ERIK SMOLINSKI | from esInvests
ERIK SMOLINSKI | from esInvests
What do exercise, the great outdoors and a healthy lifestyle have to with successful investing? Does the military prepare you for more than just battle? Joining me in this episode is Erik Smolinski from esInvests. Erik is a Marine veteran and self-made millionaire investor. He’s spent over 30,000+ hours honing his craft and outpacing the market for the last 14 years (22.8% CAGR).
"The first thing is don't let a bull market confuse you with brains. And the other thing he said is, your plan is absolute garbage because you don't have one. And I was like, what do you mean I have a plan. And all he did was start asking me questions and he dismantled everything. He's like, okay, so what do you do if this stock goes down this much and this amount of time, oh, I do this, and then what happens if it goes down more in this amount of time? He literally just asked like a series of wishbone diagram questions and it wasn't even that many. But what he did is immediately identified to me, even though I felt like I had put in a tremendous amount of effort, it, the amount of effort I put in, it's inconsequential. What matters is the output and the output was still superficial at best. So him completely dismantling my genius plan was probably the best possible thing that could have ever happened to me."
You must have a trading plan, according to Erik. And to test that plan before using real money.
"Start your trading plan, which seems a little overwhelming at first. But the way that I would think about a trading plan if as I was, if I was first starting was just sketch out my thoughts. I think support and resistance works. This is how I determine support and resistance, this is how I think I would trade it. This is what happened when I traded it and I would do it in a paper account, which is fake money. It's, it's like monopoly money, but it's a way to simulate different things.
Last year was a good year for me and I still paper trade. And the reason for that is it gives me an opportunity to get initial kinks out of the way so that I'm not burning real money. I think that's a really important differentiation. There's just a lot of people that just bash paper trading because it's not real. They'll say you'll never get the full emotional cycle and I don't disagree with them, but I use the military as an example just because I train in peace time to go to combat and that's not real. I'm training in peace time, I'm not getting shot."
Erik maintains that there are many well-documented biases in traders and investors. They are covered in the following white paper. One of the things it talks about is how we like to cut winning trades short and we let losing trades run. It's because of ego. We like winning trades, we like being correct. That's why as soon as we have something that's in profit, we want to take it. It's a huge win for the ego.
When something's losing and going against us, we don't want to close it, because if we close it, we have acknowledged that we're wrong. Not only do we have a financial loss, but we're also completely incorrect in that trade. It bruises our ego.
We provide an overview of research on the stock trading behavior of individual investors. This research documents that individual investors (1) underperform standard benchmarks (e.g., a low cost index fund), (2) sell winning investments while holding losing investments (the “disposition effect”), (3) are heavily influenced by limited attention and past return performance in their purchase decisions, (4) engage in naïve reinforcement learning by repeating past behaviors that coincided with pleasure while avoiding past behaviors that generated pain, and (5) tend to hold undiversified stock portfolios. These behaviors deleteriously affect the financial well-being of individual investors.
TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE
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Stocks for beginners. Phil Muscatello and FinPods are authorized reps of Money Sherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.
I think if I were to start all over again, my approach would be pretty simple. I really believe getting into some sort of buy and hold ETF position. So starting to dollar cost average my way into SPY or IWM, those are just two index ETFs. One's the S&P500. One is the Russell 2000, which is small cap stocks. And I would start there. Just buy and hold.
Hi, and welcome back to Stocks for Beginners. I'm Phil Muscatello. What does exercise the great outdoors and a healthy lifestyle have to do with successful investing? And can the military prepare you for more than just battle? Joining me today is Eric Smolinsky from esInvests. Hi Erik.
Hey, how's it going, Phil? Good,
Good. How are you
Doing? Beautiful. We got some sun here in San Diego finally. I know it sounds kind of weird, but it's been raining like the past couple weeks, so we've all been like little blown away. That's not what we pay for to live here.
Phil (1m 10s):
Erik is a marine veteran and self-made millionaire investor. He spent over 30,000 hours honing his craft and outpacing the market for the last 14 years with a 22.8% CAGR, CAGR. I'm not sure how to pronounce it. How do you pronounce it? Eric
Erik (1m 25s):
CAGR. Yep, you
Phil (1m 26s):
Got it. Previously when we first met, when we had a little chat before this conversation, you were saying that you have been to Australia and you admire our military and our crocodiles.
