Best of TTU – Trading for a Living

The financial crisis back in 2008 is slowly fading from the memories of investors. But for those of us who lived and traded through it, many important lessons were learned, and usually the hard way.  For many investors, it was a period that can be best described as an Emotional Roller-Coaster, where billions of dollars were lost by investment decisions which were primarily driven by emotions.  In my hope to make sure that these lessons are not forgotten and wasted, I wanted to share a story that I think many of us can relate to.  So I looked through my list of guests to pull a few Golden Nuggets from on this topic, and I thought that Robert Carver, who spent many years at AHL before deciding to share his knowledge about Systematic Trading through his books and blog, would be ideal for this.  So enjoy these unique takeaways from my conversation with Robert, and if you would like to listen to the conversation in full, you can go to Top Traders Unplugged Episode 89.
A Solution For Avoiding Irrational Decisions
Niels:  I can’t think of a better way to kick things off then by setting the scene, and you reading a little bit of the book in order for people to get a sense of your writing style which I very much enjoy.  So I would kindly ask you maybe to read a little bit of the preface and then a little bit of the introduction to the book, if you don’t mind.
Rob:  Sure.  “I’m very bad at making financial decisions. Like most people I find it difficult to manage my investments without becoming emotional and behaving irrationally. This is deeply irritating, as I consider myself to be very knowledgeable about finance. I’ve voraciously read the academic literature, done my own detailed research, spent 20 years investing my own money, and nearly a decade managing funds for large institutions. So in theory, I know what I’m doing. In practice, when faced with a decision to buy or sell a stock, things go wrong. Fear and greed wash through my mind, clouding my judgement. Even if I spend weeks researching a company, it’s still hard to click the trade button on my broker’s website. I have to stop myself buying or selling on a whim. Based on nothing more than random newspaper articles or an anonymous blogger's opinion, but then, like you, I’m only human.

Fortunately, there is a solution. The answer is to fully, or partly, systematize your financial decision making. Creating a trading system removes the emotion and makes it easier to commit to a consistent strategy. I spent many years managing a large portfolio of trading strategies for a systematic hedge fund. Unfortunately, I didn’t have the opportunity to develop and trade systems to look after my personal portfolio. But after leaving the industry, I’ve been able to make my own trading process entirely systematic resulting in significantly better performance.”
I will now read from the Introduction.

"But I hesitated, everything had happened as expected. I should go ahead and buy, but what if this was wrong, what if the financial industry really was imploding as everyone else seemed to think?"

“It was the 23rd of January in 2009 and I was in my London office. Although I had a desk overlooking the Thames, I was usually too busy to appreciate the view. My day job was managing a portfolio of systematic trading strategies for a large hedge fund. But right now I was focusing on my own bank balance. Data was about to be released indicating how the UK colony had performed in the last three months of 2008. It would be bad news, the official confirmation that we were in recession, but nobody knew how bad. This didn’t mean extra work for me however, since a bank of computers would adjust our clients’ portfolios automatically when the news arrived.
So I decided to devote some rare free time to trade my own money. With a stressful fulltime job, I was not a particularly active trader. But very occasionally,