In this week’s episode I interview Michael Martin.
For those who don’t know Michael, Michael is an author, blogger, editor, trading coach, podcaster, and professional trader.
He’s the author of a book I thoroughly enjoyed called The Inner Voice of Trading and he’s been in and around the business of trading and finance for the past 25 years.
What I admire most about Michael is his tell it how it is style.
He’s not one to mince words and in this interview he gives some great insights from not only being in the trading game but also being around some of the trading world’s best traders.
I especially appreciate our discussion around how Michael came to be mentored and later on became friends with Market Wizard Ed Seykota.
As Michael said “at the end of the day, trading comes down to you and your relationship with money; and relationships mean emotion”.
“Trading after all is just a part of life and the way you handle money is probably a reflection of your best relationship with a person or your worst relationship with person”.
That’s a powerful statement worth reflecting on.
Here’s what you’ll hear on this episode:
“When I trade it’s about me and what I know about myself, and the markets and instruments I’m trying to trade.”
On trading systems that are being marketed –
[Tweet “”We’ve never seen a backtest we didn’t like.””]
“You have to think about your trading as not just about the financial payoff but it’s the emotional payoff”
[05:00]Houston: Greetings Michael, welcome to the show.
[05:02]Michael: Thank you for having me.
[05:04]Houston: Yeah, it is a real pleasure to have you on the show. Before we get going today I am just going to introduce the audience to Michael. Today’s guest is Michael Martin, he has been a professional trader for about 25 years, he is also an author, editor, trading coach and podcaster, Michael has written for numerous industry journals and publications and he is the author of a book I thoroughly enjoy called The Inner Voice of Trading, I think we will spend a bit of time talking about that book today and some of its contents and when Michael spare time he also teaches securities and related courses at UCLA and is also in the faculty of the New York Society of Security Analysts and in his extra spare time he also blog over at martinckronicle.com. So before I launch into things, Michael did I miss anything there or did I cover the high level stuff.
[05:58]Michael: No you got it all, I mostly teach through my own outfit anymore. The UCLA stuff was great, it was a way to kind of give back to the community and teach through like an open enrollment style environment, I also guest lectured in Behavioral Finance at Anderson School of Business for a while, that was a lot of fun and the nicest stuff I teach commodities there, so it is a elective course for the CFA candidates
[06:28]Houston: And so tell us a little bit more about yourself, so what’s your trading background, how did you get involved with trading and maybe you can share with us your current approach. I assume you still do a bit of trading. What is kind of your approach in the way that you teach the folks that you coach and the folks that you teach?
[06:47]Michael: SO the way I got started was, I was a hard worker, I had my own company when I was very young, I did landscaping when I was younger and I was all cash and I wasn’t thinking of hiring new people or more people to work with me to kind of leverage labor. I really wanted to work hard but also work smartly and so I was just thinking about where would I put my money and make it grow. I wasn’t really interesting in real-estate, because it is kind of illiquid, yes you can buy and sell houses, but the most part you can’t just go get your cash. So that’s how I got started with investing and trading and then when I was at school I happen to work in a part of the school that was called Facilities Management in like a work study kind of a deal and after I was done with my Clark Kent kind of thing. They said hey listen, did you know that we are the third largest landlord in all of Manhattan besides the City Proper and the Catholic church because we have enormous exposure to basis risk and energy markets because all of our rental agreements are utility included, so if you had a sweltering hot hazy hot and humid Indian summer even kind of deal, people would be jacking up the air conditioning and not worrying about who is paying the bills, because it is utilities included right, the same thing in the winter, if you had really cold winter especially one that kind of crossed over the widow maker March, April again people would be gemming on the heat and there is your heat and oil exposure, so I had to help them create on Lotus one, two, three seasonal model for energies for fuel oil, heating oil and natural gas when seasonally they might want to hedge where was their risk and that kind of stuff outlining events notwithstanding, then I realized if it is a zero sudden game I could take those same models and use them to make money, obviously I would have to get into position sizing down, because as a speculator you don’t need any of the size of any particular size. So hedging is a lot easier cause you know what your exposure is, but speculating you have to figure out what’s the optimum size for your temperament not just for your model, there is an intellectual answer for your model then there is the emotional answer that you can withstand and not want to do Acapulco Cliff dive off the top of the roof of your building, which is only a onetime event depending on how big the building is and so that’s the crux of it.
[09:41]Houston: And so you started building models then, so that’s kind of still a big leap from building models to like you said learning your temperament and handling your losses and this is probably like in the mid 80s, is that right around the right time frame?
[09:56]Houston: Okay, so how did you then, how did you start, did you open up accounts with future brokerage at that point – how did you cut your teeth and put your first trade on?
Michael: I had an account with a firm that was concurrently registered as a broker dealer and FCM and so all I wanted to do was the paper work to qualify for having future margins account. I didn’t do a lot of futures until I actually got to Wall Street where I knew I could do it myself more than trust someone else, I didn’t really want people telling me that hey, we have to buy the Duetsch marc here because it was trading still at the time – I didn’t want to hear anyone else nonsense, because I had a stronger inner game from age very self aware and I just didn’t have any need for a sales person to kind of market stuff even if they thought they could make me money, my level of trust for people like that, it starts out low and it usually gets lower.
[11:04]Houston: Nice and so do you remember the first trade you put on was it a winner or loser, you remember that?