Erik (1m 35s):
I do. Yeah. So I actually have some really cool photos. I, I did like one of those boat tours up in the NT Northern Territory. The critters out there are wild man. It, it is completely different, like even here in San Diego, like I'll get scorpions snakes, but it's not the same. Like I'm not walking around with prehistoric dinosaurs that want nothing more than to consume me and they have a proven track record of existing beyond whatever other dinosaur is extinct. So yeah, that was super cool. But I spent some time up in Darwin at the, the base up there, which, like you were saying, the, the Aussies up there, they're just super cool dudes. Actually one of 'em is out here now in that I was with like three years ago, and he's hanging around with all the marines that he met before.
Erik (2m 19s):
Like that's just the relationships that we built. They genuinely, like, they just span, I keep in touch with these guys cause they're so cool.
Phil (2m 25s):
That's fantastic. Military camaraderie, huh?
Erik (2m 27s):
Yeah, absolutely. It's actually pretty funny how far a little bit of combined misery can bind people together
Phil (2m 35s):
A few days in the mud together. In the, in the jungle, huh?
Erik (2m 38s):
Yep. It it is in the mud. It's no joke too. It was actually a joke. We were in Koltana and it was nothing but rain for days on end. And when we were moving around it was, it was just like mud pits. So a bunch of the guys cheeky as they are, they took photos from literally Normandy and then they side by sided it with like pictures from Koltana, you know? Totally, very muddy. And what, and it's like the same thing.
Phil (3m 3s):
Yeah, I had an uncle who was in the military in World War ii and you know, those guys, they never talked about action or what they did, you know? And I said to him, what was New Guinea like? And he said, wet. Yep. That was it.
Erik (3m 17s):
Say less. Exactly. That's exactly how those dudes are.
Phil (3m 20s):
So tell us a little bit more about your background, which obviously the military has played a big role in.
Erik (3m 25s):
Yeah, so I grew up in New York, so I had a, a single mom, an alcoholic father. My, my dad actually died, what, like four years ago, essentially from drinking himself to death. So he wasn't, he was a loving dude, but not in the like, in the picture too much. And I just essentially saw my mom and she hustled. She worked real hard. She was a contractor. She's a physical therapist for kids with disabilities. So I've always admired that. But she's always been a contractor and we just did not grow up with money whatsoever. Like I walked through metal detectors to go to school ever since junior high school. Did not grow up in a nice area. Not bad. I'm always very careful to make the differentiation.
Erik (4m 7s):
We were not impoverished there. I'm still super, super, super fortunate with where we grew up, but it just wasn't advantaged in many ways in my opinion. So, you know, I spent some time in high school. I saw my brother join the Marine Corps, he enlisted and I went to his graduation from bootcamp and I was just, I, I loved it. And I was in junior R O T C at the time and I started in ninth grade, kept doing that and I had a mentor that he introduced me to investing. Then he, you know, heard that I wanted to join the Marine Corps and he literally, he guilted me into applying for a Marine Corps scholarship cause I was just gonna enlist like my brother did. And he said, well you could do that if you want to be selfish.
Erik (4m 47s):
He's like, but you have a skillset that lends really well to being an officer. So if you wanted to do really the right thing for you and for the people that around you, you should look at that. I did ended up getting a scholarship and that's the only reason why I went to school wasn't gonna happen otherwise. We didn't have that kind of money. The way I explained it to people is like in my mom's bathroom, I literally could see through the floor into the basement and we didn't have the money to fix that. All of that kind of painted a really interesting initial relationship with money and I'm very thankful for it, to be completely honest with you because it made me appreciate what not having money looks like.
Erik (5m 28s):
And then also as I've developed wealth over time, I truly appreciate it and it's not just the, you know, the things that I can buy, but it's also the capacity to take care of my family and things like that. So after high school, went to college, did that, did ROTC there, then I joined the Marine Corps, did six and a half years mostly out here in Camp Pendleton. And then I got outta the Marine Corps. I worked at Deloitte, which is a consulting firm. I actually think you guys have it out there too. Yeah.
Phil (5m 53s):
Hmm. Yeah, worldwide. Yeah, yeah,
Erik (5m 55s):
Yeah, yeah. So worked at Deloitte for two years in, in management consulting, just to learn how the world worked. And then that's when I decided during Covid start a YouTube channel because I'm kind of an evangelist for a handful of things, one of which is investing. And yeah, that's really where I'm at now.
