Behavioral Edge: Guest emphasizes that top managers win via superior payoff ratios—running winners and cutting losers—rather than high hit rates.
Market Volatility: Host highlights dramatic swings tied to geopolitical headlines, including a sharp VIX drop and oil’s steep selloff, underscoring policy-driven markets.
Momentum Dynamics: Discussion notes momentum’s structural role amid quant and algorithmic trading, while quality growth has struggled, requiring adaptation.
Systematic Discipline: Case studies show robust, rules-based systems can outperform emotions; consistency and process fidelity are key.
Trade Examples: Companies like Carvana, Bank of Ireland, Just Eat, and Yutong Bus are used to illustrate sizing, scaling, exits, and re-entry—presented as process examples, not recommendations.
Allocator Tools: Daily holdings and decision attribution analytics help identify true skill and biases; Morningstar partnership aims to bring deeper manager insights.
Psychology Pitfalls: Endowment effect, overconfidence, illusion of control, and behavioral “tribes” (connoisseurs, assassins, hunters, rabbits, lumberjacks) shape outcomes.
Practical Takeaways: Analyze alpha decay, maintain disciplined rules, keep watchlists for potential re-entry, and create feedback loops to continuously improve decisions.
Transcript
This episode is sponsored by Interactive Brokers. Where could quantum computing take your portfolio? Investment themes from Interactive Brokers. Well, they help you find out. Start with a trend like quantum computing or clean energy and instantly see which companies are most connected based on revenue and strategic focus and product relevance. You can explore competitors, global exposure, and business relationships across more than 500 themes. Built on AI powered insights from reflexivity, investment themes turns complexity into clarity and helps you move from trend to trade faster. Available now across IBKR desktop, mobile, and trader workstation. The best informed investors choose interactive brokers. Remember SIPC. Check it out right now at ibkr.com/ themes. The Disciplined Investor is all about you, your money, and the markets. Sit back and get ready for this edition of the Disciplined Investor podcast. This episode of The Disciplined Investor is sponsored by Horowits & Company. If you're looking for a portfolio manager, look no further. Horowits & Company. From seed through harvest, cultivating financial success. Well, we have kind of a ceasefire depending on who you ask. The Fed's still thinking of a rate cut this year. The best day for the market since April 2025. Worst day for oil in six years. Government's heavy hand is all over it. And we're talking stock market maestros with our guest Claire Flynn Levy, CEO of Essentia Analytics. All this and much more on episode number 968 of the Disciplined Investor podcast and welcome to the crazy place we know affectionately and call it Wall Street where the the tide turns on a dime these days, doesn't it? I mean, they can often turn a fortune into ruin and ruin into a fortune in more than less than, I should say, a blink of the eye. And welcome to the Harold Company studios here. This is where we produce both the disciplined investor podcast and DH Unplugged. And I am Andrew Horowitz, the founder of Horowitz Company, which uh is an investment advisory firm for people just like you. So, if you're looking for a little help in this madness of what is going on right now and a little bit help meandering, wandering, and making sure you're set straight, give us a call, find us, go to the website, the disciplinedinvestor.com, drop me a line. We'll be happy to look at your portfolio. It is that time of the year for, you know, when we start doing a little spring cleaning, right? And, uh, no better time to do a spring cleaning than on your portfolio. By the way, if you are listening in Europe, I don't know if you know this, but in Europe, you are not allowed to trade US-based mutual funds. You're not allowed to trade US-based ETFs. The good news is we can actually do some of that for you. So, if you're in the UK or in the Euro zone, European Union, we can actually manage your money uh using our global allocations and our managed growth strategy. So, something to to consider. whereas you can get access to the ETFs in the US that you can't get access to on your own. Impossible to do. So, something that I thought I'd let you know and let you in on. So, last Wednesday, what was that? April 8th, the markets delivered one of those classic geopolitical whiplash moments, right? where it was like ah you know we all a sudden have a ceasefire because remember the night before we had uh something happened the Dow surged we'll get to that Dow surged 1300 points closing up almost 3% on the day the S&P 500 jumped more than 2.5% the Nasdaq moved up about 3% at the same time the VIX this is Wall Street's um the official fear gauge plunged, dropped about 20% as this panic pricing basically evaporated overnight. Oil took the opposite route with WTI, West Texas Intermediate, cratered like I guess it was about 16% at one of the low points. That was the biggest one-day drop since 2020. And dare I say we know what happened then when in fact oil went negative for a little while there. Brent oil interestingly enough also f full fell about a similar amount but interesting divergence of pricing where Brent is actually less money than WTI. Something we haven't seen in a long time. The problem is that the futures markets are predicting a lower value than the present day I want to buy right now oil market. the spot price of what you get for oil right now somewhere in the 120 to 130 range for Brent in Asia and other markets outside of the United States. And I think what's happening right now is that that is pushing up WTI as well. We had a moment that I think WTI fell below I think it fell below 95 94 was it 92 at one point? Uh why? Well, the spark that ignited all this was President President Trump announcing that there's now this two-week ceasefire with Iran. And this came in just I don't know minutes maybe an hour before his own deadline. The deadline that said we were going to basically incinerate an entire civilization. Now this also was coming with a understanding that will be a complete reopening of the straight of Hormuz and what what we I'll tell you what we're calling this by the way this happened on Tuesday. This is a different kind of taco Tuesday trade taco taco formerly known as Trump always chickens out. This one is Trump announces a ceasefire option. Taco, we got a ceasefire option here. Now, I don't know who is agreeing to all this. We saw the Pakistanisians come in and beg for this to happen. Who knows if we were begging the Pakistanians to do this. I don't know. Who knows? The truth is somewhere between here and there right now. What we're hearing from the Iranians in supposedly they say things in different in private in public because in private they're saying they want to do a deal supposedly. Of course, we don't know that from anyone but one source. and in public they're saying, "You know what? You broke one of three of the 10 already. We're not interested. And you did this with Lebanon. We're not interested. We're not letting anybody through the straightforward moves." But somehow magically markets are elated. We've seen this movie before. Let's not let's not let's not get ahead of ourselves. We've seen this before. We've seen these similar sharp reversals play out during the earlier tariff pauses. Tariff on, tariff off. Mag Miyagi say wax on, wax off. Tariff on, tariff off. War on, war off. Pause. We're going to obliterate. Pause. We're going to do this. Pause. It works. It seems markets get all excited. You know why? because a lot of shorts get wrongfooted just like the longs get wrong footed. So things move tremendously. The heavy hand and the fingerprints that are all over this by the government enacting various different modes throughout is is is very tough on markets. Takes a toll on investor confidence. Now when the tension is building and the threats are looming and oil prime premiums spike on sudden supply fears and e equities kind you know get all crazy and upset and wobbly and investors are all upset and then we see this last minute deescalation and then a flipping of the script that triggers this huge rally because when a when a when a single government announcement can swing the Dow by over a thousand points and crush oil in hours. It clearly highlights this this heavy hand. Some people call it the invisible hand. It's not invisible. It's not invisible by a a long shot. It is clear as anything that you could see that how impactful the government can be when it comes to markets. this policy that dominates pretty much everything throughout the day because we, you know, the 24-hour news cycle is now like a 15minute news cycle. It's unverifiable, but information comes out from governments, including our own, at such a breakneck speed that is impossible for anybody to keep up. You watch the Algos grab this well before the news really hits the media. And what we're seeing, I think, right now is less of a fundamentally driven market and more like investors trading, the the timing, the tonality, and clearly the the headlines that are coming out of Washington. And with you know these these welltimed trades ahead of these moves I'm starting to wonder about question about influence and undue influence in the markets and when it crosses into something closer to dare I say manipulation. This has been a theme that is now coming out. As a matter of fact, there's some lawsuits and there's some Congress that are doing some looking into some of this and it would it would seem likely that some of that what we've seen the potential for us to find out is is actually a lot better than was expected. Each future contract has a footprint, a fingerprint, a a a ID of what and who traded. We should be able to get this. But right now, where we are with all this is we still don't know. We have a twoe pause. We don't, you know, the the over the weekend they said that who knows because we haven't gotten all the information, but over the weekend was the time period that was going to get this going. And you know, we look back on the last couple of days and we see, well, yeah, I mean, something's going on, but who knows what. We don't know if it's genuine or just maybe another temporary pause. with plenty of of these unresolved issues that are still on the table and Iran already signaling potential pullbacks to what they had agre well nobody's agreed to anything but what's in some of this ceasefire and how fragile the ceasefire is we can see fresh spikes in the VIX another round of oil whiplashing if tensions flare again as a reminder how quickly sentiment can shift when government action keeps on rewriting the narrative that's exactly what's going on. So I think with that um it it's it's important to understand there's a big psychological impact and the question is how to stay ahead of this and how to master this and how to make sure that you don't fall prey to getting whipsawed not from a trading standpoint but from an investing standpoint. And I think we're going to do that today because we have a great guest. We have a great guest coming on and she does a lot of work in the area of I would say behavioral finance to a degree studying studying great traders actually studying good and bad traders. Okay, if you read her work, you know that what has happened is that she has done a great deal of work in analyzing the trading and the process utilized, helping investors, I mean institutional investors understand more about themselves, what they do, how they're doing it, and how they can better themselves, where they make mistakes and how they can stop doing so. where they do have great uh out outputs and and and working that angle to refine that. Hone hone in on exactly what it is that made it for this investment to go well and that one not. to train, retrain, teach to to to extract the information about what was the mood, the mode, the moment, the backdrop that made that successful of an investment idea an allocation a portfolio transition. And what didn't? Her name her name is uh Claire Flynn Levy. We've had her on before and uh she's really great. But before we go any further and I introduce her and I have her book right in front of me by the way and we'll talk about that. Let's take a moment and let's talk about Interactive Brokers, shall we? Because Interactive Brokers or IBKR as we call them has key competitive advantages for sophisticated investors just like you. IBKR's margin loan rates are from just 4.14% to 5.14%. In fact, IBKR is rated one of the lowest margin fees by stockbrokers.com. I want you to compare IBKR's clients low margin borrowing costs to other brokers like Schwab or or Erade, Fidelity, and Vanguard, which charge hundreds of basis points above IBKR's low rates. Look, the best informed investors choose interactive brokers. Margin, of course, is only for investors with experience and have have a high risk tolerance because you can lose more than your initial investment. Rates are of course subject to change. Get started today at ibkr.com/compare. Interactive Brokers is a member of SIPC. Again, it's ibkr.com. All right. So Claire Flynn Levy, she is the founder and CEO of Essentia Analytics, which is a fintech firm that uses decision attribution analytics to help both equity fund managers and allocators of capital to identify investment skills and biases and continuously improve their decision-making process. They lead the feed field in um behavioral analytics and work with many of the world's largest investment managers. And prior to founding Essentia, she spent 10 years as a fund manager, both active equity uh and as hedge. So that's great. She's also author of the book that I have in front of me, stock market maestros, the winning habits, strategies, and mindsets of the world's best investors. This just came out and this is a great book. It has, you know, chapters on uh how to handle winners. Uh each there there's there's a number of specific masters uh maestros that she identified and look at their behavioral alpha scores, their hit ratios, their payoff ratios, and and takeaways from each of them looking at what has happened. But let's let's bring it right on. Claire Flynn Levy, how are you? >> I'm fine. How are you? >> It's been a while. Last time you was on, you were on was 2022. You've been on since >> first time on was in 2019, we recently discovered. Uh so, thanks for coming back. >> Well, it is a pleasure to be here. It a lot has happened 2019, hasn't it? >> Wonderful book. I'm I'm I'm rubbing the cover right now. It has one of those covers you just want to you want to It's one of those like comfort covers. Um >> that's funny because I' I've been doing that, too, but I thought it was just me. There's some certain books that you just like kind of put under your palm of your hand and you just like >> you just it's it just feels good. >> The covers that's that's a great thing. So the stock market mash maestros the winning habits strategies and mindsets of the world best investors. But we're going to start out a little bit differently. I want to start out finding more about you because what I've learned I want to find out something unique about you. This is kind of a thing we've been doing with the show recently. >> You you started your financial career as is told and is out there. I think or maybe not as well known in the mail room of