[11:15]Michael: I honestly don’t remember, I tried to write about the woops, not the woops but I tried to write about the ones that I did remember where at any given moment of my career where I really had done a lot of work and research and study and reach out to certain people, you still get hit and you still get blindsided, so those are the ones I remember most, it probably was a grain trade, but I don’t remember I know I was trading soft and grains quite a bit. I try to stay away from things that I would see in the headlines, back then there was no internet. I didn’t want to wake up and read the C section of the Wall Street Journal or even Baron’s the following Saturday and see something like the whole world is short corn after I just put on a monstrous position or an old crop new crop spread, so I try to stay off the beaten path is something I still try to do these days.
[12:16]Houston: Interesting, so my understanding of the way you trade is that you certainly trying to build a sizable position or I guess maybe position trading is probably the best way to characterize it holding it for longer periods of time and looking for the larger moves around commodities and perhaps using spreads.
[12:36]Michael: I would say that is a fair assessment. I think after seeing a lot of different types of trading, I really don’t have any one style, which probably sound blasphemes to many people where you have to have a system and you have to do things like I would probably say that you could say I am a discretionary trader, but everything is still systematized, like I just don’t trade futures out right or future spreads or just derivatives and options – my portfolio is like a drain catch soup of stuff – I know what my risk is, I know what my entries are, I know what the long term goals of my trading and investing are suppose to be. I just think that one style doesn’t A it doesn’t feed me emotionally and two if you just trade one style like especially trend followers who are taking it in the back pocket right now, it’s the worse commodity markets in the history of mankind and some big places not to mention any names Chesapeake are down to one account and 12 million in assets or something like that, so it says something not just about the methodology, but just where we are in the times of people making out locations, is it the model or is it people just going to the ETN, ETF space or is it just people losing faith in the manager and the process, these are tough questions to ask and you have to be able to afford draw downs and people with drawing money, so if Jerry Parker and Chesapeake, John Henry and Dunn are out of the business it says quite a bit about that space
[14:21]Houston: And so I have heard you speak about this in your previous interviews and your own show as you use this idea of – you have a team of three time, money and capital. You like those working your team when it comes to trading. Can you elaborate on what you mean by that?
[14:39]Michael: I am just writing it all down now, you said time, money and capital. I don’t know don’t know how you define money other than capital.
[14:43]Houston: Oh, I guess maybe I missed one there.
[14:56]Michael: No, leverage. I am going to cross out capital, this is a color by number follow it home model, so I have time, money and leverage, that’s absolutely correct, so remember what I said I wanted to work hard, but I also wanted to work smartly and this is what short term traders and day traders typically come to find out the hard way before they make the conversion to trading more smartly and expanding their time horizons. I can work for my money and I can have my money work for my money and so if you buy real estate, you know you have really great tax treatment, you can buy a piece of property, put in a tenant, have the person hope cover the PITI and as long as your cash flow neutral just hopefully positive you will get the growth, you get the cash flow, you get the depreciation with rates been practically at zero you can also try to increase or better your financial situation in terms of the mortgage in the commodity and so we are talking about option like puts and calls and stuff. So I want to make sure I have time on my side just for the very fact that I was talking with Steve Steers the other day in an interview that is yet to be published and we were talking about the effect of ESPN on Disney’s parent company and how they receive approximately six dollars for every box or subscriber that come through a traditional cable channel or direct TV kind of a deal and we talked about what they would need to replace and I told them that I had been longed to seventy calls, the long dated leaps, then I have rolled to the 90s then I role to the 110s and then low and behold I think it was yesterday they said ESPN is laying off 350 people which you know is a sad day for 350 people, but it is typically a good thing in terms of cost cutting for shareholders, so I don’t know if and when those things are going to happen but I know I have to be there and I don’t want to have to sit at my desk at five in the morning California time to figure that out, because that is what our desk is trading like I just think that is nonsense. If you have to reinvent the wheel every day, you are involved in a process that is not build for long term success. I don’t care how hard you working, you can work hard, but that’s great but the minimum wage in Seattle is fifteen bucks and so if you can make that much money working at a place up in Seattle you probably have a higher quality of life cause you won’t have the stress and you know that your income therefore is a function of time, but setting goals like for two hundred bucks a day trading or whatever, that means your account is too small when you should probably take time off to build a bigger time off to build a bigger grub and if you are worried about slippage and skid on you stop orders and getting nailed for half of tick, because you are trying to fight the high frequency traders, you are trading too small or you are too anal, so stop trading a build a bigger grub stake, because if you are worried about getting scalped for six bucks on the e-mini you’ve got bigger issues.
[18:11]Houston: You got bigger fish to fry than that, and so what about the leverage part? How does that fit in to things?
[18:23]Michael: So leverage just means that we are afforded an implied leverage with commodities and futures so you’re putting down say worse case bases on the span calculators that they use at the exchanges anywhere between 3 and 10%, with option premier on certain things like Disney or otherwise. You know you are putting down a small amount of your capital to control a bigger amount of the notional and you have a built in stop order with the options. If you have a two dollar premium, I knowing what my max lost is ahead of time is also when I was mentioning this to someone else like Disney’s $110 stock, so say you go out and buy a $8 call, now I like what Bob Eiger is doing at Disney and I like where Disney is going period, that’s why I am an investor in Disney discloser, but say something happen that I can’t fathom because it happened before and all of those things that happened before in the book of how bad things happen to good people with the best intentions, so suppose Disney got cut in half or even got cut down to 90, I don’t want to be sitting in something waiting for a 33 or $20 return just to get back to break even, cause I think in terms of finance and financial planning, so all of this trading and investing has to kind of come together in cul-de-sac called your financial plan which is part of your estate plan and I don’t want to be sitting in a dirty diaper of a stock even if it is a blue chip number waiting for something to come back because that is not good finance, that’s probably smart investing, but I need my securities working for me all time, so by using an option I am forced to let the think expire or on the other side let time work for me and let he leverage work for me, because I don’t have to tie up whatever it is $11,000 for every round lot of the stock that I want. I have to obviously for sake the dividend, but I don’t really care about that at this point also, because the tax treatment on dividends is bad, so it doesn’t matter to me.
