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Using Systems for Successful Crypto and Stock Investing with Adrian Reid – EP #19

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Transcript of Adrian Reid’s Interview On Screw The Stock Market podcast

Using Systems for Successful Crypto and Stock Investing with Adrian Reid – EP #19

Alex Escobar:

Adrian, thank you so much for joining us today. We’re really excited to have you on the show. Today it’ll-

Adrian Reid:

Alex, awesome to be here. Thanks so much.

Alex Escobar:

Thank you. Yeah. So today it’ll just be me interviewing you. You’re going to miss out on the charming and charismatic Aziz Yousuf. I’ll tell you a quick anecdote about him since we go so far back. I had been working at the office where we both worked. I had been working there for five years, and I’m a pretty sociable guy. Then I gave him a job posting. I said, “Hey, you should apply to this job. I think it’ll be good for you.” He came in and two weeks later he was taking me around the office, introducing me to everyone as if I was the new guy. So I’m sorry to say you’ll be missing out on meeting Aziz, but Hey, it’ll be one more guy that I can introduce him to.

Adrian Reid:

Very nice.

Alex Escobar:

So yeah, I’m really excited to have you on and chat. Normally the way we’ll structure the episodes is essentially we’ll try to touch a little bit on the personal and where you come from, how you got to where you are. And then we’ll dive into kind of the content, right? Of investing and maybe any lessons you might have for our audience on how to do that, how to make our money work for us. This show’s all about taking control of our finances outside of the stock market. So if at any point you want to hate on the stock market, go crazy. Knock yourself out, okay?

Adrian Reid:

Yeah. Well, considering where I’ve coming from, this may be a little interesting. We’ll see. I’ll love and hate at the same time. How’s that?

Alex Escobar:

Okay. Fair enough. Yeah. Yeah. Fair enough. We’ll see where we go. But please take a little bit of time and introduce yourself to our audience and tell us a little bit about where you came from and how you got to where you are.

Adrian Reid:

Sure. Absolutely. My name’s Adrian Reid and I’m the founder of Enlightened Stock Trading. This is why it’s going to be an interesting conversation because one of my main gigs is actually teaching traders how to make money in the stock market, but probably not the way most people do it. And this is why I think it’s sensible that I’m on here, right? Screw The Stock Market, because it’s all about the non-traditional approach. I’m not just about saving money in my 401k or the Australian equivalent. In case you haven’t noticed, I’ve got a strange accent. I’m Australian. I live just north of Sydney. And so if you can’t hear me, I’ll try and slow, can’t understand me rather, I’ll try and slow down a bit.

Alex Escobar:

We’ll get subtitles at the end.

Adrian Reid:

Yeah, that’s right. So look, I started life as an engineer. I’m an analytical technical sort of person. But I got about three weeks into the workforce and realized that this is not what I wanted to do for the rest of my life. I graduated university. I started working as a strategy consultant very early on. I was doing crazy hours in the day job, sort of anywhere between 12 and 16, 17 hours a day on projects, flying around all over the place. And look, I sat down with my dad very early on and said, “Look, I don’t want to do this forever. How do I retire?” Right? And I’m what, 20 odd years old at this point. And he sort of laughed and said, “Well, you’ve got to learn to invest and you’ve got to save money and make it work for you.” And so I started learning about that.

Adrian Reid:

And I’d already known about the stock market because when I was about nine years old, our family had this game and I’ve still got the game. It was called the Stock Market Game. And it’s based on the Australian stock market. And you go around the board and every square you land on is a chance to buy or sell something. And the market goes up and down. And I remember sitting, playing with my brother and my dad becoming a billionaire on paper and thinking, this is the best thing in the world, right? So when my dad talked about, I had to learn to invest, that was where my mind went. It’s like, okay, obviously I’m going to make a fortune in the stock market, right? Because I did in the game. And so fast forward a little while, and I started earning a little bit of money in saving. And I started reading about investing in the markets and I read about, well, first of all, I copied what my dad did.

Adrian Reid:

He was a fundamental investor. He researched companies. He decided what was a good company. He bought it and he held it. And I found that incredibly boring, and I lost money, and it took a lot of time. So I was like, okay, clearly this is not for me. It’s not going to work. I’m not going to trade one day job that I’m not really thrilled with for an investment style that I kind of hate and suck at. So I started looking for all different ways of investing. And to cut a long story short, I read dozens and dozens of books and actually hundreds truth be told. And three years of trying different methods of trading and investing in the stock market. And I came across a book called Market Wizards. And if anyone is a trader out there, you might have read it. If you haven’t, if you are a trader or you want to be a trader and you haven’t read it, Market Wizards by Jack Schwager is a brilliant book.

Adrian Reid:

And in that book, there was interviews with all different traders, and all different types of traders and investors. And some very short term, high frequency, some long term, Warren Buffett style, and everything in between. And in there, I found my method, because basically reading all of the interviews, I found the ones like, “Wow, that’s what I want. That’s exactly how I think about things. That’s how I feel. That’s what kind of juices me up.” And that was systematic trading. And we’ll get into talking about systems and why that’s important, whatever, later. But basically I found that, I threw myself into researching that style, that strategy because it fit me, and read a whole bunch of books, studied, did courses, and became profitable with that method. Profitable because I loved it and it was interesting, and I committed the time and energy to it. And look, largely the rest is history.

Adrian Reid:

My profit up until that point was like volatile and up and down. And my account was basically losing money, losing money, losing money. But the day I implemented my first trading system, my results turned around on a dime and started growing. And so I was hooked and that’s what I’ve been doing ever since. So there’s a lot in that, which I’m sure we’ll pull apart during the episode, but that’s where I’m from. 2012, I’ve been trading for quite a few years, and that year I made more money trading than I did in my day job. And I had a pretty good executive job. I was earning multi six figures a year and working 12, 14 hours a day. And then 30 minutes a day in my trading, I beat my day job. I was like, okay, I don’t think I want my day job anymore, ’cause that’s just way too much time and stress and effort. So I left my day job and started just trading full time. But full-time is 30 minutes a day again, as we’ll get into. So, that’s all the work side.

