Successful traders and investment professionals come in all shapes and sizes. They possess many, often vastly differing, personalities and characteristics, they have widely differing approaches to finding value, and they adopt a broad array of different ways to monetise that value. In my role as a performance coach I have been privileged to have access to many outstanding traders and Investment managers. One question I get asked more than any other, is ‘What is it that differentiates the most successful traders from those many highly capable individuals who do not quite make the grade?’ – What are the qualities and characteristics they have which that others do not? What is their dirty little secret?
People may think that it is advanced news, better data, or greater systems. Or perhaps superior cognitive skills, exceptional intellect or an excessive depth of knowledge. Valuable as all these things are, they are not the key differentiators. For me, the key difference is that these individuals possess, or more crucially have developed, ‘The ability to thrive in Uncertainty and Complexity’. Or more pointedly, they have developed superior ‘Risk Intelligence’:
Risk Intelligence, as a concept is still emerging. Early constructions of it focused on risk in the organisational context. However British philosopher Dylan Evans brought it to the individual concept in his brilliant book ‘Risk Intelligence: How to Live with Uncertainty’. In the book Evans defines it as “a special kind of intelligence for thinking about risk and uncertainty”, which at the core focuses on improving the ability to estimate probabilities more accurately. Taking this one step further, and applying it in an Investment and Trading context, I see Risk intelligence, as ‘The ability to be able to determine, assess and evaluate risks with greater accuracy, and then to monetise these risks more effectively’.
‘Risk Intelligence’ is a quality markedly different from what we would call `Intellectual Intelligence’, as measured by IQ. Warren Buffett once said, “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”. The venerable Mr Buffett certainly knows this ‘dirty little secret’.
Risk Intelligence works across all domains and is not just displayed by investing masters such as a Warren Buffett or a George Soros. I see traders and investors of all colours who are highly ‘Risk Intelligent’. From day traders to momentum and price action traders, from relative value traders, to longer-term macro fund-managers. I also see many systematic traders and investment managers, whose systems, and the way they run and manage them, reflect their risk intelligence.
The theme of ‘Risk Intelligence’ is something I have touched upon in many of my articles, though perhaps without making it so explicit. An article I penned earlier this year, ‘The 10 Behavioural Traits of Highly Successful Traders & Investment Professionals’ describes some of the behaviours which are common to the highly ‘Risk Intelligent’.
You will find many examples of ‘very smart’ people who lack ‘Risk Intelligence’, and many others who lack ‘intellectual intelligence’, which is so valued in our world, but who positively radiate ‘Risk Intelligence. These people who lack ‘Risk Intelligence’ may have many fine qualities and capabilities, they may even be geniuses in other domains, but without ‘Risk Intelligence’, they are often doomed to fail in activities which require taking and managing risk.
An outstanding example is the Nobel prize winners behind ‘Long-Term Capital Management’. The fatal flaw in these genius’s model, was ultimately their lack of ‘Risk Intelligence’. Equally at Enron. They were a firm who supposedly hired the brightest and the best, but on what measure? It certainly wasn’t ‘Risk Intelligence’.
You will find people who are ‘Risk Intelligent’ in all walks of life, entrepreneurs and successful business people, Poker Players, Military leaders, Surgeons, Sportspeople. In certain areas and fields, it is hard to get to the top and stay there consistently, without developing ‘Risk Intelligence’, trading and investment are one of them.
In trading and investment, the ‘Risk Intelligent’ individual is conscious that they will not always win. They are willing to suffer or sacrifice losses, albeit in a limited way, in the pursuit of winning big in the long term. Taken at face-value, this might seem paradoxical. But ‘losing well’ is the key, there is a saying: ‘In trading, the best loser is often the long-term winner’.
‘In trading, the best loser is often the long-term winner’.
Another reason people find this so challenging, is that our Western sensibilities have groomed us all our lives to win. We are brought up to come top of the class, to accumulate knowledge, to have answers, to get the best grades, to win places in the best universities. In the Western discourse, failure is not accelerated or tolerated. Losing is not just ‘bad’, its ‘very bad’, potentially even ‘existentially bad’. We do not lose, we do not fail, we do not accept defeat, we don’t ‘not have the answers’.
But the highly ‘Risk Intelligent’, they have developed an ability to get past these attitudes. They usurp conventional thinking. This is what the most successful traders and investors do. They are willing to accept defeat, as a necessary evil on the way to victory. They are willing to admit they don’t know the answers to complex problems, which ironically allows ‘the best answers’ to arise.
Conclusion
One of my trading clients was also an astonishingly successful poker player. He was at one stage ranked in the top-250 poker players in the world. This was all the more remarkable considering he was a full-time bank trader. He once told me that when he was at the poker table, he was no better than anyone else at winning, but when it came to losing, he was ‘the master’, and this is what made the difference. By accepting defeat as a necessary evil, and factoring it into the success equation, he was better able to accept the consequences of bad luck. This mindset meant he was able to ride out the negative outcomes of risky plays which didn’t work out. The consequence of this attitude was that he was better able to withstand the storm which arises internally inside our heads, just when calm and rational perspective were most needed. As such he became a ‘Master of Managing in Uncertainty’ He was a genius when it came to being ‘Risk Intelligent’.
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Steven Goldstein is a leading Performance and Executive Coach working with Traders, Banks, Energy Firms and Hedge funds: He is Managing Director of Alpha R Cubed, which works with banks and investment firms to help improve performance and develop their human capital within their financial risk businesses. To know more about Alpha R Cubed, visit their website www.alpharcubed.com or email Steven at steven.goldstein@www.alpharcubed.com.