In this Trader Dozen we speak to ex-hedge fund manager, trader, economist, author and self-proclaimed stats geek, Rob Carver.
This interview is packed full of good stories*, lessons learnt and great advice. Discover what Rob means when he says “he’s not sure if genuine skill exists in the investment world”, why he puts his success down to “almost entirely luck” and the one bit of advice he would give having experienced systematic trading in a bank, a hedge fund and with his own money.
*so good, in fact, that interviewer Chris Johnston appeared to sneak in an extra question!
Don’t be overconfident. Overconfidence is the main reason for trading badly.Rob Carver
1.Can you remember when and why you got into trading? (and what do you trade?)
In my mid-twenties; I dabbled a bit with technology shares in the last few months of the 1990’s tech boom. Mainly I just registered for new issues and then sold the shares a few weeks after the IPO. On the back of that I ended up getting a part-time job at a stockbrokers to fund myself through university (my second attempt – I dropped out the first time round); nothing glamorous just answering the phones.
It wasn’t great timing as the bubble popped a few weeks after I joined. A few of the other students I joined with ended up being quite active traders, and as employees of the brokerage company they didn’t have to fund trades until a week later, which meant they could effectively buy with infinite leverage. I remember a couple of them getting quite badly burned when prices started falling, and then a few months later nearly everyone in the team got made redundant.
Fortunately for me I hadn’t got involved with any infinitely leveraged trading, and I was also able to get transferred into the technology team as I had a background in that area.
My career as a professional trader began after I graduated in 2002 when I was employed by Barclays Capital, as it was then known, the investment banking arm of Barclays Bank PLC. I was employed as a trader on the exotic interest rate derivatives desk. That was an all-consuming job, so it wasn’t until I left a couple of years later that I started trading shares in my personal account again.
2. What’s your trading style and how do you fit this into your other life activities? Do you trade around your life or does your life/job fit around trading?
I have three portfolios. The first trades futures in a fully automated way with holding periods between a couple of weeks and a few months, depending on the instrument. Because it’s fully automated all I am doing is occasional maintenance. The system sends me daily emails flagging up any problems. Every now and then I’ll see a big movement and out of curiosity see what happened; a recent example would be the massive rise in Natural Gas that happened in mid-November and wiped out optionsellers.com.
Secondly I have a portfolio of UK shares which I trade systematically, but in a manual way. The average holding period is longer here, about six months. All I have to do is occasionally move stops, and then when something gets stopped out work out which stock to buy next.
Finally I have a portfolio of ETFs that I rebalance every year. I probably spend one or two entire days doing that, but the rest of the time I don’t touch it.
On average I spend only 1% of my working day doing things that are “trading”, whether it be babysitting the automated system or actually trading myself.
3. What motivates you to constantly work on improving your trading systems and enjoy what you’re doing?
I have to own up and say that I don’t ‘constantly improve my trading system’. In fact I’ve made almost no changes to it in the last five years. Because I’m working with fairly slow persistent signals whose performance will decay very slowly, if at all, there isn’t much value in constantly refitting the system – in fact it’s probably the worse thing I could do.
Things that I enjoy more than working on my trading system are educating people – I write books about trading, regularly blog, and also do some university teaching; and research into theoretical aspects of finance and trading which I won’t necessarily use in my own trading.
Having said that I do have a few ideas for new trading systems I’d like to try, and it’s possible I’ll get time to look at them in 2019.
4. Throughout your journey, are you able to pinpoint a moment or a routine that you started doing that made all the difference to your trading and/or life?
Towards the end of my career in the hedge fund industry I worked on a project which looked at how rising interest rates affected trading strategy returns (this was in 2013 when there was real fear in the market that the Fed would abandon their policy of Quantitative Easing, a fear that was a few years premature). I concluded that there was an effect, but it was much weaker than you might imagine. This really brought home to me how much uncertainty there was about trading strategy returns. Since then I’ve been a lot more relaxed and avoided wasting time making numerous changes to my system.
5. I’m presuming that you’ve come up against failure in the past. What has been your approach on getting past these failures and has this evolved since?
My life has been a constant series of failures! I dropped out of university when I was 19. I had an early mid-life crisis at the age of 24 when I quit my job without a clear idea of what I was going to do next. I then failed as an investment bank trader after doing that after less than two years. I then had another mid-life crisis at the age of 39 when I left the hedge fund industry. Every time I’ve failed something good has come along; which makes it easy to be more sanguine about failure. I’m probably just really lucky.