[20:56]Houston: So the idea then is to summarize, so you are using the options so that you have that build in time stop you going to have to get out at some point it is going to expire, that’s going to get you out of position. How would you decide when to take profits then, so let’s say you are rolling over those leaps, what point is the premise to get invalidated based on price action – is it a combination of price reactions and fundamentals what gets you out of that trade?
[21:22]Michael: I would say keeping the story going with Disney, the fundamentals are still there even if the stock zigs and zags and with options you are doing that delicate balance of the art and science of trading and that you have to have a good, it’s a poker scale so you have to say okay well, this thing gone parabolic, now is a good time to cash out of my debt offset have an opening purchase, have an closing sale and then wait to re enter by something long dated by the money. That’s typically how I would do it, I just don’t role contracts like I would or I use to any way in the futures market where your offsetting one contract and simultaneously re establishing the position, that’s more of a CTA kind of model to keep the exposure. For my style of trading it’s kind of hit or miss whether or not that actually works, so I would typically do it more ([17:25]) which of course is reflected in the trading of my mentors who are now my good friends in my Mike Marcus and Ed Seykota. I want time working for me, because in that kind of space, time heals all wound even there is some bad news or if there is like that flesh crash – the market was down a thousand points or whatever, cooler heads prevail and if you’re in the derivative, you don’t have to worry about getting smack, because the option premier it is what it is, you can take it home over night, you can take it home over the weekend and not worry about getting blasted. The idea about day trading I think, it is very mitotic in that you have a winning position which you are lucky to have in the first place and you have to close it by the end of the day, that’s retarded, you are lucky to be it in the first place, why deliberately offset it I mean it makes no sense and if you are working for a firm that mandates you got to find a new firm, there risk management is not your system, so I wouldn’t let them impose that upon me. I would tell them to go forth and procreate and find another outfit.
[23:42]Houston: And so just back to that Disney trading, so you would get out of that trade if the price goes parabolic and if or the story changes?
[23:51]Michael: Yeah, what’s going to change now? The thing that you are playing with Disney is they are probably going to stream ESPN; it is just my guest as a standalone sooner or later
[19:04]Houston: Everyone is going to want to pay for that?
[19:06]Michael: Yeah, even people who have it through their regular cable, if they can stream it on their tablet or their Smartphone and get the full access to all the seven channels that they have or whatever, because it is not just ESPN anymore, there is a million different versions of it. People love their sports right and so they will likely pay for that added feature of having it mobile, maybe there will be special behind the scenes stuff, but Disney is very smart, I would trust that I don’t know the right answer, but that they do since it is their asset. They could package it and bundle it with other stuff, they can start doing joint ventures at live events, they could tie it into parakeet whatever it is called, mere cat or vine or other type of user submitted stuff that boast the brand and sells the app. You just never know, they can sell it as an app and then have a premium feature where you can opt out of ads, don’t know I am just been creative, but I trust that they know what they are doing, cause it is a very successful medium for receiving sports entertainment and then you have got Star Wars. There pre selling tickets already for a movie that is not coming out for two months and there is a enormous buzz you can’t browse your twitter feed or RSS feeds without seeing speculations. Is Luke Skywalker the bad guy in this movie? So they are getting all this buzz. We don’t even know what characters are going to be there, so they will be merchandising just in time for Christmas funny thing and you have got two more. So you have episode seven then you got eight and nine, plus you might have a spin off. So, most analysts don’t get paid to think creatively or to take chances or to kind of guess, but that to me is a good guess, if you are going to guess if they are going to get it right and that the number will probably be better than expected, because analysis don’t get paid to go too far a foul of what they were taught on the CFA. Even the highest consensus estimates are still kind of conservative when you look at the rules that they use or the guideline they use to publish their research, so again I think you are asking. When do I rule, I don’t have a hard set rule, that’s an discretionary aspect, I have to look on the market and say okay you got to get out when the getting is good, now my preference would be to stay long that long dated call first long as possible, but there is that biological conclusion it will expire, so I have to role it at a time when I think usually on a big up day, like there is news that hits the tape and there is a big up day and you think the getting is good, it might be a good day to sell the call, cause that’s how you got to trade the call, you have to trade the call part of it never mind the intrinsic value. So that to me is getting the best of both worlds as it expressed in the premium and then you wait for things to kind of calm down, let the things settle in, find a new range and then buy something again long dated probably at the money first far out as you can find, so
[27:21]Houston: Makes sense. And how do you use the same kind of approach around commodities, can you still build these types of same narratives and stories when you put on these trades and find these kind of bigger stories and pictures that you can trade around? Is that what you do? Don’t want to presume that’s what you do, but is that how you do the same with commodities when you put on trades around commodities?
