Jason McIntosh – Mastering your trading mind

Bryce: [00:00:16] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing, whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you going?

Alec: [00:00:30] I'm very good, Bryce. Great to be back for 2023 or a few weeks in. We are ripping and roaring. I don't know why I said that and I'm really excited to kick off this series. We've spoken a little bit about investing psychology, but we're doing three episodes, all about mastering your trading mind.

Bryce: [00:00:50] Yeah, that's it. And our brains aren't naturally wired for trading, but the good news is when they can be rewired and IG is helping traders master their trading mind and take control of the emotions, biases and psychological influences that come with trading. And this helps traders and investors develop a plan and stick to it to stay cool under pressure. And we know that we need to stay cool this year and to be the best that they can be. 

Alec: [00:01:14] So a massive thank you to IG for sponsoring this episode. They've collected a wealth of information, including interviews with experts, articles, podcasts and e-books and collected them all in their Master Your Trading Mind hub. You can find it by searching master your trading mind or heading to the master your trading mind hub on ig.com. Now Bryce or kicking off a three part series, three interviews with three experts, all on the topic of investing and trading psychology, how we master our mind, how we control our emotions, how we correct our cognitive biases. And interestingly, something I haven't thought a lot about how we recover. 

Bryce: [00:01:57] Yes, the post trade icebox. 

Alec: [00:02:01] It's pretty mentally taxing. Losing as much money as I lost last year. So to kick it off, we've got a guest, an expert that we've spoken to before on video, but never actually on the podcast. So excited for this one. Who if we got to start the series. 

Bryce: [00:02:17] That's right, Ren. It is our absolute pleasure to welcome Jason McIntosh, founder of Motion Trader. You may have seen Jason join us in our OSBI show a couple of years ago, but Jason, welcome to Equity Mates. 

Jason: [00:02:27] Oh, Bryce It's really fun to be here. I think it's an exciting topic that investors can get a lot from. 

Bryce: [00:02:32] Absolutely. 

Alec: [00:02:33] Yeah, it is. And it's probably one we don't speak enough about. We speak a lot about what we can invest in, but we don't speak about, you know, how to become the best investor you can be. Let's start with managing emotions, something that I think we all feel when real money is on the line. If you were going to associate one emotion with investing, what would it be? 

Jason: [00:02:51] It's such an interesting question because a lot said about emotion in terms of that we need to take emotion out of the process. We need to be clinical in the way we look at markets. And I think to a large extent, I think that's I think that's true. But we've also got to recognise and remember that we're all human and emotions are part of who we are and it does affect how we, how we operate. So I don't think you can just completely like strip stripped out the process and you just think about some of the emotions and how, how they influence the way we trade. So, for example, take, take fear. Now you think now what? What is emotion of fear all about? So fears all about these, all about alerting us to a potential dangerous situation. And so in the financial markets, a dangerous situation is risk of losing money. So a little bit of fear is not a bad thing. And then you look at greed and people say, well, whoa, I don't want is great, has got to be bad. And but when you think about it, a little bit of greed, a little bit of greed is not bad because say you've got a stock which is up 20 or 30%, it might be that bit of grey that gets you to hold on to say, Oh, look, maybe you can go 40%, 50% might even go 100%. So a little bit of greed is not necessarily bad. I think it all comes down to not letting your emotions red line is when they go into the red, that's when they start to cause havoc and really start to rule in what could be a good, good trading plan. I think if you ask me what's one emotion that that is most important for me, I would say it was calmness. Now I know calmness, strictly speaking, isn't an emotion. It's more of a thing. It's more of an emotional state that takes the edge off our emotions and helps smooth them and helps us keep under control. And that's what's really important when you're trading and investing. And I'll tell you, one of the things I've really enjoyed over the years is a day at the races. So, you know, imagine being out there, suns out, you're on the lawn, you know, horses are charging down the track. Everyone's out there waving their arms around, a lot of yelling, a lot of excitement. Horses hit the line. And you look about and there's always groups of people. There's going to be high fives, there's slaps on the backs, toasting glasses, you know, heaps of excitement, you know, euphoria, a lot of happiness. And then you look. To the side and you look to other pockets and you can have people the heads down rubbing their brow. You know who's won? You know he's lost. It's obvious. It's not that different for a lot of people when it comes to trading it. They flooded with these same emotions, is particularly true for, I think, novice traders and I think traders who maybe find mediocre success in that they really they've got this really extraordinary pull of the emotional highs and lows. And this is something I've worked a lot on over the years in that you think about that, that emotional roller coaster. You've got the high peaks and the low troughs. What I really worked hard on, as you know, from my early twenties, it's been rather than this we want to moderate it. We want to get this no one can go flatline because, you know, we're human, we have emotions. But you want to you want to compress it. You want to compress that emotional. You know, it's swings. We get inside us and that can make the whole trading process more sustainable over time. It's just exhausting. If every day trading is a day at the races, it's not going to work. 