Gabelli. And >> that's true. That's true. It is not well known, but I did. >> You're in college. >> Um tell me a little bit before that. You had jobs as you were growing up. Maybe in high school. >> Yeah. Yeah. I went um I went to boarding school. So in high school, I had jobs at like breaktime. I worked first I worked in the local bookstore gift wrapping. That was my first job and then in their book ordering service and then I uh I did get interested in economics at in high school. I mean this is obviously another time. So uh kids didn't have the opportunity to really explore that kind of interest at this in the same way that they can today uh when I was in high school. But I did, you know, I did what reading of Forbes magazine and other other Wall Street Journal type things that I could do. And uh I ended up getting in a summer job in uh as you said in the mail room filling putting mutual fund perspectuses in envelopes at Gabelli Funds. >> Wow. That that's pretty cool. I mean the thing is that you know with regard to um the the idea that you got interested so early in economics but I'm I'm more curious about one more thing to this day can you wrap like a like a banshee can you do those corners really nicely on gifts and things like that what you learned in in the bookstore >> I actually can but the question is do I >> I think my I do a calculation about return on energy expended and decide like, eh, this person's not even going to notice. If I think they're going to notice, I can pull out the big guns. >> My wife is like very much in the groove of you when you go somewhere and you bring something, it has to be wrapped. If you bring wine, you cannot bring to wine to somebody's house in just a bottle. It has to go in a gift bag with tissue and a card. It It has to. >> I mean, there's a whole industry of gift bags that relies entirely on that belief. Yeah. >> And I mean, I'm kind of with her. I think maybe women have been trained >> to do this. >> Maybe. It's nice. But the thing is, I'm like, are you sure we're using the bag that they didn't give us when they came here? >> You know, I'm going to feel awkward about this. Uh, let's talk about some things you did. Um, you did a uh you have done an incredible amount of research into the the habits of investors and um there's a lot of myths out there in in equity investing that it's all about, you know, stockpicking or it's all about, you know, the Brinen Bower and Hood and we look at the the efficient frontiers and Marowitz and how 92% of the portfolio's effective return based on the variability blah blah blah you know all these things right so so why is that a myth about this whole issue about stock picking and maybe even market uh relation uh statistics >> well in the end it turns out that most people don't get it right more than 50% of the time when it comes to stock picking if you're comparing that to buying an index fund um if you think about it in absolute loop return terms. Sure, you can you can pick stocks that go up more than 50% of the time hopefully. U but the question is could you have just put your money in an index fund and got the same result. That's what that's the question that people are asking themselves uh who are running the big funds and that's who I've been studying this whole time. So what we found is that even the very best fund managers have a median hit rate that's like your batting average of 49%. which means that actually that they don't make their money by getting it right more often than they get it wrong. At least not in terms of of the stocks they're picking. What what the research also shows is that the way they differentiate and what makes an investor actually skilled beyond do they pick the right stocks is how do they behave when they're winning and how do they behave when they're losing. >> But can I stop you? How do you quantify that? That's what we've talked before and I we've talked about this, but I'm still I'm still like a little bit squishy on this. >> I mean, the way that that we do it at Essentia Analytics was which is my company. Um, you know, I used to be a fund manager myself. So, in trying to answer these questions like how would you measure how I behave when I'm winning? I'm coming at it from from the point of view of a fund manager. And I mean the first thing with with all of this sort of analysis is that there's not like one right answer that's the only right answer. So we end up looking at it in lots of different ways. But for that particular question um the way we found most effective is to say okay let's let's look at every trade you've ever done. Let's divide them into trades where you were increasing your exposure. So we we do this for long only managers but we also do for long shorts. So, you know, the short side uh means that I'll speak in more generic terms, but you're increasing your exposure and then you have trades where you were decreasing your exposure. And then we're going to categorize those trades by ones that you did when you were when the stock you were trading was already making you money and ones that you did when the stock you were trading was losing you money. So therefore you can see you know how do you do when you you've been adding to winners and how have you done when you've been adding to losers and uh yeah I mean different people have different habits. It's not that there is one right way to do it, but in stock market maestro is actually um my new book uh you can see there's a variety of of different sort of attitudes towards it. But uh but the key is understanding whether what you do works because often people will uh buy losers. You know that they might have very high conviction about a stock and the price is falling so they think I'll I'll just average down. But actually, you can end up blowing a huge hole in your P&L by doing that. And >> for example, on page 138, I just happen to grab this right here. Uh I couldn't have grabbed the open the book and thumb to something more perfect than this, by the way, for this conversation. This is Gorm uh Thomasson >> and um and it's uh about just eat is page 138. and how you wrote although he was he built a success on a few major wins >> um >> he he he he can't afford to let his losers run too but he did on just Eat for example right >> yeah well he >> well he got out at the good time at that but he just wouldn't he wouldn't I should say this differently he wouldn't let his losers run that was my point >> yeah I mean it it's all about recognizing when you're wrong and that can be really hard to do because you you know your one data point can't be well the price went So therefore, I'm wrong. But when the price has been down for like some sustained period, it's not behaving the way that you thought it was going to be behaving, you might come up with explanations for it. But what often happens, particularly to people who have done a lot of research on a on a stock, is that they end up succumbing to the endowment effect where they're just so convinced that they know, you know, this thing is worth more than that and it's only getting cheaper. So therefore, I'm I'm not getting out. I'm, you know, I'm totally convinced about this stock. And then before you know it, you've given up all the money that it was once making you. And now you feel like an idiot. And that's happened to a lot of people recently in uh particularly who invest in like the quality growth space where that's just stopped working. And it's taken people a really long time to sort of realize this is not a necessarily a short-term thing. It's not to say quality growth will never outperform again, but I think the role that momentum has to play is not a temporary thing. that in my opinion I think that's about the fact that there are a lot more computers involved in a lot more mathematical models driving things and they feed off like momentum is is a standard part of of that sort of a system. So having to take that sort of price movement shorter term price movements into account when you're not used to doing that because you've always been a very long-term investor has been really hard for a lot of people. Well, and then it's interesting because uh there's also you there's the whole thing of uh the concept that the efficient market and the market is correct >> and those that are out there saying no it first the market got it wrong uh you know a lot of people do that or um I know better the valuation of where we are let's say it's on the way up or it came down it doesn't matter is different than what the market is putting the value That's that's a lot of the the the edge that a lot of people think they can have with that, right? There's that and and I think that could cloud some people's view on uh on reality sometimes. >> Yeah. Well, I mean, one of the most powerful analyses that an investor can do and you have to have, you know, held a number of different stocks uh to have enough data points to do this. But if you can go through and do what we call an alpha decay analysis, but look at how long like over the life cycle of the typical stock that you own from the day that you bought it to the day that you sold the last share of it, how has the excess return uh typically unfolded? Like does it all happen in the beginning and then not a lot after that or does it go down typically first? like if you're a value investor, you may find that you're early and so things tend to go down and then they go up. Um what what does that pattern look like? And once you can identify that pattern, you can say, okay, well, looking at my winners, I can see that they tend to run out of incremental alpha generating steam after let's say 18 months if that it depends on what your strategy is and you know how long term of a investor you are. There's a point where you can say, "Okay, so if something's going to work, it will definitely have worked by this point. >> If anything, it will probably be done working." Yeah. >> So, actually, I can I can put a stake in the sand where I say, "All right, I might be convinced, even more convinced than I was 18 months ago, and yet I've done the analysis and I know that I am probably wrong." >> Yeah. >> And because I know I'm wrong half the time anyway. >> Yeah. Right. So, the chances is I'm only 50/50 I right or wrong on the wrong my my my thinking I'm wrong. >> So, therefore is higher probability. >> The um let's talk about assassins, hunters and and connoisseurs. This is uh your co-author of the book who was Lee uh Freeman Shore wrote a book called the art of execution >> and he proposes that there are these distinct >> I think he calls them behavioral tribes right >> that that are um about how they handle winning and losing positions. And now you, by the way, you filtered you you took down all these different possible stock market maestros, which I also want to talk about the difference between wizards and maestros in a moment, but just hold that thought. Hold that thought. Jack Schwagger is a good friend. Uh so we we we look at this and and it and it can be um broken down into various kinds of behaviors. Go through those three and how that shaped how you were actually working on uh creating the finalists >> for the ba book. >> Um yeah well so Lee's first book was as you say the art of execution. great book. If you're interested in this stuff and you haven't already read it, I highly recommend it. That's how I met him in the first place. I read his book and I thought it was so aligned with the work I was doing that we needed to meet. And that was 10 years ago. Um so funny how >> that that was the moral of the story is if you really like a book, why not reach out to the author? You don't know what will up happening in 10 years. Um but uh in that book he had he was running money he was running a fund of funds and he had parcled out assets to uh a series of different managers who were all very highly decorated you know award-winning managers and and he this is you know a long time ago now but even back then he did have access to their daily holdings data because they wanted the mandate and the mandate would be run in a separately managed account anyway so the data was was contained. And so he had access to this data and he um he put together this best ideas fund where he said to each one of them give me your you know 10 best ideas and I'll create a fund out of everybody's best ideas. Um, and he learned a lot of lessons that uh I won't uh do I won't spoil here, but uh one of the the main one was that what predicted whether the manager would make him money wasn't did they get it right more often than they got it wrong. It wasn't the hit rate. It was about their payoff ratio when they were right on average. Were they more right than they were wrong when they were wrong? So that that was about how do you behave when you're winning? Do you run those winners so that they get big? And how do you behave when you're losing? Do you cut those losers so that they stay small? That's how you get a a good payoff ratio. Um, and what he found was these these three tribes of of people. Um, the connoisseur is the person who runs winners, you know, they just they they've done all the work. They keep going. They have to have a a strong stomach to be able to uh withstand you know draw downs. >> Uh but they don't give up >> and as a result they they reap the benefits. Um then you have uh people who when they're winning what did he call the uh there are people who take a a quick profit. Obviously you don't want to be doing that. Like people who just take a quick profit when they're winning, that's not actually going to help you in the end because you need the winners to be bigger. >> Right. That's like just take This is taking one sprinkle the off the top of ice cream. >> Exactly. It's like that's like sounds like fun. >> That's like what my son does on his day trading app. It's like >> right I made $3. I MADE $3. >> I COULD TELL YOU who's making more than $3 off of that one. Um it's not you. But then you have when people are losing the rabbits are the people who are just like frozen. They don't they just they don't do anything or maybe they just like burrow further into the hole by adding adding adding in in small increments on the way down. Um where is so you don't want to be like that but what you do want to be uh is either a hunter or an assassin where an assassin is somebody who they just you know they cut that loser. It's like that. It hits a point, I'm out. I'm done. Move on. Just >> and don't look don't look back. >> Don't look back. You're done. Um, the hunter is somebody who's actually going to double up. They'll The price might be falling. It's not working. It's not that they then just keep adding all the way down, but they find their moment and they go big. And that's a very, you know, gutsy thing to do. So you don't find a lot of people who do that, but it is a very effective thing for for those who do it. >> Yeah. If you get it right, surely, especially if you're going to double up at a lower a much lower value. >> Yeah. But in the in the stock market maestroers book, we came up with a new a new tribe which we call the lumberjacks. And it was because we we discovered this manager and goes back to like how did we even choose these people? Um, we I I run a software company that, you know, does analytics for fund managers. So, I have access to a lot of fund managers data, but certainly not the entire universe of fund managers. So, we went through Morning Star. We looked up, you know, everybody who's won an any of the big awards in the last three