[27:44]Michael: Oh yeah. I know it is popular to say like you don’t need to know the fundamentals, but if you take anybody who was like a global macro investor like Soros or Jim Rogers or Caxton or Bruce Kovner and any of those people like they all have a sense of the fundamental story and they are looking for the technical’s to kind of line up to kind of validate in the account of Jim Rogers, he is probably more fundamental trader and he buy things often times in the cash market and he buys, it would be the equivalent of having like a thousand dollars in cash on your desk and he gets like a one penny exposure, so when he is wrong he is early, but he is wrong in such a small way, he is really putting on piece on for the data that he can garner from having the position on to seeing how the markets behaving, cause people trade like they play poker, so you want to see the information you can get with both price action and volume, but well the goal in that case with futures is to build a strong story and research the day light out of it and then when the technical’s line up, you know that the wind is at your back and so you are hoping that you see the follow through, cause then you can have a position on like one of the lessons that I have in the course with Peter Borsch is particular sugar trade I had on for about seven months, were back in the mid 2000s. We caught sugar from about eight or nine all the way up to I think it was eighteen, it went to nineteen on a quarter bases the March of 06 contract, but I think we got stop at eighteen even after been in and out in and out. We had like a 300% rate of return just base on that sugar trade alone, but that is not happening every year, you can’t wield that into happening, you still have to follow the parameter of what you know is smart finance and we were continually adding to winners many times not just many times, not just to three four directional units ‘cause it was going up and it made sense, and all the while I was managing risk, we were managing risk – my rule on risk management is I can scale into positions but when the party’s over everybody has to go at the same time; I don’t need…
[30:32]Houston: You don’t want to layer out of that.
[30:35]Michael: There no sense in layering out and it’s like think about you going to a party – when the party’s over I don’t want the kids hanging out because there’s separation anxiety, it’s like every play date has a beginning, middle and an end so now the party’s over do get the hell out of my house and so if you don’t want to own – say you have a hundred contracts for sugar and the movements are over , why do you want to hold on to five just for posterity sake because if the moves are over and the technicals aren’t there even if the fundamental story has become a little bit blurry to me it’s far better to get out of the whole thing and then come back with a clear head and say okay after a few days. And to be honest, when we did look at the thing afterwards and try to say that or thought that we knew something, we invariably lost on the next four trades but we were trading tiny positions but the thing had gone parabolic and afterwards there was a bunch of directionless market and tonnes of volatility but no directions which for any trader is a mess.
[31:43]Houston: Yeah, I like that idea so instead of trying to hold on to the last few lots and just trying to bask in the afterglow – just get out of the whole position.
[31:52]Michael: And that’s what we did – so for the folks listening at home , if you add ten then you add seven, then you add three, then you have twenty contracts then you stop cause your get out is at twenty if you’re long; so your sell stop is somewhere underneath the market for all twenty .
[32:15]Houston: That’s great and maybe we can just change gears for a second because we’re getting a bit deep – kind of deep into baseball so maybe you can share with the audience – in your book you have a great foreword by Ed Secoda and you mention that he’s one of your mentors and friends; how did that relationship come about , so how did you find mentors like that and did you purposefully set out to find mentoring or what was your path towards building such great relationships with such great traders?
[32:45]Michael: So with Ed, I just cold called him basically. I was already in LA, I was already registered as a CTA, I already had eight million in assets at the time so I already had my company; I was already doing it , was already making money and going back to whatever it was fifteen years – I remember saying I wanted to work hard, I wanted to work smart but I was a one person operation and so I thought it might make sense to have somebody that I could be accountable to and the question is when you’re doing that – who are you going to be accountable to – your parents, who are like it’s legalized gambling or you ought to become a partner in a law firm. My parents didn’t say either one of those but that’s typically what you hear (Houston: it was implied) when you’re trying to do something unconventional; my parents just said go do what you want to do be happy. (Houston: Nice) So, I remember emailing him first and I guess my email resonated with him because he didn’t even answer the email he just sent his phone number and I remember sitting back at the time and truth be told saying that’s just great, I want the answer and all he did was send me his freaking phone number – what the hell am I going to do with that? So, it kind of occurred to me because I’m really bright – about two weeks later that he probably wanted me to call him and so that’s what I did and I do recall we hit it off right away, soul mates kind of deal and I do remember our first chat was for about an hour and a half and he invited me up to his house and I flew up there and we talked about his putting that iteration of the Inclined Trading Village together and I told him I was interested and he said you’d probably come once or twice and get tired and I was like fuck you – I’m going to keep coming and after two years, I only missed one meeting. We met every other Thursday for two years straight and the only times – we had meetings that we’d cancel because of the holidays or whatever but I only had one excused absence ‘cause I was chairing a golf tournament down here that raised a bunch of money so I proved him wrong; and we got a lot out of it, that was fun time.
[35:18]Houston: So, tell us more – what are some of those things that you got out of it?
[35:22]Michael: Well, for one the easy thing to miss was the commitment, right because Inclined Village is in Northshore in Tahoe the state of Nevada, I live in sunny Los Angeles in Bel Air so I’ve got to get on a plane (Houston: that’s a bit of a trek) so people say well, Mike I don’t want to take your courses because they too expensive and I say that’s fine. The Rolls Royce is not for everybody – there’s a reason you don’t see it on sale for eighty grand because it’s not for you and that’s just because it’s me and a bunch of really legendary kind of guys and so it’s not open to open to the public per se – it’s not meant to be. So there was all that planning involved of trying to run the business, trying to be a trader – taking it on the road, getting air fare and accommodations every other week, it was a material financial outlay (Houston: yeah) being in the tribe was free but I has to get there; and admittedly I wasn’t the only person who had to get on a plane to make those meetings – it that kind of group of people – they were a great group of guys.
[36:26]Houston: Very committed, it sounds like
[36:38]Michael: Yes, so basically what you do is the tribe is where you start to learn more about if you’re not in tuned; I had been doing yoga and meditation forever so I had a really strong inner game and so or me the trading tribe was very easy to assimilate and adapt to the tribe life and that process if you will and because I knew what the goal was, I knew what they were trying to get at. There were a few people who were not in tuned with mindfulness or who they were or their emotional systems that they were running that we all run – we all have emotional systems, right. Our goal is to be pleasure seekers so somewhere in everything that you do you can trace it to some kind of pleasure that you get (Houston: right) and so this was very fun to be involved with because you could learn a lot from other people demonstrating and wrestling with their emotions to try to figure out what the drive was.