Adrian Reid:

On the family, home side, I’m married, got three kids, 21, 15 and 12. And so they’re growing up fast and more or less independent now. I try to teach them to do what I do. They say, “Dad, can you do it for me?” But I give them some of the lessons at least, so I’m sure they’ll be able to pick it up pretty quick when they’re ready. When they were very young, they were keen and they started, but now it’s just easier for dad to do it.

Alex Escobar:

So, I have a one and a half year old and I’ve tried to teach her a bunch of stuff. And I found that at least in all my years of experience as a parent, one and a half years, leading by example has been the most effective way. Anything that she sees me or mom doing, she just wants to do that. And so I’ll at least put it out there that they’ve seen it. They’ve seen the example and they’ve seen it. And so when the time is right, they’ll do what they want to do with that information, right? There’s only so much we can push. But that’s exciting-

Adrian Reid:

I think that’s absolutely right. You can’t push too much, but you also, the other thing I found, which is really fascinating, I started talking to my daughter about trading when she was five, and she actually understood the concepts at that point.

Alex Escobar:

How powerful is that?

Adrian Reid:

And she’s pretty bright. But she didn’t understand them because she was super bright. She understood them because if you can simplify it to the point where a kid understands it, then you understand it. And also good investing is not that hard. It’s not ultra complex super duper formulas and thousand page documents and all that. That’s not what it takes to be successful. It takes simple rules that you can repeat over and over again. And kids can actually get that.

Alex Escobar:

I love that. That really resonates with me because I’m a real estate guy and one of the big books in real estate is Rich Dad, Poor Dad. And that’s exactly why the book was so powerful I think is because it was told from his perspective as a nine year old. And there you go, Hey, here’s the secret, here’s this simple truth that I want to convey to you and through this book, in the words that a nine year old would use. And Mr. Kiyosaki seems to be doing pretty well for him so.

Adrian Reid:

Yeah, absolutely. I’ve met Robert a couple of times.

Alex Escobar:

Oh yeah?

Adrian Reid:

And he has this great knack of simplifying down to the essence and kind of slapping you with it. It’s like, “This is the way it is. Stop doing that, do this.” And that’s great. He’s a great teacher, very, very insightful and really perceptive about pulling it right down to the core of what you need to do.

Alex Escobar:

Beautiful. Well, what we’ll do is we’ll put a pause just for a second right now because I got a text message from our dear friend. He said he was joining, but that was 10 minutes ago, and I don’t know. Okay. Let’s just continue.

Adrian Reid:

Okay.

Alex Escobar:

Okay. So we’ll reset and we’ll dive into the content at that point. So we’ll go now. Adrian, again, so thank you. That’s a really cool story, and it’s really exciting to see, I remember the first time I’d made more money from my side hustle than I did in my day job. And for me that put a chip on my shoulder, but it wasn’t 30 minutes a day. I was busting my behind selling houses and driving all over town as a realtor. So I’m all ears. I’m really eager to learn more about how I can do that. And before you go any further the name of the show is Screw The Stock Market. But, I do want to be the first to admit that it’s a little bit of marketing, right? It’s a little bit of kind of, Hey, let’s kind of say something that might be kind of controversial.

Alex Escobar:

And the truth is, I do believe, Hey, there’s alternative investments, real estate, “Invest with me, you can probably do better.” But, I’ll be the first to admit that there’s many people who have made a ton of money, much more than me, in the stock market. And so if you have any hate for the stock market, feel free, but we’ve had a few guests who are stock guys. And Aziz is joining right now. And Hey Aziz, how are you? And your sound is not working. Okay. We’re going to pause real quick. So un-pause recording. So now we’re back. Now, Aziz joined us just in time for the content part of the show. So we briefed Aziz a little bit on what he missed and now Adrian was going to get to the content. So I mean, I see you in the background there, it says, “Trade your system, not your?” What is it?

Adrian Reid:

Not your emotions.

Alex Escobar:

Not your emotions?

Adrian Reid:

Yeah.

Alex Escobar:

Okay.

Adrian Reid:

Yeah. This is the big thing is the killer with all sorts of investment, really, if you’re thinking about money, it’s really emotionally charged, right? So if you make some money, how do you feel? It’s like, “Wow.” If you lose some money, it’s like, “Ugh.” If someone steals some money from you, it’s like, “Eh.” If you get ripped off, “Eh.” There’s all this emotion. And then we have all of the baggage from all of the times in the past that money things have happened to us. And we have all the fear and greed about these things happening again. And those emotions drive most people’s decisions when it comes to money and investing.

Adrian Reid:

And this is why most people don’t get ahead because emotion up means intelligence down. Why? Because it’s a fight or flight response. The saber tooth tiger attacks the caveman, stress goes up, blood diverts from the brain to the body, cortisols released. We get ready to fight, or run and survive. But nowadays in the modern world that doesn’t work for us. We still have the same stress response, the same response to the emotion, but there’s no saber tooth tiger to run from. There’s only the stock market going up and down or the fear about the real estate deal, or, “Oh my gosh, someone stole a hundred bucks from me,” or whatever it is. And that emotion kills your financial freedom. And so my whole thing is you’ve got to bypass the human emotion that we have if you want to be successful as any sort of investor. And the way you do that is by having a system or a set of rules, or process that you follow time and time again so that you know what you’ve got to do, regardless of what’s going on up here. And this is why trade your system, not your emotions.

Alex Escobar:

I love it. I’ve been there a ton of times, right? When Aziz talked me off a cliff one time when I bought crypto, it went up and then it went way down, and I said, “Oh no, I have to sell,” which was exactly what not to do. But all those emotions were very real for me, right? I was just envisioning my wife and the guilt trip she was going to give me, and the disappointment and oh-

Adrian Reid:

Oh yeah, really, killer.

Aziz Yousuf:

You could see the sweats forming on his forehead at the time.

Adrian Reid:

And look, there’s going to be a lot of people out there feeling like that right now about crypto. I mean, Bitcoin is, as we’re recording this, it’s approaching $20,000 from the wrong direction, right? And it was high as 69,000. So there’s some people in some pain right now. And I trade crypto, and I got to tell you, I’m loving the crypto market right now.

