Market Wizards

Transcript

All right, good morning. Hi everyone. Um, so we've done this last year and I think every time we do this we're both very keen traders. This is what we do for a living. Um we like to invest short-term as well as long-term and this is really like an opportunity for us to think through some of the lessons and philosophies and growth that we have every year. You know, last year I think we we examined some of the timeless aspects and we don't really want to talk about, you know, the market today and what's going up or down over the next week, but what we've learned is an approach and what's seemed to worked over

many different markets and and different horizons. How about we start with uh high stakes cap and we'll be just discussing them. Is that a trade style that you like? >> I mean, high stakes cap for for the ones that don't know, I mean, he's such a he's an kind of an incredible trader by by fact. He's done incredibly well and and his philosophy, you know, he kind of went on Twitter and kind of explained it a little bit, is you know, it actually doesn't matter how well you do over time. If you can pick an asset, you size it well and it 10x's, that's that's that's that's really all you need. Like the way that I read his philosophy is like one trade's all it takes to to change level and uh yeah, we

were just talking about it, thinking about his approach because, you know, been at Celina for for for a year now, see how Jordi kind of approaches uh trading and kind of capital allocation on a on a shorter time frame and that's really not the way that you you kind of think about this, so how do you approach it? >> Look, I mean, the the one balance that you always want to keep is conviction versus realism. I think some people get very philosophically convicted on a trade or on a thesis, especially if it's a fundamental one.

like, oh, I think this is a good asset. It needs to do well. Or this is a bad asset. It needs to do badly. Once you get really philosophical about it, that can work and I think it's been shown that um you know, high-stakes cap might put a position on and leave it for months and just wait until, you know, market does well versus sort of continually compounding 10% edges here and there. And psychologically, it affects the trader very differently. I think for some people, if you're risk-averse and you don't want to have the psychological fluctuation of a massive position just moving around for

months, it can be generally easier to find like singles and just kind of keep knocking them out. And what I've generally found is that the best way for anyone to trade is to follow the thing that matches their monkey brain. >> And you play to your strengths, basically, right? >> Not only hit your strengths, but avoid your weaknesses. I think that's even more important. That's literally the thing that just kills any trading progression. You know, I've talked to so many young traders over the years that they'll have a run-up. They'll say, you know, I had 50K and I ran it up to a million. Clearly, I know what I'm doing.

Like, you know, the odds of doing that are are very small. But then, you know, I had a bad risk management and lost it all. So, give me a job. Okay. I mean, there there is something to say for being able to even >> Yes. >> ride a wave to to that extent. >> You did something right. >> You did something right, but um the path dependency of outcomes means you can never draw down back to zero cuz that just like resets the whole game. You're back to square one. And I really feel like a lot of people get a bit too caught up in com- like the the way up and forget the the you know, the path can kill you.

And when I talk about monkey brain weaknesses, I guess the main ones are, you know, one FOMO is probably the most famous one. although I would say like FOMO is common and so is greed. I don't know which Maybe FOMO is a bit more common than greed. >> I think it's more more common. >> But, there's definitely a type that they're up a lot, you know, your friends put on a trade. They're up already like two, three X on it, and you're like, "Okay, are you getting out?"

No, no, no, it's still going up. I know it's still feel like it's never enough that they can just take profit. Which is, you know, sometimes getting reinforced because once a while, yeah, it'll keep running. >> That's the idea of reinforcement is key here because once you get rewarded for an action or or a way of trading that is actually suboptimal, you will keep doing it. >> Yeah. >> And that's the real problem. That's why you actually have a lot of people that probably do incredibly well, and they are more kind of like results oriented.

They miss the idea of the process. And thank you. Uh you miss the idea of the process and and they actually don't understand the fact that, you know, what actually got them up there is exactly the reason they'll end up back to zero. I think if we look at uh another one which is, you know, sizing too small when you have a big edge and being risk averse is another thing that for certain personality types holds them back. I mean, we both have a a common friend who is is a billionaire, but then wastes his time sometimes making bets that are like $1,000 kind of bets,

which just seems like a very suboptimal way to compound. Um so, that personality type is probably the least dangerous, but also not never going to sort of be able to keep pushing pushing edge. And then the fourth one is the worst one, which is like a lot of uh people get very biased, and their monkey brain wants them to avoid objective reality. And to a certain extent, all of us are not really fully objective. I mean, we're all seeing this room, but what we're actually seeing is just an abstraction of a bunch of light particles that are flickering all over

