Line Your Own Pockets

Michael Nauss CMT (00:01)
Hello everyone, welcome to another episode of Line Your Own Pockets. So in the last episode, we talked a little bit about compounding and things like that when it came to back test. And ⁓ you know, Dave had a question from a viewer that I think kind of tied in perfectly. So we decided to do that this week about congratulations, you're making money. Good for you. ⁓ now what when it comes to withdrawing and things like that. So I don't know if you have the exact question to read or if you want to describe it a little bit more there and we'll we'll pop into it.

Dave Mabe, MabeKit (00:29)
Yeah, this is from Chris B. He's longtime list member. And it kind of warms my heart when I get a message like this, because this is, you know, people's success is why I do this. ⁓ he said much of the podcast content is rightly focused on how to make money. Have you guys thought about talking about strategies for withdrawing winnings? Timing and amount are two things I'm curious about, but I'm sure there's lots more than those two. So yeah, you're right. Like this is

⁓ a a good problem to have. It's ⁓ so I I really I really like getting messages like this just because I know that ⁓ you know people that I work with I'm sort of you know trying to kind of select for people that I think will be successful or can be successful. So yeah, I I'm excited to talk about this.

Michael Nauss CMT (01:02)
Mm-hmm.

Yeah, and it's you know, again, good problem to have, but it's something I think is good to ignore until you need to was kind of my my takeaway is that, you know, it's like ⁓ taxes. Okay, well step one, ⁓ worry about making money and then step two, worry about paying taxes on that money. ⁓ the amount of times that I've had, you know, people come to me and or talk about it

Dave Mabe, MabeKit (01:39)
Yeah.

Yeah.

Michael Nauss CMT (01:54)
Should I open a an LLC or or something for my trading? Is it, you know, a better tax efficient way to do this or that and the other thing? ⁓ and I'm like, well, you know, and they're they're new traders and they're they don't really have a strategy or anything set out yet. I'm like, well, just don't worry about it. You know, don't go open up spend the money to open up a corporation and and hire the world's best trading accountant or whatever yet. Like it, you know, i if you have capital losses

Only then you don't really need to worry too much about this. ⁓ but yeah, so if you're if you're new, it you know it's it's something to keep in the back of your mind, but don't worry too much about this ⁓ from the jump. But hopefully, right, your goal is to get to a point where you have to worry about this, and that's when you start to say, Okay, well, I'm I'm at least successful enough that I have to I I have some profits and with to draw from.

Dave Mabe, MabeKit (02:33)
Yeah.

Michael Nauss CMT (02:48)
And first of all, congratulations, right? Yeah. But now it's it is a important conversation to have when you get to that point.

Dave Mabe, MabeKit (02:56)
Yeah. So th y this is classic premature optimization to be thinking about this ahead of, you know, when you have profits. ⁓ I think

Michael Nauss CMT (03:01)
Mm-hmm.

Dave Mabe, MabeKit (03:07)
I've I have used different or thought about this in in different ways over the years. So I think it'd be good to Fer first I wanna point out we are not financial advisors, so

Michael Nauss CMT (03:18)
Yeah, if you if you weren't gonna do that, I was gonna do that next, right? Like ⁓

Dave Mabe, MabeKit (03:23)
This should not be taken as financial advice in any way. What I'd like to do though is share kind of how I have thought about it over the years. I've been in sort of different situations over the years that have ⁓ and I've thought about this in different ways. And then and thinking back on how I've thought about it, I think maybe there were some mistakes that I made, perhaps. And I'm not 100% sure about that the way I think about it now. And

Michael Nauss CMT (03:40)
Mm-hmm.

Dave Mabe, MabeKit (03:52)
Probably wouldn't change anything if I went back, but if I was optimizing for something different, I would have made some different choices back then.