years, >> right? >> Let's find all of those people and let's look them up. look up their, you know, typical performance stats, risk stats, all the stuff that like somebody who was who had an access to Morning Star and was doing like basic due diligence on a manager would do. And then we approached all of them and said, "We're writing this book. We want you to share your daily holdings data so that we can analyze it and we'll give you a report back and tell you everything it says. And if we choose you for the book, you get to be in a book. And if you don't, you get a free analysis. >> You get your from from from Assentia, >> right? >> Yeah. Right. >> And you know, which would normally cost a lot. So it's like, yeah, why not? Um, and we did have, you know, a number of people who took us up on it. We also had people who didn't want to share their data or whatever. Just didn't even >> I'm sure you had strict I'm sure you had strict NDAs and all that, right? >> Oh, for sure. And you know, I deal with this sort of data at all times. So we have a very secure infrastructure and you know all the all the stuff is there but I think there are certain uh asset management firms out there who are very behind in their thinking around use of data and they were like oh we can't possibly send it outside of our building. It's like >> if you tell us how to do it. >> I'm pretty sure you're already doing that. Right. Um anyway, so so we took the data of the people who gave it to us and then we did our our analysis and uh narrowed it down and then we and we looked at them in terms of you know basic headline hit rate and and payoff but then also what we call behavioral alpha score which is about looking at each of the seven different types of decision that they make. So picking decisions, entry timing decisions, scaling in decisions, sizing, size adjusting, scaling out and exit timing. Those are the the seven that we uh that we think of when we think about you know the life of a stock in the portfolio and uh and we look at all of you know all of those types of decisions that you've done and then compare them with what would have been achieved by chance. So the point is are you adding value through making this type of decision or again would an index fund do just as well? Um, or if it's a question of like a sizing decision, what if you just had an equally weighted portfolio, would that do just as well? Or if it's about timing, like could you just throw a dart at a dart board over a certain period and you would do just as well? Because if the point isn't to tell you how bad you are at everything. It's to say, here's what you're good at, and let's free up your energy from this other stuff that you're doing that like a computer could do that. and focus your energy on the stuff that that you do that actually does add value. And people do add value, you know, particularly when they don't let behavioral bias then destroy the value that they've added like is the case with alpha decay. So anyway, we do >> it's fascinating. >> It's just amazing. >> What I find amazing is just you once you look at this stuff, you probably have a lot of these wow moments. You know, there's this well that that was cool. Well, that was a great trade because you can see it and you graph it, you show it, but it's all historical. So, you can really get a step back look >> at what's happening there and get a really good picture of, you know, hey, and probably there have been times I'm I don't know this, but you could either confirm it or tell me I'm just totally wrong. Oh, you know what? Look at these two months of this particular manager. Something was going on there that wasn't right. Maybe he was spooked. Maybe he's having an argument with his dog. Who knows what the story is, but something is not right here, right? And you can probably go back and say, "Hey, what happened between December and January 2022 or whatever." >> Yeah. >> And they'll be like, "Well, it was a bad time for me on this." And you can say, you know, maybe you shouldn't be trading during times of excess stress or >> you know, whatever. >> Or when you just had a baby and you're not sleeping properly because there's lots of science that says don't make decisions when you're under slept and that's bad. I shouldn't make any I don't think I should make any decisions ever then. >> Uh >> we we did an interesting um research report. This is a while ago now, but looking at winning and losing streaks and does that cause you because people when they've been having a good run of it, you know, do they get lazy? Do they do they get slap happy? Like what happens? Do they end up trading more, less, better, worse? Um, and what we found, if I remember correctly, is that about a third of the managers we analyzed showed some kind of pattern around that when they were in a a winning or a losing streak. And it was typically that when they were losing, they would start trading more and in bigger size and worse. >> Interesting. >> Um, and when they were winning, they would just typically be trading less. Um, >> that's interesting because that's that's opposite of sports, isn't it? So in sports like playing tennis for example when you're winning usually what happens you take more risk you know you got the grove groove going and it's something happens and when you're losing you just get almost like you step back it's very it's very opposite >> yeah it's interesting I hadn't thought about that but it's true I mean there's this sort of the bias is called the illusion of of control where you think somehow that you need to be trading or if you trade bigger this is going to help >> I need to take control of really bad trading right now and and continue doing it. >> Yeah. And that somehow you can like you you are going to affect the market in some way. >> Um >> Yes. revolves around me. >> Yeah. Well, but I mean at the very least you could you can just call it overconfidence because statistically, you know, if you don't think you have a better than 50% chance of the trade making you money, why are you even doing that? >> Right. >> Right. So if you now we know that that historically you haven't that's good to know but but you better believe that this is one of the ones that's going to win or don't put the trade on at all. >> Yeah. >> Then it's about being able to weed out which are the ones where I thought I was going to win I was wrong. >> Yeah. Exactly. So available this book book is available on uh all sorts of hard cover. It's soft cover. It's Kindle. It's audible stock market masters. And I don't want to forget about getting back to wizards and and maestros the differential. But one of the people you have on your book that that that has um put a little note on here and I guess you know is Annie Duke. >> Yeah, I'm a big Annie Duke fan. >> Annie Duke's awesome. I mean, you know, obviously Poker Champ uh turned I think didn't she get her PhD like more recently? >> Recently, she had done most of it and then had just not finished because I guess she was doing so well at poker, but then she came back and she finished it. Um >> I think she's got like $2.8 eight million dollars or three million dollars of of of poker winnings in her lifetime. And then she turned into turn turned doing a lot more behavioral type of work and which of course no limit holdem if you know the game is not poker. It's uh behavioral primarily. You you could have the worst hands ever, never be dealt a card through four days worth of a poker tournament and still win the tournament, >> which is just wild. Yeah. >> I mean, you don't get that so much in stock market investing, but >> Well, you can't do that. You can't bluff the stock market. >> Yeah. >> So, tell me. >> Yeah. But she's uh she's written some really good stuff and and in fact, uh I have a I put out a blog post today about cutting losers and why is that so hard and what are things you can do to get better at that? And you know, she wrote a book a few years ago called Quit, which is all about that. >> Mhm. >> As well. And uh that's one of the best skills in poker is knowing when to fold them. And you're going to do it a lot. >> Yep. >> So, it's all about making that call. >> Yep. Thank you, Kenny Rogers. So, um let's talk about wizard and maestros. You make a distinction, and I've seen this a couple times from you that there is a difference between a wizard and maestro. Do I sh should I say that it's because that you're trying to make a diff a differentiation and and a distinction between stock market wizards and stock market maestros. Is that or am I totally am I wrong? No. >> You know, I'm a big fan of the of the uh Jack Schwagger books and the the stock market wizard. When I first started out as a fund manager, I read all of that uh stuff. So I I think these people are all good at investing, but the people who are wizards typically are there these are more traders. They're shorter term. They're doing I think it has both of them are holding a wand, but the wizard is zapping things with the wand. >> And the maestro is conducting an orchestra and trying to keep everything in check. they're running a portfolio that needs to perform all together whereas the the wizard is doing like individual trades and and may have a very concentrated set of bets. >> So like an acid would be a would be a wizard. >> Yeah. >> Potentially right. Yeah. Exactly. So and then but and and and somebody like uh some of the key well-known Fidelity >> Exactly. managers. You probably don't even know their names, but there are people who are running billions and billions of dollars for all of us who have 401ks. >> Those are the misters. Hopefully >> hopefully >> you're indexing >> not indexing. So, um the the the the question I I have for for individuals, for for non-professionals, for people that are managing their own portfolio, how How do they internalize this idea that h these are just these professionals that are doing this and I could never do anything like that? Of course, they don't have the same tools available to them. So, let's let's identify that point as as a real thing. But how could where how do they interpret all of this into their and and distill it down for their own use? Well, I mean the the beauty one of the beauties of doing this book as a set of interviews with different maestros where we really chose them completely based on numbers and not based on even knowing who they were. Um is that we ended up with a really diverse group. They all run very different strategies. They even the ones that you know there are a bunch that do small cap but they all do it very differently from each other. They grew up in different parts of the world in different walks of life. Like if anything, if you were just starting out in in and interested in becoming a professional investor, the message here is like you can like there's and it they didn't all read they didn't all study economics or finance or go to Wharton or you know any of that. Some of them did, but a lot of them did random stuff. So it's not about that. It's not even about having, you know, gone to the right school or got the right degree. Um, what it is about is being disciplined and >> perfect >> in the end like if you if you can't do that then you're gambling. That's really I mean and and enjoy yourself, you know, but know that >> that's I I know this as a money manager for many years and obviously we called the discipline investor podcast and discipline investor manic growth strategy that we have and it is about discipline and there's things that you have to do and sometimes I'll give you an example by the way we have a part of our one of our portfolio strategies that is this quantitative base right it's like this is what will be in the portfolio and I look at it I'm like oh god no oh no I don't want to put that in there and I I can't tell you how many times I've been surprised at something that I'm like I don't I I just feel really wrong about this and it actually works out because my system that that we are >> we are disciplined to follow in this regard in this it it identified something that >> maybe I had a a dark view of that maybe was in the past or maybe >> you know it was just a whole different situation. One I can I I remember very distinctly was uh we were long Carvana recently >> and I'm like oh god no. Oh no no no I don't want to do that. I really don't want to do that. >> And it's like and I went to um in our office of portfolio manager I said uh hey what do you think about not put no that's not how it works. I'm like yeah but you know yeah what else do you want to make an exception for? I'm like, "Yeah." And then >> Carvana kept on going up. Kept on going up and we cut it finally, which was great. I was thrilled with a nice profit on it and then it rolled over hard. And that's again back to that again. My system obviously did what was right in that particular regard. It may not happen all the time, but >> GAP was another one. There's a few other ones that I was like, "Ah, I just I don't want that in there." Um, but >> there's a chapter the chapter in this book um with James English Jones and Samantha Gleeve that's like a a duo who run a European um systematic cash flow oriented fund and the beauty of it and and you find that the humility is sort of a common thread across all of these different managers actually but um James in particular was very cognizant of his emotional sort of reaction to prices falling and and the fear and I mean having been through the financial crisis and been through lots of different situations. He knew I will not be able to make good decisions. I need the system to be the system and right >> we do not deviate from the system. We just better make that system be like super robust and steeped in, you know, academic proof and all the rest. and what they've what they've done with their system, it makes a lot of common sense. But having seen their scores, it's like, wow, very impressive. >> And this is this is a score of 49% just to restate this point on the hit rate for them. 6 uh3% on the behavior alpha score, which by the way is probably because they have a system. >> Yeah. >> Because if they didn't, it would be a lot lower because he'd be spooked out. like 50 would be just your index fund, what would have been achieved by chance. So, he's way over that, >> right? And then 246 on the payoff ratio, which is a a nice a nice dial. >> So, their biggest winner, sorry, their average winner is winning them almost two and a half times as much as their average loser is losing them. >> That's the way to play, >> which is a great ratio. You don't have to be right more than 49% of the time to make a lot of money doing that. And what's interesting about this, by the way, this is something I want to ask you because when I read this and I was going over the various charts, particularly on page, if you want to kind of follow me here, 181 >> um and this is right with um Jones and Cleave, but it's it's the Bank of Ireland share price from 2019 to 2024. So, here's what's what I found interesting. First, I was looking at some of these going, "All right, big deal." Seriously, I was like, "Ah." But it's interesting because they bought this down a 3% position back in 2020. They didn't do anything with that. let it just groove and grow, which was great, by the way. Moved up to a 7% position. They reduced it down to a 4% position late 2023. They exited kind of on the on the bottom when it was going and then went back up, but hasn't gone anywhere in 2024. But this kind of chart, what's interesting, there's other chart examples