Bryce: [00:06:23] I think particularly in in your situation and probably many of the rest of the Equity Mates community, emotions between trading in that short sort of shorter term environment and potentially the the longer term environment where I run and I buy the S&P 500 and don't worry about for 40 years, there is an overlap, there's hope, there's fear, there's great, as you mentioned, there's anger, there's an ego that you need to deal with. How do you broadly go about thinking about managing an array of emotions? And then potentially we go into sort of specific strategies that you can put in place. 

Jason: [00:06:56] Is some magnitude of the emotions, which is which can be an issue. And it's also the way the same emotions can impact us in different ways. So let's say a stock is down 20% and you look at how a novice trader or a mediocre trader might handle that and the emotion they'll often feel will be one of hope and it will be, I hope that stock comes back. I'm down 20%, I hope I get my money back. Maybe I should buy some more, maybe I should average down, I'll bring my average price down and then if it can just go up a few per cent, I can get at it even and then I'll be happy. So it's hope. It's hope is driving that decision. Now you think about how a successful trader handles that same situation. It's exactly the same situation that it's going to have a different emotional response. So I look at that situation and I'm not hoping is coming. I'd like it to come back, but I'm not hoping it's coming back. I'm fearful it's going to get worse. I'm fearful it's going to spiral lower and I'm going to have a big wealth destructive event and I'm going to be down 50%, 80% they won't either. So it's for me, my decision be governed by fear and I'll have a stop loss and with my line in the sand will say I didn't work, so I'll move on to the next trade. Now you flip it, you look at a profitable situation and how the emotions handled then. So you're mediocre or your novice guy will say, Look, I'm up 20%, that's pretty good. Not getting much in the bank. I've made 20% in three months, six months, whatever it may be, the emotion they're feeling now, this bit of fears creeping in and they're fearing they're going to give that profit back. They fear giving back a modest profit. So then they're inclined to say, Look, I better sell it or I'd better set a very close stop loss. I can't give much back. But of course that keeps your upside potential. You sell for 20%, how do you get 50% head? You get 100%. Look at the successful trader. It's another story. They'll they'll, they'll be now working on hope be like yeah, hope that runs a bit further. I hope they get up to 30%, hope against 100% it's and they'll have different strategies for that. They'll give us a move room to move, they'll let their profit run. So I've got the same situations, but different emotions are guiding those decisions and I tell your story to you. Really fascinating story from early in my career. So this is my first first year on the trading desk. And I was I'll sit that they sat me down paired me up with the with an up and coming trader had been there for about about three or so years so he was know not senior but he's moving through the ranks and and this is back and this is back in the early nineties in the old days. And so none of us no one had flat screen monitors. They hadn't been invented. We all had these big, big boxes on our desk, looked like microwaves. So you look on the trading desk, it look like you're at Harvey Norman or the Michaels where we've set up these big monitors. They also had these big wide rims around them. What he'd written on the top of his computer. He had three words. He had three words running across the top of his screen in big black ticks. The three words were just do it. So, of course, you know, the famous Nike slogan about getting up, taking action, you know, making something happen, you know, pushing forward, you know, inspirational stuff, you know, to get us. Pushing out pushing on. And I was looking at I. What? What's that all about? Is he a sports fan or something? That I didn't know. And but I was too nervous to ask him straight away. It took a couple of weeks to muster the courage because I'm just a young bloke on the desk. And eventually I said, Look, this is just just bugging me. I just don't understand what to do. Why is it so important? And he said, and this really hit me for six is like he said, I sometimes hesitate to take the trade. He said, I'll do all the groundwork. I see the set ups, all I'll work out where I need to get in a workout, my level. I'll calculate how much I need to buy, but then I'll hesitate. I'll hesitate to pick up the phone and call the broker. And if you're a trader, you can't place the trade. 

Bryce: [00:11:01] In nothing. 

Jason: [00:11:02] It's not going to work. That's it. So it was fear. Fear for him. This is how the emotion of fear was working with him. And a lot of people would think, including myself at the time, that professional traders don't feel fear. But that's wrong because we all have these emotions is all about identifying the triggers which make things difficult for us and finding ways around them. So his way to get past this mental barrier was to write Just do it on the screen. And he did. Every time he'd hesitate, he'd say, Just do it and go, I'm doing it. He'd pick up the phone in place, the order, and he did really well. And this is something everyone can do, whether you're a novice or whether you've been at it for years, and you just got something which just, just, you know, how would you back a touch, you know, figure out what they are, figure out what those emotions, which are difficult for you, and then you find ways to to overcome them, whether it be, you know, trade small for a while while you get more accustomed to it, to it to a better approach or, you know, write something down that you look at that you remind yourself every day or, you know, you just just use practice in other and other areas of your life that, you know, using that emotion in the same way and then progressing through to, you know, the trading where you can then apply ways to do it. But really important to figure these things out and be put in the place. 

