Guest post by Colm Fitzgerald
Like most of you reading this, I’m a big fan of Yvan’s ‘Trading Composure’ tweets. His tweets remind me of my mindset when I was a professional trader―or more precisely, the enormous gulf between this mindset and the mindset of ordinary people.
I loved trading and had been trading since I was 15. But on April 30th 2008, I retired from a position as Head of Quant Trading in Bank of Ireland Global Markets. I wish there were 100 hours in each day so I could still trade. In a way, reading Yvan’s tweets makes me miss it more. But my dominant passion since then has been education. What I care about most in my work is that education for young people today is better than it was for me. I had a very fortunate trading career and I feel a deep sense of a need to give something back.
Learning to be a Trader
How do you become a trader? The starting point can be trickier than other careers. Trading is about making money. But suppose you were looking to hire a chef and in the interview, one applicant only said they wanted the job to make money, you probably wouldn’t hire them. However, if they wanted the job because they were passionate about cooking and wanted to make their living that way, you’d probably consider them. In the same way with trading, traders need to be passionate about what’s involving in trading well, yes money too, but the balance is critical.
Many also want to be a trader for the social status or otherwise that they perceive it to give. There’s often a desire to have a ‘big man’ ego. In my experience, these people mostly turn into train crashes. Followers of Yvan’s tweets will no doubt note his humility. Ego and trading don’t work together. As F. Scott Fitzgerald wrote,
Big men can do nothing but sit around and be big all day.
This can be a tough lesson to learn because it’s not really on any education course in any institution. Most traders, in my experience, learn it from their own experience or from a mentor. As part of a psychology research project, I once interviewed about 30 investment and risk professionals to ask them their perspective on what were the key psychological traits needed to be a good risk taker or risk manager. After interviewing 19 of them, I noticed only one trait was mentioned by all 19. Yes, humility! When I interviewed the 20th, and she mentioned humility, I asked her why she considered that important, especially because media and ordinary narratives that we hear are often mostly about the importance of confidence. She replied that “it’s just too hard to work with people who don’t have humility, they can wreck your head, and they cause so many problems”. Each subsequent person I interviewed also mentioned humility. Humility is not about demeaning yourself, it’s about being open-minded. Openness is the key.
Another reason people want to be traders, and for me, this was one, they don’t want to be a cog in a wheel or indeed a manager cog of other cogs. I find that deadening, especially if there is dysfunction or toxic behaviour. I wanted the freedom to express skill and flair rather than being arbitrarily limited in the impact I could make. But that said, trading well means developing your own internal cogs and managing them too, albeit in a bigger sense, with greater potential. It still requires discipline, indeed more than any other career, in my opinion. I came across more former marines as traders than former university valedictorians.
The Old Indolence
I was lucky in some ways in my trading journey; I worked with and for some amazing people, some of whom helped me in ways I find hard to put into words and to whom I’m beyond grateful. Of the many things I have to thank them for, one is that they helped me validate something to myself – that trading is mostly about what I do rather than what someone else does for me or around me. My slavish self, like the slavish self of others, has, as Walter Lippmann put it,
the old indolence of hoping that somebody else had done the world’s thinking once and for all
My slavish self thinks I should just need to do this or that, follow this reasoning or that reasoning, ok maybe with effort, and then I should get what I want. This is a common mind frame in everyday life, but I learnt a trader needs a radically different mind frame to be successful.
Developing Natural Psychological Limbs
My better self has learned, often the hard way, often the very painful way, that I am limited in what I can learn from outside myself, and that what I can learn, that is truly valuable, I can learn only from inside myself. I can be helped with this, but I have to do most of the heavy lifting. Yvan’s tweets regularly remind me of that, one reason I love reading them. And, often reading his tweets, I’m reminded of Schopenhauer, who wrote…
A truth that has merely been learnt adheres to us only as an artificial limb, a false tooth, a wax nose does, or at most like a transplanted skin; but a truth won by thinking for oneself is like a natural limb: it alone really belongs to us. This is what determines the difference between a thinker and a mere scholar
To become a good trader, you need to develop your natural psychological limbs! This takes patience, courage and, crucially, self-belief.