More relevant perhaps is that every time I lose money trading then that’s a ‘failure’. I’ve found it easier to get accept these over time, as I’ve got more of an appreciation of how noisy and random trading returns are. It will be a long time before you really know whether you’ve been a success or a failure, so there’s no point getting depressed after a bad day, week, month, or even a bad year.
6. What would you put your success down to? Just being lucky, your intellect and smarts or just consistent hard work? Or possibly a combination?
Almost entirely luck.
It’s not intellect: I’m pretty smart, but I’m not arrogant enough to think I’m smarter than anyone else in the financial markets. In fact when I worked at my last job (for fund manager AHL) I was probably one of the dumbest people working in the portfolio management and research team, at least measured in terms of pure IQ.
It’s not hard work: There is almost no correlation between effort and results in trading, with a few exceptions: high frequency trading systems that have to be refitted regularly because the signals decay, and “special situations” where you have to do a lot of work understanding the specific terms of a proposed merger, or reading the prospectus of an unusual bond issue. I do almost no work on my own trading; I’d say I could probably improve my performance by maybe 5% if I worked 20 hours a day. That’s not a sacrifice that I’m prepared to make!
7. What do you think sets you apart from others who are trying to be successful?
I’d say my main ‘edge’ is experience – I’ve made pretty much all the stupid mistakes you can make, and therefore I’m going to be able to avoid making them in the future. Of course if you read the right books and websites you can learn about these mistakes without having to make them, but (a) it’s very hard to find that kind of information, and (b) even when you tell people what mistakes to avoid they still want to make those mistakes themselves.
8. What advice do you have for those who fail, give up or never get started? For either trading or something else in life.
In my own life after failing I’ve mostly gone and done something else instead. I think a lot of people have this mindset that ‘I am going to do X, if I keep persisting eventually I will succeed’. Sometimes that makes sense – you might just be unlucky – and you really ought to be doing X. But I think more often than not if you fail at something it is the world telling you that X might not be the right path for you.
We are used to hearing stories of people who fail many times before they succeed – like Edison and his light bulb. But what we don’t hear about is the many more people who end up miserable because they spend their whole lives trying to do something when they’d be much happier and more successful doing something else.
Here’s an anecdote that illustrates this. Round about the time I was interviewing for a hedge fund job (with AHL) I was also interviewing with a firm of economics consultants. In fact the latter job was something I’d convinced myself I ought to be doing. I’d done my master’s degree part time specifically for that purpose. The hedge fund was just a plan B application for a job that I’d seen randomly in the FT. When it came to the interviews I almost failed with the economists. The first couple of rounds were fine, but when it came to the final round I messed it up, and I was fortunate enough that they decided to re-interview me and then make me an offer.
In contrast the hedge fund interviews were a breeze; a couple of pleasant hours in their office and an offer made immediately. My original plan had been to accept the economists offer, but my near failure at the interview made me rethink my career plans. Maybe I wasn’t cut out to be an economist after all? Perhaps I was a natural hedge fund type? I decided to change my plans, and accepted the hedge fund job.
Failure in trading is different since it’s almost entirely down to luck. If you fail modestly, underperforming your performance expectations, then that’s probably just bad luck and you might as well keep going. However if you fail spectacularly, then means you’ve done something seriously wrong and you should stop trading and re-evaluate what you have done wrong. Equally spectacular success in the form of unexpectedly high profits is also problematic, since it’s also a sign that your leverage is probably too high.
9. Do you set yourself goals? And do you feel that it is a good way to achieve what you want?
Not really. I have some short and medium term plans; like I can tell you what I’m expecting to do next week, and I have a book draft to turn in before the end of March, plus some vague ideas for possible projects after that. But I don’t have a goal in terms of ‘This is where I expect to be in five years’ time’. Any long-term goals I set earlier in my life have been completely overturned – I’ve ended up doing something completely different. So I don’t bother setting goals any more. The world is so unpredictable and changing so fast that I think setting long-term goals is a futile waste of energy for most people.
10. Knowing what you know now and how you got to where you are today: is there anything you would like to have done differently, maybe done something earlier in life (or later) etc.
I thought about this question for quite some time but I couldn’t think of a single thing I’d do differently. I’ve never been the sort of person who has any regrets.