Michael Nauss CMT (03:59)
Yeah, and just to expand on the disclaimer, it's it without, you know, really just being disclaimer is that it it's one hundred percent true that this is personal for ⁓ absolutely everyone. And, you know, we we can talk about our experiences and things like this, but it's gonna be way different for, you know, ⁓ a twenty year old with a five grand account and unlimited earning earnings potential in his life and a a seventy year old with a two million dollar account who doesn't have who's retired, right? It's gonna it's gonna be

and every single individual thing in between there. ⁓ so just know that, you know, you gotta take everything you're gonna hear and then just kind of wrap your own personal experience and where you are and what your goals are and things like that ⁓ into it as well. Because ⁓ it is when it comes to things like this, you know, there there are some universal truths within trading. And and you know, there are some good practices and bad practices to strategy building and back testing and things like that. But

When it comes to personal finances, ⁓ it is just the most personal thing, you know, that and health, right? This is the the two most personal things out there. So make sure whatever you're hearing, you're just filtering through that. ⁓ you know, that's good, but I'm in this situation, right? Type of thing.

Dave Mabe, MabeKit (05:12)
Yeah. And, you know, there are financial advisors out there that are really good at this and and ⁓ that's what they do. And I in fact I have one, like why which might surprise some people, but I think you know, you only get one shot at life. So it's always good to have an expert sort of, you know, reinforce the way you're thinking or, you know, give you suggestions or poke holes in what you're doing. So I always recommend that.

Michael Nauss CMT (05:30)
Mm-hmm.

And yeah, let's let's have that be the first thing and stop there for a bit 'cause I do as well. And it shocks people as well. And they say, ⁓ because a lot of people think that all financial advisors do is, you know, plug you into an index fund and and walk away. And certainly that it that can happen and that is the case. And to be honest, for most people who don't want to go down this road, it's probably the best thing for them.

Dave Mabe, MabeKit (05:46)
Yeah.

Michael Nauss CMT (06:06)
But a real good financial advisor is looking at ⁓ everything holistically and kind of neutrally, and saying, you know, okay, this is the trading thing that you do, and and but, you know, here is your house and here is your job and here is your kids and here is your and is is looking at all of this in a very detached way and is doing that and might not even be.

managing any of your finances, or maybe you give them some, you know, market structure, like just have me in this to keep myself safe from myself or something like that. but yeah, that's that's the main purpose I see as a financial planner is they're looking from like a tax point of view and they're looking at a ⁓ you know kids retire or kids' college and retirement and and all these different things. There's a lot of good conversations to have. And that to me goes into just mentoring

as a whole. Like I am one that I always, if I'm gonna enter a new thing, I do the baseline study myself. And then I I instantly look for someone to help me with kind of the mentoring side of things, even if I think I have a good grasp of it, for that detached point of view to kind of poke holes into, you know, maybe too much risk you're taking on one side or or ⁓ maybe you're not spending enough on the other side. There's like listen, you're

You know, I've I've been guilty of that. I've been a little bit too tight ass on on some things and it goes, Listen, here's your income, here's how much you got in the bank, why don't you live a little? Stuff like that I think is is there's a good use for that, even if you don't want them just to shove you in an index fund and and walk away.

Dave Mabe, MabeKit (07:35)
Mm-hmm. Yeah.

Yeah, I think I grew up pretty tight also and still have habits that way. And it yeah, right. It's good. ⁓ probably always will have that quality, but it is good to have ⁓ somebody remind you of that or at least give you a forecast, you know, ⁓ you know, sort of a strategic forecast based on your long term goals. Like all this is ⁓ very valuable to have. And it allows you to

Michael Nauss CMT (07:53)
Mm-hmm.

Dave Mabe, MabeKit (08:17)
Focus on what you want to focus on. So you don't want to you don't you know I I don't want to do my own taxes. I did this for a while. Like, well I don't I should not be spending my time doing taxes. Like I'll pay somebody else to do that and focus on other stuff. So I'm trying to sort of streamline everything. But yeah, I think ⁓ so so how do you ⁓ how do you think about withdrawing winnings or your P and L

Michael Nauss CMT (08:31)
Mm-hmm.

Dave Mabe, MabeKit (08:49)
and I can go back and t tell you how I have treated it over the years, but ⁓ do you have any initial thoughts about how you've thought about it or ⁓ how you handle it?