Phil (6m 11s):
So you mentioned two mentors to me and our previous conversation. Who was the other mentor and how did they help you out and what did you learn from them?
Erik (6m 17s):
Yeah, so like you were saying, the first mentor is the one that kind of introduced me to the, the concept of investing because it was, I didn't know what it was. The only thing I was doing when I was in high school, really in junior high school, I started working when I was like 13 and I started by splitting wood for a local family friend. And then I just started working a bunch of different odd jobs because if nothing else, my mother taught me that in spades, which is work. And she was an active display of that. So that first mentor, he saw me working, he said, you know what, what are you doing with all that money? So I'm just saving. And he said, have you thought about investing? So that's how I got started investing.
Erik (6m 57s):
Then I met my second mentor when I was in college and he was an army veteran and a extremely grumpy old dude that didn't want to be bothered by anybody. And I loved him because he didn't want to talk to me. And that's the exact kind of person that I wanted to talk to because innately I didn't know it at the time, but subconsciously I think I knew it is that that's the kind of person I want their advice, because he's not trying to give it to you. And it means to me, he was very content with where he was and I mean he was, even then, he's still alive now, but he was older than he is like in his seventies. So he was just over it and he was just kind of coasting.
Erik (7m 38s):
So when I was telling him about, you know, my master plan for trading, because I started trading derivatives specifically options. And I, you know, essentially I, I thought I was the next genius. I was special, you know, all those things.
Phil (7m 53s):
You were Dunning Kruger personified, were you? Oh,
Erik (7m 55s):
Of course. Exactly. I mean, I, anything I touched was just gold. And two things he said, the first thing is don't let a bull market confuse you with brains. And the other thing he said is, your plan is absolute garbage because you don't have one. And I was like, what do you mean I, I have a plan. And all he did was start asking me, it was like, I have questions and he dismantled everything. I said, oh, okay, you know, well this is what I do. He's like, okay, so what do you do if this stock goes down this much and this amount of time, oh, I do this and then what happens if it goes down more in this amount of time? He literally just asked like a series of wishbone diagram questions and it wasn't even that many.
Erik (8m 35s):
But what he did is immediately identified to me, even though I felt like I had put in a tremendous amount of effort, it, the amount of effort I put in, it's inconsequential. What matters is the output and the output was still superficial at best. So him completely dismantling my genius plan was probably the best possible thing that could have ever happened to me. And that's the second mentor. I still talk to him today. Every once in a while he's still grumpy and I love him.
Phil (9m 2s):
They're great, those grumpy dudes, aren't they? Because it's like you say, they're, they're, they're not gonna give you advice and willingly, you know, they don't wanna, they really don't wanna help you. So what happened, what was the change in your mindset just coming out of that conversation with, with him?
Erik (9m 18s):
It was really the, the depth of the frailty of my plan really is, is what it was.
Phil (9m 23s):
I love that the depth of the frailty of my plan that should be on every investor's, should be on every investor's desktop.
Erik (9m 31s):
Yeah. And it's, it's vicious because again, hmm, I, I genuinely did feel like I, and I did put in a lot of effort. I worked really hard to build what I had, but then him just casually stumping me with a handful of very simple questions. It just really elucidated that point that regardless of how much effort I thought I put into this, it's just, it's not enough and it doesn't matter how hard I work at it, what matters is getting the output to the correct spot. So really he's the one that got me so passionate about things like trading plans, which that's one of the things I advocate to everybody.
Erik (10m 14s):
And even if you're just a passive investor, creating a trading plan is second to none. It really surprises me how much research, it doesn't surprise me. Let me re step on that because I, I used to do the same exact thing, but looking back, I was really surprised with myself how much research I would put into what motorcycle I was gonna buy so that I could flip it. That's one of the things I did for money or what car I was gonna buy and how I was gonna flip that. But somehow I just thought that I was gonna step into the world of investing, achieve above average market returns and just go off the fly, off the co. It's just wild looking back at that. So he's the one that really highlighted how awful that is and how narrow-minded that is.
Phil (11m 4s):
So what, what were you trading and how did you actually, what was that first moment when and how did you discover, tell me about that process.