[37:39]Houston: And so what was the purpose of the tribe? Was it really about cultivating this level of self awareness and having that kind of camaraderie and collaboration to go deeper; was that the gist of it? Or was it more like brass tax stuff too around trading or like you said more towards self discovery?
[38:04]Michael: Yeah; it was more about self discovery but all the other things were peripheral – like there was a great sense of fraternity – it was largely male, I mean we might have had one or two women pass through but the core group was male and it was about emotional intelligence, we really didn’t talk about trading at all. It is very difficult to – I was proof reading this book called the Trading Tribe which he wrote and I would say to him I love that you’re writing a book ; the community is going to love, the FAQ readers, the ….groupies are going to eat this up. You’re probably going to sell a lot of books but to be frank it is very difficult to write linearly about the trading tribe process; and I used one of Ed’s analogy back to him and I said the trading tribe is like sex in a lot of ways – you can write about sex and you can have sex and for those of you had sex you know what I’m talking about. You can read the joy of sex and then you can do and the trading tribe is the same kind of thing just like trading, you can talk intellectually about trading and then you can do it and that’s when the fun starts because all your associations with money and financial literacy comes forth. So it was about emotional discovery and finding things that would come up for you emotionally while you were trading or while you were in relationships for example and where you might have had blocks and we encouraged you to feel those feelings so you can figure out what those feelings are trying to teach you.
[39:48]Houston: Because ultimately that would then reflect back into your trading at some point if you had that uncommon interest or didn’t accept those.
[39:56]Michael: Well, it comes back to your life, right. I mean trading is part of your life and you find that the way you handle money is probably a reflection of your best relationship with a person or your worst relationship with a person (Houston: that’s beautiful) and I’m not talking romantic – I’m talking platonic friends and it could be a family member, however you have it tied up; you find that money is just another inanimate thing but it is a thing that because of the social morays to do with money and I think this is one of the problems about day trading is that you start to see the money you make and lose as a car payment; you start seeing it as your rent or your Netflix tuition or whatever it is, you really can’t look at your trading capital with such a small minded way of looking at things so that was – ultimately it did come back to one’s trading but you find that your trading is really a microcosm of your overall emotional intelligence and that.
[40:54]Houston: That’s beautiful and I guess that layers back to one of the quotes you put in your book when you say the key to winning in the market is internal not external; and you just kind of talked about why that is – essentially how you do anything is how you do everything so the way you live your life is the way you’re going to act in your trading and yes, that really stands out to me.
[41:16]Michael: Yeah I guess the thesis is that and this comes about all the time that there are no external solutions for your internal issues; so you don’t need a fiftieth monitor , you don’t need a machine with better clock speed and refresh rate, you really don’t need real time quotes. You find that most of the stuff that you think you need outside of your person is necessary for you to succeed when in fact it’s really just the opposite. And actually buying a solution, it seems like a quick fix right, well I’m willing to make this investment because who could frown on that – but it rarely works, the best thing that you can do is to sit quiet and go inward and really journal and monitor what your behavior is around making these decisions that you can get to see on paper what your emotional system looks like because everybody from Jerry Parker to Bill Dunn, they all have very strong emotional systems and I’ve been in the room with Bill Dunn, I’ve interviewed Bill Dunn – he’s a powerful guy and I say that as a fan – I consider him a friend but he’s got very strong opinions about things and even in the interview that I did with him on video he talks about putting on trades and having self-doubt . What Bill was really good at was not over-riding his system and keeping it that way.
[42:52]Houston: And so, how do you begin to build the emotional fortitude, have you come across a process where people can find a way to immerse themselves in their emotions; it seems a lot of people are afraid to open up to that vulnerability – they’d rather have it be a game of like you said, play it by the numbers versus this kind of more none linear aspect of what we’re talking about here.
[43:21]Michael: Well, so think but the truth is whether you’re conscious of it or not, your still running your emotional system (Houston: right) so you might as well become friends with it because it still dominates everything that you do – we’re emotional beings. The fact that you think you can trade some kind of ridiculous twenty day break out system is irrelevant because that’s just a parameter – it doesn’t say anything about the quality of the twenty day break out. There’s a million – when you look at twenty day highs there’s a quality to the twenty day high – it’s not just a consolidated breakout twenty day high, there could be a parabolic twenty day high and those are two very different numbers although the parameters are the same so how do you reconcile that emotionally. I was talking with a kid the other day who wrote in and he said I have a system, it back tested positive, I’m still making money but I’m not making as much as I could because I’m not putting the orders in as I get them and I’m like so you’re negotiating with your system as if you can bring something extra to the table here (Houston: right) and I said do you do that with other people and that’s when he hung up and then he called me back and he said oh my God, that’s what I do, I always have to ask extra questions and I said so you’re a pain in the ass to deal with at the kitchen table and he said yeah; and so you can say that emotions aren’t a part of it but they absolutely are – as long as you’re a human being emotions are front and centre.
[44:48]Houston: And I’ve heard you talk about having emotional hazing – is there any way to short cut that? (Michael: No) There’s no way to short-cut that?
[44:55]Houston: Short answer – no.
