Episode Transcript
Jamie: Hello everyone and welcome to another episode of Hedge Fund Huddle with me, your host, Jamie McDonald. Exciting news today, we start a new series entitled ‘The Psychology of Trading’. Now, this is a topic that we've done before and I strongly encourage everyone to go back and listen to the one we recorded in, I think, January 2023. But it was such a popular episode that we thought we should revisit some of the topics we discussed and dive a little deeper. So, for episode one in the series, we're going to welcome back our two star guests from last time, Dr. Alden Cass and Dr. Richard Peterson, two experts in the field of market psychology and performance coaching to give us their views on how to become a more successful investor, a happier person, a better wife, husband, parent, all the answers are going to be in this episode. Oh, and I should also say that we're going to be drawing some real usable conclusions from this episode. So please do stay tuned for that.
Alden, I even remember last time I went away and bought a happy lamp to increase my vitamin D. So, there you go. First, first conclusion has been acted upon. So, let's start with performing at your best in the workplace. But even before we do that, I want to discuss how someone knows that they are cut out for a job. And on the flip side, how do you know that someone interviewing for a role has the right personality to cut it as a trader or an investor and do you believe personality testing works? I don't know, Richard, maybe you want to go first?
Richard: Sure, yeah. So obviously, I'm Richard Peterson from MarketPsych. And on our website since 2003, we had personality tests. For Google, it was the number one ranked free financial personality test. Those were investors and traders. We had 40,000 people take those. So, we've analyzed the results of that. And we've seen that there's essentially two traits for longer term investors that determine success. One was openness to new experiences is what it's called in the neo framework. Openness to do experiences mean you're willing to try new things, you're willing to think outside the box. People like Warren Buffett have this, you can see it through his sense of humour. George Soros has it, obviously, he even created the Open Society Institute. So, you see openness quite commonly with those. And then emotional stability, which is the opposite of what's commonly called neuroticism. So emotional stability means when the markets are up and down, you aren't reacting, you're able to take the longer term view, you're more emotionally, I guess, comfortable and able to reframe the situation for yourself and not react to it. We saw this since 2003 up until we took the test down last year.
Jamie: And Alden, same question to you.
Alden: Well, I've been using something called the disc profiling system for over 20 years. It's not really normed for using it specifically with traders or portfolio managers, but based on my experiences of using it with traders and portfolio managers, I've been able to extrapolate a lot of findings that are just more anecdotal than scientific about what makes some of the, when I've done this profile on top portfolio managers, what I've seen is a high D scale, is known for dominance and decisiveness. That has always been a conclusion that I've seen with these top portfolio managers is a high D. They're really confident. They have a lot of conviction. They're very competitive, results oriented. And on the other side, we have the C scale, which is compliance based. And that is basically, you like to see someone that's a little bit higher than the median, which is a little bit of a high C, which is a calculated risk taker. Somebody who is able to do their due diligence, but really on the facts and data to support their decisions. However, they make them rather quickly. They are much more disciplined with their routines.
and their habits, they're black and white thinkers, and they're very analytical. So, as far as emotional stability, as Richard said, you want somebody who can be emotionally disciplined. And that means that we would have a higher S, which is where they hold their emotions in more. They're not explosive with their emotions. You'll see a lot of top traders just be much more quiet and introverted from that vantage point and they are more realist thinkers. And sometimes you can see a contrarian in there as well. But those are the characteristics that come out of my profile tests that I've been using with people.
Richard: I would say that the relationship that we found with these traits was very low in terms of statistical significance. So, there's a lot more that describes what's a really great trader. And I even got a phone call one day from a mathematician who is a top hedge fund manager. And he said, I took your test and it's nonsense. Like it says, I'm not a good trader because my conscientiousness is really low. I'm very successful. What are you talking about? So, then I asked him a few questions. said, well, tell me about your setup. How are you undisciplined and still a good trader? And he was like, well, I don't know. I leave my phone around like I know my pager goes off and I don't even respond like, I don't know. Like I just have good ideas. And I said, well, you know, tell me how does it happen? You can leave your phone and like miss meetings. And he said, well, I hired this policewoman. And she's my assistant and she keeps track of me and she tracks me down. She made me be sure I have two pagers on me at all times. And then I got two cell phones.
Alden: He compensates for his weaknesses.
Richard Exactly
Alden That's how Richard and I deal with performance coaching in terms of teams. That's how we make teams better by finding out not only what the individual strengths are, but how do you compensate for the weaknesses so that the weakest link is not hurting the team on the whole.
Jamie: Is there any argument to suggest that some degree of emotion is needed to be a good investor? I mean, I worked with people who were like gut traders. Now, obviously they did the maths, and they ran the numbers, and you had a bit of a structure as to how to size your position or what your price target was, for whatever. But there's also those people that just get a feeling for things, you know? So, I mean, what's the right balance to have.