Alec: [00:12:16] That just do it. That same fear that holds back a professional trader sitting on a trading desk trading, I don't know, six, seven figures. However much he was trading is exactly the same fear that holds back the person that is maybe listening to this podcast and is very early in their investing journey and is hesitant to put their first lot of money into the market. It's exactly the same fear, just a very different context. One thing that I'm hearing there are a number of strategies that you use so that you try to have a mental reminder. But you mentioned a stop loss there a few times and you know, where your emotions perhaps get the best of you. There's like a structural strategy in place to stop your emotions overriding the call ahead. I guess So the right decision. Are there any other specific strategies that you use to, I guess, smooth those peaks and troughs or just override your emotions entirely? 

Jason: [00:13:11] Yeah. For me, the key to it all is to systemise the process to make it clinical and procedural. Like one of the things which surprises people when I say this, but I will openly say I do not know what the market is going to do next. I don't know. Nobody does. Plenty of people will tell you they do know, but you shouldn't listen to them because I really don't. So I don't know what the market will do next, but I know what I do because my processes are systemise they're rules based. So at the market goes up, I'll do this. If it goes down, I'll do that, go sideways. There's another thing to do. If I'm entering a position, I do this calculation to work out how much to buy and figure out where to get out. It's rules based and that takes a lot that dulls emotion down because I'm not making decisions on the run with markets which are moving when money's on the line because I've got this predetermined set of rules which I will follow. And this is saying I've noticed over the years I get emails from members of my motion trader service and one of the things of I've noticed is that I've been contacted by a number of members who are pilots, and I mainly keep track of this because aviation is one of my first loves. One wants to be a pilot, ended up trading things instead. When a pilot sends me an email, I'm always, always interested in what they're saying and they all say the same thing. They say, I like what you do in the markets and how you teach us to operate in them. Because it's like what we do in the cockpit, because everything we do is is systemise it's checklist. It's before takeoff, this pre-flight check that you do. If there's some sort of a mid-air incident, if an engine shuts down, you don't turn to the guy. Next, you can go high, the engine shut down. What do you reckon we do? You've done simulator checks, you know, you practised it. You go to the manual and there's a list of things that you do. It's exactly the same with how a successful trader will operate. So a stock falls and that's what comes out. It gets lower. What do you do? Do you panic? No. You go to the rules. What are the rules say to do? Well, has it hit the stop loss? No, I don't do nothing. So the market settles down. Maybe it bounces back tomorrow. It's within the bounds of the exit strategy. See, what happens. Has hit the stop loss. Yes. Fine. Log on, sell the stock. It's clinical, it's procedural. It's clear cut and takes the emotion out because you don't have to make a decision. What do I do next? Just go to what it says. And one of the things I do, which I find really interesting, is doing a lot of backtesting. So backtesting is where you get a whole lot of historic data and you apply it to your trading rules. So you can see how it would have worked in the past. So a mistake I think people make is they might get a year's worth of data and they see how it would have gone. But a year's done nothing really in a whole market cycle. So you need at least several years, preferably several market cycles. So I'll use like 30 odd years of data. And so it doesn't tell you what's going to happen next year, not predicting, it's just seeing like how a process generally works through through cycles and what that does. It helps me understand my process. It helps me understand what, what to expect, what could happen, how it could behave in different situations. So I don't get emotional going. I feel like I'm in a dark tunnel and I can't see anything because I've seen similar situations in the past. And it's I tell you about this, this system I started, it was the time. The timing was awful. It was about a month before the GFC peak. And, you know, you can time these things. You know, sometimes, you know, things happen and it was for the futures markets so I had were leading into the GFC peak so markets were trending up. So I was long currencies, I was long commodities, long equity indices, markets. They all started to roll over together and they start to accelerate lower. So I had this sequence of 12 losing trades in a row and it was an ad and it was it was new system. It hadn't been running for long. And the emotional first emotional response is, this isn't working. I need to stop. But then it's like I've done this for long enough not to make emotional decisions. It's like, let's go to the backtesting, let's go the backtesting and see whether the president has this sort of thing happened before. And sure enough, it had happened before. I could find another sequence of 12 losing trades, a drawdown of 15 to 20%, which is kind of where I was. So where I was was within the bounds of historic precedent. And I could see that in the past of the signals as Jen then swung to adapt to the new environment and the profitability had come back. So I stayed the course. I did what would have probably been almost impossible for someone who didn't have access to backtesting and understanding of what they were doing. And then over the next few weeks, I got a whole lot of signals to buy bonds and to sell indices. And those trades worked out really well. Within a couple of months, I was back to break even. I was into profit. So that happens through understanding your process. And one of the one of the cool things with backtesting, if you if you get an exit, it's hard for a lot of people to because you need some systems to do it but at least going through by eye and just plotting out your trades and thinking about them within the rules and it can get better, you understand your system, the more likely you are to be able to like, like see it through the course of the market cycle and not get freaked out when it shifts and you think it's broken and you jump to another strategy and you forever jumping in. If you forever jumping, it's you can't get consistency, you can't get long term success. 