like this where they start out with like a half percent position. >> Um, you know, they increased it to a 1% position or or, you know, because it didn't go anywhere, came back a little bit. Um, it's kind of interesting. These are not huge positions in any of this. Here's another one. Page 113. This is John Lynn. He bought Utah bus shares. U bought a a 3% position, reduced it down to a 1% at the at or reduced it down to zero. I can't read that. It's very small. >> He raised it reduced it to one. >> Is that one? Yeah. Okay. One. Um exited the position again. Then he bought it back on the on the dip down at 2% position. Uh you know, four years later. >> Yeah. >> There's a lot of times. >> Gosh, those are really small positions. Now he's running a, you know, he's running a big um Chinese equity fund where he has to be diversified and he's running it against a benchmark. So it's not like his PA portfolio where he could take really big bets. But um >> but but the point is though, >> a lot of people won't go back to the well. You've heard this before, >> right? Like look, I got the gain. I got the look. So here's the I'll set it up. >> Bought it at uh 12. uh bought more at 18, sold it at half at 32, it went back up a little bit more. I was lucky. I sold at 35. I'm out now. >> Yeah. >> The psychology is I'm not going back because if I go back into it, what's going to happen? If I lose, I lose all these great profits I had. No longer do I get to stamp that as the winner extraordinaire and I could take something. Let's go somewhere else. Therefore, I can keep that trophy on my mantle. Is that you've heard this? I I mean it comes up so many times in the book of people saying I don't if I got out I wouldn't be able to get back in. I psychologically wouldn't be able to get back in which the hedge fun guys don't say that right because they're they've been trained like yeah you can what's the problem like each each at bat is a new chance and you just better have a good set of you know criteria. Um but with the long only guys and particularly the ones who are running a concentrated portfolio or just very long-term positions, they get so invested emotionally and intellectually and they go around the market telling the story of this stock and it's all about this narrative and then once they they abandon that narrative, the idea of coming back to it, particularly if it was something that lost some money is like >> yeah, >> they really struggle and I I think that's a huge mistake actually. I think um there is a guy in in one of the chapters, Greg Padilla um from Aristotle, he makes a point about we don't we don't just like cut it and walk away. We stand we just stand back on the sidelines and watch the play and see if we can get comfortable again because we and same thing when you when you exit at a profit, you made a lot of money. Great. But don't totally stop paying attention because you might want to get back in, >> right? >> You know, there that does happen and I think uh most fund managers don't have that sort of watch list that's going on after they get out. >> I have three more questions. First, you said and you've discussed that recent performance is often a extremely poor proxy for skill because it doesn't accurately attribute the outcome to specific decisions, >> right? um how should allocators, those pension funds, those that are listening are are our institutional boys and girls that are listening, um how can they use a framework like yours to evaluate managers better? I mean, I think most uh professional fund selectors and and manager researchers know that, you know, the performance data that they're using as a quantitative um screen for managers or way of monitoring managers isn't really that useful, but it's kind of all they have. And so, they use it and then they try and supplement that with qualitative data from interviewing and, you know, doing research about the managers and and that type of thing. But actually now if they can if they can get their hands on daily holdings data which they can if they're running segregated accounts you know if they they've valated to a manager in the form of a of an account that they actually own then they have control of that data or if they can tell the manager give these people your data to do this analysis because it's a bit like you know going to get your blood work done like you should probably do it because it's going to tell you a lot more than just looking at your blood pressure and and weighing you, you know, like we we need to actually see what's going on here so that you could be the healthiest you can be for your own good. >> Yeah. >> And as people who are backing you, we would we would hope that you're going to be healthy and good, too. So um there's a there's a role for the allocators to play in suggesting to managers that they get this blood work done. And then um know that because Essentia Analytics is founded by somebody who was a fund manager and it was founded for the fund manager. It is not about humiliating the fund manager. Like it really isn't. It's about showing you here are the things you're doing that are like clearly skill and you should brag about and here are the things that you're doing where if you did it slightly differently you could get a better result and we can help you if you want to be helped with that. Have you ever had the big idea of commercializing this somehow to make a standardization for making it easier for others to pick those particular winners like uh Allah Morning Star has done for the mutual fund universe. >> I'm sure I'm sure you've thought about it. >> Well, we're definitely and uh earlier well about a year ago signed a partnership with Morning Star. There you go. >> Or strategic alliance anyway. um whereby we are developing this for their morning star direct platform um and and it's just a question of okay well morning star itself is operating off monthly data and the world has got so much more granular than that >> that this is an opportunity for them to leverage daily data daily data makes a huge difference to what you can See, when you create a feedback loop on the on the decision- making that's going on in your firm, like >> y >> monthly hides way too much stuff, >> right? I would think it'd be interesting also if you could do some kind of like plugin on a smaller scale to like those uh like we use something called Orion, >> you know, like utilize Orion because that obviously has all the data. Now, we have different accounts and and individualized accounts. It's not one big block, you know, but still you you could do composite >> work on that. That'd be kind of something interesting also on a on a lower uh not the institutional side, right? You know, the institutional scale that if somehow you could do some kind of dare I say AI based on your on your protocols with Orion. Anyway, um I'll let you roll. >> I did, you know, uh like a week after the book came out, I got a LinkedIn request from somebody said, "I've just been reading your book. I'm convinced that, you know, this is the way forward and I I need you to analyze my fund." And I looked him up and I thought, "Oh, he'll never be able to afford this. I he won't have the data. Like, it's it's complicated." Except I, you know, I he was very transparent about why he wanted it analyzed and and I feel his pain. And so I'm a softy ultimately and was like, "Sure, let's talk." And so I said to him, "Look, we normally we will do for a large client a pilot where we do like a one-off analysis. It costs 15 grand, which you know, we don't actually really make money off that, but it gets it gets you a taste and you can do this analysis and and in as a pilot, it's about giving them a taste so that they sign up for lots of portfolios, but I'll do it for you as a one-off because they can see you really need it, but you do have to find a way to get the the data and here's the data template. And he said, "Oh gosh, you know, our service providers aren't really very great. We're small, so we don't really get, you know, great data back, but we do get an email once a day with a PDF of our holdings. And we've been getting that for five years or something. Um, and I said, "All right, well, get Clawed out and start scraping that email because you could make a data file, I bet, by doing that. Let's see. Try it." And he did. He got his team to do it. And in two days, he had the data set. And in six days, we had the analysis. and now he can go to his board with like way more transparency in his own mind about what is going on here and what are they >> that's interesting I don't know how small he was but um I mean our firm we could I could pop data you in literally a minute >> you know of we just all the stuff everything we know everything at all times where everything is and it's all can slice and dice it in 150 ways >> oh that's so good >> yeah I mean some people in my opin right you got to know this stuff if you don't know if you don't know where your bank account is recon reconcile or not, how to even go forward. >> Yeah. And yeah, I mean, I'm obsessed with it's funny. Um, people keep asking me, "How's the book doing?" And I'm like, "The analytics in the publishing industry are shockingly slow and poor." Yes. Like, >> how do you live without that feedback? >> It's doing great. I'm going to tell you right now, it's doing great. >> How's that? >> I think it is actually. It was It was the number one new release in its in its investment management space. But >> so what uh last quick things on the on the end here. What um you not only did you do the analytics but you actually talked to the the people of course you know throughout this what do you have any >> particular favorite like oh this was really memorable some story about something from all these interviews that really stuck with you and and maybe even challenged your own thinking. >> Gosh there there were like a bunch of them. I think probably the most inspirational one for me is Josh Goldberg, which is the first chapter. And I won't I won't spoil it, but this dude has beaten a lot of odds and persevered through a lot of things that should have put an end to him and his business. And he's thriving because he is is continuously improving and that is his nature. and he he insists on it being the case for everybody around him and and what he's been able to do is carve out like a really specific way of making money and then protect, you know, just keep honing it and honing it and uh that's awesome. >> Yeah, if you have a read to see what the what the juicy part is, but it is um >> it takes all kinds out there. You know, none of these people running big money is magically, you know, endowed. They they've all learned a lot the hard way and somehow managed to survive to fight another day. And that's how they've got, you know, down the road to where they are. They've learned from the past. >> That that's that's what I, you know, when I talked to Jack Schwagger, too, and other people that that that interview uh other major players and the things that you read from the memoirs and books of those players that they put out themselves, the story is the same. It >> it's it's all about the hard work, the discipline. Discipline comes up all the time. That's why my first book was called the disciplined investor. That was the whole point of it. I was trying to create to be honest with you a discipline that I could put down in writing for me. That was the whole point. That was the whole point. Like I look, you know, I'm like, uh, you know what? I don't I hate things that fall through the cracks. I don't want to miss an opportunity if possible, right? I don't want to um get run out of the side of the road because I wasn't looking. I don't want to, you know, all this kind of stuff that's going on and and let me put it down on paper. And that turned into a book. That's how that all happened, by the way. And you know, you learn a lot. What What did you learn? What did you going through this experience with a co-author, right? Um, what did you find out that you didn't know before? Was there something? >> I mean, I learned a lot about the publishing industry and how that works. And I had no idea. >> We know about that. That's a tough one. >> Oh, that was interesting. And >> and by the way, try to do your own Audible. Have you done an audible? Did you do the own your own audible? >> I did not do my own and I >> they wanted me to do my own audible. Do you know how horrifyingly difficult it is to read your own book for days on end? And each day that you come back, you have to make sure that you have the same tonality in your voice that you did, the same speed the whole time. And you >> Well, and in this one, there aren't very many female voices. So, I could have probably got away with reading. >> You have a great voice. You You would do a great >> female voice. Well, the person who did read the chapter where she says, "My name mispronounced my name." >> How can you mispronounce it? It's like phonetically pro. What's it's not even there's nothing in it. There's no there's one. >> No, you know what? Actually, now that I think of it, you It's Levy rather than Levy. >> Oh, Levy. Levy. That's I have a I have a friend like whatever. >> I have a buddy. His name is L E V I N E. How do you say that? >> Leavine. >> No, Levine. He's Levine. I'm like, what do you mean you're Levine? Who's Levine? >> Okay. >> So, you're Levy. Okay. Claire Flynn Levy. >> But I I and I love um I love audiobooks actually. I've been listening I wouldn't have even known obviously I've read this book lots of times so I you could think like why bother listening to it but I was dying to hear the voices and it is pretty good and it's it flows really nicely because it's voices talking having a conversation. It's not quite a podcast but you know >> more than a normal book interview. >> Great stuff. Well, >> thank you for writing this book. Thank you for coming on today. And uh thank you for uh all the things you do for all those people out there and great stuff. Really uh really happy for you. Proud of you and you're doing great. >> Thanks so much. It was great to catch up with you and uh yeah, thanks for having me. >> Do it again. Thanks. >> Okay. >> Always great to talk with Clara Flynn Levy. She was great. Uh it's been a couple of years that we have uh not talked. So catching up and finding out more about this and it's always I find it always really interesting and refreshing and and frankly um very satisfying when you hear that the great of the greats have a batting average that's usually under 50 and and and the fact that they can not only hit the home runs but consistently bat and do well and achieve greatness for themselves and their clients. is very inspirational to me and I think that the idea that we can do that as disciplined investors, you can do that as a disciplined investor is something to take heart and to understand that the opportunities that we have in a in a in a stock market, a market of stocks is such that by creating a very good discipline is what we teach and and and you know are pounding into your psyche on a regular basis. This whole disciplined way of being when it comes to investing is what it really takes to make sure that you have the various ratios which when when we talk about it in with regards to stock market market maestros we're talking about this behavioral alpha score the hit rate the payoff ratio all those things that may be uh overlooked sometimes are extraordinarily important in the long run. So let's continue to be disciplined investors. Let's continue to be uh solid with what we're doing. Next week coming up, we have Tom Nelson uh and then we have Wes Gray from alphaarchchitect coming up at the end of April. So, a lot of great things happening for this month. Thank you for joining me this week. Go over to the disciplinedinvestor.com. Episode number 968. On the show notes, you'll find information about uh Claire Flynn Levy uh and her book as well as information on how to get in touch with other us as well. Thanks for joining me this week at every week. See you again real soon. 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TDI Podcast: Stock Market Maestros (#968)
