Success in business and elsewhere is often gained with years of experience through trial and error. Battlefield conditions necessitate a different approach that prioritizes good decision-making under the most stressful and high-stakes situations imaginable. In a different way, trading is similar. Moving millions of dollars in and out of positions while competing against the best and brightest is some of the highest competition available. Winning is defined every day with either profits or losses. Those who succeed reap the rewards. The others close their doors, rarely to be heard from again. Extreme Ownership is a book by Jocko Willink and Leif Babin that chronicles some lessons they learned through their SEAL training and deployment to Ramadi, Iraq, in 2006. Many of them can be applied to leadership and trading as well.
Lesson 1 – Leaders must believe in the strategy
When a battlefield order is given, the person leading their unit must understand the purpose of the mission and how those instructions align with their objectives. Going into a gunfight without confidence is a recipe for disaster. In Extreme Ownership, SEALs were told that Iraqi soldiers would be joining them on missions. Many of these men were illiterate, untrained, and possessed rudimentary shooting prowess. Compared to the mental and physical rigors required to become a US special forces operator, they were a liability, to say the least. The order did not make sense until they figured out that the only way for US forces to leave Iraq was if there was a capable force in place to keep the peace. With this understanding, they could see the rationale and plan accordingly with full faith in the reasoning of their superiors.
A trading strategy, while different, must also be grounded in understanding. The proliferation of “Black Box” trading and now AI can result in back-tested models that look incredible. This is enough for some CTAs, but discerning investors want to know WHY their trading works. Without understanding this question, knowing that the parameters changed is impossible. I spent a lot of time with a brilliant trader over multiple years of conversation. He almost always made money as he identified a pattern that worked “all the time.” When I asked what caused the anomaly, he said he didn’t know; it just works. One day, that pattern ended, and he lost a year of gains in just a few days. Without knowing what caused it, he couldn’t fix the system when it didn’t. He closed his doors shortly thereafter.
Lesson 2 – Extreme ownership requires checking your ego
Elite soldiers, much like the best traders, need to make confident decisions quickly. Not surprisingly, there is a fine line between arrogance and egotism. Mistakes happen. In war, these can be catastrophic. In trading, they can be as well. Recovering from these errors requires taking ownership, recognizing what happened, and developing a plan to prevent the same thing from occurring again. Both discretionary and systematic traders use systems. Computerized trading codes are part of their strategy, while fundamental CTAs might use specific rules to guide their allocations. These might include position sizing, defined stop loss levels, taking days off around critical announcements, and more. As a colleague once told me, “The market is never wrong. If it isn’t doing what you expect, you must be missing something.” A position can be applied for all the right reasons and still lose money. Great portfolio managers learn from these losses and find out how to improve—no excuses, no blaming others, just fixing the problem.
Lesson 3 – Simplicity is key
Simple plans let a team adapt quickly and efficiently. Many leaders want to micro-manage their teams. This takes time and creates confusion amongst their employees about what is important. The book uses an example of a company’s complicated bonus system for its sales team. It made sense to those who designed it, but led to poor results. They determined that its structure, meant to encourage moving certain products at different times, did not make sense to the team, and they did nothing. By simplifying the plan, employees knew what to sell, how to make more money, and what the expectations were from management. The best people excelled, and the poor performers were let go.
Even with the technology available, processing additional information still takes time. When prices can swing in just seconds, a complicated algorithm might cost you dearly. The simplicity of a trend system might look odd from the outside. A firm I worked with used only a dozen or so indicators. Most of these were traditional ones that included moving averages and simple patterns. The uniqueness came in just a few proprietary indicators and excellent execution of their trading. When under stress, too many variables can overload a system and the person running it. This could apply just as easily to an overwhelmed nurse, soldier, or project manager.
Lesson 4 – Plan thoroughly
In Ramadi, Task Force Bruiser planned a mission to rescue a hostage in a neighborhood known to harbor a large contingent of insurgents. Last-minute intelligence indicated that improvised explosive devices (IEDs) were buried in the yard and high-caliber machine gun nests were built in the house. They decided to proceed with the operations and succeeded without losing a man. Fortunately, their training taught them to plan for every contingency they could anticipate. They had already determined that there could be surprises like the IEDs and had built it into their approach.
A simple example of this in trading is the placement of a stop loss. Virtually all CTAs use these in some format. A system often places a defined exit point when the trade is placed. This might tell the computer to sell if the stock drops to $100. This is enough 90% of the time. In rare instances, the price might drop directly from $103 to $95 without triggering the trade. This might be caused by an announcement, company news, or an error in the ticker feed. One of our traders identified this risk and built an orderly process to exit. First, the system recognizes that the stop got skipped. Second, it checks multiple data feeds to confirm the price is accurate. Third, it places a market order to get out of the trade as soon as possible. Imagine a scenario where it dropped to $95 and continued to fall, and nothing happened until someone noticed and manually exited. A thorough plan protects everyone.
Lesson 5 – Discipline equals freedom
Jocko Willink believes that discipline in small things, including positive habits and beneficial routines, is a key to success. Part of this includes accountability. As a retired Navy SEAL and best-selling author, he could easily sleep in and take some well-deserved rest. Instead, he wakes up at 4:30 AM each day and posts a picture of his watch to Instagram for the world to see. His three million followers would let him know if he missed a day.
Running an investment business requires discipline as well. Waking up before the market to review the previous day’s trades, checking your system to make sure it works properly, and backing up your data are just a few of the routines that create success. Over time, these positive habits become ingrained. The freedom comes from knowing what to do when times get tough because it is second nature.
In conclusion
Doing things well requires extreme ownership. This is especially true for Navy SEALs and traders. I would argue that anyone could benefit from taking responsibility for their decisions, good and bad. Rather than look for others to blame, true leaders analyze what they could do better to help their team succeed. Whether it is within our families, our careers, or our social circles, we can all learn from these lessons.
Bonus Note: For Parents
As a side note for parents, Jocko Willink is a best-selling children’s author as well. His “Way of the Warrior” series follows a boy named Mark who is struggling in school, in sports, and with friends. His Navy SEAL uncle teaches him that “discipline equals freedom” and helps Mark become a leader through hard work and consistent routines. One of those is getting out of bed and being productive. It is listed for 8–12-year-olds. Both my daughter and son enjoyed them and learned a lot from them.
Photo by Yaniv Knobel on Unsplash