The Biggest Leak in Finance | Brent Donnelly on Why You're Probably Too Bearish

**Matt Zeigler** (0:02)
You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use or better questions lead to better decisions. Who's with me? Spectrum Markets, the must read and still very free Friday Speedrun author. And he's got this new book, Trade Outside the Box, Advanced Thinking for Professional Traders. I love this. There are so many little dog ears and footnotes in this. It's not even funny.
You might know him as Beeper. You probably don't. In which case, let's welcome Brent Donnelly back to Excess Returns.

**Brent Donnelly** (0:31)
Well, that's a deep cut. Hi, Matt. Thanks for having me.

**Matt Zeigler** (0:35)
Man, I love this book and I think I love this book so much because I realized the hard way I wasn't cut out for stuff like this. And I think this was part of me discovering your work and reading it. Because I would read stuff and I go, obviously, that's not me.
There's a person who does this. And if you could, can we just start? I want to start with this idea, these four quadrants. We've talked about this before. Can we talk about that again?

**Brent Donnelly** (1:02)
What are these four quadrants? Launch me right now. So everyone that trades or reads books about trading generally learns about fundamentals, technicals, behavioral bias, and quantitative finance, or quantitative systematic trading kind of stuff. And those are kind of the four foundational sort of parts of finance and more about trading that you need to know in order to understand trading. And I wrote another book called Alpha Trader, which essentially covers those four.
And my purpose there was to kind of cover the more important things like risk management and psychology that I feel like aren't always covered very well in books. I think just generally the fun part of trading is coming up with trade ideas. So if you read a lot of blogs and even FX Strategy and stuff like that, it boils down a lot to trade ideas. And people don't spend enough time thinking about risk management, trade structuring and things like that, which actually are very often the determinants of whether you make money or not. Like you can obviously many times I've been right and lost money.
And so digging into why would that happen? How can you make that not happen? But then, so that was AlphaTrader. And then the new book is essentially saying, okay, now that you've got those four pillars, what else can you do to develop an edge and to make money trading? Because sort of the tagline for the book is, if you do what everyone else does, you'll perform the way everyone else does, which is a highly pejorative comment because most people underperform a simple index or a simple benchmark or any whatever statistics you look like, day traders lose money, 80 to 90% of day traders lose money, etc. So if you're doing what everyone else is doing, then you're going to lose money. So you need, once you have the basics mastered, then you need to figure out, okay, how am I going to actually make money? And my belief is that you mostly do that. By thinking differently and doing different things than what everyone else is doing. So you do need to know the basics, and I'm not shitting on fundamental or technical analysis or behavioral bias and things like that. I feel like those are absolute must haves, but they're necessary but not sufficient to actually make money.

**Matt Zeigler** (3:26)
And I think what's fascinating about it, and again, emphasis on trade outside the box, this is basically what you're talking about. Here's all these things, the four quadrants are there, not in the image, but the four quadrants are there, and you have to master those in order to go outside of them. And whether you're doing due diligence on a bunch of asset managers, you're trying to understand a hedge fund and where they might have edge or whatever, like this is where it emerges from.
Here's something we understand.

**Brent Donnelly** (3:50)
Yeah, part of the inspiration I think was if you... So I ran or not ran, but I was a participant in many analyst programs at banks over the years. And what you get in those analyst programs is very intelligent, book smart people who are quantitatively very strong, but aren't necessarily creative and don't necessarily have a long history of thinking for themselves because what you're trying to do in order to get to an analyst program at a bank, you need very high grades at a five-star university, like whatever, a strong university. And the way that you do that is by correctly answering all the questions on the test. And that doesn't really work in markets because what you will see, if you canvass 20 of those analysts and say, okay, we need you to present a trade idea at the end of your three-month internship, those trade ideas, and again, these are smart people, but this is just the way it works, those trade ideas will be incredible contraindicators because what they'll do is amalgamate all the known information and essentially extrapolate from the current environment to a trade idea that is probably fully priced in and all the information that they're looking at is probably well known. So how do you get away from that? And the sort of primary idea, like if you just read the book and took my ideas, that's one thing, but that's not really what I encourage or what I advocate. What I would encourage is you read the book and then you see, okay, this guy does it a certain way. He takes things from areas that he's familiar with, clinical psychology, gambling addiction, poker, all those kind of things, or even like multiverse theory and random shit that I'm interested in, and then applies it to trading. And I think that's what people should really be trying to do, is take something that you're really good at or that you know a lot about, and see, is my specialization in how viruses propagate through biology, is that relevant to how narratives propagate through markets, because markets are kind of this quasi-biological system, and things like that. So specifically, like I said, there's areas that I feel like I know a lot about, and if you're a trader and you've been trading for a long time, you just start to see trading stuff everywhere. Like a friend of mine who read the book, who, his son participates in F4 racing, which is kind of like F1 racing, but for, this kid's 15