Alex Escobar:

Really?

Adrian Reid:

Yeah. But it’s because I’ve got a system that will make money and a process that works. And I probably want to talk a lot about crypto today, maybe even more than about stocks, because it’s one of those markets where people have piled in with very little financial education, very little investing or trading education. And so when the market’s going up, people feel like champions and they think they’ve changed their world. But then they blink and the market is down 60% and they wonder where it all went. And it doesn’t have to be that way. One of the messages I want to get out there is that you don’t need to just buy and hope. There’s better ways to do it. And in crypto especially, because if you buy and hope, you might end up holding like Luna or something like that, that once upon a time is a market darling and now is in the doghouse.

Alex Escobar:

Aziz.

Aziz Yousuf:

I didn’t buy any Luna.

Alex Escobar:

No? Okay, all right.

Adrian Reid:

See, well I held Luna, right? But I sold it way up the top because it started going down, so I sold it. Because, I’ve got rules that tell me when to get in and when to get out. And this is really important. I mean, you’re property guy, Alex, and you need to have some sort of indication that the market is good and stable, and not collapsing and going to cause you grief. I mean, if it’s collapsing and you find the best deal, the deal of a lifetime, that’s perfect, right? But, if the conditions are not right to invest, you shouldn’t be investing. And if the conditions are not right to stay in, you shouldn’t stay in.

Alex Escobar:

I love it. I love it.

Adrian Reid:

Particularly in something like crypto, because the moves are so dramatic. So we got to be careful to not just buy and hope. We need to have strategy.

Aziz Yousuf:

No. And that’s a good thing to talk about and discuss because I mean, I know that one of the issues that Alex and I had in the past is the whole FOMO thing.

Adrian Reid:

Oh yeah.

Aziz Yousuf:

We’ve made huge impulsive jumps because of FOMO, which on hindsight if we had just waited a little bit or not jumped along with everybody else, it would’ve been fine. Example Alex made was with crypto back in like 2017, we jumped onto FOMO bandwagon and we were in a good position. We actually had some Bitcoin and we were holding steady and we were good. But then we got into the FOMO and decided to jump in and switch into the alt coins, particularly the more riskier ones because everything was going to the moon at the time. Even though our gut was saying, “Just stick with what seems to be the good hold,” which would’ve been Bitcoin. So we got burned in that aspect. We got some of our money back because we did have some Bitcoin still, but all those alt coins really, really bit us in the backside just because of FOMO essentially.

Adrian Reid:

Yeah, absolutely.

Aziz Yousuf:

Yeah. I had a similar issue also with the GameStop rush.

Adrian Reid:

Oh boy.

Aziz Yousuf:

Everything in me said, “Stay away from it. There’s no fundamentals. It’s fine. You’re good.” But then I had a buddy of mine that really, really hyped it up and I was like, “All right. All right, fine. It seems like it’s a good idea. Let me just go in now.” And obviously that’s when the Robinhood crash happened immediately. So again, just go with a systematic kind of like research approach as opposed to this whole kind of emotional kind of reactionary response.

Adrian Reid:

Yeah. The challenge that traders and investors have is that, that feeling of FOMO, when it overpowers you, chances are it’s not just you that it’s overpowering because other people feel this as well, right? They see what’s going on. We’re just part of a crowd. And that’s like, “Oh fine. I’ll just get in so I don’t miss out.” That’s the end typically. And if that’s the end, then you’re the one that gets screwed because there’s no one left to buy because everyone just kind of FOMO’d in capitulated. “Fine, I’ll get in because I’m the only one that’s missing this move.” But by definition, if you are the only one that’s missing this move, when you’re in, there’s no one left to buy. And which way does it go once there’s no one left to buy? Exactly the wrong direction, right?

Alex Escobar:

Very interesting.

Adrian Reid:

So, this whole FOMO thing, we’ve got to get past it. And the way you get past it in any sort of active trading, whether it’s stocks or crypto or Forex or trading commodities, is by having rules that tell you when to get in and when to get out. And these could be really simple. My favorite style of trading is trend following. So you find something that’s trending either up or down and you profit from that trend. So let’s take a stock. Stock starts moving up strongly, smoothly without much volatility, you buy, because it’s trending up. If it’s moving up, which direction is it likely to keep going? Up. Because people are seeing the trend and buying in and understanding the story and getting convinced by the story and more good things are happening, and so the stock moves.

Adrian Reid:

But then eventually the trend will slow and something will change. The competitors will react or the market will change, or interest rates will go up or something, and the stock will stop trending up and it’ll start trending down. And when you have evidence that it’s starting to trend down, then you get out. And our whole idea of trend following is you get in when it starts moving up and you get out when it starts moving down, and you make a profit from the move. Makes sense? And you can do that in stocks, you can do it in commodities, you can do that in crypto. You can absolutely do that in crypto.

Adrian Reid:

And those rules bypass all of that FOMO because you just have a formula. Like if today’s price is the highest price it’s been for the last 200 days, it’s going up, buy it. If it crosses below the 200 day moving average in stocks, sell it, because it’s going down. Simple. I’m not recommending you follow exactly those rules, but that’s the essence of trend following, right? And that sort of thing really works. And it bypasses those feelings. So it allows you to get in well earlier than most people and get out well before most people, because most people hold all the way down and then go, “I can’t stand the pain anymore,” and they dump it, right?

Aziz Yousuf:

Alex.

Adrian Reid:

But they didn’t have to have all that pain. All they had to do was have a rule that got them out when the trend was going up and it turned around and they have this like exit point that says, “Well, if it drops to this level, then I’m out.”

Alex Escobar:

Now, I love-

Adrian Reid:

Like with Bitcoin, I haven’t held Bitcoin long for like months now, but I went short way back and I’m short a whole bunch of things and that’s making a ton of money on the way down.