[44:57]Michael: No way to do it; no way to prepare you for managing real risk versus the simulation model. Everything looks good – I was talking to a buddy of mine who is a big allocator and I caught up with him at the Milken Institute Global Conference and we were chatting and we were having a laugh and we were talking about the emerging TA pace and receiving marketing material and otherwise and we both looked at each other and laughed and we’ve never seen a back test that we didn’t like because marketers can send you something that can send you into Monte Carlo ruin no matter how many iterations you run – they are going to send you something to entice you to allocate money (Houston: that’s right) but trading those models and designing them are two very, very different things; again you’re very safe when you’re sitting with your simulator, you’re very safe when you’re going through your value and risk calculations with you Excel add-ons – you’re very safe doing that but the minute you have to put on a trade that’s when the fun happens.
[46:08]Houston: Right, have you ever heard of anyone who didn’t have any emotional struggles or is there such a thing as anyone who was raised perfectly – a perfectly loving family, had the perfect emotional upbringing that brings no baggage to the game – have you ever seen that before?
[46:27]Houston: No. Yeah.
[46:28]Michael: I mean I have a perfectly loving family and my mother’s in Heaven now but at the end of the day I had the best of all worlds – I had the freedom, I had the education, I had the mentors but you still lose money, it still sucks and you still have to get on the phone with your clients and explain to them even though you say please don’t call me and you have to deal with all that. You have to deal with people who you tell them in your disclosure document – you’ve given pretty much every reason to talk them out of giving you money yet they still do it and yet when you’re in a draw down they still want to know why and that become impossible so when you’re sitting there saying, I m at the zero point with my emotional constitution, I know my returns are in model but I still have this jack ass calling me about the gold market and I don’t want to talk to anybody about the gold market – we’re not buddies. You’re an investor and I have third party trading authorization and that’s it – I don’t want to talk to you anymore. Ed had a great thing, I’m not telling tales of school – Ed has this thing where he used to say in his client agreement and it’s called the three call rule and if you called him – if he managed money for you, which I don’t really know because I don’t talk to him about that, but it used to be anyway that if you called him three times, he gives you your money back.
[47:58]Houston: I like that.
[48:00]Michael: And it was just hand-written on the backside of a piece of paper – I agree to follow my system, you agree to not call- if you call me three times, I’ll give you your money back.
[48:09]Houston: Your money is coming back to you.
[48:10]Michael: Yeah. It was awesome, only he could do that – probably myself could not do that.
[43:17]Houston: That’s great, great, great story. So tell us more just in the time that we have left – it sounds like you discovered yoga and meditation early on which right now if the hottest thing in the world for traders to be doing. How come you found it so early in your adult life? How did you follow up on it or how did you discover it?
[48:44]Michael: So, I had read Autobiography of a Yogi just because I’m a very avid reader and that got me interested in it; I also was in New York City where you’re in the urban environment where there’s a lot of yoga schools and I had some family members who did yoga and at first I was like nah this isn’t for me.
[49:12]Houston: And at what age was this, can I ask?
[49:15]Michael: Oh my gosh – this is probably twenty years ago and I just tried it and I immediately liked it because I realize that yoga is not about you getting into this level five kind of position where you look like a contortionist – if you need to go there then great but yoga itself and the vinyasa which is when you string all the poses together – it’s a choreography – so they call it a vinyasa. The point of it for me was to practice the poses enough so that I had technical proficiency so that when I did them I could lose myself in the vinyasa thus making yoga a moving meditation. So I was like this is awesome – I hate the phone anyway don’t call me – I’m driving in LA traffic which makes you want to go postal and now I can tune out and go inward because I’m an introvert – that probably doesn’t come as a big surprise I can inward for ninety minutes and then feel like a million bucks, not only after the class but you get this emotional hangover the next day where you just feel like wow I am really grounded and I feel like a million bucks – I could get addicted to how this feels and there’s no pills to take, there’s no drugs – whatever the worst part about it is, it’s probably the driving and then there’s probably the street traffic where you hear the horns and other wise but it’s probably the smartest thing you can do is just stop, turn things off – you don’t need Twitter …
[50:44]Houston: Is that still a practice you follow nowadays? The meditation?
[50:51]Michael: Oh, yeah. Oh yeah.
[50:54]Houston: Can you share with us how often you do either yoga or meditation in a week?
[50:00]Michael: I do yoga every day; I do meditation several times a day.
[50:06]Houston: Is that like a ninety minute practice and is meditation throughout the day or maybe in the morning or in the evening; can you share that?
[51:15]Michael: Well, here’s the thing about yoga – you tend to be clearer in the mind in the morning but the body is less flexible because it’s not warmed up so it flips over to the end of the day so if you practice at night then you might be more limber but your mind I going in forty-five different directions (Houston: right) I’ve been able to turn that down a bit because meditation – although the mind is a beast – even for me I can still turn things off and go inward much more quickly when I was of a bigger monkey mind than I am now. So a lot of it comes down to my schedule and how I have thing – like today I didn’t want to be running late for you and so I decided to do the yoga stuff on the latter part of the day rather than the front-end. I probably could have gotten away with it but I just don’t like having that in the back of my mind – it would have been a distraction so I kid of do it as it makes me feel good so I do it in my calendar and my schedule so that it makes me feel good.
[52:17]Houston: That’s a great routine and so can I ask you, what do you think meditation brings to you and the practice of yoga; what does it bring up for you, how does it benefit you?
[52:30]Michael: Well, it allows you to just be you in your own energy and there shouldn’t be any hang ups, any duresses if you just let yourself go; you also find – and this was concurrent with the trading tribe, or congruent with the trading tribe – that you can find that your mental hang-ups can be found in knots in your body like backaches or hip tightness or otherwise and I’m not a doctor, I’m not a physiologist or whatever but I do know that when people get all cranked in their bodies physically it’s because many times there is an emotional side that goes with it – whether conscious or unconscious. So you can unwind a lot of that if you just get into the practice of yoga and it’s not uncommon to see or hear people become weepy in the class because they’re surrendering and they’re letting all of that stuff go.