Erik (11m 12s):
Yeah, so when I was in ninth grade is the first time I opened up my account and it's from that first mentor, the junior ROTC instructor, he told me about investing. So I bought a handful of stocks with the money I had, I don't even remember how much it was, it was probably two, $3,000. It was just essentially everything I saved up and I bought some equities and one of the worst possible things happened, they immediately went up and it made trading seem easy, you know, this investing thing's a joke, you know, the only problem I'm gonna have is to figure out what to do with all of the money I've amassed by the time I'm 25 because everything apparently only goes up and this is super easy.
Erik (11m 52s):
So I, I bought a handful of products, I mean things like Apple, Amazon, Netflix, genuinely, I mean I remember buying them pre-split Apple when it was like $224 I think it was. It was just insanely cheap. And after I had that like four months where I just saw them skyrocketing, I then pivoted to trading derivatives. So that's when I was impatient, which I think most young men probably can identify with, whether they acknowledge it or not, I'm still impatient to be clear, but I was even more impatient then and I wanted to make more money faster. So I started looking for different ways.
Erik (12m 33s):
I tried binary options, I tried candlestick reading the same stuff everybody gets into, most of it's complete and utter garbage. And then I finally found derivatives. So I started trading what I could and learning about them and that's really what my second mentor specialized in. He trades derivatives. So I think that's what kept me on that track. But it definitely started with just buying and holding some equities, seeing some success and then being impatient, wanting to accelerate that success. And yeah, that's essentially what got me running down that path.
Phil (13m 2s):
So I'm assuming that 30,000 hours of self-education happened, what, between the military and starting your YouTube channel is that case?
Erik (13m 11s):
It's essentially, yeah, the way I came at that number is I looked on average how much time I spent on the topic of investing essentially since 2007 when I started. And I mean realistically that's even a pretty low ball estimate. It's just the 30,000 sounds better than 34,000. So I picked 30, I have an obsessive personality naturally. So as soon as I started getting interested, I started devouring every knowledge source I could find on the topic I was going to my library. Cuz that was still a big thing. The internet definitely was there obviously, but it just, it's not, it wasn't what it is now.
Phil (13m 50s):
Hmm. It's changed so much hasn't it? Yeah,
Erik (13m 52s):
It's incredible. I feel like the internet is, it's a blessing and curses at the same time like most things because it, is there anything you could ever want to find is there, but there's so much of it now that it's so confusing for people. It's almost like just information overload and I'm actually really thankful for even that where, you know, when I went to the library, the, the books there, what the books were, right, there's not this unlimited number of alternative sources. It was what it was. But you know, I came across thing like The Intelligent nvestor, which any new investor that or trader, I really do think it's a great book to read, but man, it's boring.
Erik (14m 35s):
Oh if you can get through that, you're doing okay because it's so boring. And the, the other thing I had an issue with that book is just a lot of this stuff is pretty old. That's not to say that it's not pertinent. A lot of it still is, but I mean they're still talking about constructing portfolios where bonds are yielding pretty heartily and you want them in your portfolio, whereas now you're still like, not really. I don't necessarily think that's a great idea. Mm. So yeah, that's, that's how it evolved was I saw that initial success and then I just wanted to learn literally everything about it. That's just kind of how I naturally operate with most of my hobbies actually.
Phil (15m 17s):
Yeah. And so you did pretty well out of it and during that period of time as well, presumably?
Erik (15m 22s):
I did. So I was really fortunate because when I first started trading in 2007, like I said, I saw that initial success and then I happened to want to start actively trading. So to do that I didn't have a bunch of capital that I could dump into the account. So I had to liquidate the account to start trading. That coincided literally haphazardly with the oh eight crash I happened and it, I, I am so clear about that because this was no sort of premeditation, it was pure dumb luck that I moved to cash to start trading right as that crash started. So as soon as that crash started, I just sat and did nothing cuz I didn't know what to do and I started trading some bearish strategies because I learned a handful of them and it was all defined risk.
Erik (16m 13s):
So I did okay, not great, but I didn't get ran over like most people did. And again, to reemphasize it truly was just happenstance.
Phil (16m 21s):
So it was a, it was a little big short, was it?
Erik (16m 25s):
Yeah, I think that's a, the, the exact way to frame it. Once I saw the crash starting to happen again, I was just really trading with what the broader market was doing. I wasn't doing any sort of, you know, complex strategy development. I didn't have the acuity for it yet, so I was still mostly just trading directionally and that's about it. But luckily during 2008, eight and nine, the direction was pretty clear. It, it wasn't that difficult and I didn't have a lot of bad scars. I noticed that with a lot of new traders where if you talk to 'em about trading something to the short side or to the downside, it's like the, it's Spanish, it's a completely different thing.