The Secret Self
Stephen Covey wrote,
We all live three lives: public, private and secret. The secret self is where the heart is, where your real motives are – the ultimate desires of your life
I use the analogy of the heart for Stephen’s concept of the secret self, or more formally ‘nous’, because the English word ‘heart’ can have numerous meanings. To me, our hearts or our nous is the quiet place inside every one of us that only we have full access to. To become a good trader, in my opinion, you must develop your heart/nous / secret self.
However, as Stephen Covey also wrote,
Courage is required to explore your secret life because you must first withdraw from the social mirror – the reflection of ourselves that society feeds back to us but may have little to do with our inner selves. We get used to the view of ourselves in the social mirror. And we may opt to avoid self-examination and idle away our time in a vacuum of reverie and rationalisation. In that frame of mind, we have little sense of identity, safety or security
Why is courage needed? Because it is difficult, easy to make an excuse not to do it. And it can initially cause chaos, upset, and it can destabilize a person’s life. But these difficulties pass as we fully open to what is required and get through this initial stage. As Alexander Pope wrote,
drink deep, or taste not the Pierian spring. There shallow draughts intoxicate the brain, and drinking largely sobers us again
If you are doing this, be careful of the initial intoxication and destabilization that comes from it. This is best done in solitude/mediation. As readers of Yvan’s tweets will know, he’s a big advocate of meditation.
Many might partly buy into this, but too many think the key to trading can be found in established education in institutions. But in my opinion, this is just an illusion.
The only key to anything is in a person’s heart. Each has to learn to use our inner quiet places or we’ll likely be left wanting, and playing brutal games that often cause only trouble.
Unfortunately for me, I made this mistake, and it was hazardous and cost me. I’m mainly trying to change things in education so that others don’t have to experience the unnecessary anguish that I had to experience from making this mistake.
I began trading at age 15. I found a legal loophole to buy shares before the age of 18. I was fascinated by markets. Every day I would look up Teletext on the TV to get updated share prices (showing my age here, the internet hadn’t been invented!). But whilst I did this, I was taught I needed to go to college, and there, ‘they’ will tell me how it is really done. I’ve since learned that ‘they’ don’t exist and that ‘they’ is a construct of my slavish self.
So what happened to me? I went to university and during my undergrad, I was ‘taught’ that markets are ‘efficient’, that it is impossible to make consistent trading profits. Considering I was making money at the time, I excused this thinking that maybe ‘they’ only told students later on in their education and when I did an MA in Economics, I hoped ‘they’ might pass on this insight to me. Alas, I was ‘taught’ even more forcibly that markets were efficient in the masters.
The idea of markets being efficient is intuitively appealing in a very shallow way, that is, that all the traders will make the market price the right price, so it becomes impossible to beat the market. But when I investigated the history of this, it seems to me that this concept is, what I would call, a group-ego defense mechanism.
Earlier last century, the book ‘The Intelligent Investor’ by Ben Graham was publishing showing how investors can outperform the market. According to the book it required creating a deeper narrative of company share prices and understanding that an investor is likely their own worst enemy (if they don’t know themselves and if they are not self-disciplined). But many academics in the 1950s and 1960s then tried to shallowly ‘test’ Graham’s idea, by testing very shallow versions of his ideas, e.g. that a certain accounting ratio might help you pick better stocks, and thereby ignoring the psychological side of Graham’s work. In my opinion, these tests were completely against the spirit of Graham’s book and indeed ignorant of the full contents of it. As might be expected, none of these academic studies could consistently find easy ways to make money by simply doing some simple sums in simple narratives. This likely bruised some of those academic egos. That was until Eugene Fama came along in the 1970s and pretty much, in my opinion, said that, it’s not that you guys failed, it’s that it is impossible to outperform the market, and hey we academics are ‘smarter’ because we know that, and anyone who thinks they can outperform the market must be dumb and uneducated. This was a popular story to tell at some universities.
So today, young people today have their minds brutalised with nonsense to defend the unhealthy egos of financial market academics. That said, thankfully not all academics fall into this category and thankfully I’m not the only one standing against the efficiency concept (that said, I stand more for an alternative concept, what I refer to as a classical market hypothesis). In financial markets themselves, the concept of efficiency is considered a joke by many notable participants.
