The Minimalist Trader INTERVIEW: Carl Richards of BehaviorGap.com

I recently had the opportunity to chat with the amazing Carl Richards who runs an asset management business, is the author of behaviorgap.com, and also writes for the New York Times "Bucks Blog."

Mr. Richards has a truly transformative power of being able to reduce complex and emotional financial concepts into simple sketches that communicate far more than plain words on a page could ever accomplish.

A few years back, my wife and I struggled with excessive debt. During my research into ways to right our ship, I accidentally stumbled upon Carl's work and have been following him ever since. Viewing his sketches was an "Aha!" moment for me and I imagine would be for many others who view his work.

Even though Carl and his wife and children have not owned a television set for 13 years, Carl is not a minimalist. However, the way he communicates and applies his craft has many applications to the Minimalist Trader mindset and anyone striving to cut through the BS to get to workable solutions to advance your goals.

Carl's input was insightfully valuable and I could've kept our conversation going for twice as long as we did. But Carl made himself a resolution that he would focus on being on time and he had another appointment that he needed to attend to immediately after our call. I can relate. If you were to ask my wife, she'd tell you one of her biggest pet peeves about me is my obsession with never being late!

What follows is excerpts from the conversation Carl and I had last week over Skype about his thoughts on items I've identified as being enemies of the Minimalist Trader. Enjoy.



Why Carl got started with his sketches:

I have an asset management firm and I found I had to continually explain myself over and over to clients. And for whatever reason, I have a need to take complex structures and simplify them. I didn't realize I'd been doing it for so long, but my whole life I've had to academically figure out: What's the key thing that matters here? A silly example is skis. I used to have 8 or 10 pairs of skis and when I would go outside to see what the snow is like today, I got to a point where I couldn't handle that level of complexity! It was overwhelming. Now today, I only have one pair of all-mountain skis. This is just a silly example of how my brain works. And it's pretty cool that other people like it. I'm still surprised by the whole thing. The sketches have gone crazy!

On Overhead:

There are a lot of assumptions out there about what you "need" to start - and I think this applies to any business. Going back to my skiing analogy, we just moved from Las Vegas to Park City, Utah. I really enjoy Nordic cross-country skate skiing, and I'm pretty competitive on my mountain bike and my road bike. I understand the impact that a new bike makes, and the impact that losing a pound on the bike makes. I visited a guy who sells skis and never understood how complex Nordic Skate-Skis could be! He was explaining how the weight, the type of wax you use, and all these other things were necessary and that I needed all these extra accessories.  I was blown away and I loved that he was so passionate about it. But in the end, I decided I already have everything I need. I think people get caught up the assumptions that you need all this stuff.

Traders or people starting businesses make assumptions that you need to buy "X", and we need "X" amount of office space and "X" amount of servers if we're going to scale this. But you haven't built anything yet! For me, as with the skate skis, I'm not even good enough to know what you're talking about yet. Why don't I just start with my old stuff or with what I've got and as soon as I hit some limitations with my current stuff - which may be in a year or two - then I'll begin to think about adding something else?

I think with financial, business, and probably trading decisions, it's the same thing. It starts with questioning some assumptions. Do I really need that extra newsletter? Do I really need that extra Thing? And sometimes it reveals a holistic problem.

You may identify one opportunity that you're going to try to take advantage of - and you know how to do it better than anybody else. And as soon as you identify it, it allows you to get rid of a whole bunch of other stuff that you don't need and now you're just going to stay focused.

If you're familiar with the guys from 37 Signals, it's pretty wild if you look at what happens when you decide to solve one very simple problem. And in trading, I imagine it would apply if you decided to focus on one very simple trading approach. And it may take you YEARS to get to the simplicity on the other side of complexity. You might have to go through a whole lot of complexity to get there. But once you find it, there's always that temptation to tinker with it. But if you find that one way to keep it simple and leave all the complex stuff to all the really smart people who think they're smart, you'll win by just focusing on your one thing.

