Mostly Beta

What was the R^2 of my own effort on my career?

I had been reading some “stop-loss” stuff on X and wrote nearly a whole post on that, then decided to see if Kris at Moontower had written on it. He’s got a whole post: “stop with the stop-loss debate.” Mostly the same points I had! I feel targeted. Something personal instead.

I left my trading seat after 15 years in 2023 to pursue the FIRE / stay at home dad dream. Even though I’ve been out of the game for a bit, I follow the public side of the trading world pretty closely, and hear the advice given to younger traders trying to enter it. The shift in the industry since I started is profound. This likely rings true for many of my cohort but I’d guess the chances someone like me could get an entry level job in the industry today is sub 50%.

A concept I keep coming back to, that particularly applies to high-agency individuals, is how much outlier results are driven by luck. Our lives are mostly beta, and while we can independently produce alpha in some spots, we’re much more interdependent than we realize.

I’ll give some examples from my story.

I would guess I’m about 98th percentile for raw IQ. Sounds like bragging right? 1) I did nothing to earn that, and 2) In a top trading firm this makes me pretty darn average. And the folks (some that I worked with) at the 99.5%+ percentile are as alien to me as I must be to someone who struggles with multiplication. I’ve been in plenty of meetings where I was the slowest person there.

In college I did a CS internship for a defense contractor. As part of the experience I got one face to face with a senior exec. I asked him “I see these titles and a clear career track - Engineer I, II, III, and that in 9 years I can be a year ahead on that ladder if I do especially well, how do I get ahead faster than that?” He advised me to “maybe consider the finance industry instead.” The next year I took courses in probability and shifted my electives to economics, which is how the next summer I ended up on the corn, wheat, and soybeans pits at the CBOT as a floor runner. A not insignificant part of the job revolved around getting coffee and lunch orders done correctly and promptly. There’s still merit to that type of work early on, especially for nerds.

I got to see the end of the pits and understand some of that world. I also studied enough computer science to be capable of picking up skills in this direction that were better than the average experienced trader (but would look terrible vs grads today). This put me in a spot between the two worlds as the pits subsided and electronic trading grew in importance. Many former pit traders did not make the switch.

So I started full time at an upstairs desk in Philly in 2008. I remember wondering if the desk was always this crazy and if people really screamed like that all the time (this was as the market crashed in 2008).

Places I got lucky in the next few years:

• Firm that didn’t go under in 2008

• Started with an unusually talented cohort of traders who pushed each other to get better

• Placed in a product (not of my choosing!) that grew rapidly in importance over the next decade (international ETFs)

• Multiple managers over the years that invested serious effort into teaching me and eventually had confidence in my decisions.

• Teammates that complemented my skills and from whom I learned a great deal.

• Ended up in a leadership role, initially due to a personnel gap that fit my skillset.

Sure I worked hard but there were plenty of people as smart as me. And yes I had to not screw it up too much to get in these spots, but much of the above was not in my direct control. There are many universes where I made many of the same decisions and perhaps ended up in a firm that collapsed, or didn’t get along with a manager and went back to engineering. In college I went to Sales & Trading info sessions with Bear Stearns and Lehman.

I remember the “you didn’t build that” Obama meme from years ago. Regardless of your politics it is easy to over-attribute your actions on your results. I can only reflect on my own experiences, but even in what’s considered one of the most meritocratic, competitive, and individualistic roles anywhere, my own success was the product of a community more so than my own individual agency. The role of that community is not random however, these were individuals chosen because of their skill in communication, teaching, and given incentives to do those things. The structure of a firm and the people there is deliberate, and designing this structure is an especially impactful and difficult role. I used to ask the traders on my desk “Imagine I’m the most selfish individual in the world - what set of incentives would make all of us work together effectively? …Ok let’s start there and then try to do a little better than that in practice.”

The one place I will give credit to my own agency is curiosity. I lived and breathed this stuff for years. Even things not directly related to trading - the economic and political history of countries I traded, corporate supply chains, podcasts from other traders. I constantly dug for information. I don’t think the motivation was financial, I was just curious. Today I understand many people are fearful of AI, but to me the opportunity to indulge my curiosity in an even more accelerated way feels like a godsend.

I like to imagine a Monte Carlo simulation that replays my life 10k times given the same starting inputs. I reckon this specific output in the top few percent of that simulation. I grew up a middle class kid in Rochester NY who got good grades. Very little of the result is stuff “I deserve.” In fact when I look at the tails of the income distribution in the US - at least for my generation there are plenty of paths that lead to an eventual net worth of a few million dollars and a decent retirement. But for many of the tail results in the 8-9 figure plus range, I would chalk up to a ton of luck.

None of this is to suggest not working hard or saying it’s not fruitful. Absolutely incorrect. It’s akin to saying that beating the market by 3% a year on average is a great result that requires a lot of skill and effort, but if your benchmark returns 10% a year or -5% over the first decade of your career, your notional success is going to look very different. The outperformance may be due to you, but the raw results are dominated by beta. I’m glad I wasn’t born in Germany in the 1920s. And how many ML Phds made millions before OpenAI? Your benchmark should be your own success given the cards you’re dealt.

What’s the R^2 of my own actions on my results? Maybe 0.3? I can give credit to myself for some consistent hard work and curiosity. But I can’t give myself credit for the results.

Right before I left my trading career, one of the firm’s partners asked me, “Do you think you could have made more money somewhere else?” I said “Given the same results, yes. But I don’t think I would have made it to the same level as a trader anywhere else.” Be honest about the attribution of your own effort and skill vs luck.