Richard: I love this question. So, there's some really interesting work, Antonio Demacio, he's a neurologist in Iowa and some people who've worked with his findings that the body tends to react to risk first and only then does it create a hunch and then it becomes conscious. So, when we're in a bit of trouble and we have a good idea maybe or when there's something bad about to happen to us in our positions, first our body will pick up on this. It's this very nuanced feeling. Then there's a hunch and then there's this conviction to act. But the people who have high dominance as Alden said, or in our personality test, people who react quickly to make decisions, which we found was a key indicator, they feel and take action quickly when they get that hunch. George Soros used to say, he said, my back hurts. And actually, his son has said this as well. His back will start hurting when he has a bad position. And that's an indicator to him or used to be that now I need to think about this position twice. Maybe I need to unwind this. And he would use that felt sense as a key indicator of what he should do with his position. So yeah, the feeling that we have is a really key predictor of what's likely to happen with our position. But tapping into it faster than others and having confidence in that feeling takes time and experience. And so sometimes it really helps as a trader, what I tell people, review past cases, review not only your trades, but other people's. And learn about it and feel what would it feel like in that situation? How would you have known that things were off? Find those little indicators and then internalize that and then you'll develop a better filter. We're a pattern recognition machine in a way and we've got to learn how to tap into that quickly because the brain tells us, but we don't always become consciously aware until it's too late.
Alden: Yeah, I think that Darwin would follow suit with a lot of what you're saying and in terms of how we respond to threats against things like death. Our bodies are wired to avoid problems and people who are coming after us. Like, so when we have a problem and we think that we're in a bad trade, like humans are wired to have an adaptive mechanism by which we're warned that there are predators coming to get us. And that predator is a bad trade. Or something that could be really damaging to us. As Richard said, the first reaction is a physiological one that is like, okay, my heart's beating fast. This is not good. This is not good. I'm muscle tension. I had a supervisor once who said, if the hair on the back of my neck starts to tingle, that's my indicator. And like that there's a problem that I don't like. And this is when I was getting trained in clinical psychology. If he was intaking a client and that the hair in the back of his neck tingled, he knew that this person was in trouble, or this person was dangerous. And he knew that that's where he needed to take action. So, we're informed by our physiology about what to do next. And then we have to be mindful enough. And that's where the cognitive piece comes in. How to be mindful once we see those, become aware of those physiological signals, what do we do next? We need almost like a fire drill of what we do next. And you know, it's funny, just the other day when Nvidia was like plummeting due to the rival in China, people were like, there was significant amount of panic that was happening. Is this the end? Is this the end? And it's so funny because I was sitting there and I'm not really, I'm not a trader, I’m a performance coach and a clinical psychologist, but I've seen this so many times that I was like, this is a pattern. I know what's going to happen. This is going to plummet $23 a share and the market cap is getting wiped out. This is a buying opportunity. This is definitely going to play out where after hours, these money managers are to pile back in because this is an overcorrection, an overreaction. And people are getting chewed up because they can't deal with the fear and panic. And the expert traders were able to ride that out and invest down $23 a share and boom, went right back up $9 the next morning. Like this was, it was so predictable. And that's where you use past experiences to bolster you or anchor you. When things are really chaotic and uncertain in the moment, you have to have the emotional discipline as Richard said before, to be able to say, I've seen this before. This is not going to kill me. I'm going to actually make this into an opportunity. So that's called a cognitive reframe. And that's what we do for a living.
Jamie: So I'm stepping a little bit on market psychology here, but Alden, following up on that, how do you know or are there things to look at perhaps in the options market or just the type of people that are selling that you know you're in a panic? How do you look at a stock or look at a market and go, people are selling on emotion now? Or is it just simply you look at volume, you look at the price move, and you can just tell?
Alden: Volume,price, move, but also you look at the fundamentals of the actual company that you're focusing on. Like if it doesn't make sense, if it's not rational, what you're seeing, it doesn't mean it's not really happening. People are really following the trend. They're following the herd, so to speak. And it doesn't necessarily mean they're following them in the right way. So, that's where you have to know, like I believe in my conviction of this trade. I put in the due diligence. know that this doesn't make sense for what I know about this company or about this particular trade idea or thesis that I created. It doesn't make sense. This will write itself. And that's what the best traders do. They don't fall for that. They let the lemmings get trampled.
Jamie: And I suppose you actually expect bigger sell-offs in stocks that have done incredibly well because people are much more likely, psychologically speaking, to take profit. People are less likely to sell when they haven't made anything on the trade.
Alden: Right, exactly. Exactly, it's not a loser until you sell. So, they try to avoid that.