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This episode is sponsored by Interactive Brokers. Where could quantum computing take your portfolio? Investment themes from Interactive Brokers. Well, they help you find out. Start with a trend like quantum computing or clean energy and instantly see which companies are most connected based on revenue and strategic focus and product relevance. You can explore competitors, global exposure, and business relationships across more than 500 themes. Built on AI powered insights from reflexivity, investment themes turns complexity into clarity and helps you move from trend to trade faster. Available now across IBKR desktop, mobile, and trader workstation. The best informed investors choose interactive brokers. Remember SIPC. Check it out right now at ibkr.com/ themes. The Disciplined Investor is all about you, your money, and the markets. Sit back and get ready for this edition of the Disciplined Investor podcast. This episode of The Disciplined Investor is sponsored by Horowits & Company. If you're looking for a portfolio manager, look no further. Horowits & Company. From seed through harvest, cultivating financial success. Well, we have kind of a ceasefire depending on who you ask. The Fed's still thinking of a rate cut this year. The best day for the market since April 2025. Worst day for oil in six years. Government's heavy hand is all over it. And we're talking stock market maestros with our guest Claire Flynn Levy, CEO of Essentia Analytics. All this and much more on episode number 968 of the Disciplined Investor podcast and welcome to the crazy place we know affectionately and call it Wall Street where the the tide turns on a dime these days, doesn't it? I mean, they can often turn a fortune into ruin and ruin into a fortune in more than less than, I should say, a blink of the eye. And welcome to the Harold Company studios here. This is where we produce both the disciplined investor podcast and DH Unplugged. And I am Andrew Horowitz, the founder of Horowitz Company, which uh is an investment advisory firm for people just like you. So, if you're looking for a little help in this madness of what is going on right now and a little bit help meandering, wandering, and making sure you're set straight, give us a call, find us, go to the website, the disciplinedinvestor.com, drop me a line. We'll be happy to look at your portfolio. It is that time of the year for, you know, when we start doing a little spring cleaning, right? And, uh, no better time to do a spring cleaning than on your portfolio. By the way, if you are listening in Europe, I don't know if you know this, but in Europe, you are not allowed to trade US-based mutual funds. You're not allowed to trade US-based ETFs. The good news is we can actually do some of that for you. So, if you're in the UK or in the Euro zone, European Union, we can actually manage your money uh using our global allocations and our managed growth strategy. So, something to to consider. whereas you can get access to the ETFs in the US that you can't get access to on your own. Impossible to do. So, something that I thought I'd let you know and let you in on. So, last Wednesday, what was that? April 8th, the markets delivered one of those classic geopolitical whiplash moments, right? where it was like ah you know we all a sudden have a ceasefire because remember the night before we had uh something happened the Dow surged we'll get to that Dow surged 1300 points closing up almost 3% on the day the S&P 500 jumped more than 2.5% the Nasdaq moved up about 3% at the same time the VIX this is Wall Street's um the official fear gauge plunged, dropped about 20% as this panic pricing basically evaporated overnight. Oil took the opposite route with WTI, West Texas Intermediate, cratered like I guess it was about 16% at one of the low points. That was the biggest one-day drop since 2020. And dare I say we know what happened then when in fact oil went negative for a little while there. Brent oil interestingly enough also f full fell about a similar amount but interesting divergence of pricing where Brent is actually less money than WTI. Something we haven't seen in a long time. The problem is that the futures markets are predicting a lower value than the present day I want to buy right now oil market. the spot price of what you get for oil right now somewhere in the 120 to 130 range for Brent in Asia and other markets outside of the United States. And I think what's happening right now is that that is pushing up WTI as well. We had a moment that I think WTI fell below I think it fell below 95 94 was it 92 at one point? Uh why? Well, the spark that ignited all this was President President Trump announcing that there's now this two-week ceasefire with Iran. And this came in just I don't know minutes maybe an hour before his own deadline. The deadline that said we were going to basically incinerate an entire civilization. Now this also was coming with a understanding that will be a complete reopening of the straight of Hormuz and what what we I'll tell you what we're calling this by the way this happened on Tuesday. This is a different kind of taco Tuesday trade taco taco formerly known as Trump always chickens out. This one is Trump announces a ceasefire option. Taco, we got a ceasefire option here. Now, I don't know who is agreeing to all this. We saw the Pakistanisians come in and beg for this to happen. Who knows if we were begging the Pakistanians to do this. I don't know. Who knows? The truth is somewhere between here and there right now. What we're hearing from the Iranians in supposedly they say things in different in private in public because in private they're saying they want to do a deal supposedly. Of course, we don't know that from anyone but one source. and in public they're saying, "You know what? You broke one of three of the 10 already. We're not interested. And you did this with Lebanon. We're not interested. We're not letting anybody through the straightforward moves." But somehow magically markets are elated. We've seen this movie before. Let's not let's not let's not get ahead of ourselves. We've seen this before. We've seen these similar sharp reversals play out during the earlier tariff pauses. Tariff on, tariff off. Mag Miyagi say wax on, wax off. Tariff on, tariff off. War on, war off. Pause. We're going to obliterate. Pause. We're going to do this. Pause. It works. It seems markets get all excited. You know why? because a lot of shorts get wrongfooted just like the longs get wrong footed. So things move tremendously. The heavy hand and the fingerprints that are all over this by the government enacting various different modes throughout is is is very tough on markets. Takes a toll on investor confidence. Now when the tension is building and the threats are looming and oil prime premiums spike on sudden supply fears and e equities kind you know get all crazy and upset and wobbly and investors are all upset and then we see this last minute deescalation and then a flipping of the script that triggers this huge rally because when a when a when a single government announcement can swing the Dow by over a thousand points and crush oil in hours. It clearly highlights this this heavy hand. Some people call it the invisible hand. It's not invisible. It's not invisible by a a long shot. It is clear as anything that you could see that how impactful the government can be when it comes to markets. this policy that dominates pretty much everything throughout the day because we, you know, the 24-hour news cycle is now like a 15minute news cycle. It's unverifiable, but information comes out from governments, including our own, at such a breakneck speed that is impossible for anybody to keep up. You watch the Algos grab this well before the news really hits the media. And what we're seeing, I think, right now is less of a fundamentally driven market and more like investors trading, the the timing, the tonality, and clearly the the headlines that are coming out of Washington. And with you know these these welltimed trades ahead of these moves I'm starting to wonder about question about influence and undue influence in the markets and when it crosses into something closer to dare I say manipulation. This has been a theme that is now coming out. As a matter of fact, there's some lawsuits and there's some Congress that are doing some looking into some of this and it would it would seem likely that some of that what we've seen the potential for us to find out is is actually a lot better than was expected. Each future contract has a footprint, a fingerprint, a a a ID of what and who traded. We should be able to get this. But right now, where we are with all this is we still don't know. We have a twoe pause. We don't, you know, the the over the weekend they said that who knows because we haven't gotten all the information, but over the weekend was the time period that was going to get this going. And you know, we look back on the last couple of days and we see, well, yeah, I mean, something's going on, but who knows what. We don't know if it's genuine or just maybe another temporary pause. with plenty of of these unresolved issues that are still on the table and Iran already signaling potential pullbacks to what they had agre well nobody's agreed to anything but what's in some of this ceasefire and how fragile the ceasefire is we can see fresh spikes in the VIX another round of oil whiplashing if tensions flare again as a reminder how quickly sentiment can shift when government action keeps on rewriting the narrative that's exactly what's going on. So I think with that um it it's it's important to understand there's a big psychological impact and the question is how to stay ahead of this and how to master this and how to make sure that you don't fall prey to getting whipsawed not from a trading standpoint but from an investing standpoint. And I think we're going to do that today because we have a great guest. We have a great guest coming on and she does a lot of work in the area of I would say behavioral finance to a degree studying studying great traders actually studying good and bad traders. Okay, if you read her work, you know that what has happened is that she has done a great deal of work in analyzing the trading and the process utilized, helping investors, I mean institutional investors understand more about themselves, what they do, how they're doing it, and how they can better themselves, where they make mistakes and how they can stop doing so. where they do have great uh out outputs and and and working that angle to refine that. Hone hone in on exactly what it is that made it for this investment to go well and that one not. to train, retrain, teach to to to extract the information about what was the mood, the mode, the moment, the backdrop that made that successful of an investment idea an allocation a portfolio transition. And what didn't? Her name her name is uh Claire Flynn Levy. We've had her on before and uh she's really great. But before we go any further and I introduce her and I have her book right in front of me by the way and we'll talk about that. Let's take a moment and let's talk about Interactive Brokers, shall we? Because Interactive Brokers or IBKR as we call them has key competitive advantages for sophisticated investors just like you. IBKR's margin loan rates are from just 4.14% to 5.14%. In fact, IBKR is rated one of the lowest margin fees by stockbrokers.com. I want you to compare IBKR's clients low margin borrowing costs to other brokers like Schwab or or Erade, Fidelity, and Vanguard, which charge hundreds of basis points above IBKR's low rates. Look, the best informed investors choose interactive brokers. Margin, of course, is only for investors with experience and have have a high risk tolerance because you can lose more than your initial investment. Rates are of course subject to change. Get started today at ibkr.com/compare. Interactive Brokers is a member of SIPC. Again, it's ibkr.com. All right. So Claire Flynn Levy, she is the founder and CEO of Essentia Analytics, which is a fintech firm that uses decision attribution analytics to help both equity fund managers and allocators of capital to identify investment skills and biases and continuously improve their decision-making process. They lead the feed field in um behavioral analytics and work with many of the world's largest investment managers. And prior to founding Essentia, she spent 10 years as a fund manager, both active equity uh and as hedge. So that's great. She's also author of the book that I have in front of me, stock market maestros, the winning habits, strategies, and mindsets of the world's best investors. This just came out and this is a great book. It has, you know, chapters on uh how to handle winners. Uh each there there's there's a number of specific masters uh maestros that she identified and look at their behavioral alpha scores, their hit ratios, their payoff ratios, and and takeaways from each of them looking at what has happened. But let's let's bring it right on. Claire Flynn Levy, how are you? >> I'm fine. How are you? >> It's been a while. Last time you was on, you were on was 2022. You've been on since >> first time on was in 2019, we recently discovered. Uh so, thanks for coming back. >> Well, it is a pleasure to be here. It a lot has happened 2019, hasn't it? >> Wonderful book. I'm I'm I'm rubbing the cover right now. It has one of those covers you just want to you want to It's one of those like comfort covers. Um >> that's funny because I' I've been doing that, too, but I thought it was just me. There's some certain books that you just like kind of put under your palm of your hand and you just like >> you just it's it just feels good. >> The covers that's that's a great thing. So the stock market mash maestros the winning habits strategies and mindsets of the world best investors. But we're going to start out a little bit differently. I want to start out finding more about you because what I've learned I want to find out something unique about you. This is kind of a thing we've been doing with the show recently. >> You you started your financial career as is told and is out there. I think or maybe not as well known in the mail room of Gabelli. And >> that's true. That's true. It is not well known, but I did. >> You're in college. >> Um tell me a little bit before that. You had jobs as you were growing up. Maybe in high school. >> Yeah. Yeah. I went um I went to boarding school. So in high school, I had jobs at like breaktime. I worked first I worked in the local bookstore gift wrapping. That was my first job and then in their book ordering service and then I uh I did get interested in economics at in high school. I mean this is obviously another time. So uh kids didn't have the opportunity to really explore that kind of interest at this in