Erik (17m 6s):
If they're English speakers, it's a completely different thing for them. And for me it wasn't, it was like, oh okay, well if I can do this when it goes up, then I'll just do this when it goes down. And that worked out pretty well. And from there it's just been a constant refinement. I was actually just talking with my wife about this, it's kind of hilarious. Most things that I do if I look back at them, like even two years, if I look back at what I did, I'm, I'm literally embarrassed even now I'm still embarrassed. Like if I look at my jiu-jitsu, if I had tape of my jujitsu two years ago, it would be embarrassing. And I always attribute that to two things and I generally think it's a good thing.
Erik (17m 46s):
It means that my standard is continuing to rise and my skillset is continuing to rise. But looking back at my early trading, some of the things were genuinely okay, like trying to trade the trends and things like that. But I just look back and I think there's so much that was just not good.
Phil (18m 6s):
We should just say at this point that we are talking to beginners at the moment and this kind of trading can be very risky. Absolutely. And so we're not encouraging anyone just to go in and start trading options straight away without knowing anything about what they can do because totally agree. You know, you can so easily blow up your account. What would you suggest to someone, say someone who's just starting to become interested in markets and they are starting to become interested in using technical analysis and trading trends like, like yourself, where is the best place to start as well as with your YouTube channel obviously,
Erik (18m 42s):
And I mean to, to talk me out of that, my channel is not a good place to start because I, it it's not, yeah, it's not that it's all super technical. I do have some introductory stuff there, but I think a lot of people, I was actually talking to some of my audience members to like understand where they're at with trading and things like that a little bit more. And I, I've learned actually a pretty commonality between most of them and it's, most of them already went through what I like to call the initial phase, which I went through the initial phase is when you wanna make a bunch of money really quick and you're gonna try things like candlestick reading, you're gonna try things like day trading, you're gonna try all those sorts of things until you get burned enough and then you become a little bit disenfranchised and then you realize, okay, I probably need to do something else.
Erik (19m 31s):
And most of my audience falls into that other bucket. So there are people that want to actively trade, already tried the stuff that always seems good to all of us, but really isn't. And then they're disenfranchised a little bit and they're looking for like the, the truth behind this stuff. And not that my way is the truth, but I talk about what most of the finance space doesn't talk about, like things like hard work, hard smart work, the fact that it doesn't matter if you spend 2000 hours on something, you're not guaranteed success. You still need to be smart about it. And that's disenfranchising to some people. But in my opinion it's the reality. So to get to your question, I think if I were to start all over again, my approach would be pretty simple.
Erik (20m 16s):
I really believe getting into some sort of buy and hold ETF position. So starting to dollar cost average my way into SPY or IWM, those are just two index ETFs, one's the S&P500 is the Russell 2000, which is small cap stocks. And I would start there, just buy and hold. And the reason for that is I think a lot of people, at least for me, again going back to that level of impatience, I wanted to trade because I didn't wanna lose time. I was nervous that if I didn't start I would lose time. But the problem is the only thing I did was move the goal post backwards sometimes because I'm taking trades that I don't fully understand yet because of that impatience.
Erik (20m 58s):
So what I would do is set up that buy and hold portfolio so that it's working in the background, it's already going for me. And I would learn about super basic option strategies. I would do things like a cash secured put or a covered call and then that's it. I would start by understanding those concepts and then applying those other analysis aspects like you're talking about. Technical analysis still applies to index ETFs. You're not gonna do a bunch of fundamental analysis, you could do some, but you know, because they're index ETFs, they have very broad profiles, it means that they're built up of a lot of individual stocks. So the SPY has all 503 large cap S&P 500 stocks, you know, from the US And then the same thing for the Russell 2000, like I said, it's 2000 small caps stocks from the US.
Erik (21m 45s):
So I think setting up that buy and hold is the first step. And then I would paper trade all of these ideas that you come across, chat rooms, Twitter, discord, wherever you interact, Reddit, I would track them all down, start your trading plan, which seems a little overwhelming at first. But the way that I would think about a trading plan if as I was, if I was first starting was just sketch out my thoughts. I think support and resistance works. This is how I determine support and resistance, this is how I think I would trade it. This is what happened when I traded it and I would do it in a paper account, which is fake money. It's, it's like monopoly money, but it's a way to simulate different things.