Richard: Yeah, and I would say, you know, just to take a bird's eye view. Our company MarketPsych right now what we primarily do for business is analysing news and social media and transcripts and creating sentiment data feeds. And when we look at phenomena like what Aldan’s describing with Nvidia sell off, you see that the top 100 stocks in terms of attention or a lot of people are watching them, they tend to have these panics where there's a big spike in fear, a big drop in the share price. And then you'll get an average one and a half percent, one week return back in the long direction. They'll bounce back. So, for example, if you take the top 10 percent of stocks that have fear in one week and then they drop you get a nice return bounce back and that's called overreaction. So you can measure it by the amount of fear that's expressed of worry concern. And then you can measure it, of course by the stock price and you put those two together and you see the bounce. The same thing happens on the upside If you get a lot of positive optimism and a big share price move in the upside, you often get a retreat. So that's overreaction. But on the other hand, when you look at thousands of stocks you see that generally when people are negative about something in social media, and it's not in that top 100, there's more of a price drift. So if they're negative it tends to go down down down down and if they're more positive on average it tends to rise up up up little by little and that's called under reaction. So typically, if information is not dramatic if it's kind of boring and hidden it'll lead to these price drift phenomena and if it's more like in your face top of the headlines it'll lead to these bounces and this volatility. So, we see that over and over. It’s why people buy our data products is to be able to detect that actually.
Jamie: So there you go. We've got our first conclusion, which is if you're out there trading, focus on the biggest stocks and you can make money just one or 2% from pullbacks and bounce backs when you get these outsize moves. So that's good. That's great advice. So, I want to go back a little bit to the performance coaching aspects of things. I know this is what you guys do. We talked a lot last time about companies hiring performance coaches like yourselves. I want to know are more companies doing this? It makes so much sense to me, particularly if you're operating in a high octane environment, why do these large corporations not have more people like you coming in? I mean, when I was at SAC, obviously I had Ari Kiev and everyone saw the show Billions, I try to get that in once a podcast. and, I just want to know, for the past two years since we've spoken, are there more companies hiring people like you and what are the kinds of conversations you're having?
Alden: I gotta say, feel like it is, you know, the Billions TV show did wonders for the visibility of what me and Richard do. There's still very few of us ou.t there in the world that do what we do. And I feel like the last four years, and maybe this is a performance related issue for some, a lot of the companies or where the markets were, but I feel like a lot of the companies were not as into the Billions mindset of we're going to spend money on this as a resource.
Jamie: But if I could just interrupt, like, why is that? Because if you look at anyone who's operating at the top of their game, you know, sports is obviously a great analogy. But in sports, you've got people who are, they've got their own nutritionist, their own training, their own, I don't know, sleep doctor, do you know what I mean? The people who want to operate the top of their game should have people like yourselves, because, when it comes to performance and returns and investing, it's, such small margins to beat the market to be ahead of the game, that it just surprises that there aren't more of you out there.
Richard: I mean, what I saw was, and what I do see is generally the people at the top of the game will pull in various coaches, a year with this coach, a few months with that coach and they'll try different techniques and they'll adapt what works from each coach. And so, these are really smart people who can self-coach to some degree. And a lot of what the, the top performers need long-term is really just someone to keep them accountable to self-improvement. So, they don't need all the fancy ideas or all the kind of the research studies. Eventually, what they need is someone to say, hey, you how are things going? Are you staying on track with your plan? And that doesn't require a lot of work for some the top performers. And the lower tier performers, if they aren't able to self-coach, a lot of them blow out of the industry. The firm would rather than pay for an expensive coach, they'd rather say, I'm sorry, you're not a fit for this firm. So that's what I've seen and it's an interesting evolution in the industry.
Alden: But when they're grinding to have a decent year, they don't always make optimal decisions when it comes to what's good for them. And that is what I've learned over the last three years. There have been fewer of these types of calls in terms of performance coaching because I feel like a lot of these companies or portfolio managers or hedge funds, if they're struggling at all, they're too busy trying to get their returns right and they don't think about it as like, I can't take 30 minutes out of my day to talk to a coach. That's honestly how a lot of these guys are wired. I don't want to be away from the screen for 30 minutes to talk to this guy. And I feel like during, when markets are better, when there's a lot more winning, so to speak, I feel that that is when all of a sudden, the Bobby Axelrods of the world will come in and say, I need a coach. This is my time, I'm the king and I need to roll with this and make it bigger. That's when it becomes more euphoric for them. And stress does not do well for a lot of individuals when it comes to making good decisions about their health, wellness. And then those are the times that they should be calling guys like Richard and I, but I'm hopeful that if things were a lot easier for them this year, that will open that floodgate again in terms of let's bring these guys in and fix what was broken.