This market efficiency narrative, and the conformist and in-the-box thinking associated with it, was particularly hazardous to me in two specific incidents. Firstly, during my MA in Economics, I proposed doing my MA project on my trading model. My supervisor disliked my topic so much, that I got offloaded to another academic and he gave me different research to do. I could have easily decided that my model must be stupid. That model subsequently made millions. For example, whilst working as a junior trader for an Irish bank, I made over 5% of the bank’s entire profits over a three-year period.
The second incident was during those 3 years where I lost money over a period of six months and my position was consequently in question. This was traumatic for me. I lost self-belief at one stage and fell back on my education, my market efficiency education. Embarrassingly, one day I defended my losses by saying markets were efficient. I thought this would help, but really I was saying my job doesn’t make sense and that I should be fired, and really that all traders should be fired. My ego was quite unhealthy at this time.
Thankfully, I dug deep into my secret self and got back to incredibly profitable trading. I don’t see self-belief as being about confidence; I see it as about believing in the secrets that we secretly know about ourselves. It’s about internal, not external, confidence. There’s a gulf between the two.
FT Electric Money Conference
In August 2007, there was a ‘quant’ crash, but my model actually did really well during it. I ended up in the Financial Times and then was invited to speak at the FT Electric Money Conference in New York. So many big names also spoke at it. For the first time in my life, I felt I knew how to trade, but at the same time, the challenge in it disappeared and I had been doing some part-time lecturing and my gut feeling was to get out. I figured trading is like a professional sporting career, you have to be very psychologically fit for it, and being young helped. I also figured getting out on a high was a good way to finish. That said, I really miss it, but life is also short and there are always competing interests. I don’t regret my decision.
I now teach at University College Dublin. I teach a number of different modules, but two of note are an Ethics module and an Investing, Investment Psychology, and Trading module. I’m also the primary author of the Investment Fellowship Examination Core Reading of the Institute & Faculty of Actuaries. Trading opens up greater freedom and I hope my students will not just invest well for themselves, but also for other people. Many of my students will go on to manage pension fund investments and the financial wellbeing of people will depend on them.
I define ethics as an understanding of what it means to be human, what is the best way to live, and what is the best way for society to function. And I see this as a prerequisite for a trading and investment module because there is a real-world aspect and a psychological aspect to investment and without that students risk becoming poor investors.
A key aspect of the prerequisite ethics is the concept of knowing yourself. Knowing yourself was the original method of education. The true meaning of the word education was to draw out from within us, our best self. The word education comes from Latin, from ē- (“from, out of”) and dūcō (“I lead, I conduct”). The original aim of education was to emancipate those who desired it, from their slavish selves so they would be fit to take part in the governing of a democracy. Knowing yourself takes place in ‘schole’. Schole, from where we get our word school, is a Greek word that meant leisure. Not a leisure to pursue pleasure, but the leisure that best enables a person to listen to themself to know themself better and to draw out their best self. In contrast, modern education can be brutalizing and can sometimes be an institutionally violent process. Knowing yourself is difficult, but is also a more humane and life rewarding journey, indeed it can be considered being the opposite of being brutalized, it is about being civilised.
The concept of ‘knowing yourself’ can also be potentially confusing. Hypothetically asking somebody “do you know yourself” is usually met with the answer, “of course I do, of course, I know myself”. In this case, it is usually confused with knowing the person’s ego, and in fact ‘knowing yourself’ is a different concept altogether. Before elaborating on the meaning of ‘knowing yourself’, it is useful to consider what knowing a person’s ego means because this is often the erroneous interpretation of the concept ‘know yourself’.