On Over-Trading:

I think it would do us a great bit of good to write up a poster to hang in view of our desks that says: "It Just Doesn't Matter." I get asked the question all the time: "Why don't you do this?" The answer is: Because, in the end it just doesn't matter. "Why don't you have this feature?" Because it just doesn't matter. With trading, it could probably apply there too. Some of the reasons people are tempted to over analyze or over trade in the investment world is because they are getting hit with so much information all the time. They feel like the "smart" people are moving, changing, and making quick decisions. They don't realize that often it's not JUST GO DO SOMETHING!, it should be JUST STAND THERE! In reality, often the best thing you should do is to just do nothing.

On "Trading with the rent money":

Money and Investing is so emotional and emotions are what drives behavior. The more emotionally charged the money is (Rent money, mortgage money, money that we can't afford to lose) the more it hurts to lose. That's the kind of stuff people shouldn't be touching. People make this mistake all the time. People thought they could borrow money against their house at 4% and turn around and invest it and earn 10 or 12%. Yeah, that works great, until it doesn't. And when it doesn't - now you've VERY emotional about it. This is when mistakes happen. You sell low after buying high.

It's hard enough being an investor. When you add an additional emotional layer on top like rent money or mortgage money or money you borrowed from your Grandma, it makes it so much harder and it's a very bad idea. We've got to do everything we can to remove the emotion from the experience, or else investing doesn't work. We're hard-wired to avoid pain, so our genetic makeups are already working against us when it comes to investing. We don't need to add another layer to make it more difficult for money that is so important to us.

On Indicator Abuse:

The problem with indicators - in general - is we are pattern-seeking organisms and we try to create patterns for activity in the past, even where patterns don't exist. And often, we'll identify patterns that worked perfectly - up until they don't. And then that's a problem when you start laying one indicator on top of another.

I talk to a lot of Traders, and the best I traders I know have identified ONE thing and they do it very well. And they do it over and over and ABSOLUTELY DON'T CHANGE IT, because the moment they change it they are going to make a mistake. And so with indicators, most should get to know one and know it really well, build a set of rational rules around it, and then never break them.

On Cable Financial News and Noise:

I've always called Cable news "Financial Pornography." It's probably that addictive and destructive. It's meant to sell copy and ad space - it's not meant to be informative. There's a huge difference between noise and information, and there's a huge difference between information and wisdom. I'm curious what would happen (and I'm tempted to get my clients to try this) if we did a month-long media fast? Let's just not watch any business news for a full month. What would change? We'd probably wake up a month later and realize absolutely nothing changed!

There's a lot of work being done now on behavioral indicators based on news. Like, what happens when CNBC uses "X" word, what happens and with what frequency? Is there something there? Sure, but it's for people who are much smarter than me.

I'm a strong believer in reducing the number of inputs required to make decisions. Not only TV, I'm constantly weeding my RSS reader and subscriptions. I sort of have a "ten rule" to focus on the 10 or so people who are having the biggest input on me, whether via the blogs or twitter. I realize this isn't the right thing for everyone. I'm glad that thirteen hundred or so people follow me on twitter or my blog, that's great! But I've always tried to reduce down the people I follow. I can't possibly follow so many people - there is too much noise.

On the need to be right:

I think we make a lot of mistakes when we get too anchored to one decision. We all have this tendency to hang on to losers way too long and to sell winners way too soon, and that's just basic behavioral finance. We just don't want to recognize a loss. Getting rid of a loser means we have to acknowledge that we've made a mistake and I think that is something we have to be very cautious about.The most insane thing I ever hear is "I'm going to hold on to this position until I get back to even." Nobody cares what you paid for the stock! Nobody cares that you even own the stock!

One way to approach this is with what I call the "overnight test:" Once a month, play this game where you assume you went to bed and in the morning you wake up and somebody had sold every stock or investment you own. You imagine you are now in 100% cash, and you can repurchase anything you want tax and commission free. You have to make a decision: would you buy the same portfolio?

There's really no such thing as "buy, sell, or hold." It's just buy or sell.

Advice for traders who earn lumpy income?

You have to treat it like a business. You've got to separate your working capital that will get you through X amount of months, and then have the cash that you will use to trade. I have a lot of entrepreneurial clients who have very variable income. And so for them, we try to establish a safety net or reserve that they live off of. We pick a number that makes sense - say $100,000 - and whenever they have money north of that in their personal accounts, they will then spin that money back into their business, or in the case of Traders - into their trading account. Any time your personal accounts are below this number, you focus on replenishing it first.