Erik (22m 26s):
And what I've learned, I still paper trade now. I've, I've just passed my 15th full year of trading and I beat the market handedly last year. Last year was a good year for me and I still paper trade. And the reason for that is it gives me an opportunity to get initial kinks out of the way so that I'm not burning real money. I think that's a really important differentiation. There's just a lot of people that just bash paper trading because it's not real. They'll say you'll never get the full emotional cycle and I don't disagree with them, but I use the military as an example just because I train in peace time to go to combat and that's not real.
Erik (23m 6s):
I'm training in peace time, I'm not getting shot. I'm gonna go home and have pizza that night, maybe some beer and it'll all be okay should I not do that because that's not actual war, I argue, no, I argue it's really good. It'll never fully simulate actual war. But it gets me through those initial phases so that when you do need to adjust rapidly to a kinetic environment, you're not starting from zero. You have a baseline on some things and it's never a perfect substitute, but it's good to do in my opinion. So that's really what I would do. Buy and hold practice, some really basic option strategies, cash secured put into a covered call that's really called a covered strangle. It's one of my, my favorite strategies, I still use that all the time now and paper tried
Phil (23m 48s):
It. So a cov covered call that's a covered strangle as well. Is it, is that like where you own the underlying stock and you sell a call option on your underlying holding? Is that how that one works? With
Erik (23m 59s):
A sh with a cash secured put as well?
Phil (24m 1s):
Oh with a cash secured put as well.
Erik (24m 2s):
Yeah. So the way it would work is you would sell a cash secured put, then you would have long stock and then you would have a short call as well. So, so for anybody that's completely new to options, essentially if you, if you sell a covered call, you're giving up some upside potential but you collect money upfront and if you sell a cash secured put, you're essentially just telling somebody, I'm willing to buy your stock at a specific price at some point in the future. And you collect money upfront for that. So we're just combining those two different strategies with a long equity position.
Phil (24m 35s):
Yep. So I think today we're talking military grade financial training with a guy like you and you know we, in our previous conversation we talked about stoicism, discipline, ego, purpose, growth via discomfort, which all sound pretty military now there's a lot of words in there but have you got something to summarize that?
Erik (24m 57s):
Yeah, a couple things. So the first one is I increasingly learned that the power of the ego, it really cannot be understated. And the, the most nefarious part about it is that a lot of times your ego is interacting with your decision cycle subconsciously you don't even know it's happening. If there is a point in time where you want to do something and you know in your higher brain that that's not the right thing to do and you try to redirect you somewhere else, there's a lot of subconscious processing that's happening. Then there's the internal negotiations and things like that and a lot of times they're based on good things. So I think acknowledging the fact that the ego has an overstated influence on our decision cycle is important when we approach something like trading.
Erik (25m 48s):
So we, there's super well-documented biases in traders and investors, one of which it's one of my favorite white papers called the the behavior of individual investors. You can look it up on ssrn.com, it's fantastic. And one of the things it talks about is just some of the propensities for traders, one of which is we like to cut winning trades short and we let losing trades run and it's because of, you guessed it, ego, we like winning trades, we like being correct. So that's why as soon as we have something that's in profit, we want to take it, we get to realize being right, huge win big plus to the ego when something's losing and going against us, we don't wanna close it.
Erik (26m 33s):
We want to hope because if we close it, we just acknowledged that we're wrong and we put money in it that we're wrong. So not only do we have a financial loss, but we're also completely incorrect in that trade. So there's tons of small variations of that when it comes to the ego and the longer you trade, the more you really develop a relationship with it. So I look to create space for me to make sure that the decisions I'm making are typically based on some sort of evidence, whether it's trade notes or a trade log that I'm maintaining studies that I've done. But it lets me know that what I'm doing actually makes sense and it's not the comfort seeking side of my ego trying to intervene in a decision process.
Erik (27m 21s):
And then the last thing I would know on kind of that, that grouping of topics is trading changes. And I think it's important for anybody that intends to trade long term to accept the fact that there truly is no mastery. Again, I spend a lot of time every single week doing this and it's primarily just cause I really enjoy it. I'm fascinated by markets and back to that obsessive personality trait. But I still see things changing. I still see things like I was telling you that I would do two years ago that I would do differently now. So accepting that there's kind of a constant evolution aspect to it, it helps I think orient the brain in the right direction because one of the biggest issues I see with traders and people in general is they believe something for whatever reason and now they're attached to that thought, it's part of their identity.