What is ego? The term ego in normal everyday language is often used to signify somebody who had an overly high opinion of themselves or that they are behaving quite egocentrically, but technically, the word ego is the actual person as distinct from others. Ego is the Latin word for “I”. In the PBS series, the Power of Myth, when asked by Bill Moyers “What is my ego?” Joseph Campbell replied
what I want, what I believe, what I can do, what I think I love, and all that, what I regard as the aim of my life, and so forth, it might be too small, it might be that which pins you down, and if it’s simply what the environment tells you to do, it certainly is pinning you down
The confusion between a person’s ego and a person’s self can perhaps best be resolved by an understanding that their ego is the present actualisation of the potential of their self, but their self has lots of untapped potentials, and knowing yourself is principally about knowing that untapped potential rather than only knowing its actualisation. If a person only tries to know their ego, it means the best that can be drawn out from them is not even considered.
Only trying to know a person’s ego can often be a sad and wasteful journey. Many young students often go travelling to “find themselves”. But if the student is only looking within their ego, they will probably have the same experience as Peer Gynt, who finds that when he tries to find himself, he is like an onion, one layer after another is peeled off and there is no core to be found. In the play Peer Gynt by Henrik Ibsen, Peer learnt that becoming himself was about getting over himself (Johnston, 2004:7). This is because it is only by getting over the actualisation of the self that we can open up to the untapped potential of our true self. Otherwise, Ibsen considered we risked becoming trolls.
How do you know yourself?
The approach that I use to help students know themselves is based on the idea that individuals see the world partly the way they are and partly the way the world is, so they need to know themselves better to see the world clearer. All human beings are considered to have the same basic psychological make-up. Seeing the world clearer is considered helping them to best govern themselves to achieve their full potential. An individual ego becomes the filter through which they see the world. ‘Knowing yourself’ is about improving the health of their ego, whereby they can see the world closer to the way it is and can engage constructively with it.
Figure 1- Schole, educating the head, heart and the guts
This novel theoretical approach to knowing yourself uses a tripartite model of the human psyche. It was common in classical times to use tripartite models, for example, Plato’s Chariot Allegory (Plato, 2005), Aristotles use of Ethos, Logos and Pathos (Aristotle, 1991), and Plotinus’ Intuitive Mind, Reasoning Mind and Unreasoning Mind (Plotinus, 1991). Here the theoretical approach taken is that the human psyche can be regarded as being analogous to the heart, the head, and the guts whereby the heart creates the stories and pictures of the world that individuals use, the guts give their minds the light and the energy they need, and their heads are limited to operating rationalisations within the boundaries created by their hearts and our guts (Figure 1). To know ourselves effectively means knowing how to use our guts, whereby we can govern our fires, our passions, rather than being governed by them, and whereby we can better understand and better conceptualise the story of our lives, by knowing the quiet place inside us, our hearts, and being able to engage it, rather than following the role given to us in somebody’s else story. In the ancient world, those who were considered to know themselves were considered free, while those who didn’t were considered yet to attain their freedom.
In trading, the key aim is to understand the story the market is operating within. When that is achieved, the rationalisations are usually easy. But an individual needs to be able to get over their ego, otherwise, they bring in unconscious distortions about how they trade.
Don’t be a FROG
A very simple example of this is a lesson I used to teach when I worked as an investment consultant and ran trustee training courses for pension schemes. Quite simply, I told them they need to try to avoid being a FROG. Where F stood for fear, seeing too much of what can go wrong, R stood for regret and hindsight bias, O for overconfidence and getting carried away, and G for greed, seeing too much of what can go well. Any decent trader will probably have had to develop enough self-awareness to recognise when they have each of these feelings. They can learn the hard way, or they can learn by stopping and thinking before a trade and better knowing themselves before clicking the buy or sell button. Failing that, they greedily buy at the top and fearfully sell at the bottom.
Why Investment Psychology is So Important
As Yvan often points out in his tweets, having a system that works in one thing, implementing it whilst being human is another. I know when I infrequently try trading again, it takes me about a week to get into the right headspace and to collect fully the thoughts I consider necessary, technical factors included, to be in a realistic position to trade well. If I gave my system to somebody else, very few could implement it because of the engagement of the self that is required.
Knowing yourself is a key part of investment psychology but also not something that can be explained in a short blog piece. Indeed, any language is inadequate to explain the concept if the listener is merely passive and falls into the mistake of the literal-minded, who expects every word to contain a precise image of reality. To communicate about it, I have to abstract from life and a reader is compelled to animate the abstractions in order to understand them. Knowing yourself is probably the most difficult thing a person can do. For anyone interested, you can read more about it on the education section of my website.