Bryce: [00:18:45] So speaking of a systemised approach, it's a good sort of segway to the next sort of main pillar, which is forming good habits as an investor and a trader. And you spoke there about, you know, using backtesting and, you know, having a process of stop losses or whatever it may be. What are some other key investing habits that work for you or potentially that you've seen from other successful traders and investors as well, that if we don't have access to reams of data for backtesting and whatnot, that we can sort of think about to bring into our investing journey yet? 

Jason: [00:19:20] Look, I've got two habits which are just, just so important. I just grounding to me from day one on the trading floor and they're just, just so important for I think, long term success in this business. And just to clarify, like I use the word trading and investing kind of interchangeably, like trading can refer to trading on one minute data or it can be trading over many months. It's just trading is just means you're active. I describe myself as an active investor, but someone else could say I'm a trader. Like I look for trends over 1 to 2 years. So that's for me, that's active investing. It's just you're not passive. You're not buying and holding for 20 years. The first call habit I got into it was and we've spoke a little bit about this hitting a stop loss, having an exit strategy, know when you're getting out, protecting capital and doesn't matter if you're you know, you can be an investor, you can be a short term trader longer term trader for. Acting capital is key. If you lose your capital, it is all over. You've got to protect your capital. So many people will look at an opportunity and go, How much could I make? What they should start with is how much could I lose? Yes, what we can make is important. That's one of the components in the risk reward equation. But how much we could lose is it? If you could make 100%. But what if you could lose 100% as well? Well, I don't want to play that trade. It doesn't work for me. So it's not just about how much you can make. You've got to look at how much you can lose potentially. And it reminds me other of a quote which comes this is one of my mentors. This I describe. This guy's as a mentor through print. I don't know him personally, but some of our best mentors can come through books. Yeah. And because he's probably mentor to millions of people. Seriously, it's one of the things I can't say enough to people is read about successful people and make their ways. Your ways. It's there's no secrets in this business. It's all the best ideas have been done for centuries. Copy what works. Done it. The reinvent the wheel. Not necessary. So. So this guy's called Larry Hyde. So he's. He's a pioneer of algorithmic trend following and fascinating guy is quite of his. I read this early in my career. He said if you don't bet, you can't win. But if you lose all your chips, you can't bet. So that encapsulates the trading process so well, because our business is about taking risk. But if we take too much risk and the house gets all our chips, we're going to walk out, we're gone, it's all over. So you got to protect your capital. This is why stop loss is so important. The other habit, which I think people need to get into, and this can be emotionally a harder one for a lot of people, it is being able to delay, reward, to resist the temptation of taking an early reward. So in the case of trading, it's taking an early profit. So resist the urge to, you know, to take that 20% gain because you take 20% gain, you can't get a bigger gain. And this is this is a tricky thing for a lot of people to do because they worry about giving back those profits. But if you want to have a portfolio that that can potentially outperform the market, you get that by the big outlier stocks, which run a long way. You don't make up of having a whole lot of 20% wins. They'll cancel your 20% losses. So you net net you muddle through at best. You've got to have those big outlays and you can only get the big outlays if you resist the urge to take small profits. There's this fascinating research done on not specifically on trading, but on the ability to resist the urge to to take a reward. There's done back in the 1960s, this guy called Water Marshall did it at at Stanford. And it was done with kids, with pre-school kids. And he got this group of kids individually. They'd go into a room and say, okay, here's a marshmallow. I'm going to leave you in this room for 15 minutes. And if you donate the marshmallow, I'll give you another one. How is he? Said, and apparently not that easy, because he leaves the room and 70% of the kids just gobble back the marshmallow. They just can't quite like some of them try to hold the line. They, you know, they cover their eyes. They turn their backs. You know, they talk the marshmallow. They do all sorts of things, pull their hair to distract themselves. But 70% of them give in at some point. And he's done this longer. Choo choo to your study on on these kids throughout the decades to come. And what he found was that the longer they were able to delight the temptation to take a reward, the better they did later in life from all aspects financially, physically, emotionally, academically. It makes so much sense when you think about if you can say no to yourself, you can control that emotional impulse to do something and for the potential of, uh, for a potentially better future outcome, you put yourself ahead of the game. That's an important thing for people to take on board. 

Alec: [00:24:29] Yeah, that's fascinating. Now we've mentioned stop losses a few times and I think a lot of people will be familiar with them, but if they're not, it's when the stock price reaches a certain predefined level, your broker will automatically sell that position for you. The question always becomes where do you set your stop loss at now? I imagine it changes based on the security and how much you're investing and the volatility in the stock or whatever it is. I'm sure there's a number of individual factors that go into it, but do you have any rules of thumb when it comes to setting a stop loss? 