the same way that they can today uh when I was in high school. But I did, you know, I did what reading of Forbes magazine and other other Wall Street Journal type things that I could do. And uh I ended up getting in a summer job in uh as you said in the mail room filling putting mutual fund perspectuses in envelopes at Gabelli Funds. >> Wow. That that's pretty cool. I mean the thing is that you know with regard to um the the idea that you got interested so early in economics but I'm I'm more curious about one more thing to this day can you wrap like a like a banshee can you do those corners really nicely on gifts and things like that what you learned in in the bookstore >> I actually can but the question is do I >> I think my I do a calculation about return on energy expended and decide like, eh, this person's not even going to notice. If I think they're going to notice, I can pull out the big guns. >> My wife is like very much in the groove of you when you go somewhere and you bring something, it has to be wrapped. If you bring wine, you cannot bring to wine to somebody's house in just a bottle. It has to go in a gift bag with tissue and a card. It It has to. >> I mean, there's a whole industry of gift bags that relies entirely on that belief. Yeah. >> And I mean, I'm kind of with her. I think maybe women have been trained >> to do this. >> Maybe. It's nice. But the thing is, I'm like, are you sure we're using the bag that they didn't give us when they came here? >> You know, I'm going to feel awkward about this. Uh, let's talk about some things you did. Um, you did a uh you have done an incredible amount of research into the the habits of investors and um there's a lot of myths out there in in equity investing that it's all about, you know, stockpicking or it's all about, you know, the Brinen Bower and Hood and we look at the the efficient frontiers and Marowitz and how 92% of the portfolio's effective return based on the variability blah blah blah you know all these things right so so why is that a myth about this whole issue about stock picking and maybe even market uh relation uh statistics >> well in the end it turns out that most people don't get it right more than 50% of the time when it comes to stock picking if you're comparing that to buying an index fund um if you think about it in absolute loop return terms. Sure, you can you can pick stocks that go up more than 50% of the time hopefully. U but the question is could you have just put your money in an index fund and got the same result. That's what that's the question that people are asking themselves uh who are running the big funds and that's who I've been studying this whole time. So what we found is that even the very best fund managers have a median hit rate that's like your batting average of 49%. which means that actually that they don't make their money by getting it right more often than they get it wrong. At least not in terms of of the stocks they're picking. What what the research also shows is that the way they differentiate and what makes an investor actually skilled beyond do they pick the right stocks is how do they behave when they're winning and how do they behave when they're losing. >> But can I stop you? How do you quantify that? That's what we've talked before and I we've talked about this, but I'm still I'm still like a little bit squishy on this. >> I mean, the way that that we do it at Essentia Analytics was which is my company. Um, you know, I used to be a fund manager myself. So, in trying to answer these questions like how would you measure how I behave when I'm winning? I'm coming at it from from the point of view of a fund manager. And I mean the first thing with with all of this sort of analysis is that there's not like one right answer that's the only right answer. So we end up looking at it in lots of different ways. But for that particular question um the way we found most effective is to say okay let's let's look at every trade you've ever done. Let's divide them into trades where you were increasing your exposure. So we we do this for long only managers but we also do for long shorts. So, you know, the short side uh means that I'll speak in more generic terms, but you're increasing your exposure and then you have trades where you were decreasing your exposure. And then we're going to categorize those trades by ones that you did when you were when the stock you were trading was already making you money and ones that you did when the stock you were trading was losing you money. So therefore you can see you know how do you do when you you've been adding to winners and how have you done when you've been adding to losers and uh yeah I mean different people have different habits. It's not that there is one right way to do it, but in stock market maestro is actually um my new book uh you can see there's a variety of of different sort of attitudes towards it. But uh but the key is understanding whether what you do works because often people will uh buy losers. You know that they might have very high conviction about a stock and the price is falling so they think I'll I'll just average down. But actually, you can end up blowing a huge hole in your P&L by doing that. And >> for example, on page 138, I just happen to grab this right here. Uh I couldn't have grabbed the open the book and thumb to something more perfect than this, by the way, for this conversation. This is Gorm uh Thomasson >> and um and it's uh about just eat is page 138. and how you wrote although he was he built a success on a few major wins >> um >> he he he he can't afford to let his losers run too but he did on just Eat for example right >> yeah well he >> well he got out at the good time at that but he just wouldn't he wouldn't I should say this differently he wouldn't let his losers run that was my point >> yeah I mean it it's all about recognizing when you're wrong and that can be really hard to do because you you know your one data point can't be well the price went So therefore, I'm wrong. But when the price has been down for like some sustained period, it's not behaving the way that you thought it was going to be behaving, you might come up with explanations for it. But what often happens, particularly to people who have done a lot of research on a on a stock, is that they end up succumbing to the endowment effect where they're just so convinced that they know, you know, this thing is worth more than that and it's only getting cheaper. So therefore, I'm I'm not getting out. I'm, you know, I'm totally convinced about this stock. And then before you know it, you've given up all the money that it was once making you. And now you feel like an idiot. And that's happened to a lot of people recently in uh particularly who invest in like the quality growth space where that's just stopped working. And it's taken people a really long time to sort of realize this is not a necessarily a short-term thing. It's not to say quality growth will never outperform again, but I think the role that momentum has to play is not a temporary thing. that in my opinion I think that's about the fact that there are a lot more computers involved in a lot more mathematical models driving things and they feed off like momentum is is a standard part of of that sort of a system. So having to take that sort of price movement shorter term price movements into account when you're not used to doing that because you've always been a very long-term investor has been really hard for a lot of people. Well, and then it's interesting because uh there's also you there's the whole thing of uh the concept that the efficient market and the market is correct >> and those that are out there saying no it first the market got it wrong uh you know a lot of people do that or um I know better the valuation of where we are let's say it's on the way up or it came down it doesn't matter is different than what the market is putting the value That's that's a lot of the the the edge that a lot of people think they can have with that, right? There's that and and I think that could cloud some people's view on uh on reality sometimes. >> Yeah. Well, I mean, one of the most powerful analyses that an investor can do and you have to have, you know, held a number of different stocks uh to have enough data points to do this. But if you can go through and do what we call an alpha decay analysis, but look at how long like over the life cycle of the typical stock that you own from the day that you bought it to the day that you sold the last share of it, how has the excess return uh typically unfolded? Like does it all happen in the beginning and then not a lot after that or does it go down typically first? like if you're a value investor, you may find that you're early and so things tend to go down and then they go up. Um what what does that pattern look like? And once you can identify that pattern, you can say, okay, well, looking at my winners, I can see that they tend to run out of incremental alpha generating steam after let's say 18 months if that it depends on what your strategy is and you know how long term of a investor you are. There's a point where you can say, "Okay, so if something's going to work, it will definitely have worked by this point. >> If anything, it will probably be done working." Yeah. >> So, actually, I can I can put a stake in the sand where I say, "All right, I might be convinced, even more convinced than I was 18 months ago, and yet I've done the analysis and I know that I am probably wrong." >> Yeah. >> And because I know I'm wrong half the time anyway. >> Yeah. Right. So, the chances is I'm only 50/50 I right or wrong on the wrong my my my thinking I'm wrong. >> So, therefore is higher probability. >> The um let's talk about assassins, hunters and and connoisseurs. This is uh your co-author of the book who was Lee uh Freeman Shore wrote a book called the art of execution >> and he proposes that there are these distinct >> I think he calls them behavioral tribes right >> that that are um about how they handle winning and losing positions. And now you, by the way, you filtered you you took down all these different possible stock market maestros, which I also want to talk about the difference between wizards and maestros in a moment, but just hold that thought. Hold that thought. Jack Schwagger is a good friend. Uh so we we we look at this and and it and it can be um broken down into various kinds of behaviors. Go through those three and how that shaped how you were actually working on uh creating the finalists >> for the ba book. >> Um yeah well so Lee's first book was as you say the art of execution. great book. If you're interested in this stuff and you haven't already read it, I highly recommend it. That's how I met him in the first place. I read his book and I thought it was so aligned with the work I was doing that we needed to meet. And that was 10 years ago. Um so funny how >> that that was the moral of the story is if you really like a book, why not reach out to the author? You don't know what will up happening in 10 years. Um but uh in that book he had he was running money he was running a fund of funds and he had parcled out assets to uh a series of different managers who were all very highly decorated you know award-winning managers and and he this is you know a long time ago now but even back then he did have access to their daily holdings data because they wanted the mandate and the mandate would be run in a separately managed account anyway so the data was was contained. And so he had access to this data and he um he put together this best ideas fund where he said to each one of them give me your you know 10 best ideas and I'll create a fund out of everybody's best ideas. Um, and he learned a lot of lessons that uh I won't uh do I won't spoil here, but uh one of the the main one was that what predicted whether the manager would make him money wasn't did they get it right more often than they got it wrong. It wasn't the hit rate. It was about their payoff ratio when they were right on average. Were they more right than they were wrong when they were wrong? So that that was about how do you behave when you're winning? Do you run those winners so that they get big? And how do you behave when you're losing? Do you cut those losers so that they stay small? That's how you get a a good payoff ratio. Um, and what he found was these these three tribes of of people. Um, the connoisseur is the person who runs winners, you know, they just they they've done all the work. They keep going. They have to have a a strong stomach to be able to uh withstand you know draw downs. >> Uh but they don't give up >> and as a result they they reap the benefits. Um then you have uh people who when they're winning what did he call the uh there are people who take a a quick profit. Obviously you don't want to be doing that. Like people who just take a quick profit when they're winning, that's not actually going to help you in the end because you need the winners to be bigger. >> Right. That's like just take This is taking one sprinkle the off the top of ice cream. >> Exactly. It's like that's like sounds like fun. >> That's like what my son does on his day trading app. It's like >> right I made $3. I MADE $3. >> I COULD TELL YOU who's making more than $3 off of that one. Um it's not you. But then you have when people are losing the rabbits are the people who are just like frozen. They don't they just they don't do anything or maybe they just like burrow further into the hole by adding adding adding in in small increments on the way down. Um where is so you don't want to be like that but what you do want to be uh is either a hunter or an assassin where an assassin is somebody who they just you know they cut that loser. It's like that. It hits a point, I'm out. I'm done. Move on. Just >> and don't look don't look back. >> Don't look back. You're done. Um, the hunter is somebody who's actually going to double up. They'll The price might be falling. It's not working. It's not that they then just keep adding all the way down, but they find their moment and they go big. And that's a very, you know, gutsy thing to do. So you don't find a lot of people who do that, but it is a very effective thing for for those who do it. >> Yeah. If you get it right, surely, especially if you're going to double up at a lower a much lower value. >> Yeah. But in the in the stock market maestroers book, we came up with a new a new tribe which we call the lumberjacks. And it was because we we discovered this manager and goes back to like how did we even choose these people? Um, we I I run a software company that, you know, does analytics for fund managers. So, I have access to a lot of fund managers data, but certainly not the entire universe of fund managers. So, we went through Morning Star. We looked up, you know, everybody who's won an any of the big awards in the last three years, >> right? >> Let's find all of those people and let's look them up. look up their, you know, typical performance stats, risk stats, all the stuff that like somebody who was who had an access to Morning Star and was doing like basic due diligence on a manager would do. And then we approached all of them and said, "We're writing this book. We want you to share your daily holdings data so that we can analyze it and we'll give you a report back and tell you everything it says. And if we choose you for the book, you get to be in a book. And if you don't, you get a free analysis. >> You get your from from from