Jamie: That's interesting. You just got me thinking about when to get people like yourselves in. When you're having a bad year, feels like it's already too late to be talking to you guys. And like, I'll make an analogy with a marriage, if you know what I mean? Like if you're like not on speaking terms with your partner, you're probably a little too far down the line. And actually, you should be doing these routine performance, you know, coaching sessions, even in the good days because that's when you maintain the process when things get rough.
Richard: Well, it's interesting just to give you a couple stories from the industry. On the one hand, they have very tight risk management now. So, if somebody's volatility goes outside of the boundaries, they're let go. First, they're reduced. Their book is reduced substantially. And then they've got to really grind themselves back up. That's a good time. That's a good time for us as coaches, because we can really help them grind their way back and keep confidence while they come back.
Jamie: Has that changed a lot over the last few years? I mean, the amount of flexibility you're given by risk managers has got tighter. I guess it depends on how volatile the market is.
Richard: It's more mathematical. In my experience, it's much tighter. mean, the whole industry is much more mathematical now. I think there's a lot more risk managers. Active management, that kind of freewheeling to shoot from the hip, that's not happening so much. It's much tighter. You also see a lot more of these multi-pod hedge funds where they don't want people mixing ideas or interacting with each other. So, you have these separate risk parameters, and each one has their own coach, for example. I've also been called in there for funny things like somebody made a lot of money, say in the first nine months of the year, and the fund wants me to keep them on the game because they're about to have a life-changing payout at the end of the year and they want to stop trading because the last three months of the year, they're going to make a life-changing amount of money. They'll call me in and say, hey, can you convince this guy to keep trading? He's doing great. There's a lot of dilemmas that they put you in. Yeah.
Jamie: Well, you know what, you made me think of something because, I worked at a pod shop, obviously, and I always used to think if you've got a hedge fund manager who's been putting up good numbers and they're having a bad few months, and of course it depends, you can't generalize, but I always thought, well, maybe it's a time to give them more money, not less, because you know that over time they have a process that works, it's just they're having a bad streak and a bit like, you know, you should be buying on dips with a stock, sort of trade your pods a bit like you trade the stock market. I mean, obviously, if they're just not seeing it, it's a different story. But how do you feel about that kind of mentality as in taking capital away from hedge fund managers who've actually just done too well, they've over delivered.
Richard: I mean, from what I see, they have quants who've tested all of these scenarios, and they know, you they say, okay, if this guy's been bumping on his lower bounds, based on historical probabilities, a 70% chance he's not going to make it at this firm. So, let's dial him way down or maybe we should just let him go and hire some fresh meat. So, there's, there's a lot of cycling through like that where they're just, it's purely a quant game for a lot of the risk managers.
Jamie: Okay guys, back to some usable conclusions. I last time we spoke about distraction and cognitive load and it was a really interesting discussion. Something that's happened over the past two years is we're all getting distracted, I guess even more. So, what do you tell people in order to try and block the noise out? Like what are things that people can do day to day to try and, you know, really focus, streamline their thought process, et cetera.
Richard: I don't know about you Alden, I've got a series of grounding practices that I teach and I can give you a couple examples. One is a short meditation, and I won't go through it right now but meditation can be very helpful. But if you have even a little script that you can do in one or two minutes, like Alden said for a lot of these guys, 30 minutes is too long if you just have a couple of minutes. The other one is every morning, you know, we brush our teeth, we do our dental hygiene, but why don't we do mental hygiene every morning for 15, 20 seconds? You can do something very simple to emotionally prime yourself for the day which is to imagine your best possible self for that day. Like who do I need to be this day? And if you have trouble even you know embodying that and bringing it in think of a role model. Maybe it's Warren Buffett or you know Bobby Axelrod whatever it is, embody that person and feel like what if I were this guy today? How would I live? How would I be in the world? And you can imagine you can even do that while you're brushing your teeth if you claim you don't have the time. Like just imagine that, embody that, and it creates something called an emotional prime that in research by Sonia Lubiomirsky, I believe, it truly shows a better outcome. She did students, but it was better grades, better lifetime income. So, it really helps you to do these types of practices, and very few of us do them, but they can ground you for the day. And then there's like a gratitude list as well that can be quite helpful in grounding.
Jamie: Yeah. And Alden, actually last time you really helped me actually, when you spoke about just getting your morning routine right really sets you up for the day and to think really hard about what that first half an hour to an hour is. So, I'd love to get some advice and, you know, let me throw some things out there. You know, should you check the stock market as soon as you wake up? How long should you wait till you look at your phone? Should you have a coffee? When should you eat? Should you exercise first thing? Obviously, these things are different for different people and you should do what works best for you, but are there certain things that you sort of advise people? Because I totally agree like that first 60 minutes is key.
