Articles

Let me tell you about my investment process: I trade whatever the hell I want to trade whenever I feel like it.

I’m exaggerating, of course. I do have a process, but it is a little unorthodox. I run technical studies on about 50 charts every day. I scroll through Twitter and try to pick up sentiment clues. I scan my email inbox for ideas and more sentiment clues. 

About the extent of my fundamental analysis is looking up market caps and P/Es and dividend yields. I look up relevant news articles and opinion pieces. And that’s about it. It’s not very formal. I don’t have a checklist of 20 things I must do before I buy a stock. Sometimes I do all these things, and sometimes I do none of these things. Sometimes I really do buy a stock on a whim, and the stock I buy on a whim ends up my biggest winner. Sometimes the stock I do days of work on is the biggest loser. There is no correlation whatsoever.

Some people are focused on process, and some people are focused on results. On Wall Street, most people are focused on results. The results? Make as much money as you possibly can. 

People who focus on process and procedure work for the government and universities and HR. HR has processes. There is a specific way you have to hire someone, and there is a specific way you have to fire someone, or else you are going to get sued. The world needs people who are focused on process. 

SpaceX has people who are focused on process. There is a checklist of stuff that needs to be inspected and cleared before you send a rocket into space. Otherwise, it is going to blow into smithereens. But the guy on top, Elon Musk, cares about results: Put the damn rocket into space.

People who focus on process typically work for people who focus on results.

The CFA program is all about process. You are going to memorize these formulas and dividend discount models and plug and chug all these equations and spreadsheets and build financial models before you invest in a stock. The CFA program doesn’t care about results. Its entire existence is dependent on process.

But like I just said, people who focus on process typically work for people who focus on results. You can be a financial analyst with a CFA who is focused on process, but you will work for someone who focuses on results.

Bureaucracy Is the Enemy of Finance

I am a results guy. I don’t really care how you get there… as long as you get there. I doubt Stanley Druckenmiller has much of a process. Not to say that he puts on trades on a whim (though maybe he does), but it probably goes like this:

• He has an idea.

• He develops a thesis.

• And he might have some people working for him who do some investigative work.

That said, he will probably start putting on the trade before the investigative work is finished. He’s not filling out any forms or getting permission from anyone—he just trades. And the more process and structure you put around the investment process, the more prone it is to dysfunction and losses.

Bureaucracy is the enemy of finance. My first job on Wall Street was as a clerk on the P. Coast Options Exchange for a market-making firm called Botta Capital Management. It was a small firm, with about 50 traders across all the exchanges. I worked there for a while, and a few weeks before I left, the office manager handed me a form. A performance evaluation! 

I said, “Are we really filling performance evaluations on traders? I thought that P&L was all that mattered.” I thought to myself: This firm is doomed.

It went out of business a year later.

Intuition Counts for a Lot

Investing is a creative discipline, which requires imagination and inspiration. If you want to succeed as an investor, or as an investment firm, you have to create the most intellectually free environment imaginable, where all ideas are welcomed. 

Lehman Brothers was such an environment. I remember working there, fresh out of the military, and I was given a few pieces of trading software. I asked my boss, “Do they have instruction manuals for these things?” He laughed. I had to figure it out. 

There were no instruction manuals or four-inch binders with standard operating procedures. Lehman put a bunch of smart people in a room with a bunch of computers and phones and told them to go make money. It was surprisingly tolerant of losses. No one kept track of vacation days. Incidentally, this was the business model of every Wall Street firm in the ’90s and 2000s. Now, there is process and procedure, and the firms are correspondingly less profitable.

While you are busy fat-fingering numbers into a financial model, the stock is going higher. By the time you are done with your analysis, it will be 20% higher. 

What I’m saying is that intuition counts for a lot. Intuition will fail you occasionally, but your models will too. The military is famous for focusing on process. But in an operating environment, the process goes out the window, and the only thing that matters is results.

Jared Dillian, MFA

P.S. Last chance to get three months of The Daily Dirtnap (TDD) for 99 bucks—you’ve got until midnight to jump on this extended Black Friday/Cyber Monday deal.

What are you signing up for? Daily, unfiltered, actionable market insights. I share both trade ideas and the analysis to help you develop your own. TDD is normally $795 for a full year, which is inexpensive for what you get. But for the first time ever, you can try it out for three months and then decide whether it’s a good fit longer term. Get all the details here while the offer’s still up.