Knowing Yourself Better
Knowing yourself has the obvious difficulty it requires a person to be honest with themselves, a self-awareness that is hard to achieve. It might be said that we lie to ourselves more frequently than we lie to others. To help get around this, and to help a person know themselves better, I developed a Know Yourself Test.
Know Yourself Test
The Know Yourself Test was created with funding from the Society of Actuaries in Ireland (Fitzgerald, 2014). It sets out questions, each with several answers representing answers that would be chosen by people with different levels of ego health. One answer is that of a person with a healthy ego, whilst the other answers mostly represent various excuses to enable their ego-defense mechanisms to shield them from the discomfort that greater self-awareness would bring, so they need to validate them to avoid the discomfort.
Each answer is set out in a socially acceptable or even admirable way, making each answer justifiable and excusable by the individual. Other techniques are used to nudge individuals away from the best answer, making it more difficult to game the test. Individuals are considered to be mostly unaware of their own egos, making it difficult for them to game the test to a significant degree.
The test provides feedback in the form of a quantitative assessment of how well an individual is reaching their psychological potential, along with supportive and challenging qualitative feedback.
The overall methodology of the Know Yourself Test was tested in focus groups and trialed to enable statistical testing of the results. These indicated moderate-to-strong levels of reliability and validity. The test was validated by creating an additional test to measure the test taker’s susceptibility to the biases and heuristics discovered in the field of behavioral finance. The test showed that those who it considered having a healthier ego were also less likely to be susceptible to biases and heuristics. The test has been used by companies and individuals in the US, Europe, India, and Africa.
Readers of Yvan’s blog
If you think the Know Yourself Test might be of use to you, you can use the code “tradingcomposure” to get a €50 reduction in the cost of taking the test and getting the quantitative and qualitative feedback.
Thank you for taking the time to read this blog post and I hope you found some elements of it useful to you.
About The Author
Trader, economist, actuary, classicist. Trades using non-axiomatic maths. Lectures at UCD. Previously Head of Quantitative Trading at Bank of Ireland.
Aristotle (1991). Art of Rhetoric, Penguin
Campbell, J. (1987). Power of Myth, PBS
Covey, S.R. (2015). Primary Greatness, Simon & Schuster
Fitzgerald, C. (2014). Assessing Psychological Capacity for Risk Taking and Risk Management, Society of Actuaries in Ireland, June 2014
Johnston, B. (2004). Ibsen’s Selected Plays, Norton Critical Edition
Lippmann, W. (2008). A Preface to Politics, Arc Manor
Plato (2005). Phaedrus, Penguin
Plotinus (1991). Enneads, Penguin
Pope A (1994). An Essay on Criticism, Dover
Schopenhauer, A. (1970). Essays and Aphorisms, Penguin
Artwork in Figure 1 by Connor Adam
Memorable Lines From This Post
Trading is about making money. But suppose you were looking to hire a chef and in the interview, one applicant only said they wanted the job to make money, you probably wouldn’t hire them.
traders need to be passionate about what’s involving in trading well, yes money too, but the balance is critical.
Ego and trading don’t work together [...] Humility is not about demeaning yourself, it’s about being open-minded. Openness is the key.
It [trading] still requires discipline, indeed more than any other career, in my opinion. I came across more former marines as traders than former university valedictorians.
To become a good trader, you need to develop your natural psychological limbs! This takes patience, courage and, crucially, self-belief.
Knowing yourself is difficult, but is also a more humane and life rewarding journey, indeed it can be considered being the opposite of being brutalized, it is about being civilised.
‘Knowing yourself’ is about improving the health of their ego, whereby they can see the world closer to the way it is and can engage constructively with it.
In trading, the key aim is to understand the story the market is operating within [...] But an individual needs to be able to get over their ego, otherwise, they bring in unconscious distortions about how they trade.
Knowing yourself has the obvious difficulty it requires a person to be honest with themselves, a self-awareness that is hard to achieve. It might be said that we lie to ourselves more frequently than we lie to others.