Alden: Well, it's called deliberate practice. What are the things that you can control in the morning? Checking your emails is probably the last thing I would do because that's the world ruining your day. Like it's impacting your day. You're being fed information as opposed to you going for information. And therefore, I would prefer to hesitate on that, assign a time where I'm going to start checking emails. And this is all predicates on what time I'm gonna wake up in the morning. Obviously you have to be aware of when you really need to be on for emails. If your boss is emailing you at 7 a.m., you better be on it by 7 a.m., but that means at 6 a.m. you shouldn't be looking. And you should be starting your morning routine. And one of the things that Richard said, it's interesting how we kind of have the same strategies, but packaged differently. I have something called the mental highlight reel that I do with my clients where they wake up, and this actually can be done at the trading desk itself where they actually, to tune out the noise, they actually focus on a previous memory where they were at the top of their performance game. And that could be in sports, athletics. It could be in trading, an amazing trade where they actually focus on all the minute details of that event. And it could be literally, and if you want to calm yourself or relax yourself, it could be about a trip to Aruba, 15 years ago, what restaurants did you eat at? What clothes were you wearing? The more you focus on the details, the minutia of that event, the sights, the sounds, the smells, the tastes, the who, the what, the where, the why, the when of that event from the past, the more you can take in and absorb the emotions that came from it and you could re-experience it, that feeling, and that can let you go through the rest of your day feeling the same way. So, if you wanna create for yourself a competitive feeling, you would go back to a great sporting event that you were at the top of your game, you scored the winning goal in soccer, or you hit a home run when you were in high school, but you were gonna go through how it felt when the crowd was cheering, what number you wore, what the weather felt like, and all of those feelings, if you could just close your eyes for 10 minutes and think of all of those details, it's psychologically incompatible with thinking about, did Nvidia just go down $23 a share? Like, and I just lost X amount of money in three minutes. Like you could recover, you can get yourself focused. And again, it doesn't take much to get your physiology down, your nervous system down to an optimal performing level of five or six on a 10 point scale of intensity. You know, it's actually considered optimal to be at a six of anxiety on a 10 point scale for you to perform optimally. So oftentimes when we're feeling really overwhelmed and, and panicked, we're at an eight or a nine. And so, these exercises like the mental highlight reel or doing yoga or meditation, Pilates, that gets you down to a six, which is optimal to get out of this problem. It allows you to be more mindful and solution focused when things are uncertain or ambiguous. And that allows us to be more rational thinkers when things become irrational. And that's when we're seeing the herd psychology take us into irrational places. This type of exercise in addition to working out in the gym or going for a long run, listening to music, I'm a big fan of ambient trance while I'm doing writing or anything like that because it helps turn off the bad noise and keeps the good noise in. It's kind of like white noise maker that you play outside of your office so that no one hears what's going on. It actually has a soothing impact on the person that's hearing it, although it's noise.
Richard: Yeah, I would just jump in and say on the exercise front, they find that some researchers have found a high intensity interval training tends to be the best for resetting the mind. And there's also hot, cold exposures, sauna, cold plunge, a few of the marks in nature, all of that can be helpful.
Jamie: On the HIIT training exercises, is there are sort of optimal amount of time. mean, sort of, I should rather say a most efficient amount of time. So 10 minutes, not worth doing?
Alden: I heard 20 minutes, I think. 20 minutes is the number.
Richard: Yeah, the New York Times, I think, even has like a seven minute version that they found was, gives you some benefit. yeah.
Jamie: They're just trying to sell papers. If they've come up with a seven minute routine that's as good as a 20, they're just, I don't know. But I also remember you saying like a 20 minute nap in the afternoon, like scientifically proven to raise your IQ in the afternoon. So maybe 20 is the magic number.
Richard: Yeah, one standard deviation is substantial. Yeah. That nap can be really powerful. And I would say, know, on the anxiety side, I've worked with hedge fund managers who were extremely anxious, who were constantly on edge, and yet they were extraordinarily successful as well. And they were using their anxiety to fuel their success. So, on the neuroticism scale, like I said, emotional stability is important for long-term investors, but some of the shorter-term people are really really anxious to the point where they're staying up all night watching the Australian Central Bank and the Japanese Central Bank announcements, and yet doing very well because they're just constantly tuned in and attuned. And they know that they're burning themselves out a bit, but they're thinking, I'm going to do this for a few years. I'm going to be on edge. I'm going to hurt myself a little bit, but I'm going to be really successful, and a lot of them do. And there is just a whole variety of people out there.
