272: Erik Smolinski - Marine Corps Discipline Crushes the Markets
Dec 12, 2023
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Erik Smolinski, Marine Corps officer turned successful trader, shares his journey from a difficult upbringing to investing. He emphasizes the power of discipline, perseverance, and proactive planning in trading. Erik discusses his effective use of derivative strategies, the importance of having a comprehensive trading plan, and the significance of balancing risk and returns.
The importance of having a well-defined trading plan to promote accountability, proactive decision-making, and discipline.
The significance of adapting trading strategies during periods of heightened volatility and understanding the suitability of different strategies for specific market conditions.
The calculation of expected return, which takes into account average win size, win rate, loss rate, and loss size, as a more accurate indicator of potential strategy performance.
Deep dives
Early Introduction to Investing and Self-Motivation
Eric Smolensky, the guest on the podcast, shares his background growing up in a difficult environment with financial constraints. He talks about how a high school instructor introduced him to the concept of investing and the power of compounding, which sparked his passion for taking immediate action towards financial independence. Despite his challenging circumstances, Eric was driven to save money and started investing in stocks, particularly focusing on well-known companies like Apple and Amazon.
Embracing Options Trading
Eric quickly recognized the potential of options trading for leverage and accelerated wealth creation. He started exploring different option strategies, including vertical spreads and later expanded to other types of trades like ratio diagonals and covered strangles. He emphasizes the importance of managing risk and adjusting position sizes based on market conditions. Eric's options trading journey began just months after he started trading stocks, and he continued to refine and develop his strategies over the years.
Key Role of a Trading Plan
Eric highlights the significance of having a well-defined trading plan to navigate the markets effectively. He shares his own comprehensive trading plan, which incorporates various sections like market structure, financial statements, option markets, and strategy outlines. Eric believes that a trading plan promotes accountability, enables proactive decision-making, and helps traders stay focused and disciplined. He draws parallels with his experience as a Marine Corps officer, where meticulous planning and ultimate accountability are crucial for success.
Navigating High Volatility Environments
During periods of heightened volatility like in 2020, Eric adapted his trading strategies to capture opportunities presented by the volatile market conditions. He highlights the importance of understanding the nuances of different strategies and their suitability to specific volatility regimes. While he generally leans towards capturing variance risk premiums by selling options, he also acknowledges the potential to profit from directional trades and mean reversion strategies during high volatility periods. Eric shares that he stayed away from the meme stock craze but observed the market phenomenon with interest.
Expected Return and Win Rate
Expected return, as discussed in the podcast, is a calculation that takes into account the average win size, average win rate, average loss rate, and average loss size. This provides a more accurate understanding of the potential performance of a strategy. The speaker emphasizes that win rate alone is not a reliable indicator of profitability, as a high win rate can still result in overall losses if the average losses are large. Expected return, on the other hand, focuses on the likelihood of making money and helps guide trading decisions.
The Importance of Managing Risk
The speaker acknowledges that they still struggle with risk aversion even though they have made progress in overcoming it. They emphasize the need to align with one's risk tolerance and approach trading from a business perspective. The speaker mentions their own investments in commercial real estate as a way to diversify their wealth and generate uncorrelated returns. They stress the importance of not relying solely on trading as a source of future wealth and the need to consider other investment opportunities.
Growing up poor and living in violent neighborhoods didn’t stop Erik Smolinski from being motivated and curious. Erik only needed to hear a few words about investing including the power of compounding from his high school instructor to light the passion and determination to take ACTION. The discipline, responsibility, accountability, and patience he cultivated as a Marine Corp officer strengthened his ability to stick with his well thought out trading plans and persevere. His use of derivatives strategies help him to minimize painful drawdowns while creating consistent, long term market-beating returns.
About Erik
Erik is a Marine veteran, options trader, real estate and angel investor. He is a strong advocate for authentic investing information. Erik became a first generation millionaire before 30 through hard work and unwavering dedication to his Outlier mindset. He started investing in 2007 and has spent more than 30,000 hours honing his skillset.