[53:29]Houston: That’s beautiful. And I have heard you talk about that before –the power of surrendering and just giving up to certain things.
[53:25]Michael: Chapter Two – and it’s tough for alpha types – macho, alpha types because they’re all like yeah man the market’s this that and there’s all this macho talk around trading which you find out later in life after you’ve lost sufficient amount of money that the language or the vernacular doesn’t help you make money (Houston: absolutely) or even understand it because at the end of the day it comes down to you and your relationship with money and relationships mean emotion. You have to figure out why would Ed Secoda who is certainly one of the forefathers of technical analysis and systems trading and trend following –why would he have a men’s group that deals with emotions. I mean if you’re following the market then you deserve what you get but if you want to trade like a pro you have to embrace your feeling, you have to embrace your emotions and you certainly need to know who you are emotionally. If you go in to see an allocator they are sizing you up as a human being – not sizing you up because of your stupid model. I mean that part’s kind of easy at the end of the day and I might be simplifying a little bit but ultimately allocators are going to be sizing you up as a human being because they are making an investment in the business – in your business and you are a big part of your business.
[54:57]Houston: Right, that’s a great insight and so see this a lot where people use the analogies online about fighting the markets and being like a boxer or being like a warrior in trying to take the market down – I guess it goes against what you just talked about – that relationship of trying to overwhelm it or trying to be that warrior – it may not be healthiest relationship with the market.
[55:21]Michael: Not at all, I mean you can be like a warrior to yourself and hold yourself to a certain standard but you have to basically say that the market is a gigantic ocean and you’re just looking for waves to surf on some level and hopefully you’ll get the longest ride possible you don’t want to be body surfing near the shore because it’s very volatile, you’re going to get banged up, you’re going to get scratched elbows and knees and the ride is going to be very short and you want to catch the wave way out there and hang ten for as long as you can, have a nice ride, jump off the board at the last minute and try to do it again.
[55:57]Houston: That’s a beautiful analogy – it’s so much more energetic in a way- it just feels better.
[56:00]Michael: But why would you want to turn trading into blue collar despair? One of my favorite authors is Raymond carver who wrote short stories – since deceased I think he passed away in 1998- but he wrote short stories about blue collar despair so I always look at the trading macho guys who are sitting at desks which is clubby and it’s like dude I’m a trader and it doesn’t mean shit in terms of making money like yeah, you can trade ideas but ultimately and I’m not saying this to sound like I don’t care for you or about you as a person but when I trade it’s about me and what I know about myself and the market and the instruments that I’m trying to trade. I can’t allow anything from you to enter my process – I wish you the best but what I do is based on what I do and I can’t take your parameters or insight or otherwise as something that I could find valuable especially in the middle of the trading day when the war is on – it’s the war so you can absolutely set warrior standards for yourself but I think if you try to fight a war with any instrument or any market around the world – sooner or later you’re going to find out the hard way that you were never really in the fight because the market doesn’t care if you’re long or short anything. It doesn’t care at all, you’re just a participant and those markets don’t even exist for you – look at the secondary market in all types of trading; look at the capital markets, stocks and bonds – those markets don’t exist for you. The secondary market trading is incidental – those markets exist so that issuers can raise capital so the secondary market trading kind of comes as a nice after market thing and the same thing with commodities – to market functions they’re a price discovery and risk transference and again the fact that you can trade you’re just a player . I don’t want to say a pawn but you’re definitely not a general and probably won’t be – you won’t be a ninja, you’re not going to be a general, you’re not going to be a Navy Seal sniper – that’s all marketing bullshit. You want t think about going inward and being the yoga boy who’s going to stand on your head for seven hours only and only to when it makes sense make a trade. Based on rules that you’ve tested, risk parameters that you test far beyond the concept of end or normalizing risks across commodity instruments and that’s very back of the napkin – pardon me for saying it – low brow stuff that even my dead grandmother knows. You need to go beyond, there’s so much more to it and at any given moment of your trading system, your emotions are right there – like water looking to seep into the paper towel – you can’t escape your emotions they are at very part of your system and if you’ve designed a system well then your emotions are embedded in the system. So when you have to think about trading, it’s not just about the financial pay off but it’s the emotional pay off and that ‘s where the trading tribe really helped people figure out if they’re trading for profits, or are they trading for drama or a combination of both and of course the possibilities are relatively limitless.
[59:29]Houston: That was beautiful; so many insights and layers there so we really appreciate you sharing that Michael; so I know we’re running a bit long on time so maybe I can shoot a couple of quick questions for you and then we can wrap things up. First off, I know you’re a big reader I know you also have edited a number of books, so do you have any top recommended books not really around trading but any books that you find yourself gifting a lot or you just love to revisit or share with people –it doesn’t have to be trading?