Alex Escobar:

Amazing. Now, I’ll say just again, from my own limited experience in riding these emotional roller coasters, right? The thing that’s hard about it. And I think what you’re saying is in your rules, there’s still volatility happening, but there’s trends, right? So you have kind of these ups and downs as you go, but you still see an upward trend and so you go. But the hard thing is that you never know where it’s going to go, right? Is it one of those little…

Adrian Reid:

Ah, yes.

Alex Escobar:

… little downward trend spikes or is it a real trend downwards? So, is it something that is still just mathematically kind of well defined, so that again, it’s not that emotional guesswork? I mean, you gave us that one example, but that’s just from my experience, it’s been hard to know, right? Whenever you zoom out or zoom in on one of these little charts, it’s challenging. So please?

Adrian Reid:

It is, absolutely you’re right. And there’s a couple of reasons why it’s hard. Most people zoom in way too much. They’re looking at five minute charts or they’re looking at a one day. Watch social media when Bitcoin jumps six or 7% in a day up, it’s like, “Oh it’s over quick buy before you miss out.” But no, Bitcoin fell from 69,000 and it’s kissing 20 right now. 5% is nothing. 5% is not a change in trend. So when when you looking at the markets and you’re seeing little price moves and volatility, you want to zoom right out. I look at a much longer timeframe, and there’s a good saying, if in doubt zoom out, right? Because if you zoom out and get some perspective, you’ll see what’s really happening beyond the noise. That’s the first thing people focus on too short of timeframe.

Adrian Reid:

Second thing is that if you hold one thing, Bitcoin, Apple stock, Facebook, whatever, you hold one thing, that one thing means everything to your success right now, right? And if that one thing means everything to your success, if that starts going against you, that’s really going to hurt. That’s really going to be stressful. But, if instead you have a set of rules that allow you to trade a portfolio of things, cryptos, stocks, whatever, and they’re all following the same rules, but they’re getting in and out at different times because they all move a little bit differently, right? So let’s say I have a system and that system holds 20 different stocks or 20 different crypto tokens. If one of them goes against me, I don’t care because in that 20 something else will be doing well. And so the whole game becomes a game of numbers.

Adrian Reid:

If you have a set of rules that makes money, and I’ll tell you how to confirm that it makes money in a second, but let’s assume we have a set of rules that works. It doesn’t work every time because nothing works every time. But if you apply it many times in a diversified portfolio, then there’ll be enough winners to offset the losers. And if you allow the winners to be big and you keep the losers small, you can make a lot of money.

Adrian Reid:

And let’s just do some simple math. Out of 10 trades, if you are wrong, 70% of the time, 70%, seven out of 10, you are wrong and you lose $1. But when you’re right, you make $5 on each trade. Those seven losses are going to feel really hard, right? But you only lose seven bucks. And then on the other three trades, you make 15. So overall you make good money. So you’ve got to get past the idea that, I need to be right. And this is where most people struggle, right? Because at school, what are we taught? You’ve got to be…

Alex Escobar:

Right.

Adrian Reid:

Right. You’ve got to get the correct…

Alex Escobar:

Answer.

Adrian Reid:

… answer. But in investing, well trading at least, active trading, that’s not correct. You need to be able to be wrong. And I’ve been wrong way more than most people, which is why I can trade well. Because out of thousands and thousands and thousands of trades that I’ve made over the last 20 years I’ve been doing this on average, I’d say 60% of them have been losers. You’d say, “Whoa, Adrian, you must be really dumb.” No, actually I have a high tolerance for losses, but I keep my losses really small. And I allow my winners to be really big so that when the math works out, I make money overall.

Aziz Yousuf:

Now, I want to clarify one thing for the listeners if they’re not too familiar with the investing concept. You keep referring to trading as opposed to long-term investing.

Adrian Reid:

Yes.

Aziz Yousuf:

Explain the difference of that for anyone who’s new to investing in general and trading in general.

Adrian Reid:

Yeah. Solid question. Thank you. Any sort of investing, there’s a spectrum, right? At one end there’s the big Wall Street funds that have huge, super computers and they trade thousands of times a day, ultra high frequency. At the other end, there’s buy a good stock and hold it forever. And in between there’s a whole bunch of different ways of doing it, right? As individuals, we can’t do this high frequency thing. Just can’t compete. We can do the ultra long term buy and hold forever. But the trouble is we don’t have, typically, access to the research, access to the management team, access to the company. We can’t interview the CEO, all of those things. We can’t form those really high conviction, deeply researched positions that maybe someone like Warren Buffett can. We can dilute ourselves that we can. “Oh yeah, I did research. I Googled it.” But, we don’t know.

Aziz Yousuf:

And to be-

Adrian Reid:

In between is trading.

Aziz Yousuf:

And just to emphasize, to be honest, most average folks, I mean, even though they claim to research, they don’t have time to really go that deep in depth. It’s really whatever they can find on any of those CNBC, Yahoo Finance or whatever your trading platform provides for you is what they’ll use. And that’s about it. And that’s very shallow.

Adrian Reid:

Yeah, absolutely. It’s enough to placate the masses, right? And that won’t make you money. Because, CNBC is there for entertainment and to sell ads. It is not there to inform you. Turn that shit off, sorry. But it just does not help. Jim Kramer, if you watch that sort of garbage, turn that off too. That does not help. But back to the question of what is trading, it’s actively buying and selling stocks, crypto, commodities, using a set of rules to get you in and get you out of the market, hopefully with a profit over time.

Adrian Reid:

Now, there’s different ways of trading. You can do fundamental research, which is understanding the company and understanding the marketplace and the competition, all of that. That’s the thing that is pretty hard. That’s pretty hard for an individual to do. And even if you do do it, it’s really hard to know if you’re any good at it because you can’t test it in the past. You can only do it now, and then in 10 years time say, “Hey, did I make any money in the last 10 years?” It’s like, I’m not willing to leave that to chance. But technical trading, which is what I do, is where you have rules based on the price movement of the thing that you’re trading. You see the stock market charts, right? And you see the little candle stick bars and the price goes up and down, and you can put indicators and moving averages and that sort of thing on there. That’s what I’m talking about.