the you know, all over the walls. So, there is no fully objective, but I think we all know people that you know, if something is not pleasant, they don't want to look at it, or they want to reframe it in a way that makes them feel better. I think you know, sometimes it maybe comes from childhood where you you just sort of learn to cope with bad situations by restructuring reality in your head. And I would say this is probably the most dangerous kind of ego weakness. And before being an investor or trader, this has to get fully overcome

because you really start to make larger and larger compounding mistakes once you have a bad view of objective reality. >> And I think that links with the idea of, you know, to be an incredible trader, you really have to just shatter your ego. You need to understand and that's a difficult uncomfortable process. Like you you really need to really evaluate your views of the world. The market will very quickly just rebalance you correctly. And and you need to be humble enough to readjust when you when you have and that's a very difficult process. As you said, the monkey brain is not is not built to to be doing this.

And then the other thing that we've spoken about you know, there's the mathematical kind of expected value general way of looking at it and then there's the more like human utility curve where it's kind of well known in psychology that losses just hurt a lot more than than wins. And if you get a 2x versus like losing all your money the actual like human utility of that is very different than the mathematical outcome which is kind of you know, in equilibrium.

And I think I've kind of come to you know, even though I started as a poker player and was always trying to calculate expected value because there's always another hand. You can just keep playing hands. I think if when you're running a portfolio that that approach which is you know, what SBF was doing infamously it doesn't really like map so much to the outcome range that you want and ultimately if you really want to maximize your human utility you just want to avoid huge drawdowns.

You don't necessarily need to like you know, make a million X because the difference between 100x and a million X is is not going to be profoundly different. And I think the other thing that I've spoken about you know, in the past which we can break down a bit more um is like the the growth shouldn't happen even too quickly. I think generally the way that you get the most pleasure out of life and out of your like success is just kind of keeping it going year after year.

And I've talked about this like approximate 2x every year as a as a one benchmark that I feel ties nicely with like the human psychology where if you keep 2xing every year you're getting adapted at a pace where it's still exciting, you know, you're still kind of leveling up in the game but you're taking your time and not trying to force an outcome which I think a lot of the crypto traders especially a bit less than TradFi but the crypto traders are always trying to jump up 10 levels right away.

>> Yeah, I think that links with the underlying kind of assumption that you have which is right that there's always an next trade, right? You don't have to make 20x this year and then you're done. You have enough conviction in in your ability to say look, even if I don't take this one, I'll take the next one and over a year's time frame I'll probably identify a few opportunities that will get me to that 2x. um one of the key elements for doing this well is differentiating between a conviction trade that should actually be a like a 98% trade and I don't go above 98. I feel like there is no 100% trade and if you don't leave any space

for how things can go wrong that will always get you in trouble. But there's 98% trades and then there's like 90% trades. When I look at my portfolio over the last year, I feel like the mistakes that have costed me the most are a couple trades where I tried to have a 98% conviction because it's it looked so clear to me that you know, there was some structural trade there. Oversized it and then you just end up in a big drawdown where it's hard to even disconnect the plug.

those are usually the the mistakes that can you know, cost you millions and also just get you stuck where your your time is spent managing a trade that you could be doing something, you know, like a new a new more exciting trade. >> Was that Are you talking Are you thinking about a short or a long? I think I know what you're talking about, but are you talking about a short or a long? >> It's short. It's short. >> It's always a short. That is the most painful. >> It is short and it's the most painful. We've talked about shorting last year. Like shorting is it's funny like on the one hand, obviously most people go long. Very few people go short.

And that has two very important side effects. One is that most of the time everything is overvalued. By definition, everyone is preferring to long. So all assets are usually somewhat overvalued. Now, it doesn't mean they're going to come down. Like you look at the US stock market, it's just overvalued on PE ratios and everything, but just keeps going up because everyone just keeps going long and then occasionally you do get like, you know, some repricing event which is where the shorts finally have their you know, their payday after just eating all these like easy easy longs.

so going back to what we talked about expected value from an expected value standpoint, you you want to short because everything is expensive. >> But then structurally the game is against you when you try to short it. When you go long, for example, there's no liquidation price if you're fully collateralized. When you're short, there's always a liquidation price. >> You get infinite losses. >> It doesn't matter how much money you have. At some point, your margin runs out if if if like the path dependency goes up.