Alden: What you just described is the hedge fund manager that is successful with anxiety. I get called in for a lot of companies where the hedge fund manager is extremely anxious, is successful, but then becomes very difficult to be around for the people who work under them. And it actually becomes a cancer for the company because they don't know how to manage the anxiety. And it just gets vomited all over the company and everyone is a casualty of it. And so that is where it involves the teamwork and the team development and helping, you got to kind of work top down model in terms of I got to help the head manager contain their emotions and learn the emotional discipline, which is what I do with bullish thinking and teaching them some of the skills for adapting to the stresses, so that they can, as Richard said, successfully turn anxiety into something that is motivational and activates a game plan for success when they're feeling anxious so that it moves towards more of success mindset rather than, oh my god, the world is coming to an end. Everyone's gonna feel my pain right now, which is what happens. Everyone does feel the pain. And then people are left standing like, well, that sucked. That was a hurricane that just blew over. And then, that's not good for morale.
Richard: There's an interesting fine line here because we also, like if you teach someone meditation, for example, and you say, okay, I want you to manage your anxiety, some types of meditation actually reduce motivation. So yeah, now you're not as anxious, but you're also not as hyped up to make as much money. And so, the firms that call us in, you know, they say, first do no harm, don't change what's happening here, but you know, make sure these employees can deal with this really anxious head trader. And you get in these funny dilemmas, just like Alden was saying. So, we want to help the head trader with his anxiety. And usually, we have to do that by enlisting, like, well, how's your wife dealing with this? Or how's your husband? Like, how do they feel about all this anxiety? Like, well, not good. Okay, well, let's talk about your relationship. Maybe we should focus on the most important relationship, because you obviously don't care about your people working for you. So, let's talk about some other places where you can start polishing this up.
Jamie: Y Yeah, it is interesting. Maybe that's the answer to the original question we ask about being emotional. It's not that you can't be a good trader is how to use it to your advantage. I mean, I'm not proud of it, but I think I'm quite an impatient person. But if you ask me, you know, would you like to be more patient? I'm not so sure because that impatience can sometimes lead to just getting things done. You know what I mean? You just you make decisions faster, quicker. You don't prevaricate so much. Anyway, that's really, really interesting and thought provoking. So, let's move on. We haven't talked about AI yet, but I want to kind of bring this in. Over the past two years, since we last spoke, to what extent are clients of yours using AI to help A, run their positions better, when to cut losses or simply, you know, large language models in terms of researching and coming up with ideas. So, I just wanted to ask you guys that.
Richard: Yeah, on the research side, it's enormous. mean, we're, everyone's built, we're even building an AI analyst, an agent that'll, you know, show you, give you a report, do deep research. Gemini Pro deep research can give you some really interesting content in just a couple of minutes. It'll come back with incredible organization of information, stuff that would take somebody, an intern working overnight or even longer to piece together. So, it's really crazy what you can get now. That's on the research side. I think we've already seen analyst jobs on Wall Street are declining quite a bit, and I think that's gonna continue, maybe even accelerate. So that's one side of things. But on the trading side, I mostly work with quants now in our data business. We see a lot of quants using LLMs, for example, to do mapping of data, finding outliers in data. We don't see anybody trading with it except on some really interesting edge cases. The edge cases are things like pattern recognition. So, they'll feed in images of candlestick charts and say to the LLM, after they've trained it on images, where's the market likely to go next based on all of these charts you've seen in the past? So, we've seen some interesting examples like image recognition and things like that. But no one's using that for time series forecasting, statistical forecasting because they're already trained on the past information and it's really hard to pull that out. It's really hard to, it's already learned that and so you just don't know what's real and what's not or what's overfit. But anyway, that's a whole divergence into the quant world.
Alden: And I think that that's mostly a quant trader would be really primed for that type of use of AI. And I feel like the guys that I work with that are less quanty are not as attuned to the AI world yet. I feel like that's something that they will become more and more intrigued by and will take advantage of in the longer run. I feel like they're not using it as much yet. I think that they're maybe getting some ideas, some divergent and convergent ideas for trade theses or hypotheses based on historical trends or patterns, but for the most part, I think that's something that will be used more. And I agree with Richard, it's definitely going to really impact the analyst world and what we see with that and the use for them.
Jamie: So the analyst world, yes, there's an impact, but we don't see AI running portfolios yet.
Alden: Remember, AI cannot compete with human intuition and feeling and gut instincts and that power we get from conviction of an idea being right, it can't give us that. In fact, I think it kind of robs us of the due diligence and what we get from putting in the hard work, that feeling we get from working hard and having a positive outcome. It's too instantaneous. We're being robbed of that experience by it. But, listen, for every technological advance that saves us time, we lose something. It's a trade-off.
Jamie: So let's move on to talk a little bit about the type of market you think we might be in right now here at the beginning of 2025. I was going to ask you what defines a bubble. Does it make sense to look back in history and try and find bubbles that are similar to the ones that you feel that we're in now? And I immediately think of 99, 2000. I mean, does it matter if we're in a bubble? Because, you know, markets can, you can be wrong for much longer than you can stay solvent. And sometimes you need to just wait for the big move before jumping on. I just wanted to get, I think one of you mentioned you even had a bubbleometer, which I'd be fascinated to hear about, but what kind of market do you kind of think we're in?
