Don’t put yourself in someone else’s shoes - Systematic Personality

Hi, today I want to write a quick note about the behavioral aspects of systematic investing and typical traits which could show that YOU are indeed made for systematic investing strategies (or not).

Why is it important?

Nowadays, you are bombarded daily by news, macro data, survivorship-biased return reviews, single stock analyses, guru investor praises, research about innovative new strategies or themes, declaration of death for old styles and much more on X, Substack and elsewhere.

It’s hard to keep track and not go insane, especially if sometimes people are not even talking the same language. Everyone who ever asked 10 different investors about the definition of “value investing” or their opinion on “dividends vs. buybacks” knows what I mean. And it doesn’t stop there. Most of the time, different types of investors argue about technicalities from their own narrow, subjective POV. And that’s what makes most topics in investing so difficult:

Subjectivity.

That’s why we have a market in the first place. If everyone would have the same opinion on how to invest, which stock is worth what etc., the market would freeze up instantly. Your opinions and trading actions are influenced by everything that shaped you as a person up to this single current moment in time. Be it

• Parental education (How did your family talk to you about money? Is your mother a successful businesswoman? I know a guy who was indoctrinated by his father that stocks are rigged because he lost everything to a stock market con at some point. He only invests in high-safety fixed income today…)

• Genetics (Maybe you are neurotic by nature, have ADHD, or similar)

• Formal education (Favorite subjects, that one teacher who ruined math for you, …)

• Studies and career (Do you study/work in finance, IT or statistics? Or in media? Are you actively using your professional skills for your investing or are you even trying to “hedge” against your career?)

• Preferences and personal traits (Are you a numbers person or a narrative person? Are you creative? Communicative? Are you rather a big picture person or niche master?)

• Past experiences with people and/or money (Did you experience financial stress and loss or abuse of confidence in the past?)

• Financial situation (Are you already rich in relation to your living expenses? Do you have kids, a house or other responsibilities?)

• This Substack (Subscribe!)

• Others (age, peer group, regional culture or (tax) laws, technology adoption, …)

In my opinion, everyone should first ask him/herself questions like these before deciding what type of investor he/she wants to be. Too many - me included - start out by blindly following the distant battle cry of whatever tribe of investors which is currently the loudest, the most popular or the most successful. And then they get lost…

No, Warren Buffett is not for everyone…

As many before me, I started out by reading about the great investors of the last decades. Warren Buffett, Peter Lynch, Seth Klarman… I was hooked (mainly because I wanted to get rich) and started investing the little money I had by finding undervalued high-quality businesses through 1-by-1 analysis of the stocks and companies.

But I quickly noticed that I had a hard time doing so. I did not know what to focus on, making my research pretty superficial. Whenever I researched a company in more detail I quickly got bored and half of my brain already asked:

“Why this company? There are 1000s of companies out there that you don’t know yet. Do you really want to deep-dive into every single stock? But if you don’t deep-dive, how can you decide whether to buy and if you buy when to sell…”

While others posted about how they talked to management and discussed with other investing geeks what the old manager did say in 2013 about the preferred stock and the bloo-blee-blaa… I couldn’t take it. I always got so frustrated. Especially, when I read from hardliners:

“You have to know your businesses in and out, otherwise you can not win in the stock market”

So I am the problem? I have to change to compete in the markets? Should I stop trying and stick to ETFs? But I want to do more, I want to outperform, is there no way?

Long story short, after some escapades into “discretionary derivative and stock trading” (blind gambling in my case because I did not know wtf I am doing), 2018/19 I finally landed in systematic (factor) investing. Thank god!

Don’t put yourself in someone else’s shoes

Labels and categories can be dangerous. “I am a quant” can mean 1000 different things. To this day, I do’t even know if I should call myself a trader or an investor. Fortunately, labels don’t matter for your personal investing. What matters is to align your strategy with your strengths and personality. You don’t have to go all-in into one camp of investing or trading, it’s more about using the right tools and practices.

Of course it is also possible to “change” and learn how to become the investor you always wanted to be. But swimming against the stream takes a lot of energy, time and willpower. In my opinion, it’s a lot easier (and healthier) to adjust your investing to your life instead of the opposite.

If I would have listened to MYSELF instead of others in the past, I would have noticed that:

• I have a scanner personality and I am a generalist. I love to learn new things superficially but hate going into detail. I am a walking Pareto principle: I work most efficiently by going 80% of the way with 20% of the effort and switch to the next topic. I need constant stimulus. Learning something new puts me into hyper focus but doing repetitive work (or deep-diving into expert stuff) likely takes me double the effort of a peer. This is horrible for discretionary stock-picking but might work for macro trading.

• I am creative, always tinkering, I look for connections everywhere. I love patterns and puzzles. I am the guy at work people come to to get a random solution idea for a problem. I can’t control it though. Sometimes ideas shoot out of my brain like fireworks, sometimes I can’t make the simplest connection (e.g. between a colleague telling me that he will be on vacation the rest of the week and me asking him if can help me with some stuff on Friday). Also my memory is terrible. In discretionary investing and business, this makes me always question my decisions and seeing patterns even if there are none. This disturbs objective decision-making.

• I am emotional, overthinking and anxious. No need to analyze this.

• I am a numbers person (engineer by trade) and have a over-sensitive bullshit sensor. Not bad or good, just tells me that I should focus on quantifiable features instead of narratives/people cults.

• I am always looking for financial shortcuts. I tried gambling and played poker in my youth. Also I frequently fell into the honeytrap of leveraged trading. This one runs in my family. Always dreaming of the big jackpots. Pretty risk-seeking if the risk is appraisable and correlated to things I can’t control. But panic attacks when the only one to blame for loss is me. Bad both for boring passive investing and leveraged trading with blow-up risk.

• I am probabilistic, not deterministic. I always see the role of luck in life. I love big picture statistics. Can be an advantage for all types of investing but it’s also a curse if I ever want to start a business or get a once-in-a-lifetime opportunity because I will not trust the odds or chicken out too quickly.

• I have problems sticking to complex routines, maintaining hobbies, or doing anything consistently. I am always relying on random bursts of creativity which I can not control. A problem if you have to generate new discretionary ideas frequently (macro or micro) and in every market environment to stay fully invested if an old position is closed.

I bet there are many more points but from the personal traits above, it should become clear that a person like me who caught the investing bug (no way back) has to act differently from a Warren Buffett.

I have to redirect my creativity, pattern recognition capabilities, risk-seeking, and inconsistent productivity bursts from the stock-level decision-making (where these traits do harm) to the strategy-level research (where these traits can help). My gambling mindset and need for stimulation prevent me from becoming a passive ETF investor. My emotionality requires clear guardrails and as much automation of the decision-making process as possible. The decision-making process furthermore has to be evidence-based due to my probabilistic mindset and the fear of own mistakes and it has to be repeatable to simplify consistent portfolio maintenance. My numbers brain furthermore prefers a quantitative approach and my scanner personality would love to “screen” the universe at once to find new opportunities.

And at the cross-section of all these considerations lays the strategy I had to find by trial and error: Systematic factor investing.

Sitting down and taking a moment to analyze myself would have saved me a lot of time and pain in the past. Depending on your own personal traits, any other combination of tools, practices and strategies might be suitable for you.

Maybe you are a natural-born swing trading talent. Maybe you are the next Peter Lynch. Maybe you find your own style between the chairs by combining quantamental screening for idea generation with intense communication to management and other investors.

Who knows… But whenever you doubt that you are on the right path, just take a moment and think about that one cheesy self-help systvest substack article (maybe I should start a $10K mindset course)

Cheers!