Assentia, >> right? >> Yeah. Right. >> And you know, which would normally cost a lot. So it's like, yeah, why not? Um, and we did have, you know, a number of people who took us up on it. We also had people who didn't want to share their data or whatever. Just didn't even >> I'm sure you had strict I'm sure you had strict NDAs and all that, right? >> Oh, for sure. And you know, I deal with this sort of data at all times. So we have a very secure infrastructure and you know all the all the stuff is there but I think there are certain uh asset management firms out there who are very behind in their thinking around use of data and they were like oh we can't possibly send it outside of our building. It's like >> if you tell us how to do it. >> I'm pretty sure you're already doing that. Right. Um anyway, so so we took the data of the people who gave it to us and then we did our our analysis and uh narrowed it down and then we and we looked at them in terms of you know basic headline hit rate and and payoff but then also what we call behavioral alpha score which is about looking at each of the seven different types of decision that they make. So picking decisions, entry timing decisions, scaling in decisions, sizing, size adjusting, scaling out and exit timing. Those are the the seven that we uh that we think of when we think about you know the life of a stock in the portfolio and uh and we look at all of you know all of those types of decisions that you've done and then compare them with what would have been achieved by chance. So the point is are you adding value through making this type of decision or again would an index fund do just as well? Um, or if it's a question of like a sizing decision, what if you just had an equally weighted portfolio, would that do just as well? Or if it's about timing, like could you just throw a dart at a dart board over a certain period and you would do just as well? Because if the point isn't to tell you how bad you are at everything. It's to say, here's what you're good at, and let's free up your energy from this other stuff that you're doing that like a computer could do that. and focus your energy on the stuff that that you do that actually does add value. And people do add value, you know, particularly when they don't let behavioral bias then destroy the value that they've added like is the case with alpha decay. So anyway, we do >> it's fascinating. >> It's just amazing. >> What I find amazing is just you once you look at this stuff, you probably have a lot of these wow moments. You know, there's this well that that was cool. Well, that was a great trade because you can see it and you graph it, you show it, but it's all historical. So, you can really get a step back look >> at what's happening there and get a really good picture of, you know, hey, and probably there have been times I'm I don't know this, but you could either confirm it or tell me I'm just totally wrong. Oh, you know what? Look at these two months of this particular manager. Something was going on there that wasn't right. Maybe he was spooked. Maybe he's having an argument with his dog. Who knows what the story is, but something is not right here, right? And you can probably go back and say, "Hey, what happened between December and January 2022 or whatever." >> Yeah. >> And they'll be like, "Well, it was a bad time for me on this." And you can say, you know, maybe you shouldn't be trading during times of excess stress or >> you know, whatever. >> Or when you just had a baby and you're not sleeping properly because there's lots of science that says don't make decisions when you're under slept and that's bad. I shouldn't make any I don't think I should make any decisions ever then. >> Uh >> we we did an interesting um research report. This is a while ago now, but looking at winning and losing streaks and does that cause you because people when they've been having a good run of it, you know, do they get lazy? Do they do they get slap happy? Like what happens? Do they end up trading more, less, better, worse? Um, and what we found, if I remember correctly, is that about a third of the managers we analyzed showed some kind of pattern around that when they were in a a winning or a losing streak. And it was typically that when they were losing, they would start trading more and in bigger size and worse. >> Interesting. >> Um, and when they were winning, they would just typically be trading less. Um, >> that's interesting because that's that's opposite of sports, isn't it? So in sports like playing tennis for example when you're winning usually what happens you take more risk you know you got the grove groove going and it's something happens and when you're losing you just get almost like you step back it's very it's very opposite >> yeah it's interesting I hadn't thought about that but it's true I mean there's this sort of the bias is called the illusion of of control where you think somehow that you need to be trading or if you trade bigger this is going to help >> I need to take control of really bad trading right now and and continue doing it. >> Yeah. And that somehow you can like you you are going to affect the market in some way. >> Um >> Yes. revolves around me. >> Yeah. Well, but I mean at the very least you could you can just call it overconfidence because statistically, you know, if you don't think you have a better than 50% chance of the trade making you money, why are you even doing that? >> Right. >> Right. So if you now we know that that historically you haven't that's good to know but but you better believe that this is one of the ones that's going to win or don't put the trade on at all. >> Yeah. >> Then it's about being able to weed out which are the ones where I thought I was going to win I was wrong. >> Yeah. Exactly. So available this book book is available on uh all sorts of hard cover. It's soft cover. It's Kindle. It's audible stock market masters. And I don't want to forget about getting back to wizards and and maestros the differential. But one of the people you have on your book that that that has um put a little note on here and I guess you know is Annie Duke. >> Yeah, I'm a big Annie Duke fan. >> Annie Duke's awesome. I mean, you know, obviously Poker Champ uh turned I think didn't she get her PhD like more recently? >> Recently, she had done most of it and then had just not finished because I guess she was doing so well at poker, but then she came back and she finished it. Um >> I think she's got like $2.8 eight million dollars or three million dollars of of of poker winnings in her lifetime. And then she turned into turn turned doing a lot more behavioral type of work and which of course no limit holdem if you know the game is not poker. It's uh behavioral primarily. You you could have the worst hands ever, never be dealt a card through four days worth of a poker tournament and still win the tournament, >> which is just wild. Yeah. >> I mean, you don't get that so much in stock market investing, but >> Well, you can't do that. You can't bluff the stock market. >> Yeah. >> So, tell me. >> Yeah. But she's uh she's written some really good stuff and and in fact, uh I have a I put out a blog post today about cutting losers and why is that so hard and what are things you can do to get better at that? And you know, she wrote a book a few years ago called Quit, which is all about that. >> Mhm. >> As well. And uh that's one of the best skills in poker is knowing when to fold them. And you're going to do it a lot. >> Yep. >> So, it's all about making that call. >> Yep. Thank you, Kenny Rogers. So, um let's talk about wizard and maestros. You make a distinction, and I've seen this a couple times from you that there is a difference between a wizard and maestro. Do I sh should I say that it's because that you're trying to make a diff a differentiation and and a distinction between stock market wizards and stock market maestros. Is that or am I totally am I wrong? No. >> You know, I'm a big fan of the of the uh Jack Schwagger books and the the stock market wizard. When I first started out as a fund manager, I read all of that uh stuff. So I I think these people are all good at investing, but the people who are wizards typically are there these are more traders. They're shorter term. They're doing I think it has both of them are holding a wand, but the wizard is zapping things with the wand. >> And the maestro is conducting an orchestra and trying to keep everything in check. they're running a portfolio that needs to perform all together whereas the the wizard is doing like individual trades and and may have a very concentrated set of bets. >> So like an acid would be a would be a wizard. >> Yeah. >> Potentially right. Yeah. Exactly. So and then but and and and somebody like uh some of the key well-known Fidelity >> Exactly. managers. You probably don't even know their names, but there are people who are running billions and billions of dollars for all of us who have 401ks. >> Those are the misters. Hopefully >> hopefully >> you're indexing >> not indexing. So, um the the the the question I I have for for individuals, for for non-professionals, for people that are managing their own portfolio, how How do they internalize this idea that h these are just these professionals that are doing this and I could never do anything like that? Of course, they don't have the same tools available to them. So, let's let's identify that point as as a real thing. But how could where how do they interpret all of this into their and and distill it down for their own use? Well, I mean the the beauty one of the beauties of doing this book as a set of interviews with different maestros where we really chose them completely based on numbers and not based on even knowing who they were. Um is that we ended up with a really diverse group. They all run very different strategies. They even the ones that you know there are a bunch that do small cap but they all do it very differently from each other. They grew up in different parts of the world in different walks of life. Like if anything, if you were just starting out in in and interested in becoming a professional investor, the message here is like you can like there's and it they didn't all read they didn't all study economics or finance or go to Wharton or you know any of that. Some of them did, but a lot of them did random stuff. So it's not about that. It's not even about having, you know, gone to the right school or got the right degree. Um, what it is about is being disciplined and >> perfect >> in the end like if you if you can't do that then you're gambling. That's really I mean and and enjoy yourself, you know, but know that >> that's I I know this as a money manager for many years and obviously we called the discipline investor podcast and discipline investor manic growth strategy that we have and it is about discipline and there's things that you have to do and sometimes I'll give you an example by the way we have a part of our one of our portfolio strategies that is this quantitative base right it's like this is what will be in the portfolio and I look at it I'm like oh god no oh no I don't want to put that in there and I I can't tell you how many times I've been surprised at something that I'm like I don't I I just feel really wrong about this and it actually works out because my system that that we are >> we are disciplined to follow in this regard in this it it identified something that >> maybe I had a a dark view of that maybe was in the past or maybe >> you know it was just a whole different situation. One I can I I remember very distinctly was uh we were long Carvana recently >> and I'm like oh god no. Oh no no no I don't want to do that. I really don't want to do that. >> And it's like and I went to um in our office of portfolio manager I said uh hey what do you think about not put no that's not how it works. I'm like yeah but you know yeah what else do you want to make an exception for? I'm like, "Yeah." And then >> Carvana kept on going up. Kept on going up and we cut it finally, which was great. I was thrilled with a nice profit on it and then it rolled over hard. And that's again back to that again. My system obviously did what was right in that particular regard. It may not happen all the time, but >> GAP was another one. There's a few other ones that I was like, "Ah, I just I don't want that in there." Um, but >> there's a chapter the chapter in this book um with James English Jones and Samantha Gleeve that's like a a duo who run a European um systematic cash flow oriented fund and the beauty of it and and you find that the humility is sort of a common thread across all of these different managers actually but um James in particular was very cognizant of his emotional sort of reaction to prices falling and and the fear and I mean having been through the financial crisis and been through lots of different situations. He knew I will not be able to make good decisions. I need the system to be the system and right >> we do not deviate from the system. We just better make that system be like super robust and steeped in, you know, academic proof and all the rest. and what they've what they've done with their system, it makes a lot of common sense. But having seen their scores, it's like, wow, very impressive. >> And this is this is a score of 49% just to restate this point on the hit rate for them. 6 uh3% on the behavior alpha score, which by the way is probably because they have a system. >> Yeah. >> Because if they didn't, it would be a lot lower because he'd be spooked out. like 50 would be just your index fund, what would have been achieved by chance. So, he's way over that, >> right? And then 246 on the payoff ratio, which is a a nice a nice dial. >> So, their biggest winner, sorry, their average winner is winning them almost two and a half times as much as their average loser is losing them. >> That's the way to play, >> which is a great ratio. You don't have to be right more than 49% of the time to make a lot of money doing that. And what's interesting about this, by the way, this is something I want to ask you because when I read this and I was going over the various charts, particularly on page, if you want to kind of follow me here, 181 >> um and this is right with um Jones and Cleave, but it's it's the Bank of Ireland share price from 2019 to 2024. So, here's what's what I found interesting. First, I was looking at some of these going, "All right, big deal." Seriously, I was like, "Ah." But it's interesting because they bought this down a 3% position back in 2020. They didn't do anything with that. let it just groove and grow, which was great, by the way. Moved up to a 7% position. They reduced it down to a 4% position late 2023. They exited kind of on the on the bottom when it was going and then went back up, but hasn't gone anywhere in 2024. But this kind of chart, what's interesting, there's other chart examples like this where they start out with like a half percent position. >> Um, you know, they increased it to a 1% position or or, you know, because it didn't go anywhere, came back a little bit. Um, it's kind of interesting. These are not huge positions in any of this. Here's another one. Page 113. This is John Lynn. He bought Utah bus shares. U bought a a 3% position, reduced it down to a 1% at the at or reduced it down to zero. I can't read that. It's very small. >> He raised it reduced it to one. >> Is that one? Yeah. Okay. One. Um exited the position again. Then he bought it back on the on the dip down at 