Erik (28m 15s):
If that thought is wrong, they're now wrong. And I think it's a mistake. I think the way that I perceive trading specifically is there's something that I've done for a while that might be proved correct or incorrect, whatever. What I'm focused on is truth. I'm focused on what is actually working, not whether or not my strategy is the best. I tell people all the time, as soon as I see a scenario where my strategy can be optimized or if there's something better, I am dropping my strategy like it's hot and I'm moving on to whatever is better. I'm not attached to it, I stay really open to new information and I focus less on right or wrong and more on truth because that's where people's minds get entrenched and it doesn't make anybody money.
Erik (29m 2s):
Phil (29m 3s):
Mentioned in that answer journaling and taking notes and putting it down. And I found that that's been one of the, the best things for my investing is actually when you do place a trade or even just buy an etf, you write down the reasons for doing it so that several months later and you're looking at it on the screen and you're going, what's going on here? You actually know what's going, what's happened in the past and how you might have screwed up in that intermediate period because you get that little bit of distance between when you make the decision and when you've got a bit more of the cold, hard light of truth revealing itself.
Erik (29m 39s):
Yeah, I I absolutely love that. And the other thing is, you know, again our, the way our psychology typically works, we have a, a habit of really skewing things that have happened. And I think by journaling and doing things like that, you really limit that happening because you might be in the middle of a losing trade and is as you journaled it before you're like, I think it's gonna do this. And then you know, this is what happened or didn't happen in your notes and as you look back at it, you might recollect a completely different experience than what actually happened. I even noticed that with my childhood and a lot of that again is because I had a slightly abusive father and my brain does all sorts of gymnastics to bucket that away so that I have a different recollection when I look back at it.
Erik (30m 30s):
But then sometimes I would talk to my mom and my brother and they'll look at me sideways, those what? What do you mean that's not how that went or that's not what that was like. And I was like, okay, you know, obviously my brain is doing a lot of things to protect just my day-to-day processing and whatnot. So in trading, again it's one of the most strange places because it's only you verse you, there is no audit, there is nobody that you have to report to and say this is what happened today. And they screen you and say, what do you mean? You know, you said it was gonna go up and it went down. You don't get to say that to somebody and them just be like, oh, okay, no problem.
Erik (31m 10s):
You can't justify things like that away when you're doing it externally. But when you're creating trade notes like that, you start to create your own check and balance system. I actually in, I have a, a free discord that I run and I have a sheet with one of my members who I'm longstanding friends with. He actually helped me set up the discord cuz I'm an idiot and we, we have it, it's called a prediction sheet and it, that's all it is. We're just listening things that we think are gonna happen, our confidence interval associated with it. And we're seeing what happens. Funny enough, some in some super preliminary results, but the two of the calls or predictions that he had with the highest confidence interval didn't happen.
Erik (31m 54s):
But he has three or four other predictions that have happened with the lower confidence interval. This doesn't surprise me whatsoever in my studies of just psychology specifically with trading, but it's hilarious to see. And he was shocked by it because again, what happens is if he didn't track it like that and he looked back at it, there's always a reason. There's always something else that happened that now changes the way we perceive that original assumption. It's just really, really interesting stuff to see. But like you said, the logging process is a must for anybody that wants to trade seriously.
Phil (32m 28s):
And what's a tactical pause, and I, I'll just preface this by, I was editing another podcast episode this morning and one of the guests was talking about Warren Buffett, a quote from Warren Buffett in that it's the market's like baseball and you don't have to swing at every ball that's thrown at you is a tactical pause like that.
Erik (32m 47s):
Exactly. So in the, in the Marine Corps, a tactical pause is typically when you are in the process of some sort of actions and the best course of action at that point is in action, but it's different in the mindset. It's a purposeful pause. It's not a, I don't know what to do so I'm frozen. It's not a, I'm scared and don't want to do it. It is a, I want to let this situation develop a little bit more so that I can make the right decision. And that's exactly the same concept in trading. So for anybody, again that has seen some of my work, especially in early 2021, I was lightly invested for like the first half of the year for a lot of different reasons and I was super vocal about it.