Adrian Reid:

And the reason that’s good is because you can actually, as an individual, you can do it. You can learn it. But what most people do is they get their chart and they draw some indicators and they look at it and they go, “Okay, well, I think this is going to happen. So I buy.” And that doesn’t work either because what we think is going to happen is all driven by our emotion. So I want to take it one step further and suggest again, that you need a system, right? A set of rules. And if you trade by a set of rules, you have some exact conditions that get you in and exact conditions that get you out. And the cool thing then is that you can take those rules and you can test them on past data.

Adrian Reid:

So the other day I took one of my sets of rules and I tested it on all stocks that have ever been listed in the United States, between 1950 and today. And I basically did a backtest. We call it a backtest where I put those rules into the software and took all of that data, every single day, every single stock, found all the buys and sells, assembled the portfolio and showed me how that portfolio would perform over time.

Alex Escobar:

That’s exciting. That’s really cool.

Adrian Reid:

That’s super exciting, right? And let me ask you this. If I gave you a strategy and you did that, you backtested it and that strategy lost money for the last 70 years, would you think that’s a good strategy? Would you follow that going forward?

Alex Escobar:

No, sir.

Adrian Reid:

‘Course not, right? That’d be dumb. But if I gave you a strategy and could show you that it worked over the last 70 years consistently, not every day, not every month, but the trend of that strategy was up the whole time. Had some dips and whatever, but generally it made money. Would you think that might be a good strategy?

Alex Escobar:

Yeah.

Adrian Reid:

Yeah, right?

Aziz Yousuf:

But the question I have though is, when you are creating a strategy, you’re partially basing it on historical data to create kind of like a pattern for the trends.

Adrian Reid:

Exactly.

Aziz Yousuf:

For the example that you use, where you’re backtracking, I mean, you’re using that. It’s kind of like hindsight is 2020. So how does that work, if you’re already using back data to justify what’s already occurring?

Adrian Reid:

Yeah. Look, there’s a lot to this. This is really great question. But let me ask you this; if I showed you on past data that didn’t work, do you think it’s going to start working miraculously tomorrow? No. Most people follow rules that never worked in the past, and so they’re never going to work in the future. And then they wonder why they lose money. But, if I test it the right way on the historical data, and it did work, there’s a much better chance that you will make money in the future.

Adrian Reid:

Now, let me demonstrate the right way versus the wrong way. Let’s say I’ve got certain rules and it might be a little bit technical, but let’s say I can do… One thing we do in technical trading is moving averages. And what that is is you take the price today and yesterday and the day before and the day before, and you add them up and you take the average. And if the price today is above that average, then it’s probably trending up. If the price is below the average, it’s probably trending down. Simplest example of a technical indicator. You can have lots of different indicators in your system.

Adrian Reid:

So let’s say I develop a set of rules and I keep adding lots of different indicators until I eliminate all the bad trades in the past, and the backtest looks really great. In order to do that, I’ve added 20 different rules. And then I’ve varied the numbers in all of the different rules to find the one combination that worked amazingly well in the past. Now, do you think that would work in the future? No, because I’ve added so much complexity and I’ve fine tuned it so much to those exact conditions in the past to force the backtest to look good. That complexity won’t be able to predict the future. It won’t be able to predictably extract profit in the future.

Adrian Reid:

But, if I have a much broader, more general set of rules, let’s say I have two or three rules, and those rules work, whether I use a 200 day average or 150 day average, or a 300 day average, doesn’t matter. It’s all profitable in the past. And if I use a 50 day breakout or a hundred day breakout, or a 40 day breakout, or a 75 day breakout, they’re all profitable. Those rules are stable, right? I haven’t fine tuned them to make the past look good. It works kind of no matter what parameter values I use. That is then more likely to make money in the future. And there’s the difference, right? We need elegant simplicity that works in a very broad sense, rather than ultra complex specifics, that work only under precise conditions. Then we can make money in real time trading.

Aziz Yousuf:

So how do you come up with something that broad and applicable? I mean, like for example, like last year with the whole retail investor aspects and COVID and whatnot, those are things that are historically, you cannot account for that in any way, shape or form. So how a broad set of rules kind of like translate into something like that? I feel like you would have to adapt it to somehow, I don’t even know how you would adapt it, because I think it stumped everyone last year.

Adrian Reid:

Yeah. Look, there’s good years and there’s bad years. There’s easy years to make money and there’s hard years, right? But, what you do is, you start with broad market behavior. I mean, the market can only do, and when I say the market, I’m talking about the stock market, or crypto, or commodities, whichever market you want to trade, right? The market can only do certain things. It can go up sideways or down in the broader sense. And within those three things that trend can either continue, there can be a temporary shock against that trend, or that trend can change. So the market can go up, sideways, or down. And it can continue, have a temporary shock, or it can change. And so that gives us like a three by three matrix of the behavior that could happen.

Adrian Reid:

Now, if the market’s going up, it can turn around and start going down. Do we have to care that it’s COVID, or that it’s the financial crisis, or that some crazy person got elected as president, or that interest rates went up, or that some crazy person invaded another country, or any of those things? So we don’t have to predict those things. What we have to know is what the market could do. If it’s going up, it could keep going up, it could dip, or it could change to either a sideways or a down trend. Now, my rules don’t have to make money in all of those different conditions. They just have to make money where they know how to make money, and they have to stand aside where they don’t know how to make money.

Aziz Yousuf:

So essentially it’s creating guidelines for when to get out and when to get back in.

Adrian Reid:

Yeah. And so if I have a set of rules, let’s say I’m trend following, so I’m following trends of stocks that are going up. That set of rules is going to work way better when the broader market is going up, when the S&P is going up. So I might have another rule that says if the S&P is going up and the stock is going up, then by the stock. And sell the stock if the stock starts going down or the S&P starts going down. Because, it’s the broad conditions that set you up for success, as well as the individual stock you’re buying. So you don’t want to try and make money with one set of rules all the time, because that one set of rules won’t work all the time.