Theoretically I should have stayed at University instead of dropping out at age 19, I should have gone straight into hedge funds instead of making a temporary detour into investment banking, and I should have stayed in hedge funds instead of retiring in 2013. At the time those all seemed like bad decisions, but in hindsight I’m extremely happy about the way my life has worked out.
If I had stayed at University (where I was doing Computer Science) I may never have got into trading (or met my wife); my temporary detour into investment banking taught me a lot about trading and if I hadn’t done it I might not have ended up so well placed when I finally joined the hedge fund world; and if I hadn’t left in 2013 I wouldn’t have had so much fun writing these books and doing all the stuff I’m doing now.
11. You’ve experienced systematic trading in a bank, a hedge fund and now with your own money. Is there one thing you’ve learnt from experiencing all three that would be beneficial for new or experienced traders?
Don’t be overconfident. Overconfidence is the main reason for trading badly. You overestimate your likely performance, which means you end up trading with too much leverage, and paying costs that are too high. Be cynical and pessimistic about your likely trading performance.
12. You have also published two books Systematic Trading & Smart Portfolios. Could you expand on why you decided to write these and tell us a bit about your new book coming out in 2019?
Both books were essentially written off the back of work I’d done on building systems to handle my own portfolio. When I left AHL I decided it would be fun to build my own trading system from scratch. With the benefit of a clean sheet I thought carefully about how you could build that system as simply as possible whilst still getting most of the benefits of the sort of large complicated systems we ran at AHL. Those ideas then became the book Systematic Trading, which explains the process and philosophy that you should use when designing trading systems.
Then I did a similar process with my investment portfolio of shares and ETFs, working out the best way to manage them whilst using the ideas I’ve developed about the uncertainty of returns and the importance of costs. That became Smart Portfolios.
My new book essentially came about because a lot of people have come to me and said “I really like your first book (Systematic Trading) but it’s a bit too complicated and seems to be more aimed at institutional traders with large portfolios”. So in this new book I take a different path to explain the concepts of trading systematically by beginning with a very simple trading system, and then subsequently I explain how to make it more complicated. It’s also much more geared at traders with smaller portfolios; an important question I ask repeatedly throughout the book is ‘What is the best use of the scarce trading capital that you have?’
13. Your blog bio mentions "(Rob) also has an irrational bias against the use of big data and artificial intelligence in financial markets (and deep learning, and machine learning)". Could you please expand on this? Do you not think it’s possible to apply Big Data and AI techniques to market data to generate alpha?
That bias is partly borne out of ignorance; I don’t know much about these techniques so I’m naturally suspicious of them. Many of these techniques are just spurious rebranding of things that people have done for many years. All of the methods I use are also used by other people who label them as ‘machine learning’; but for me they are just econometrics or statistics. So it’s not realistic to expect them to do anything novel, because they aren’t really new methods.
But my bias is also based on experience of having seen people use these methods really badly. I’d say compared to classical statistical methods it’s easier to do dumb things with these methods, and not realise you’ve done dumb things.
I do think some of the genuinely new methods, if used properly, can find alpha in certain areas of the financial markets; I’m thinking in particular of relatively non-linear short-term patterns that might arise temporarily due to the behaviour of large slower moving funds. Others will just rediscover things we already knew existed from using simpler techniques. Then there’s a whole set of poorly used methodologies that are going to just data mine and find at effect that doesn’t really exist and/or won’t persist.
14. That same bio also notes that you’re not “sure if genuine skill exists in the investment world”, but it also states you “know for sure you don’t have any”.
Why do you say this and does this mean you think retail traders can succeed if only they just apply themselves, work hard and learn?
It’s really difficult to distinguish between luck and skill. There are a relatively small number of people who appear to have been skilful in the past, but it’s almost impossible to know whether they were just lucky. We have to look beyond their returns and see if there is evidence that their investment process embodies some kind of special skill that could feasibly lead to outperformance. Of course we’ll never know for sure whether a trader or investor is guaranteed to outperform in the future, so even evidence of skill in the past isn’t of any practical use.
I’ve certainly seen no evidence of consistent market beating performance in my own trading so I’m pretty sure I don’t possess any special skill.
Retail traders aren’t guaranteed to succeed – nobody is – because of the huge role of luck; and working harder or learning more won’t change that. What retail traders can do is avoid making stupid mistakes – being overconfident, overfitting systematic trading strategies, using too much leverage, and trading too often. That won’t guarantee success, but it makes it less likely that they will fail.