• I thought they said the quiet part aloud.
• But then I saw the byline: Aaron Brown is an ace quant and former professional poker player.
• The study gives would-be traders study alternatives: game theory over economics.

Good morning from a brisk morning in the foothills.

My facility with the English language isn’t good enough to convey my disappointment with Wall Street.

As naive as you’ll think I was when I was a kid, I genuinely thought Wall Street was the one place a person could go to work, do some good, and make a lot of money while doing that good.

While I think Wall Street is one of the best movies ever made, I still haven’t seen The Wolf of Wall Street or Margin Call.

I loathe Jordan Belfort and remain astounded someone hasn’t removed his head from his shoulders. Only Bernie Madoff has done more damage to The Street’s reputation. Scorsese film or not, I can’t hand him dollars to check out a movie whose proceeds haven’t made it back to the people he ripped off.

Admittedly, I couldn’t resist The Big Short because, as a financial trainer, I wanted to see how it explained mortgage-backed securities and collateralized debt obligations. It did a fair job for the layman. But the math is far trickier than they let on. That’s because even the quants don’t get the math of those securities, whose death has been greatly exaggerated.

So it was with great amusement yesterday that I read a WhatsApp message from my friend and Rude reader, Biggus Vikas.

If you recall, Vikas visited Piedmont late last year for truffles and chocolate.

Yesterday, Vikas sent me a Bloomberg article titled “Want to Succeed on Wall Street? Learn Poker, Not Economics.”

As I had only read the title, I replied:

Best training I ever sat in on was poker training. But all this shows is the market is literally a casino now. Thanks for this! Didn’t know what I was going to write about this morning!

The bit about the best training is true. My friend and colleague Badhri and I split the pot during a furious training session in Singapore circa 2016 about how poker relates to trading.

Credit: Balazs Fogoly, Ember Associates

Of course, yesterday I wrote about, ahem, coincidences only to revisit Vikas’s message yesterday afternoon.

And then I saw who authored the article: Aaron Brown.

Clearly, I had jumped to conclusions.

In this edition of the Rude, I’ll take you back in time before parsing what Aaron Brown was conveying in his article.

But before we do that, please understand that as an investor, it always behooves you to learn about economics and valuation.

The Quants at 7city.

7city Learning, which Fitch Ratings bought in 2013, was the place to be a financial trainer in London.

I didn’t know this when they hired me; I just needed a job.

As you know, that worked out well, as I still teach banking graduates during the summer.

But in March 2007, I walked into a world that would change my life forever.

Since the world’s top fear is public speaking, people who can stand in front of a room talking for 6 hours a day get paid well. Indeed, they get paid more than I thought they were.

And if you’re going to “edutain” the kids at places like Goldman Sachs and Morgan Stanley, you better keep those Harvard, Penn, Oxford, Cambridge, MIT, Chicago, Stanford, and Sorbonne kids amused and enthused.

But the graduate training business was only a piece of the puzzle.

The CQF, or Certificate in Quantitative Finance, was the jewel in the crown.

Paul Wilmott, Riaz Ahmad, Nassim Taleb, Emmanuel Derman, and Espen Haug were only a few of the world-renowned quants teaching the course.

The math they used scared the life out of me. I got Bs in Calculus I and II in undergrad, but this stuff was rocket science.

And Aaron Brown was one of the frequent contributors to Wilmott Magazine, which all the nerds read.

Who’s Aaron Brown?

According to his Wikipedia biography:

Brown was born in Seattle, Washington. In college and graduate school, he was a professional poker player and traded securities for his own account.

In 1982, Brown moved to New York and worked as a portfolio manager (Prudential Financial), trader and head of Mortgage Securities (Lepercq, de Neuflize), risk manager (JPMorgan Chase, Rabobank, Citigroup, Morgan Stanley, and AQR Capital Management) and lectured at Fordham and Yeshiva universities.

Brown was named Risk Manager of the Year at the Global Association of Risk Professionals' annual convention in 2012. He was voted Financial Educator of the Year by the readers of Wilmott Magazine, and his website received several Forbes Best of the Web awards for Theory and Practice of Investing.

Brown holds an SB in applied mathematics from Harvard University (1978) and an MBA in finance and statistics from the University of Chicago (1984).

An amazing CV. But what he writes on his website is far more telling:

Among other things, I was always fascinated by gambling. Ed Thorp's books Beat the Market and Beat the Dealer (the latter with Sheen Kassouf) were great influences on me.

I studied horse racing, sports betting, backgammon, and other games, but my greatest love was poker. I played my first commercial poker in the basement of a local tavern at 14. I wasn't surprised to learn I was much better than the adults playing; I had never doubted that.

What thrilled me was to learn I could walk into a room of strangers and walk out with their money, and no one got mad. This was a formative experience for me, and the knowledge has served me well.

Unfortunately, most of the world is not as civilized as poker players and tavern basements, so sometimes along the way, people have gotten mad. But I always left with the money either way.

Now that you understand the author let’s dig into the article.

What Did the Fed’s Study Say?

From the Bloomberg article:

For a paper titled “Strategic Sophistication and Trading Profits: An Experiment with Professional Traders,” the authors recruited 56 professional traders, plus an equal-size sample of students for controls, and evaluated their performance in a computer-simulated trading game. They then tested their subjects on a wide range of specific skills to see which skills were correlated to trading success.

The main finding was that among students the only useful predictor of trading success was general intelligence.Among professional traders, though, neither intelligence nor other personality traits and cognitive skills mattered much. Success did not depend on any fundamental insight about value. What mattered was strategic sophistication in the sense of taking analysis of other people’s behavior to high levels.

For traders, intelligence, traits, or skills don’t matter because those things are evenly distributed among the traders.

That’s believable because of the insanely high cognitive levels these traders are playing at. So what matters, like most things, is what’s at the margin, what gives them the edge.

And that seems to be the ability to read other traders.

You may be thinking, “I can’t do that! How can I possibly be successful?” But the good news is that you don’t have to.

Remember, traders are dipping in and out of the markets all day, every day. Though you’re in the same market, you’re not in the same game.

They’re trying to maximize their profits on minute-to-minute moves sometimes. You’re trying to build wealth over a far greater time horizon.

Brown isn’t telling individuals to play poker; he’s relaying that the Fed thinks it’s found what makes institutional traders successful at the margin.

Wrap Up

Keep doing what you’re doing. Learn, grow, and profit.

If you like poker, play poker.

But that’s a vastly different game to your investment strategy.

Though the market comprises many players, they’re not all playing the same game.

Have a great day ahead.