2% position. Uh you know, four years later. >> Yeah. >> There's a lot of times. >> Gosh, those are really small positions. Now he's running a, you know, he's running a big um Chinese equity fund where he has to be diversified and he's running it against a benchmark. So it's not like his PA portfolio where he could take really big bets. But um >> but but the point is though, >> a lot of people won't go back to the well. You've heard this before, >> right? Like look, I got the gain. I got the look. So here's the I'll set it up. >> Bought it at uh 12. uh bought more at 18, sold it at half at 32, it went back up a little bit more. I was lucky. I sold at 35. I'm out now. >> Yeah. >> The psychology is I'm not going back because if I go back into it, what's going to happen? If I lose, I lose all these great profits I had. No longer do I get to stamp that as the winner extraordinaire and I could take something. Let's go somewhere else. Therefore, I can keep that trophy on my mantle. Is that you've heard this? I I mean it comes up so many times in the book of people saying I don't if I got out I wouldn't be able to get back in. I psychologically wouldn't be able to get back in which the hedge fun guys don't say that right because they're they've been trained like yeah you can what's the problem like each each at bat is a new chance and you just better have a good set of you know criteria. Um but with the long only guys and particularly the ones who are running a concentrated portfolio or just very long-term positions, they get so invested emotionally and intellectually and they go around the market telling the story of this stock and it's all about this narrative and then once they they abandon that narrative, the idea of coming back to it, particularly if it was something that lost some money is like >> yeah, >> they really struggle and I I think that's a huge mistake actually. I think um there is a guy in in one of the chapters, Greg Padilla um from Aristotle, he makes a point about we don't we don't just like cut it and walk away. We stand we just stand back on the sidelines and watch the play and see if we can get comfortable again because we and same thing when you when you exit at a profit, you made a lot of money. Great. But don't totally stop paying attention because you might want to get back in, >> right? >> You know, there that does happen and I think uh most fund managers don't have that sort of watch list that's going on after they get out. >> I have three more questions. First, you said and you've discussed that recent performance is often a extremely poor proxy for skill because it doesn't accurately attribute the outcome to specific decisions, >> right? um how should allocators, those pension funds, those that are listening are are our institutional boys and girls that are listening, um how can they use a framework like yours to evaluate managers better? I mean, I think most uh professional fund selectors and and manager researchers know that, you know, the performance data that they're using as a quantitative um screen for managers or way of monitoring managers isn't really that useful, but it's kind of all they have. And so, they use it and then they try and supplement that with qualitative data from interviewing and, you know, doing research about the managers and and that type of thing. But actually now if they can if they can get their hands on daily holdings data which they can if they're running segregated accounts you know if they they've valated to a manager in the form of a of an account that they actually own then they have control of that data or if they can tell the manager give these people your data to do this analysis because it's a bit like you know going to get your blood work done like you should probably do it because it's going to tell you a lot more than just looking at your blood pressure and and weighing you, you know, like we we need to actually see what's going on here so that you could be the healthiest you can be for your own good. >> Yeah. >> And as people who are backing you, we would we would hope that you're going to be healthy and good, too. So um there's a there's a role for the allocators to play in suggesting to managers that they get this blood work done. And then um know that because Essentia Analytics is founded by somebody who was a fund manager and it was founded for the fund manager. It is not about humiliating the fund manager. Like it really isn't. It's about showing you here are the things you're doing that are like clearly skill and you should brag about and here are the things that you're doing where if you did it slightly differently you could get a better result and we can help you if you want to be helped with that. Have you ever had the big idea of commercializing this somehow to make a standardization for making it easier for others to pick those particular winners like uh Allah Morning Star has done for the mutual fund universe. >> I'm sure I'm sure you've thought about it. >> Well, we're definitely and uh earlier well about a year ago signed a partnership with Morning Star. There you go. >> Or strategic alliance anyway. um whereby we are developing this for their morning star direct platform um and and it's just a question of okay well morning star itself is operating off monthly data and the world has got so much more granular than that >> that this is an opportunity for them to leverage daily data daily data makes a huge difference to what you can See, when you create a feedback loop on the on the decision- making that's going on in your firm, like >> y >> monthly hides way too much stuff, >> right? I would think it'd be interesting also if you could do some kind of like plugin on a smaller scale to like those uh like we use something called Orion, >> you know, like utilize Orion because that obviously has all the data. Now, we have different accounts and and individualized accounts. It's not one big block, you know, but still you you could do composite >> work on that. That'd be kind of something interesting also on a on a lower uh not the institutional side, right? You know, the institutional scale that if somehow you could do some kind of dare I say AI based on your on your protocols with Orion. Anyway, um I'll let you roll. >> I did, you know, uh like a week after the book came out, I got a LinkedIn request from somebody said, "I've just been reading your book. I'm convinced that, you know, this is the way forward and I I need you to analyze my fund." And I looked him up and I thought, "Oh, he'll never be able to afford this. I he won't have the data. Like, it's it's complicated." Except I, you know, I he was very transparent about why he wanted it analyzed and and I feel his pain. And so I'm a softy ultimately and was like, "Sure, let's talk." And so I said to him, "Look, we normally we will do for a large client a pilot where we do like a one-off analysis. It costs 15 grand, which you know, we don't actually really make money off that, but it gets it gets you a taste and you can do this analysis and and in as a pilot, it's about giving them a taste so that they sign up for lots of portfolios, but I'll do it for you as a one-off because they can see you really need it, but you do have to find a way to get the the data and here's the data template. And he said, "Oh gosh, you know, our service providers aren't really very great. We're small, so we don't really get, you know, great data back, but we do get an email once a day with a PDF of our holdings. And we've been getting that for five years or something. Um, and I said, "All right, well, get Clawed out and start scraping that email because you could make a data file, I bet, by doing that. Let's see. Try it." And he did. He got his team to do it. And in two days, he had the data set. And in six days, we had the analysis. and now he can go to his board with like way more transparency in his own mind about what is going on here and what are they >> that's interesting I don't know how small he was but um I mean our firm we could I could pop data you in literally a minute >> you know of we just all the stuff everything we know everything at all times where everything is and it's all can slice and dice it in 150 ways >> oh that's so good >> yeah I mean some people in my opin right you got to know this stuff if you don't know if you don't know where your bank account is recon reconcile or not, how to even go forward. >> Yeah. And yeah, I mean, I'm obsessed with it's funny. Um, people keep asking me, "How's the book doing?" And I'm like, "The analytics in the publishing industry are shockingly slow and poor." Yes. Like, >> how do you live without that feedback? >> It's doing great. I'm going to tell you right now, it's doing great. >> How's that? >> I think it is actually. It was It was the number one new release in its in its investment management space. But >> so what uh last quick things on the on the end here. What um you not only did you do the analytics but you actually talked to the the people of course you know throughout this what do you have any >> particular favorite like oh this was really memorable some story about something from all these interviews that really stuck with you and and maybe even challenged your own thinking. >> Gosh there there were like a bunch of them. I think probably the most inspirational one for me is Josh Goldberg, which is the first chapter. And I won't I won't spoil it, but this dude has beaten a lot of odds and persevered through a lot of things that should have put an end to him and his business. And he's thriving because he is is continuously improving and that is his nature. and he he insists on it being the case for everybody around him and and what he's been able to do is carve out like a really specific way of making money and then protect, you know, just keep honing it and honing it and uh that's awesome. >> Yeah, if you have a read to see what the what the juicy part is, but it is um >> it takes all kinds out there. You know, none of these people running big money is magically, you know, endowed. They they've all learned a lot the hard way and somehow managed to survive to fight another day. And that's how they've got, you know, down the road to where they are. They've learned from the past. >> That that's that's what I, you know, when I talked to Jack Schwagger, too, and other people that that that interview uh other major players and the things that you read from the memoirs and books of those players that they put out themselves, the story is the same. It >> it's it's all about the hard work, the discipline. Discipline comes up all the time. That's why my first book was called the disciplined investor. That was the whole point of it. I was trying to create to be honest with you a discipline that I could put down in writing for me. That was the whole point. That was the whole point. Like I look, you know, I'm like, uh, you know what? I don't I hate things that fall through the cracks. I don't want to miss an opportunity if possible, right? I don't want to um get run out of the side of the road because I wasn't looking. I don't want to, you know, all this kind of stuff that's going on and and let me put it down on paper. And that turned into a book. That's how that all happened, by the way. And you know, you learn a lot. What What did you learn? What did you going through this experience with a co-author, right? Um, what did you find out that you didn't know before? Was there something? >> I mean, I learned a lot about the publishing industry and how that works. And I had no idea. >> We know about that. That's a tough one. >> Oh, that was interesting. And >> and by the way, try to do your own Audible. Have you done an audible? Did you do the own your own audible? >> I did not do my own and I >> they wanted me to do my own audible. Do you know how horrifyingly difficult it is to read your own book for days on end? And each day that you come back, you have to make sure that you have the same tonality in your voice that you did, the same speed the whole time. And you >> Well, and in this one, there aren't very many female voices. So, I could have probably got away with reading. >> You have a great voice. You You would do a great >> female voice. Well, the person who did read the chapter where she says, "My name mispronounced my name." >> How can you mispronounce it? It's like phonetically pro. What's it's not even there's nothing in it. There's no there's one. >> No, you know what? Actually, now that I think of it, you It's Levy rather than Levy. >> Oh, Levy. Levy. That's I have a I have a friend like whatever. >> I have a buddy. His name is L E V I N E. How do you say that? >> Leavine. >> No, Levine. He's Levine. I'm like, what do you mean you're Levine? Who's Levine? >> Okay. >> So, you're Levy. Okay. Claire Flynn Levy. >> But I I and I love um I love audiobooks actually. I've been listening I wouldn't have even known obviously I've read this book lots of times so I you could think like why bother listening to it but I was dying to hear the voices and it is pretty good and it's it flows really nicely because it's voices talking having a conversation. It's not quite a podcast but you know >> more than a normal book interview. >> Great stuff. Well, >> thank you for writing this book. Thank you for coming on today. And uh thank you for uh all the things you do for all those people out there and great stuff. Really uh really happy for you. Proud of you and you're doing great. >> Thanks so much. It was great to catch up with you and uh yeah, thanks for having me. >> Do it again. Thanks. >> Okay. >> Always great to talk with Clara Flynn Levy. She was great. Uh it's been a couple of years that we have uh not talked. So catching up and finding out more about this and it's always I find it always really interesting and refreshing and and frankly um very satisfying when you hear that the great of the greats have a batting average that's usually under 50 and and and the fact that they can not only hit the home runs but consistently bat and do well and achieve greatness for themselves and their clients. is very inspirational to me and I think that the idea that we can do that as disciplined investors, you can do that as a disciplined investor is something to take heart and to understand that the opportunities that we have in a in a in a stock market, a market of stocks is such that by creating a very good discipline is what we teach and and and you know are pounding into your psyche on a regular basis. This whole disciplined way of being when it comes to investing is what it really takes to make sure that you have the various ratios which when when we talk about it in with regards to stock market market maestros we're talking about this behavioral alpha score the hit rate the payoff ratio all those things that may be uh overlooked sometimes are extraordinarily important in the long run. So let's continue to be disciplined investors. Let's continue to be uh solid with what we're doing. Next week coming up, we have Tom Nelson uh and then we have Wes Gray from alphaarchchitect coming up at the end of April. So, a lot of great things happening for this month. Thank you for joining me this week. Go over to the disciplinedinvestor.com. Episode number 968. On the show notes, you'll find information about uh Claire Flynn Levy uh and her book as well as information on how to get in touch with other us as well. Thanks for joining me this week at every week. See you again real soon. 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