What do you have an ear for?

I’m easily distracted, especially when slogging through a book that could be the final challenge in a copy editor’s reality show. I recalled my college days when my best friends took creative writing. One of their early assignments was to write a piece in the style of The New Yorker's “Talk of the Town.” They assumed this task with ease. Some got closer to the target than others, but no one froze. If I had been foolish enough to take this course, I would have frozen. I’m absolutely tone deaf when it comes to literary style. (And I don’t want to hear the obvious—we’ve read your blog, well, duh!) I’m a voracious reader, and I certainly know when I’m reading Austen and when I’m reading Faulkner. But I can’t even begin to replicate their styles.

On the other hand, I recall trying to explain the difference between 3/4 and 4/4 time in music to a fine literary stylist. One you waltz to, the other you march to, an explanation replete with live demonstrations. And I’m a pretty good teacher. No go; she couldn’t even hear the difference, let alone write a waltz or a march.

In the markets it’s critical to know what you have an ear for and when you’re tone deaf. There are so many ways to make money in the markets that you are almost assured of finding some strategy that you have an ear for. The question is how to discover that strategy.

Alas, I don’t have an answer to that question, yet it’s critically important to find an answer. Here’s one very, very preliminary mind exercise. Assume that if you have an ear for something you can create an original piece that echoes the work of a master and that performing this task isn’t torture. Your final product doesn’t have to be good but, judged by an expert, it can’t be pure trash. For instance, I who have an ear for music could compose a fugue in the style of Bach. It wouldn’t be good but would nevertheless fulfill the assignment. I could not, however, paint a picture in the style of Renoir. (Yes, I know I’m using the “ear for” phrase very loosely here, but humor me.)

Now let’s consider some possible market-oriented assignments. The style is more or less built into the assignment, so it’s not necessary to name a particular person or fund as a model. (1) Analyze a company as a possible short candidate. Look at its reports, its management, and its competition. (2) Write a trend-following system for a commodity of your choice relying on weekly data and then program it for entry and exit signals. (3) Using ETFs, devise a portfolio that, based on a five-year lookback period, has the most promise for high returns and low volatility in the future. (4) Find an intermarket signal that gives the intraday trader of, say, ES an edge.

Unless you have an inflated ego, you probably found some of these assignments undoable. Some you didn’t have the training for, some you don’t have the talent for, some you’re simply bored by. Okay, keep searching. Finding the right assignment is akin to finding the perfect partner. Otherwise, you might find yourself trying to paint that Renoir day after day, week in and week out, meeting with nothing but unmitigated failure. And all the time you were a brilliant engineer, a respectable mathematician, or—yes—a great trader.