Adrian Reid:

Right now, we’re in a bear market as of time of recording, I’m pretty sure the S&P just dipped below that 20% from the high, which is the kind of technical definition of a bear market. But it’s been going down for a while, so I don’t want to buy and hold, hoping stocks go up. Just like I don’t want to buy and hold Bitcoin, hoping Bitcoin’s going to go up. Bitcoin’s gone from 69,000 to 20, almost 20. That’s clearly not going up. It’s in a down trend. So I’m not holding it, trying to hope for it to go up. I sold it short so I can profit from it going down. And my rules will tell me to do that. So if you have those systematic rules that make money in different market conditions, then it doesn’t matter what the market does.

Alex Escobar:

Very interesting. And I think I appreciate too that the fact that in a market as complex as a stock market or crypto, there’s just so many factors that I think as an individual, there’s no way you could have predicted. There’s no way you could predict why things are happening. But I like the simplicity of the fact that you’re not getting into that level of detail. You’re responding to the trends that we see. And I think that’s doable. That’s possible for us as individuals. And yeah, I mean, did you have another question Aziz? I feel like I kind of spoke over you.

Aziz Yousuf:

No, no. I was just clarifying also for those who are listening, when Adrian refers to selling short, he essentially is betting that the particular currency, like either the particular crypto or the stock is going to continue to go down lower. So he’s going to make money on the difference from where it is at this point and the lower value that it’s going to go down to, which is another strategy that you can play using options as another aspect.

Adrian Reid:

Yeah. I mean, you can also sell short directly, like in the stock market or in crypto. Aziz, just imagine you’ve got like 50 Bitcoin, okay? And you are buying and holding forever, right? As far as your concerned, you are never getting out of Bitcoin. And I’m a trader and I just want to borrow some of your Bitcoin for a moment here. So Aziz, can I pay you a fee, like maybe a certain percentage each year? And can I just borrow some of your Bitcoin? I’ll pay you interest on that borrowing. Is that okay if I just borrow like two Bitcoin or something for a little while?

Aziz Yousuf:

Yeah.

Adrian Reid:

Just play with me. Yeah? Cool. Okay. So you give me the Bitcoin. Now I’ve got the Bitcoin. I didn’t have any Bitcoin before. I owe you to Bitcoin, right? ‘Cause I borrowed them from you. Now I’m going to go ahead and I’m going to sell that. I’m just going to sell that in the market. And let’s imagine the market is at 30,000 right now, I sold it. Now I owe you two Bitcoin. And I sold those two Bitcoin and I collected 30,000 times two. Now the price goes down to 20 and you want your Bitcoin back, right? You’re like, “Adrian dude, give me my Bitcoin. It’s been out there too long. I want to sell it myself. The market’s going down.” So the market’s at 20,000, I buy it back. How much do I have to pay? Two times 20,000, $40,000, $40,000. And I sold it at 30. So I made $20,000 on the difference, right? I give you your Bitcoin back plus a little bit of interest. I made $20,000 and I didn’t own any Bitcoin to start with because the trend was down.

Alex Escobar:

Interesting. I like that example.

Adrian Reid:

Yeah. Now I don’t have to physically go borrow it. The broker arranges it for you all automatically, particularly in the stock market. So you can do that. It’s not a beginner strategy. So don’t rush out there, just try and do it without some rules and some education. But I want people to think beyond the fact that you have to buy something and it has to go up forever and then you will win. Because, a lot of things won’t go up forever. And particularly in crypto, right? I want to kind of focus on crypto a little bit because people think it’s going to change the world, and it will. But the token you think is going to change the world may not.

Adrian Reid:

So if you buy and hold, I don’t know, Luna, thinking that’s the next big thing. And that’s changing the world. And this is a couple of years ago now. You thought you were right. It got to 119 bucks or whatever it was and you thought, “Oh my God, I’m a champion. I bought this thing at a couple of bucks and look how much money I’ve made, and it’s changing. It’s going to change the world.” But, you’ve bought and hold that token thinking it’s going to change the world. You’re never going to sell it. And then when the market turns and something bad starts happening and you start getting proven wrong, but you don’t have an exit strategy, you are just buying and holding it forever. That goes down to almost zero. And that entire potential for wealth has been wasted because you didn’t have a set of rules to tell you when to get out.

Adrian Reid:

Buy and hold forever in crypto is really, really risky. I mean, okay, maybe if you buy and hold, Bitcoin, it’ll be around in 10 years time. But most of the other ones, you have no idea if they’re going to be around in 10 years time. And most of them won’t, because if you look back, how many of them have disappeared already? Because there was no substance.

Aziz Yousuf:

It’s a lot of the alt coins that early on we invested in.

Adrian Reid:

Yeah. And the thing is, I’m not saying don’t trade them because I have systems, like my crypto systems are insanely profitable. It’s ridiculous how much money you can make trading crypto. But, you make money when they’re hammering. You get out when they stop and start trending down. And you’d go to the next thing that is moving up. If you’d have just bought and held all of them, you’re in for huge amounts of volatility and a whole lot of massive losses, because most of the alts will go to zero.

Aziz Yousuf:

And I think that was the strategy that we initially had when we purchased the alts back in 2017. The problem though that we didn’t realize was, I guess, because a lot of the platforms that were set up for crypto where they’re kind of infancy still. So making transactions like selling or anything would take like a week or something ridiculous like that. So now you’re stuck in this position. By the time you’re you can actually dump it, it’s already gone down to zero or close to.

Adrian Reid:

Yeah. And look, this is still true. Oh, I mean it’s less true now, right? The platforms are much better. But, if you try and trade the really new stuff, that’s not even on the major exchanges yet, then there’s so much more complexity and clunkiness and risk of loss and risk of mistake and all of that. But you don’t need to trade that stuff to make good money. If you go to any of the major exchanges, Coinbase, Binance, Kraken, KuCoin, FTX, the things that are listed on those, they’re a little more established. They’ve got much more liquidity. They’re easier to get in and out of. And they still have really great moves. So you don’t need to go to the really wild west. You can just go kind of to the west if you like.

Aziz Yousuf:

Though, I think I read earlier today, Binance is freezing some trades now just because of the…

Adrian Reid:

Oh well.