Richard: I can address the bubbleometer quickly. So, one thing we did was we looked on news, and especially social media, since 1998. We have this long history of data. And we were looking at what are the type of language people use when they're at the top of a bubble, and then when we're at before the bubble begins. And so, we created this ratio. And what it was with things like optimism and untethered emotion at the top of a bubble versus at the bottom, people were talking about the accounting fundamentals and the valuations. And you know the balance sheet. So, the top you get a lot of untethered emotion just pure like, you know To the moon rocket ship. This is great And then at the bottom when things are actually a good value before a bubble starts you get more people talking about the core technology and the balance sheet. So, that ratio is interesting to us, but one thing that's interesting is when a bubble begins that ratio usually bumps way up to excitement. So, with crypto, you know, you see with Bitcoin, there's been many bubbles in Bitcoin, right? But are they really bubbles? Because now it's at an all-time high again. So, NX was actually engineered to create bubbles. So that's sort of the point of Bitcoin is, you know, the game theory behind it. That's an interesting situation. And then you have Nvidia where people could say, that's a bubble too. But hold on, like they have incredible earnings, tens of billions of dollars a quarter, you know, and you have projects like Stargate where they're going to have even bigger earnings. It's just, it's incredible. So is this different from the dot com era because of the nature, the money going to AI is real versus in the dot com era, it was very speculative. And there's a lot of research that shows that, for example, IPO's when they come out, if they have no revenue at the company, they tend to have like a twofold or less valuation than a company that has no revenue. So, a company that does have revenue is valued much less than a company with zero revenue because of the speculation, the excitement. So we're not really seeing, we're definitely seeing that in some sectors like quantum computing. Quantum computing is an amazing technical breakthrough, but it's not gonna lead to anything for several years. So, anybody buying into quantum computing now, you're gonna have many years of slogging it out. Space is also going to be a multi-year issue. The space stocks have really taken off since Trump was inaugurated about a week and a half ago. But again, it's gonna be a slog before we get someone to Mars. It's gonna be a couple of years, few years, so that's my thought, but Alden?
Alden: I would say that, I mean, I also work with financial advisors in addition to traders. I always, in 1999, during the tech bubble, I also worked with financial advisors. And, you know, when we talk about sentiment and speculative behaviours and stuff like that, I mean, bubbles are caused by wild speculation about the future. It's social. It's emotional cognitive factors that influence our investment decisions that are not always rational. And this is where herd psychology comes in. It's not always based on fundamentals, but it's a lot of sentiment of the people in the marketplace. So, when financial advisors in 1999 were like, I'm going to put all my clients, I'm to get my clients and put their money into this and money into that and money into this. We're going to make lots of money. Everything that I do is going right, you're making money. So, the investors kept investing in those financial advisors and they were doing amazing. I can't even tell you these guys were making so much money, and they were depressed at the same time because that's when I did my research on their mental health in 1999. They were the ones who were making the most money at the time of study were also the most burned out, slept the fewest hours and were depressed. And it was because they were so overwhelmed with all of that frenetic energy that it took to manage everyone's emotions and they were going for the money and it was it was very intoxicating because everything they touched turned to gold and obviously when the bubble popped that went to a huge depression and that was even worse for them. But what I’m seeing now you know the sentiment is, again, as Richard said, a lot of the companies are real. The money is real. And the ideas, I mean, we're talking with AI, we're talking about what people could have been talking about when Apple first launched the first iPod. This is gonna take off. This could be something huge one day. Like, I'll never forget when Apple launched the first iPod. And I was like, huh, I see all those white headphones in the subway in Manhattan. What does that mean? Why is everyone with white headphones? And then I realized that these are all iPhones, I mean iPods, and the first generation iPods. And I'm like, wow, I should look into that. What's Apple stock at? And it was like 60 or 70 or something. I'm like, well, maybe that's a good sign. Everyone seems to have that. And AI is now in that embryonic stage that it could be really, really, really huge down the road and everyone's speculating. And then obviously political factors come into play here too, in terms of the messaging that we're receiving. Times are gonna be great. Everything's gonna be amazing. We're all gonna be successful winners. This is, invest, invest, invest. This is the messaging we're getting. So, I would not be surprised if your bubbleometer is through the roof right now in terms of like sentiments. I think that people are starting to think the same way as they did during the last Trump presidency. I remember when, Beyond Meats was like a 200 a share. And I didn't understand how that could even be possible at the time, but it was. And like, was like, this doesn't make any sense. And when, when Peloton was at 220, like, and now it's at eight. So, you have to think to yourself, like, where were we then? When it was, when Peloton was at 220, what were we thinking? What were we feeling then and that those historical