Jason: [00:25:03] Look, you're right. Like it really does depend on it can depend on your time frame. It can depend on a host of things. There's no there's you can set it. You can use a percentage base trailing stop. You can use a volatility based trailing. All sorts of ways to do it. But just generally speaking, I think the one thing I'd say on this, generally speaking, is give your stocks room to move, particularly after they start moving upwards. Give them room to move. But the mistake I see so many people make is that they sit a tight, trailing stop and I say, look, I'm letting my profit run. What's wrong with hitting a tight stop? I don't want to give anything back. But if you jam your stop loss up so close below the share price, it's going to trigger this market. Move around. They don't move in a linear way. It's someone. Once I look at 10%, surely 10% got to be good enough. You look at a stock chart of stock which has gone up, gone up 100%, it's probably had several 20 to 30% pullbacks along the way. 10% is not going to get you there. You've got to give it room to move. This tendency to want to protect open equity leads to so many people leaving so much money on the table because they're out too soon. So that's the one thing I'd say on. It's a big topic, but yeah, the quick wrap on it is give them room to move. 

Bryce: [00:26:26] So, Jason, let's turn to trading DNA, which is another pillar. In other words, finding out what works for you because it's not like you decide on day one, I want to start deploying capital data. You have the perfect strategy that suits your emotions and away you go and rent. And I obviously had the chance to be short term traders or we had the chance to short the market or whatever it may be. 

Alec: [00:26:52] I'm still trying to be a quant right here. 

Bryce: [00:26:56] There are so many ways that you can make money in the stock market. Strategies galore. How did you go about or what advice do you have for people trying to figure out what their trading day? And I is like, How long do you wait before you go? This actually isn't working for me or I need to move to and try something different. What advice do you have?

Jason: [00:27:18] It's such an open thing. It's like I look back at my own start. I started when I was about 14 or 15 year nine, year ten at school. Dad was involved with Spike Lee mining stocks. And so that was my entry point to the stock market during the 1980s. Boom. I'll look at the way I approach markets and it was all rumour based. It was all in on, on one stock there would be a drilling result coming out. It's like, you know, there's rumours out, it'll be a good result. So let's go all in. I had some stocks which go from $0.05 to $0.20 like I wow, this is fantastic. But then there was no exit strategy and then I'd come back down and go back below where I bought. So it didn't work. But I didn't I didn't know any other way. And then I go to university, I'm studying economics and the professors are all talking about values and they're saying markets are efficient. They quickly adjust to new information. They said, look, there's just this side theory on charts, but that's all hocus pocus. Don't worry about that, because, you know, the markets, markets know they're all efficient. You can't make money. So I was like, okay, So I kind of left university a bit. Just I didn't really know. I knew I was fascinated by the stock market, but I didn't know how to approach it. It was only once I once I found my way into an investment bank dealing room that I started to find my way and started to learn, learn and an approach that I thought had debt that I thought to myself, look, this, this could work. But it it takes time. I think reading is a great way for people to start just read books, read about other successful traders, great series of books I read early my career was the market Wizard series. It's the first book is is out and people say, look, I don't want to read a book that was written in 1989. Like, look, some of the terminology is old, but the principles and the lessons in a timeless like there could be someone talking about trading on the floor of the exchange, which there's not so many floors now is electronic. So some things have moved on, but a lot of other things haven't. And for me it was about reading that book. And I found two traders in particular, a guy called Larry Hight, who we spoke about earlier, a guy called Ed Skoda. They were both train followers. And there was just made so much sense to me. They're all the value guys were in there, too. It wasn't that their ways weren't weren't good. I just really liked the price component. It made so much sense to me. So that's how I start to gravitate towards that side of the market price. As you say, there's so many different ways to make money in the market. It's not a case of you've got to be technical, you've got to be fundamental, you've got to be value, you've got to be growth. You don't have to be anything in particular. You've got to just find a method that you can emotionally apply consistently over time without getting bucked off When conditions get get tricky that you understand and you can be disciplined and consistent with and then you can make a lot of money.

Alec: [00:30:10] The whole like marrying out. The first part of this conversation with the second part is is so simple. Because you can read market wizards or Buffett letters or whatever it is, and you can fall in love with a style of investing. But if you don't have the like, the emotional temperament and the habits to stick to that, you're going to be in trouble. And even, you know, something like buy and hold investing, which people think is passive. If you don't have the stomach for a 50% downturn once every decade, that's probably not the right strategy for you. Have there been any strategies that you've tried that you just were like, No, I can't. I can't do this. This was a mistake. 

