What is the problem we are trying to solve with trading?
The basic problem boils down to cash flow.
Like any business, however, you don’t just end up with a cash cow. There’s a process.
First, you adopt a newborn calf and gently nurture it.
As your calf grows, and begins to generate cash, it can start supplementing your salary.
Eventually, Daisy is weaned and has enough cash flow to replace your salary entirely.
Then you enter the next phase by breaking the correlation conundrum between your time and darling Daisy’s returns. Known in some quarters as the “h0ly c0w” plan, this occurs when Daisy’s cash flow output is steady enough to add zeros and maintain performance. (How do you think Citadel made $16 billion in profits for investors in 2022? Lots of h0ly c0ws.)
At this point, a question may be forming in your mind.
How do I solve my cash flow problem (and build a h0ly c0w)?
Start at the beginning, with a process.
Let me describe one process with a story from my youth.
A long, long time ago, in what seems like a galaxy far, far away, a new thing called the Internet was in its infancy. Only 3 out of 10 people had a mobile phone and Nokia was the dominant technological force in the universe. At one pivotal point in that era, I ran out of cash and ran out of options.
So, I did what one does when you’re down and out. I took a deep breath and began again. I had always joked that if things went south, I could become a door-to-door salesman. Well, I found myself “south” and I stepped into the “no-interview required” industry.
I travelled on the Tube to the Door-to-Door Salesman headquarters of the world—Elephant & Castle, London. (Admittedly, I don’t know if this has changed post-Brexit!)
My new boss explained the remuneration package in around four seconds flat—“No sales, no pay. More sales, more pay.” He reassured me that he had left one of the big four accounting firms to run this joint and we were the crème of the crop. I didn’t have the luxury of questioning his statement.
Now that formalities were out of the way, I had to do what the crème de la crème do: Buy a tie and report for training in the morning. I borrowed £6 (around $10) from a friend, pledged my future earnings as collateral and went to a hospice shop to buy black trousers, a white shirt and the most eccentric tie I have ever owned. With my new uniform I had become a door-to-door salesman…almost. First, a bit of training was required.
Day 1: The Lingo
Surprisingly, the training turned out to be thorough. My first morning meeting was led by the boss, who did a respectable job of shining the light on the top salespeople from yesterday. They all shared a few tips and explained how they achieved their successes.
Then we rehearsed chants from the “ACRONYM CULT”. All eyes fixed on the easel in the front of the room while the boss would frantically flip the charts, page to page to the rhythm of the team’s shouts. First came the acronym and then came its respective words yelled out as loud as possible! “REHASH! REHASH! Remember Everyone Has A Sale Hidden!” still rings in my ears today…
The Unexpected Value Proposition
It was during this ritual when an element of truth dawned on me—there might actually be something in that “crème of the crop” statement I had heard the prior day.
Our team didn’t just sell any old product… no siree. We did not have to carry any kind of heavy product around all day. We sold paper—easy to carry and easy to make. We sold each page for a pretty hefty price as well—£20 for one letter-size paper.
Now to sell a piece of paper for that price you have to be either a central bank or you had to somehow create demand for that paper.
The boss man was really very clever when it came to creating said demand. He would meet with local restaurant owners and tell them that he’s had an army of people that would market their restaurant for free in very specific areas if the restaurant would provide a £20 coupon on their menu and a two for one meal deal valid for six months. The restaurants were generally willing to do this because they had a big mark up on their meals. A £20 voucher might only cost the restaurant owner £10 in actual expenses and of course, the diners would commonly order additional items as well.
And so, everyone turned out to be a winner:
- The boss man created £20 out of thin air for which he kept half and paid the other half to the free army.
- The unsalaried army won because they were desperate and got paid for sales.
- The restaurants won because they had a highly targeted marketing strategy which had n0 up-front marketing expense and which only started costing them money when a customer placed an order.
- The consumer won because, if they were to visit the restaurant anyway and spend “real fiat”, they now got a two-for-one deal on future purchases.
- Win-Win-Win-Win – otherwise known as Makin’ Bacon.
Does this strategy sound familiar to you, perhaps? Remember Groupon? This was essentially the analog version of the Groupon strategy, long before the internet became big.
Needless to say, this was a mind-blowing experience for me.
Great Product, NOW SELL IT!
I know what you’re thinking. It’s a good thing paper is light because with this kind of value I am going to sell a ton of menus! Well…not exactly.
To sell a ton of menus, you need a system. And the system introduced to me was highly organized.
Step 1 was to get assigned a mentor. I was not yet authorized to knock on doors myself.
For the first day, I was literally a puppy on a leash, walking in my mentor’s footsteps, observing him knocking on doors, interacting with people, drawing out their smiles and perking their interest. Irrespective of the outcome of each interaction, afterward, we’d have a debrief: What did he do well? What did the would-be-customers react to positively? What were obvious turn offs? Did I notice all of those aspects?
The feedback was in real-time if I kept my nose to the ground! There were no bad smells, just opportunities to roll in the experience!
Step 2: Get assigned the target neighborhood. The town of Guildford, 40 minutes by train from London, was the lucky winner for our team.
Step 3: Divide up the neighborhood street by street, house by house, person by person.
Step 4: Knock-knock-knockin’ on heaven’s door.
The variety of responses from the people who answered the doors was amusing, but somewhat predictable. I’d break the responses down into four broad categories:
- The Quick Loss: “No”; “Never in a million years”, “When hell freezes over”.
- The Stalker: No answer at the door or you hear, “Maybe later when my husband/ wife/ dog/ cat/ ostrich returns”.