[60:01]Michael: Yeah, you’re right. I like to read just because it helps me get perspective on how other people see the world or see themselves and I just find that that helps my inner game (Houston: yeah) , my sense of self-awareness. I think as far as trading is concerned information is ubiquitous, it’s cheap, you can get everything free on the internet so what we try to do as far as teaching is to provide insight and wisdom. So I don’t really even have any favorite trading books anymore because the information and most of the books lack insight and wisdom so I think in terms of getting personal wisdom a great book called The Diamond Cutter by Lana Christie-McNally and Michael Roach probably is one of the best books you can read. That coincidentally was recommended to be me by a family member who is now a yoga teacher – I think I quoted it in my boom as well and then I find myself reading things about very, very interesting people just because I like to learn about people and how they got to be where they were so I’ve read books about publishing and music people and about boxers and entertainers. I’ve read Rhonda Rhousey’s book recently which was great – it’s called My Fight, Your Fight. I also read Tyson’s book called The Speed of Truth which I know a few of the guys in the book and Tyson’s a very self aware guy for all the stuff that you might know him for in terms of going nuts and biting the ear – he’s a very wise person and he’s very self-aware, it’s shocking. The same with Rhonda Rhousey – she was very aware of all the things that she was doing and all the tradeoffs that she had to make and then there are just some guys and gals who are just a cast of characters that have led very, very colorful lives so they are like if you grew up listening to Kiss – Paul Stanley from Kiss wrote a great book called Face the Music; Clive Davis wrote a great book called soundtrack of my life and then the late great Jerry Winthrop who just died within the last few months he wrote a book called When I Stop Talking (Houston: I really liked that book too) You’ll Know I’m Dead so I find those book interesting because these people have led very rich lives, they’re very entrepreneurial – everything that those folks did, they kinda created because there were no role models for them basically. Tyson’s book was good because he obviously had a good relationship with his coach and mentor in Constantina Demado and it was very interesting to read that relationship and see how they interacted with one another but I think that would be it in terms of the books that I read most recently. I don’t have anything on the to do list.
[63:09]Houston: That’s a great set of books though, thanks for sharing.
[63:11]Michael: Those are all non-fiction right so there’s fiction that I have read but I don’t know if anyone cares about that stuff.
[63:20]Houston: Well, if you want to share my way I write them down and definitely share them with the audience. (Michael: Alright) So, if I can ask you one final question then – we’ve spoken a lot about the inner game so let’s say you’re talking to a trader who is already doing pretty well for himself, he’s being consistent for a number of years and he wants to get to the next level – whatever that next level is, where do you think that person needs to spend time? How do they go from good to great?
[63:50]Michael: So again, I would go inward if it was me. The first thing I would do is go inward and say what is the characteristic of my wanting to go from good to great – how do I know that I’m not already great and what kind of parameter am I using to measure my own performance to know that I’m not working at full capacity because sometimes that could be a mind – what’s the word I’m looking for, it begins with and “F” (Houston: Mind form) Yes, something like that. Exactly, good use of the word; the goal is to try to be content and be happy with your progress. You need to measure everything that you do and that could be both spiritual and emotional as well as technical so you write that all down and you keep a journal which has become kind of cliché but you need to measure what it is that you’re doing that makes you good and what of it can you augment to make yourself great. Sometimes it’s deleting a step (Houston: right) sometimes it’s external like I knew a guy who was drinking fourteen diet Cokes and I’m like so you really like to get jacked and I said why don’t you run around Central Park twice and then come back to the office so there’s all types of external things that traders can do, you know take away half of the Diet Cokes and try to choke down a wheat grass or something – just try it.(Houston: see what happens);just see how it feels. So measuring behavior is huge and then finding out that a lot of what people do – you have ritual versus routine which is a whole other podcast.
[01:05:34]Houston: I love that idea.
[01:05:37]Michael: So find out in what you’re doing if you consider yourself a good trader which is largely subjective – if youre trading public money or your client’s happiness. Now if you feel performance wise you could up it a notch, do you mean in your behavior or do you think that you can affect the market so that you can take 15% year over year to 17% year over year because I’d like to know when you figure out how to do that please call me ‘cause then I’ll hire you; so be clear about what your goals and objectives are and what’s actually possible but I think absolutely a person would have to measure their behavior and keep very rigorous things like time you get up, what do you do in terms of your diet. If you want to be a high performance person – high performance is more a personality trait than it is in terms of trading result because you’re powerless over what the markets can do. So yes, you can have a 3X system but the sword cuts both ways so just be careful about what you look for because in raging bull markets, your 3X system looks amazing but if you’ve been trading a 3X system the past couple of years and you’ve been doing it for say five or ten years, chances are you’re in a drawdown or close to it and you’ve had people taking money out. So just get very, very clear on what your goals are as a person especially what your emotional goals are – if you want to be famous be an actress or an actor – at least try it because the odds of you becoming famous as a trader is just as hard as trying to become Tom Cruise or Matt Damon or Meryl Streep – it’s one hundredth of 1% of the folks who consider themselves actors or actresses hat actually make any money doing it so I think that answers it.
[01:07:35]Houston: That great advice; thanks for sharing Michael. So, let’s warp thing up – I’ll just ask one final question: what the best place – if people liked what you said today and loved your opinion or ideas about what we talked about, what s the best place they can stay in contact with you , where they can engage you or follow you further – where’s the best place to go?
[01:07:57]Michael: I guess the best place if they want to see an amalgamation of the written word, the spoken word and the video content would be at martinkronicle.com – that’s probably the best place to see it all.
[01:08:11]Houston: Cool and definitely check on Michael’s new podcast – the Michael Martin show – he’s got a great set o guests and interviews on there as well so that’s another great resource.
[01:08:23]Michael: Thank you.
[01:08:24]Houston: So, let’s wrap thing up so – to the audience now – as we usually do; I’d love to hear from you so in the show notes today or in the discussion forum I’d love to hear what’s the one biggest insight you got from this because we talked about a lot of big ideas, what is the one thing you’d be willing to try or go deeper on. Share with us, let us know and as usual you can find the show notes, transcripts and all the resources we mentioned on this show at thetradingedge .org/episode15. Michael, I really appreciate your time today; looking forward to doing another call, hopefully in the future.
[01:09:02]Michael: Thank you for having me, it has been a pleasure.
[01:09:04]Houston: Absolutely, cheers.
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