Jason: [00:30:49] Oh, yeah, I've had my shockers. Like, you know, we all have like I think early in my career it's would term this one revenge trading. It's revenge trading is where you lose money on a particular stock or a particular market and you go I need to make my money back in that stock market. That that that stock that stock owes me and this is where people average down as well because they can't cut the loss and just move the capital to something else. It's that stock. That stock has taken my money. And the thing we need to remember, the market is not our personal nemesis. It is it is not out to get us. But so many people make it personal. It's not personal. You've got to get over your setbacks, Learn what you can. If there's anything to learn sometime, there's nothing to learn. It's just like a trade didn't work and that's okay. What people also don't recognise sometimes is that losses are part of the process. No one bets 100%, a loss isn't something that you should dislike, it's just part of the process if you accept them as a cost of doing business. So there may be nothing to learn. Or maybe you've made a mistake and had a loss. So take something from that and then move on. Get out of your setbacks. Don't hold grudges against the gains of the market because the market really doesn't care. And look for the right set ups. If the right set ups in a stock you lost money in, great. If there's no set up there, I worry about it. It's just a ticker code move to the next idea and approach it that way. So I think look you know really important don't do that the other another another area where where I've and this is a really interesting one where where I've not had success with is high conviction high conviction trading. And it's interesting because it's a bit of a buzz phrase at the moment, high conviction, because I see funds named the High Conviction Fund and I see headlines for News Report five high conviction stocks for 2023 and what not. Look, now, there's nothing wrong with having a strong view on something and having belief that something's a really good idea. That's all fine. There's no problem about that. Where I find the difficulty comes in is as soon as you announce the world high conviction, what you do, you're intertwining your ego with the trade. So how do you back out of that? Where's your reversal point? Now? You don't have a stop loss when you're talking high conviction because you're going to be right. You're telling the market, you're telling everyone that the market doesn't understand this. But I do. I'm going to be right. That's why I've got high conviction and this is why it's so dangerous. High convictions. Great. When you're right. Nothing wrong with when you're right. The problem comes in when you're wrong and when you're wrong with high conviction, it can be absolute wealth destroying, disastrous event. Look at the Ark Innovation Fund during 2022. It's a high conviction fund. High conviction fund, and it has been an absolute catastrophe for anyone investing in it over the last last look about the last 12 months. And they've averaged down into summits like Zoom Media is one of their top stocks and they've continued to average down because it got high conviction. It hasn't work out. Maybe it will work out one day. But if you've been an investor in that fund and now you redeem at a big loss, high conviction has been a disaster. It reminds me of a fund manager from a couple of decades ago, high profile fund manager, high profile fund, and he had high conviction that I won't name the stock because it's dossa. Then join the dots back to the person. It was a big name stock which had had a rough couple of years and he said this stock is trading below its Break-Up value. This is a high conviction buy. And he put a big portion of the fund into this stock. And I looked at the chart for it and I could see it had been in a in aa2 year downtrend, maybe even longer, but been in a multi year downtrend. It had gone into a big trading range. Maybe it was a 6 to 10 month range. So I'm looking going, well, yeah, this could be a basing pattern. Maybe it is getting to the point where accumulation is coming in is going to turn higher, but it could also be a continuation pattern where it's pausing before falling again. So you couldn't say I'd settle. I thought, look, I couldn't be highly convicted on this because I don't know which way is going to break. Does it break up? Does it break down? Turns out a broke down and he's still saying Marcus, wrong market doesn't get it. But what happened to his fund was one of the worst performing funds of the year. The next year, he was no longer in the job. There was another. Manager and they cleaned that stock out. So high conviction again, was a disaster. It's great when you write a shocker when you're wrong. 

Alec: [00:35:21] Here's the question over the long term. Was he right about that stock? 

Jason: [00:35:25] He was. He was it. I don't remember how much further it fell, but I think it took another I think it took another 12 months but it might have been a 30 or 40% decline to the low. That's a problem when you're using when you got a lot of money in something, some stocks will go to zero. He was right. There's been high conviction calls that go to zero. Yeah. So you just don't know.

Alec: [00:35:51] Yeah. It's also for him, you know, professional investor, there's career risk there as well and he can be right. But he lost his job in the process. Yeah. 

Bryce: [00:36:00] Yeah. So Jason will move to another pillar, the fourth for today and that is recovery. And it's one that I guess was interesting when we were preparing this because, you know, Ren and I particularly don't discuss this part of investing a lot and that is the post trade. Get your head out of the game and and sort of take a bit of a breather because it can be quite stressful deploying money and savings that you've got and trying not to lose capital and forming habits. 

Alec: [00:36:28] And all I'm imagining is the a bunch of investors getting out of their suits and getting into ice baths. That's what I made my recovery. 

Bryce: [00:36:38] Yeah, you know, it can lead to burnout, fatigue, getting demotivated, saying enough's enough. I'm not interested in this. How do you define recovery and what does it mean for you? 

Jason: [00:36:49] Oh, look, it probably also depends on what type of trading you're doing, what your timeframe is. Yes, I think back to my trading floor days, the average age of the traders in the room was probably low thirties. There's no great grey hair on the trading desk. There wasn't the solstice, they were all the guys. But the traders tend to be younger guys. But that's a very different type of trading to what a lot of a lot of retail traders and investors do. This is like investment bank, hedge fund style intensive, making things happen every day type of trading, and that can wear people down. A lot of those guys no longer entrenched in the industry. Some of them would have made a lot of money and move on to other things. Others probably just it was just they just got too much. But I don't think that affects everyone. For me, it's like as an active investor looking for stocks over a 1 to 2 year period, I'm not looking at a screen all day. If you look on a screen all day, well, there's going to be more chance of burning out. If you're doing your research, your placing, your trades, and then you're letting the market do its thing, the recovery is just when you go off and do other things. And then look, it's not as easy as just let the markets do its thing because of course you get corrections, you get pullbacks along the way and they can be emotionally difficult. But rather than just just sell everything and go away, my Lord, with my process, I'm buying into momentum. So when the market's falling, I've got less momentum triggers to the upside, so naturally have less positions. Stocks will hit. Their exit points are sell, cash levels will increase. I'll have a drawdown in my equity. So the next investments will be smaller. So it's a natural way of recovering. It's not not you're not on high alert all the time. And so that works for me. This I remember this famous speculator, a famed of speculation over Jesse Livermore back in the 1920s. And Jesse would say that when the markets didn't suited his style, he'd sell off a guy down to buck a return and Florida for a couple of months and get the yacht and go out go out fishing. And it was like his his philosophy was don't fight the market if the trades aren't there, you know, walk away. Yeah. And that's pretty much what I do. The trends aren't there. If I'm not getting the triggers, I don't take positions. That's, that's the recovery. 