Erik (33m 37s):
I showed my utilization week over week in our live sessions, and that's a tactical pause. I always maintain some exposure, but I'm letting the situation develop and it's not even like over the course of a day or week, probably for the first four to six months of last year or yeah, in 2022 and 2021, but specifically 2022 for like the first four to six months, I probably was no more than 15% utilized in the account. And that's it, that's me keeping my cash on the side, taking a tactical pause, allowing the market to develop a little bit more so that I can really apply the correct approach for the market as I saw.
Erik (34m 17s):
Because a lot of what we saw last year was very novel.
Phil (34m 20s):
There's so much noise. You referred to this previously as in our conversation about how many channels there are, how many podcasts, how many blogs, you know, and you got the financial media and a lot of people don't know how to shut out the noise or how to ignore the noise or use it in their, to their benefit. What would you suggest for people in that?
Erik (34m 39s):
I think it's the same thing when people are looking to start trading. There really is a pretty important element to picking something and sticking with it for at least a defined period of time. It doesn't have to be super long, pick four weeks or something. And I think that that helps people focus because without that there are so many information sources that I, I even find myself now getting just battered around. If you look at my tabs sometimes during the day, I'll have news up from eight to 12 different places. It is just too much. It literally is just too much. So I think finding whatever you, you know, tribe or community is however you'd like to phrase it.
Erik (35m 23s):
But once you find a, a group of people or if it's just yourself or just a friend or if it's nobody and you just like to create a few information sources, but I would implore people to keep that scope a little constrained. So like the first month of trading, keep it wide open, look at everything, just drink from the fire hose. It's gonna happen no matter what. But hopefully after a few months you start to narrow down the things that you like, don't like the opinions that you respect. That's actually one of the things I find pretty funny is a lot of people on Twitter, I, I like to do Twitter spaces with some of my friends and whatnot and I'll, I'll see all sorts of people in Twitter pontificating about the tenants of successful trading.
Erik (36m 11s):
That's not to say that they're not successful, I don't know. But I do ask myself how many of these people are successful and how, like what account size do these people even have? Because if there's somebody that's, you know, with a $500,000 account trying to pontificate at me the correct way to do things, not that I don't believe them, but there's a certain proof in the pudding and I think it's important to maintain that because otherwise, and it's not to these people's discredit, most of them are genuinely trying to help. But the problem is, is a lot of them, they're not even ready to help. They're helping prematurely because helping people feels good.
Erik (36m 51s):
It's why I do these podcasts. It does feel good, but it's to the disservice of folks. So I would make sure that the people that you choose to follow, again, like you put some mental rigor for whether or not they're a viable source for you and if they make sense, what I like to tell people is, you know, as long as somebody's been trading successfully for five years or more, statistically speaking, that's probably an okay person to look at. I personally still wouldn't consider five years anywhere near enough. Like the guy again that that I really used as my mentor, he was probably trading for 40 years and you don't always get your pick of the litter.
Erik (37m 31s):
I came across him by luck. But especially the people that you see in all of the, the short content platforms, be super careful. That's not to say that they're bad, but the people that are trying to sensationalize trading make it look like a game, make it super entertaining. They're typically, they're in the wrong space. And I would wager that the majority of them have probably been trading less than five years. And the reason why I use that metric is that's also from a couple white papers that I've read, one of which is called A Day Traders Viability. Again, you can find that on S S R N and it talks about the statistics of day traders and people who are able to succeed in the art of trading for an extended period of time in the large threshold is five years.
Erik (38m 16s):
So I would find sources that you truly value that you think are legitimate and then stick with them at least four weeks, something like that. Give it a shot if you originally thought it was good. And then if it's time to move to something else, do that. But I would try to keep your score, your scope at least after you get through that initial fire hose to like less than 10 sources of information. It's too much. Otherwise after that, once you understand how to think on your own, how to process the information on your own and things like that, sure, open back up and explore different things, stay sensitive to different styles, but if you just find yourself too scoped out early on, it's gonna be near impossible to develop any meaningful eminence.
Phil (38m 58s):
So if people like you and wanna find out more about Erik, how can they do so?
Erik (39m 3s):
They can find me on Twitter at esInvests. I'm on YouTube the same at esInvests. Those really the two main spots. I do have a website for anybody interested. I don't really do much on there if I'm being honest with you. But it's esinvest.com and it just links out to everything else essentially.
Phil (39m 17s):
So Eric, thanks very much for joining me today. It's been a real pleasure speaking with you.
Erik (39m 21s):
Awesome, thank you for having me.
Chloe (39m 22s):
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