What happens when we were going through the door A, but the egress is blocked, Not just what does my plan be to get out? But how am I going to feel about that? If you can anticipate your emotional response, you can manage it when it actually comes. I thought that was fascinating. And the meditation is sounds somewhat similar to it's a tool for mindfulness to be more self aware, and so it

can be very helpful for traitors in that respect. Interesting and and now we're down to our two favored questions. So if if some millennial came to you and said, I'm interested in a career as a trading coach or as a psychologist. What sort of advice would you would

you give them? Well, Uh, if they were interested in working as a performance coach, whether it's with traders or other performance professionals, I would encourage them to get the best grounding in psychology possible and start with that and then apply to the populations of interest. And I would encourage them, in particular to to develop a grounding in that positive psychology that I referenced earlier and the research

there and as well as traditional approaches to psychology. And and our final question, um, what is it I'm gonna say that again, And our final question, what is it that you know about performance coaching today you wish you knew when you began all those years ago. Probably the greatest le uson that I've learned is that performance is every bit as much a function of maximizing your strengths

as addressing your weaknesses. And there certainly is a role for correcting our weaknesses, for identifying what we do wrong and and learning from that. But at the end of the day, what makes people distinctive are their strengths, what they do superlatively well. And it's surprising how people are often unaware of their greatest strengths and they don't tap those regularly in their personal lives or in their decision

making in financial markets. And so by focusing on who this person is and what they're really good at, it allows me to help them leverage those talents in their financial decision making. Brett, this has been really quite fascinating. I know it's a subject that people don't get to hear about a lot, and I suspect people are really

gonna enjoy listening to this. And for those of you, for those of you who are still with us here at the end, UM, be sure and check out the rest of the other hundred plus podcasts we've done over the past few years. Look up an Inch or down in Inch on Apple iTunes and you'll see all the rest of the conversations we've had. Uh, be sure and check out Dr steam Barger's blog at trader feed dot

blogspot dot com. Is that UM, I would be remiss if I did not thank Michael bat Nick, our ahead of research, Taylor rigs are booker, and Charlie Volmer, our producer. Be we love your I forgot to say this during the broadcast portion, so I'll say it now. We love your comments, feedback and email. Be sure and write to us at m IB podcast at Bloomberg dot net. I'm Barry Ridolts. You've been listening to Masters in Business on Bloomberg Radio