Aziz Yousuf:

… has gotten out of hand.

Adrian Reid:

Yeah. I don’t want to comment on exactly what’s going on right this second. There’s always going to be risk on individual tokens, right? I think the thing you really want to watch out for is the stability of platforms. And some of these platforms are so big now that the stability is probably not really as much. Well, certainly not as much of a risk as it once was. But diversification is really, really important. Not just amongst what assets you hold, but who is the custodian of those assets. I wouldn’t put all of my money in one stock broker. I wouldn’t put all of my money in one crypto exchange. I wouldn’t put all of my money in one house. I wouldn’t put all of my money in one suburb. You got to spread the money around because bad things happen. And the investor who survives long term doesn’t take crazy bets. Doesn’t bet the house.

Adrian Reid:

I’ve been trading stocks for 20 years and crypto for a little while now as well. And I’ve never blown up an account. Most people have blown up dozens of accounts or several accounts by the time they figure out either it’s not for them and they give up, or they finally get some sense and learn instead of just gamble. But the reason I haven’t blown up is because I have a strategy, that strategy is tested over historical data. I know it works. I have confidence in it, so I follow it. Even if the market dips and I have a few losses and whatever, I’ve got the confidence that the strategy will work long term. And I diversify massively. I don’t just have one set of rule.

Adrian Reid:

I don’t just hold one stock. I don’t just hold one token, one crypto. I have a set of rules that allows me to trade a portfolio of them. But more than that, I have a portfolio of sets of rules. So, I have multiple systems which each hold a portfolio of several stocks or cryptos. And so if something bad happens, if something gets frozen, if a stock goes bankrupt or whatever, I care, but it doesn’t matter. Because, each of them is such a small investment that that sort of catastrophic risk can’t really hurt you.

Aziz Yousuf:

So I had two questions. One, one of the things that I find challenging when it comes to trading, whether it’s crypto or stocks or whatever, it’s the tax implications. Because every time you buy and then sell, you’re taking a tax hit, which most of the time when I do any type of trading, I do it through my retirement accounts because obviously they’re tax exempt, so I don’t have to worry about any tax implications. So I’m assuming you’re doing this off of like your own personal accounts and not retirement accounts. So how do you strategize with that in that regard? Is that something that’s incorporated into the system that you’ve created? And my second question after that is, at the end of the day, how does one even envision or create a system when you’re just first starting out? I mean, most people, just the average Joe, just starting off, they would have no clue. I mean what’s a foundation for a system?

Adrian Reid:

Yeah. Yeah. Good. Both great questions. Let me cover tax first and then we can talk about how to create a system. First of all, I don’t give tax advice and you need to seek the advice of your tax professional on this. The principles is that you want to think in terms of after tax returns as much as possible, right? But you also don’t want to avoid something just because you might have to pay tax. Because, if you have to pay tax, generally, that means you’re making a…

Alex Escobar:

Profit.

Adrian Reid:

… profit. If you make a loss, you generally don’t have to pay tax, right? So if you’re having to pay tax, that’s kind of a good thing ’cause it means you’re ahead. But you don’t want to pay too much tax and you don’t want to do something that in after tax terms is worse than something else.

Adrian Reid:

So, let’s take again, let’s just pick on Luna because I love this story right now. It’s hilarious. Let’s say I bought Luna way back, and I’m sorry to anyone who did this, I’m not trying to be insulting, but it’s a really great illustrative example, right? Let’s say I bought it way back and I intended to never sell it because I didn’t want to pay tax, right? So I bought it, let’s say at 10 bucks and it went to a hundred. I’m like, “Man, I am so smart. I’m so rich. This is awesome.” But I’m not paying tax, so I’m not going to sell this. I’m just going to sit on my wealth and let it keep growing. And maybe one day I’ll sell my Luna and I’ll be a billionaire, and I might be able to buy something with it. And then it started going down. It’s like, well, I don’t want to sell, ’cause I don’t want to pay tax. Even though I think it might go down a little bit further, I’ll just hold for the long term, right? And now what is it? I don’t even know what price it’s at now. I think you can still buy it, but it’s like a couple of bucks. But you haven’t sold it yet, so you haven’t had to pay any tax. So don’t worry because you haven’t paid any tax.

Adrian Reid:

But, what if you bought it at 10 and you sold it at a hundred and you had to pay a little bit of tax, but you actually had a profit? So here’s the thing, right? If you have a strategy that works, and after tax it generates better results, then it’s a good thing. But if you have a strategy that’s marginal and after tax it’s just not worth it, then that’s not a good financial decision. So first of all, if you’re going to trade, you’ve got to be profitable. So we’ll get to how you do that in a second. So you’ve got to have a set of rules that work and be profitable. And then you have to trade it in the most tax effective way possible.

Adrian Reid:

If you can trade in your retire accounts. Great. I do that. If you can trade in a tax advantaged, like a trust or something like that, then that’s good too. I do that. Often in your own name, it’s quite punitive to trade, but not always. It depends on your situation. I once lived in Singapore for several years, and in Singapore, there’s no tax on trading profits, capital gains and dividends. It’s like, damn, I just trade all day long. This is amazing. Not that I trade all day long, but I don’t worry about tax because there’s no tax to pay. So you have to think about your situation and your after tax consequences, and make sure that your strategy is sound. Buying and holding an asset that goes to zero is not sound regardless of the tax implications. And in crypto, so many of them will go to zero, but some of them will be massive winners, and we don’t know which.

Adrian Reid:

So if you buy and hold to avoid tax, you run the very real risk of ending up with nothing or very little. But if you have a good trading strategy, that’s long term, then you can make some huge gains. Yes, you’ll pay a little bit tax depending on your situation, but you still come out well ahead. So I don’t want people to be afraid of paying tax. In Australia we have this crazy thing, right? If you make an income loss on your property, then the accountants will tell you that’s a good thing because you can deduct that loss against your job income. At least you can, in some circumstances, again, this is not tax advice.