So, you really have to snipe the timing right on your shorts. I think we've talked about how like to really do a lot of shorting, it's a very advanced game. It's not just like, "Oh, I like this. I heard about it. I'm going to short it." >> last year you called it an art, more more of an art than a science. >> It's a dark art. >> like a dark art where you know there's money to pick up. Everything's overvalued. Um and you know, we we've talked about Fikky before. He he loves shorting all the crypto traders and trying to make them go wage cuck so that they can be productive members of society. And you know, it's worked for him in some

cases, and he's tactical enough that he can navigate it. But even for him, you know, I would imagine that if you let himself trade more on the long side, it would generally be easier. And as as you guessed, my worst trades usually are on the short side where you don't even know if you can get to the long term. Like you start putting on a short, it starts going against you, and you're like, "Okay, is the market going to stay redacted more than I can stay liquid?" And at some point, sometimes you just kind of cut the cord. And those are usually like the worst losses. So, um still learning on that side. I think

next year, hopefully I'll have different types of losses in shorting. How about you? What's been your worst >> I think your trade your worst trade has been a long as far as I understand over the last year. >> Of course. >> You saw an asset that you thought was undervalued. >> I did. >> You piled in. >> What happened, Dim? >> I really this was not a good trade, Jordi. >> This was not a good trade, but >> it was exactly the opposite of what you're describing on your short. I had like at least a 98 percent conviction on this thing working.

And I felt I had a really good understanding of like all the parameters that go into this trade. What can work, what may not work, what's my exit plan. What's my downside? >> You ended up being one of the largest holders of this thing. >> I was the largest even in terms of open interest, which is like even worse. I could I I got to a point where I couldn't even exit cuz I was sizing so much as this thing was going down that I get >> You lost all flexibility to even be able to get out because as soon as you start getting out the rest of your position is marking down even more.

>> Correct. And basically what what happened with this trade is I was expecting a certain catalyst to come. That catalyst was not coming. I started eating it day by day, day by day. The asset goes down, so clearly I have a misunderstanding of flows. There's something that I'm really missing. Someone had tokens that I thought they didn't. And as I'm waiting for this catalyst to happen the coin starts going down and I get into this position where I'm holding a such a large amount of this of this thing that it becomes extremely you know, difficult to manage. So, I did a few mistakes, right? One was mismanagement of size. I oversized it. The second one was I had a

misunderstanding of timing. And the third one, I actually had the wrong level of conviction around the catalyst even working. So, all three prongs of what I was thinking was defining in 90% rate we're actually off. I mean uh it reminds me of there was a a recent trade that got quite quite popular which was uh this guy Looracle on Twitter traded a lot of Pons which is you know the hyper liquid coin that that was uh that was that was a Robinhood coin.

>> it's a Robinhood uh launchpad that got a ton of success. >> such a huge position. He was down millions and trying to manage this position. I know you tried to do something similar. Sometimes >> you end up trying to change reality >> Right. >> and work for your bag in the real world. Forget the trading world. You're like, I am in so deep either on this long or short. >> I'm becoming an activist. >> I I need to be an activist investor at this point. In his case you know he uh he wrote his own competitor >> to the token. He just chat GPT'd his way to like a whole competitor to show people that hey like

you can just one shot this whole thing. >> Yeah. On the long side >> And it works. >> On the long side you you become an activist investor like in my case. I talked with the team. I did everything I could. On the short side you become a professional hater. >> Professional hater. I mean it worked for him somehow. >> for him. Yeah. Once once you muster all the courage in the world to become a bit more activistic you you increase your chances of success. >> Yeah. I mean there's there's definitely levels to uh to getting involved and as we're seeing like it starts to become more and more interesting to try to influence

the trade where you're not just looking at the chart and trying to predict where the chart is going but you know getting involved and trying to make the chart >> flow in a certain direction. So we'll see if we can do more activist investing, uh hopefully more successfully. And we'll be with you guys here next year and we'll we'll share some updated thoughts. Thanks, guys. >> Thank you, guys.