Alec: [00:39:08] I love that. The other side of it is I guess when, when perhaps the market is there and you know, you're looking at trends for 1 to 2 years and you've put a put a trade on, how do you get out of the mindset of, you know, staring at staring at your forehead, staring at the screen, constantly checking the market and, you know, worrying about something that ultimately is out of your control when the market's doing its thing. How do you not completely switch off because you want to be tracking your portfolio, but, you know, get out of that desperately checking your brokerage account mindset. 

Jason: [00:39:43] Changing your timeframe. If you're trading over the space of a few days or a few weeks, you naturally need to be more on top of things. But if you're taking a medium to longer term approach, there's no need to check your portfolio every day. You shouldn't. It gets distracting and it becomes a day at the races, doesn't it? Because you see the ups, you're happy, you get the downs. I'm I'm you know, I'm upset about that. So just pull yourself back it's the market's going to move around within a trend where you can be in an uptrend and you're still going to get movement around that. So if generally your portfolio is going upwards, if it's in the black, you monitor it at least maybe once a week. You got to know where things are. It's not just sit and forget, unless, of course, you buy and hold, in which case you probably should be in an ETF, not individual stocks, and just hear back from it. If you drive yourself crazy, drive yourself crazy. Watching each tick in each stock. That's when your emotions start triggering. So you don't let them trigger by just stepping back. You know your rules. You know what you're going to do. You know the entry and exit points. Marcus Now got to do what's going to do. 

Bryce: [00:40:51] And then, Jason, the final pillar is inspiration. Finding that opportunity, finding those opportunities to then deploy your strategy, remain disciplined, everything that we've spoken about. Now, we haven't quite actually defined what your trading or your investment approach is. So maybe if you can briefly just describe how you approach trading and investing and then where you look for investing inspiration.

Jason: [00:41:17] So I'm what you call a trend follower. So I use it's a branch of technical analysis. It's an area where you use price data to identify momentum in stocks. It could be other markets as well. But for the purpose of this, we just talking about individual stocks. So it's looking for momentum and then it's using risk management strategies to minimise losses and to maximise profits and to spread risk. So there be a whole lot of rule rules based around that, but quite simply put it into really simple terms. It's buy what's going up and avoid what's going down and what's going sideways. And if something's working, stay with it while it continues to work. When it stops working, rotate the capital to do something else. And my ideas come from the daily scans I do of the ASX. So because I use algorithms I can cover, I cover the whole market every day. And so I get the daily download at 430 after the close, I'll put it through the system. All this takes about like I'm about a minute, 2 minutes and I get a list of stocks which meet the entry criteria for the next day. And I just love this, my favourite part of the day because I get to see all these, all these like some days whose no signals at all. Some days maybe, maybe several. It all depends what the market's doing, but it's just fascinating. It's fascinating because there are so many stocks out there that we just do not know about. And so a lot of us will focus on the ASX 200 because like, what else do you do? There's so much where do you start? So we might as well start with the big ones where there's lots of information and there's lots of research on and we'll stop there. But the most exciting stocks for me are the ones which are outside the ASX 300 or so. The stocks which are outside the All Ordinaries, which is the top 500 and some of the names that come up. Like I remember I got a stock a maybe was it was couple of years ago a stock called Calyx and I'd never heard of Calyx before. I haven't heard of most of the stocks which come up at the smaller end of the market. And it was involved in reducing CO2 emissions from cement manufacture at the time. It wasn't in the All Ordinaries, it was this little unknown fringe fringe company on the outer fringes of the market. And but I had the signal bias. I just, you know, like any other time when I came home, that's how much I need to buy and bought it. Putting the portfolio, don't worry about it, but turning to a really good trade. And then there was more. Yeah, they continue to develop what they're doing. It ran 700% in 18 months or thereabouts and it was one of the one of the well it was a standout trade for, for that year and then it found its way into the A6400 Myer made the ASX 200, I don't remember, maybe stopped in the 300. So once it gets to the ASX 300, more people know it. It's interesting. Look at the stocks as they come in to the ASX 300 and go, Have I heard of that stock? Some of you will have heard of some. You won't then look back at their share price action over the previous two years and invariably you're going to see they've probably rallied maybe 100 or 200%, that's how they're getting in the ASX 300 because they've grown a lot. So how do you detect them earlier? You detect them through the momentum in the share price. So price momentum doesn't predict what's going to happen. All it does is identifies a possible future which may not be fully recognised in the fundamentals. So the fundamentals were Catholics were all there, but it just wasn't fully recognised. It's only as a start to grow, get more awareness that that side became more to the fore. But you could see it. The ripples are in the price action long before. So that's why I love that part of the day, because I'm fine. Yeah, plenty of stocks come and go with, you know, don't do what Catholics did. Yeah, yeah. Plenty go and hit the stop loss and cause a loss, but they don't matter because you only need a handful of the Calyx type stocks each year and you get a market beating portfolio. That's why. That's what I'm fascinated about. 

