In July 2010, Paul Goydos shot a 59 in the first round of the John Deere Classic, becoming only the fourth golfer in PGA history to hit that mark. He birdied eight of the last nine holes. In this interview with NPR, Gaydos was asked if he was nervous as he lined up to make his final putt. “I’m always nervous. Nerves mean expectations. And my expectations are very high. I think the day that I’m not nervous is the day that I probably retire.”
Listening to the interview during my office commute, I broke out into a smile. I had recently been interviewed for an internal article. In one answer, I discussed how I constantly sweat every decision, investment, and trend. The question was ultimately pulled from the article. The reason given came with the 1984 Dry Idea deodorant tag line, “Never let them see you sweat.” Apparently, this is like the first rule of fight club in the investment newseltter world.
But I do sweat. And like Gaydos, the day that I stop sweating will be like a flashing neon sign, warning me to move on. Game over.
My public trading record is shy of two years old. That’s an admittedly short run in a game designed for the long haul. But my results have been good, which effectively sets an expectation - statistically significant or not.
So I sweat things like: How much luck vs. skill was involved in each trade? What were my assumptions going in? What was the reality coming out? How can I keep my results from reverting to the mean?
This month I dug down on one particular aspect of my trades. The last thing I want is for my company (I manage $300K of their money) or my subscribers to have to book a loss. My question: Is my bias to lock in an above-average gain costing me in the long run?
Was I selling too early? Was I getting the optimum return for my hand?
In poker, we’re taught to quickly forget a folded hand. After all, only donkeys slam the table when the flop comes 9-3-3, exclaiming “Damn it, I folded a 9-3.” And lamenting a folded hand that would have scored on a long odds runner-runner is an exercise in futility.
But there is a mental exercise in poker that should follow any winning pot. As you stack your hard-earned chips, you need to analyze whether you got the lion’s share of possible gains from the hand. In poker, this is a value bet analysis. For instance, at any time in the hand, could you have raised or check-raised instead of bet? The analysis hinges on the probability of garnering an extra bet versus precipitating an opponent’s premature fold.
When I sell an investment, I also need to know that I’m locking in the lion’s share of gains — both compared with how that investment continues to perform after I sell it and against the performance of the investments I still own.
My analysis was enlightening and educational. On average, my closed trades outperformed the S&P 500 during my holding period by 16.3 percentage points. After I sold those investments, they continued, on average, to outperform the S&P 500 — but by only 8.7 percentage points. The standard deviation, however, was huge (18.0 percentage points) — skewed by one investment that continued to trounce the market. Had I not sold this investment, my closed trades would have continued to outperform the S&P by just 3.7 percentage points.
I held the trade in question for only 13 days. My average holding period for my closed trades is 248 days. The trade in question had an annualized return of 510.4% versus my average 45.5%.
It was a risky pick from the get go — a European capital equipment exporter operating in a beaten down commodity sector. But I thought a fragile euro would give it a competitive advantage in the export market. And I thought the sector it served would start to rebound. But because of the risk, I found it very hard to turn down an 18.2% return in just 13 days.
Overall, I think I’m getting the correct value for my trades. But in this one case, gain bias worked against me. I bought the investment on what I believed was going to be a longer term currency and commodity shift - and sold for an above-average short-term gain.
I don’t believe in seller’s remorse — in investment or poker. You book a win, you need to celebrate. They are both hard games. But to enable bigger and more consistent wins, you need to constantly learn. You have to expose the leaks in your game. You need to maximize your wins and minimize your losses — on every hand and every trade.
And you need to sweat — everything.