Adrian Reid:

And so the accountants will encourage this thing and they call it negative gearing. But what they don’t emphasize enough in my view is you made a loss. It’s like, dude, you are losing money. You are paying out every single month to own this property so that you can get a tax deduction. That’s stupid. Have something which pays you money and then pay a little bit of tax on that. That’s way better because then you’re ahead. You’re not going behind. So, people are a bit scared of paying tax. I just think, think in terms of after tax returns and maximize your after tax returns. Be smart about it. Does that make sense? Sorry, a bit of a…

Alex Escobar:

No, no. That’s-

Adrian Reid:

Sensitive area for me.

Alex Escobar:

No, that’s a good point. And I guess what was the other question about? Okay, so now I’ve listened to this episode. I like the idea of the system. I acknowledge the emotional, I felt that emotion of like feeling that I’m no longer intelligent because of the fear or because of the excitement or whatever. I want to take this and run with it. What do I do? What do I do, Adrian?

Adrian Reid:

Yeah. Good question. Thank you. There’s several ways to learn to trade profitably with a system. I’m going to say that for most people, the quickest way to become a profitable trader, whether it’s stocks or crypto, is to adopt a systematic approach, use trading systems like what I do. It’s the quickest way because you eliminate the emotions, you bypass all of the judgment, subjectivity, and you just have rules. If those rules work and you follow them, then you’ll make money. It sort of simplifies the whole thing down. The trick is how do you find rules that work? Well, you can learn. You can spend years reading books about stock trading and looking at example rules and testing them and trying to figure out how to combine them together yourself. And that’s what I did.

Adrian Reid:

It took me basically three years of trying different methods and testing and losing money. And then I was like, I found systematic. I eliminated all the subjectivity. I took three months of leave from my day job, leave without pay. And I just did nothing but system testing and ideas. Cost me a ton of money because I was paid pretty good. And my boss wouldn’t pay me when I was just off playing with the stock market. So I did that. Then I started trading systematically and I’ve been making money since. So you can do that, but I don’t recommend it because it’s really hard work and it takes a lot of time and effort, and it costs you a lot in time.

Adrian Reid:

The smarter way is to go get someone to teach you and learn their strategy and learn how to test their strategy. Now, most people will go to like a signal service or a newsletter, a tip like an advisory that says, “Buy this stock, buy this crypto. Now, sell it. Now buy this one.” That’s a really bad way to do it. Because, what you’re doing is your outsourcing the decision making. You’re saying, “Expert, just tell me what to buy,” right? That’s no good because if you’re making money time after time, you’ll be confident. But as soon as you start losing money, you’re like, “Hey, I don’t trust him anymore. I’ve lost a bit now. And maybe I’ll start second guessing his signals.” So what you want to do is learn a system, a set of rules, preferably for someone like me or books or whatever, but also learn how to test it and evaluate it for yourself. So you’ve got to be self-empowered, right?

Alex Escobar:

And so that’s what you do, right?

Adrian Reid:

Yeah, yeah.

Alex Escobar:

I want to confirm. You offer a course, you offer, is it a training on-

Adrian Reid:

It’s a membership where people come and they learn my systems and we interact and I coach them through it. And we have live training and Q and A and all that sort of thing to get them from where they are to pro trader basically, where they’re consistent, profitable, confident, making money and independent. And I do that because when I quit my day job and I started trading, I was at home. And where do you think all my friends were?

Alex Escobar:

At work?

Adrian Reid:

At work. And so I was at home with no one to talk to, bored out of my mind. It took me about three months to start going a bit crazy. And so I didn’t have anyone to talk to about my trading, so I started teaching trading. And because I like trading, I like to talk about it. And I like to share about it, and I like to help people. And I hate the fact that most people lose money. So I started teaching and I’m still teaching because it’s kind of fun. And I like seeing that transformation. So in this membership we take people from beginner to advanced and we give them all of the steps. We give them the systems. We give them the process and the tools to test those systems, build confidence and actually understand how to do it and implement it, and then deal with the psychology. And basically get to that level where they’re confident and independent. And I can do that in a couple of months, right? You can make someone profitable and consistent and confident, instead of three years or five years that most people take.

Alex Escobar:

Yeah. Well that’s exciting. I remember you sent a message that you had something special for our listeners. Would you like to share a little bit more about what that is?

Adrian Reid:

Yeah, absolutely. The podcast is called Screw The Stock Market, so I didn’t put a stock market thing together. I put a crypto thing together because crypto is definitely anti stock market, and it’s easier to get into for most people because you don’t need as much money. So, what I’ve got is, it’s called The Crypto Acceleration Bundle, and it’s got a bunch of resources in there, covers the major mistakes people make trading crypto. Why you should, even if you are conservative, even if you are worried about the crypto market, why you should consider trading it. And also a course called The Millionaire Trader Code, which explains the stages of evolution you need to go through to get to what I call a millionaire system trader. And so that’s like a little bundle of training which can show people a bit more about this world. And you’ll learn about why it’s good, whether it’s for you, and whether you want to learn more.

Adrian Reid:

So people can get that by going to my website, it’s enlightenedstocktrading.com/screwthestockmarket, all word. So I guess you can put that in the show notes or something.

Alex Escobar:

We will, definitely.

Adrian Reid:

Yeah, but if people go there, opt in for that and have a read of the articles, look at the mistakes, that’s really, really important. Because, one of the best ways to get profitable is to avoid all the stupid stuff that most people do. And the more mistakes you avoid, the more profitable you’re going to be, and that’s true of every investing discipline, real estate stocks, crypto as well.

Alex Escobar:

Awesome. Adrian, thank you so much. And it’s really been a pleasure talking to you. And even though you’re a stock guy, I’ll call you my friend, man. It’s cool. And you know what? I think a ton of these lessons apply to alternative investments too, right? They might be a little bit less liquid, they might be a little bit less fast moving, but the emotional side is always there. And that fear is, I think that’s something that really resonated with me. And so really thank you so much for your time and for sharing your lessons with us.

Adrian Reid:

Absolute pleasure. Thanks so much, Alex. Thanks Aziz. So great to talk to you guys.

Aziz Yousuf:

Definitely. It was a pleasure.