lessons help ground you in the present. When things could become a rationally exuberant, that's what we're at risk for is a rational exuberance right now. And I do this thing with clients. It's called the my happiness formula. It's a math formula. It's not really a math formula, but its happiness equals reality divided by expectations. I'm not sure if I mentioned this on the last podcast, but what that is, is a form of due diligence that they have to do on any trade idea or feeling they get, an idea that they're about to embark on. And what it is, it's a way of grounding yourself in reality. It warns us, our expectations for success on a trade need to be grounded in reality based on what we'll see with reality. So if we have high expectations going in and our reality is at a six, but our expectations were at eight, we're gonna feel that, it's gonna hurt. But if there's less of a gap between what our expectations for success are on a trade idea and what the actual reality is, then as that gap gets smaller, the emotional outlay is less. We have a greater chance of overperforming our expectations when we start with our expectations more grounded at a lower level. And you can only do that by looking at all that can go right on a trade, the best case scenario, or an idea, a venture you're getting involved in, an investment idea, all that can go right, all that can go wrong, the extreme opposite of that, that's the worst case scenario. And then you take a third group, a third list of that, and you say, make that, instead of it being black and white, you make it grey, which is all that will most likely happen on this trade idea. So, that's where you factor in the top two of the best case and the worst case and you say, most likely we're going to see this. It's going to come out of five or six on a 10 point scale. There's going to be some pullback. There's going to be some problems that we're not seeing. And then you have a better chance of overperforming your expectations. Therefore, you're happier at the end of the day and you have less chance of having a huge collapse and being depressed if there's a failure. So that helps mitigate the irrational exuberance because you're doing a form of due diligence of all that can go right, all that can go wrong, and all that will most likely happen.
Jamie: Alden, that’s great stuff and unfortunately, I gotta say that we're coming towards the end where it slightly running out of time and as promised at the beginning I wanted to draw some actionable conclusions. I've just got a few. I love the idea of looking at the biggest stocks and when you get big moves, you can make one or two percent back quickly on a pullback or a bounce. Being rigorous with the morning routine something we said last time. think it's so important. Language can really help when it comes to trying to identify a bubble, but this is different to 99, 2000. There's real money buying AI. And then Alden, where you've just told us, money doesn't buy happiness, but slightly managing your expectation does. So, there you go. If there anything I've missed before we sign off, and then I would love you guys to say, how people can get a hold of you.
Richard: I would just say, it's not easy trading in the markets. And if you're not doing it full time and it's not your full time job, you probably should be doing your full time job and doing the buy and hold for the long term. Not trying to play this game because it's, you know, there's always excuses and I've met too many traders who started out, you know, they were kind of an engineer and they said, Oh, I'll become a trader in, you know, during my lunch hour and it just doesn't work out. And we even used to have a pathological gambling screen on our website to help traders realize that they weren't actually trading, they're just entertaining themselves.
Jamie: I say the same thing, either do it all the time or none of the time. Don't do it in between.
Richard: Yeah, exactly. So, I would say that and then you can reach me through the website marketpsych.com and we have three books and newsletter so feel free to sign up there.
Alden: Yup, and I would say that if you have any friends that are not actual traders, whether dentists, lawyers, or teachers, and they tell you they're doing really well in their day trading on the side in the markets, then that's how we know we're in a bubble. That's my bubble-ometer.
Richard: Exactly, that’s the bubble right there.
Alden: When you start hearing that, that people are making lots of money, they're bragging about how good a trader they are, and they're not actual traders, that's how you know we're in a bubble.
Jamie: Great. I'll let you know when my mum buys Nvidia and that'll be the absolute.
Alden: Yes, yes. You'll hear about it once it's triple. So yeah, you can reach me at draldencass.com and obviously Bullish Thinking has been out since 2007, so it's been helpful for people who are trying to achieve emotional discipline in volatile, ambiguous situations.
Jamie: Alden, Richard, you're always such fantastic guests. Thanks for taking the time to talk to me today. If anyone out there is listening, honestly, get these guys in to speak to you, your firm. They are absolutely fantastic and certainly worth your time. So, Alden and Richard, thank you so much. yeah, thank you for kicking off this series.
Jamie: Thanks once again for listening, everyone, and please, as usual, give us a follow, like us, or subscribe to us wherever you get your podcasts. The information contained in this podcast does not constitute a recommendation from any LSEG entity to the listener. The views expressed in this podcast are not necessarily those of LSEG and LSEG is not providing any investment, financial, economic, legal, accounting or tax advice or recommendations in this podcast. Neither LSEG nor any of its affiliates makes or any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast and any and all liability thereof, whether direct or indirect is expressly disclaimed. For further information, visit the show notes of this podcast or lseg.com.