Alec: [00:45:16] Yeah, that's great. Obviously, your algorithm isn't something that people can access online, but I'm sure there's a number of resources and tools online that people can access and it can help them, stock screeners and the like to look at, you know, price momentum and to filter out just the stocks that do have momentum. Are there any particular online resources that you found particularly helpful or that you recommend to other people? 

Jason: [00:45:43] If someone said, look, just give me one. One technical indicator that I could use that might be able to help me because there's like 1,000,001 technical indicators and most of them just confuse me. You know, what's going on is lines everywhere. And you said, just give me one. I'd say, okay, use a 100 day moving average. Doesn't get any simpler than that. A moving average for anyone who doesn't know. It's simply the average price over the last 100 days. Tomorrow will come along, will drop off the 100th day and we'll bring in the new day. And that will be the new average. So you get a smooth line rather than a share price, which is zig zags. That's why the moving averages is smooth. It's readily accessible there. You can get them on any charting service which is free online, something like Trading View or big charts. Just go there, put on like 100 days, Not magic. None of these indicators are magic. You could use a 50 day or a 200 day, but you need something. You need something. And even if you're a die hard value investor, which is completely fine, the moving average can just help with helping you gauge the temperature of the market. So you might have a great value play, but the share price is below the moving average. So that's just telling you that it may not be the time to deploy your capital into that stock. Maybe wait for the share price to start to move back above the moving average because all the bad stuff tends to happen below them when a share price is below the moving average and vice versa when it's above, the good stuff happens. One of my favourite value investors is Jeremy Grantham. And I love Jeremy's comment. He said he talks about the curse of the value investor and this is where you have a great idea, but you're just too early. And this is where something like a moving average can help. And he also talks about, like you say, something in a bubble, but you be two years early and the market continues another 200%. So again, a moving average can help the markets above the moving average. Yes. You think there could be bubbly conditions, but let it keep running, let it keep running and use some sort of a trailing stop loss to get you out. And so this is where like as I say, you don't need to be all value or technical you can be, but sometimes you can get some nice synergy by merging the two or at least aspects of the two. If you're a fundamental guy, let's be aware of things like a moving average and you know, don't be buying stocks as they are in decline because you know, they can stay in decline for longer than like our our friend I spoke about earlier, you know, he's timing was a great idea. Timing was wrong. He was buying when a stock was not trading above his averages and he didn't have jobs. And he waited, his conviction call would have been a winner. Yeah, but the timing just wasn't he was fighting the market. Temperature at the market is cold. Don't go there. 

Alec: [00:48:32] Go fishing in Boca Raton. 

Jason: [00:48:34] That's it. That's where the weather's warmer. And you want to wait for your stocks to warm up to get when they're getting warm, not when they cold.

Alec: [00:48:42] Yeah. Yeah. 

Bryce: [00:48:43] Well, thank you so much, Jason. We don't often speak about the psychology of investing on the show, and it's just a great reminder that everyone approaches the market in different ways and there are plenty of ways to make money in the markets. There isn't just one right approach. And it's also, I think I like these conversations because you can take lessons from each and every one of the different ways of trading and making money and apply it to your own, your own strategies. So thank you so much for sharing your tips and advice and habits and we appreciate your time. 

Jason: [00:49:14] Oh, it's so much fun talking about this sort of stuff, but there's a lot everyone can take away from it, I think. And just be open minded. People should be open minded. Don't shut yourself to a way of thinking because a little bit, yeah, it's a little bit different to what you think. You can get lots of good ideas in all sorts of areas so keep an open mind and keep learning. Thanks, guys. 

Alec: [00:49:35] Thanks, Jason. 

Bryce: [00:49:37] Well, that brings us to the end of today's episode. A big thank you to IG who have supported this series. As we said, it's a three part series focusing on the psychology of trading and investing. And with IG, they can help you be a better trader and investor. Make sure you check out their trading education hub, which focuses on the four key pillars of managing emotions, habit formation, understanding your trading day and DNA and recovery. Head to ig.com to find out more. Our Ren. That's it. That brings us to the end of today's episode. We will pick it up again next week. 

Alec: [00:50:07] Sounds good. Can we go hit that ice bath and recover? 

Bryce: [00:50:10] Nice.