- Death by a Thousand Cuts: No matter how good the deal is, how much value you are adding or how long you take to try and convince them, these people will not take the deal. Fundamentally, they don’t believe in win-win situations. I call this an accounting or scarcity mentality. In these cases, cutting my losses politely and moving on was the best strategy! In full disclosure, I am an accountant. If you have a similar kind of mentality, watch this video and tell me you can’t create a win-win situation anytime anywhere under any conditions!
https://youtu.be/Eld6ypU-JRM
- The “Yes”. A glorious moment! But not without some challenges. In the sequence of events after the yes, there were about eight critical minutes of open risk where my hard work could be undone. If the customer had cash, the deal was done but many people didn’t have cash. What then? At that time, the PayPal service existed, but many had not heard of it and most people still did not trust the Internet. Understanding these points from their market research, PayPal provided a toll-free number, if one dialed from a landline. Generally, calling from a home phone was a trusted option. After a yes response, but insufficient cash, I would request to use the prospect’s phone to call PayPal. The PayPal agent would verify my company’s credentials to the customer who would then provide their credit card details, and finally, consummate the deal.
Step 5: Log every response from every door. Meticulous records were required to plan for the evening session and make life easy.
Step 6: Meet at the pub at half-time for a cup of tea (it was the middle of winter after all). Recap on the responses so far, adjust the plan if required and head out for another three hours of knocking.
Step 7: Cashing out on the train.
This was the most brutal time of the day for the budding salesman.
The full team would assemble on the same train back to London HQ for the moment of reckoning. We had to hand back all of the merchandise (menus) signed for in the morning. For every missing menu the unfortunate salesman had to cough up £20.
Worst of all, this reckoning was done publicly. When I say publicly, I don’t mean in front of the sales team. I mean anyone and everyone that happened to be in that 10 pm train car into London would see us fumbling with our menus and our cash. Privacy was not a thing. And of course, in the early days of your career, you would have days with 0 sales. The team would be very supportive, cheering you on with kind words like, “YOU SUCKED SO MUCH TODAY BUT DON’T WORRY, TOMORROW YOU GET TO DO IT ALL OVER AGAIN.”
The declaration about getting to do it again was not meant in the spirit of heartfelt encouragement, however, repeating the sales process was actually an advantage. While it may not be much fun at first, some call this the “Lather, Rinse, Repeat” path to mastery.
What is the relevance to trading you ask?
Ironically, getting to do it all over again tomorrow is the number one edge you have in trading IF you generate and harness effective feedback. When you live to fight another day, you can do so in an organized way and progress.
What is the organized way? PLAN, PREPARE, EXECUTE, ASSESS.
Lather, rinse, repeat.
Let’s apply these early and hard-won lessons to trading.
Step 1: Find a Mentor (PLAN)
Find someone that has a consistent and persistent track record of making money in an organized manner through standard work. My mentor, Ken Long, likes to say, “Students need teachers, coaches need players, teams need them both”.
Steps 2 & 3: Get a Neighborhood and Divide it Street by Street (PLAN & PREPARE)
Neighborhood: US equities. Street by street: sector by sector. I can knock on the doors of the biggest addresses in the world at the click of a button.
Step 4: Knock-Knock-Knockin’ on Heaven’s Door (PLAN & EXECUTE)
Get a system. Either create your own or adopt one from your mentor. Be 100% clear on the written rules. Paper trade that system for 50 trades. Observe how many trades slam the door in your face, how many trades chase you away with shovels and pitchforks and how many trades end up going to the moon.
Courtesy of Dr. Ken Long, Tortoise Capital
Step 5: Log Every Feedback Response From Every Trade. (ASSESS)
No individual trade matters. Losing trades are only a speed bump on the way to work. Record keeping matters. Follow up matters.
There is no failure, only feedback. BUT, failure to log results, analyze them and act on feedback is catastrophic.
Step 6: Meet at the Pub With the Team (ASSESS)
Once you have a dataset of 50 trades, you enter the realm of useful information. But first, you need to put on your own coaching goggles.
What does the data tell you about the system performance? Does the system suck in the current market type? Maybe.
Maybe the system works fine in the current market type but the poor performance comes from a different direction. Analyze your data with a fine-toothed comb on how you followed your rules – or didn’t follow them. Do you break some rules on a recurring basis? Why are you consistently producing those mistakes? What do you need to do to change those mistakes into effortless execution?
In the beginning, you will find that your single biggest source of improving your results and increasing your revenue will come from eliminating your mistakes. You want to reach the point of trading at 95% efficiency—mistake free nearly all of the time.
I remember Van telling me, “Well, you can only really make so many mistakes in trading and then you’ll have it figured out”. That only works, however, when you are diligent about identifying mistakes and rectifying the root causes. Otherwise, you will produce losing trades with such breathtaking consistency that taking the opposite side of your envisaged trades become a really viable system! For Seinfeld fans, this would be “The Bizarro Jerry Trading System”.
Then meet with your coach and see what he sees. Is it the same as what you see? Do your assessments match?
When I sat at one such meeting with my coach, Glenn Osborne, he noted he couldn’t work out what my exit rules were when he looked at the charts. That was a useful observation considering that from my perspective, my exit rules were 90% mechanical.
Step 7: Cashing Out on the Train (ASSESS)
This is the most critical part of the ongoing day to day process: Perform your after-action review.
The two most important questions are:
- Did I follow my rules?
- Am I in touch with the reality of my cash flow in my brokerage account?
These are the cornerstone questions from which all growth and improvements for a trader stems.
Courtesy of TradingView.com
I invite you to join me on this journey. You never know. Maybe we can both win a gold medal!
Until next time, God bless.