Stories of the Insitutional Past #15
Paper vs. Real Trading
Most of you know how my name, Paper, came to light. It was mostly the result of pointing out wannabe traders in fintwit proclaiming to be big macro punters. Paper trading is nowhere near the actual experience of taking risks. No comparison even comes close. It is possibly like any other job, where theory never trumps actual practice. Let’s face it: it’s so much easier to look at markets and come up with trading ideas than to have to put those trades on and see your PnL fluctuate daily. After all, most strategists would be stopped out if they had to run their yearly projections.
Rather than giving my own views on markets, which I might or might not run in reality, I focus on tools and principles in my educational papers. In addition, I have made my momentum and reversal model available for those who want to explore technical patterns which are unbiased and run systematically. I think that’s fair play, and I hope my readers will use it fully.
It took me many years to take strategist’s opinions with a grain of salt. I remember them frequenting the offices and giving us a full rundown of their views and trades. Rather than take them as a given, it’s always nice to talk through the ideas and reasoning, which helps you frame your own opinion. One colleague of mine had a particular affinity for testing strategists and their opinions. He mostly used their trading ideas and ran a small portion of their book, taking the other side. It didn’t always work, but he would usually make money out of it by selecting those he particularly liked to see as a contra indicator.
The meetings with him participating were hilarious. Once a strategist or economist would start presenting, he would typically start slowly and quietly singing the lyrics of "The Lion Sleeps Tonight", a classic song originally written and recorded by Solomon Linda and his group, The Evening Birds, in 1939.
A-weema-weh, a-weema-weh, a-weema-weh, a-weema-weh
A-weema-weh, a-weema-weh, a-weema-weh, a-weema-weh
Now, this would not always happen but he would particularly love performing this act when someone would be especially certain of their views.
The whole specatacle would typically culminate with him hurling out a very loud “wheeeeeee”, which would make everyone just fall immediately silent.
Then, the questioning would start. “How can you be so sure of this view?” The presenter would mostly feel irritated and start explaining their stance, to which my inquisitive colleague would start grilling them as to how they would structure a trade for such a view, how much size they would run this position and where stops would be placed. 80% of all presenters would struggle with those questions and just try to swerve; others would humbly note that they are not running risks and that those opinions are just, well, just their opinions.
Our firm would grow a bit of a reputation after a while, with many strategists and economists refusing to present, given prior experiences. It was understandable. A small fraction actually took the challenge full on and prepared themselves for the onslaught of questions, which always resulted in very informative meetings.
The point many fail to learn is that an idea without skin in the game just remains an idea and will never deserve to have the same weight as a view morphed into a position and risk. I guess that’s why many strategists run a virtual or small pocket money portfolio on the side these days. To me, this adds to credibility regardless of the ultimate outcome.
How much risk? To quote Michael Jordan when asked how much they should wager on a game of golf, “Whatever makes you uncomfortable”.
Bullshit is, unfortunately, everywhere, and it’s very damn hard to distinguish what’s real and what’s fake. Over time, you build a sense for it, but even then, you will never be totally immune to it.
I have also written about this aspect in the article below.
Be a healthy sceptic to people’s opinions and don’t take any view, regardless of how respectable someone is as gospel. Work on your senses to learn and distinguish opinions from bullshit. Track what people are saying and how they react when things don’t pan out how they envisage them to be.
And by all means, work on your ideas but give them life, a small existence and always, always be nimble.
Very good article, thanks!