Michael Nauss CMT (08:53)
Mm-hmm.

I think I think the the simplest way to do it is whether or not you need the cash and then also whether or not you're getting uncomfortable with how much you're trading. Those are the two kind of levers I think that make the most sense. Well, so for example, right, you have a ten grand account, and you're young. Like you don't need the money. You shouldn't withdraw anything for any reason except to maybe help pay taxes or or

Or something like that, right? You should probably be focused entirely ⁓ on compounding, right? And that's it's all gonna eventually come down to that spectrum of ⁓ you know growing the account versus financing a life and where you want to exist on that spectrum. And that is the first kind of check that I would do is if you are confident in your continued results.

⁓ and you are still employed and right, everything's going fine from that point of view. I think it should kind of be kept as under key and and in there compounding as as long as possible until you start to come across like l liquidity constraints, or until you come across essentially ⁓ maybe just fear. You know, you've got so much money in this account, you you want to split it up somewhere else to make you feel better.

That that is kind of like if we're to s if we're gonna start like down the road, I think that's where the s the start is, is that you're a young trader, you're someone who's new to this, you're just getting started. Well, I think the goal is to grow your account as large as fits whatever trading style you have first, and then start to worry about ⁓ kind of withdrawing after that. And then the big question I think you need to ask yourself is just the tax side of things. You know, you make you have your

ten grand account, you make five grand that year on it, that's a great return. Do you take the money out to pay the taxes or do you just try to save that up from your income ⁓ and and split it from there? Right. And that that's kind of I think the easiest. And then I think as we kind of go on later and later in life, it it's gonna change and it's gonna get kind of more complex as as you go.

Dave Mabe, MabeKit (11:16)
Yeah, I think ⁓ so yeah, I think you

It's important to understand do you need the money? And that's from the very first trade I made, I made sure that I did not need the money that I was trading with. And I've always well for a long time I've had that stance and it gives you a lot of freedom. I mean, it's sort of like playing it on easy mode, because if you

Michael Nauss CMT (11:38)
Mm-hmm.

Mm-hmm.

Dave Mabe, MabeKit (11:54)
As soon as you convert over to needing that money for some reason or needing the income from it, that's a whole different mindset. And it's it it's it that can be, you know, for especially for me, like I'm a kind of a conservative with money. So that's a kind of a hard hurdle to go across. Like it changes the game. So I spent my entire career basically playing on easy mode.

Michael Nauss CMT (12:13)
Same. Yeah.

Dave Mabe, MabeKit (12:24)
And

It w that's good and bad. I would, you know, I I saved as much money as I could when I got out of college, enough to beat the, you know, the the pattern day trading rule, started trading. and from that point forward I was just trying to grow the account as big as I could. ⁓ I it's a good it's a great situation to be in because

Michael Nauss CMT (12:37)
Mm-hmm.

Dave Mabe, MabeKit (12:56)
You you can trade better if you don't need that money. And but even still then I would go through phases where I'm like, man, this money's getting really big. ⁓ I'm I'm trading much larger. I'm occasionally having some drawdowns with this, you know, at this size. So there's a whole mindset you have to go through. ⁓ and so back to the original question, how do you withdraw winnings? For a long time, I didn't I I withdrew nothing.

Michael Nauss CMT (13:06)
Mm-hmm.

Dave Mabe, MabeKit (13:25)
I was just growing my account. and recently though, I have started withdrawing money from the account. So and I've taken a very, very, very conservative approach with it. ⁓ that we we can go into, but so so I I kind of look at it as easy mode and hard mode. You could and I see a lot of traders that I suspect

Are playing on hard mode. They want a Ferrari. They want something that they think is going to make themselves happy. They start counting their money before they even like your ⁓ like the example you gave. ⁓ just wait until that becomes a problem and then it'll become apparent what to do.

Michael Nauss CMT (13:57)
Mm-hmm.

Mm-hmm.

Right. And it's it all comes to so I I brought up an example while you're talking 'cause this actually ⁓ the it's weird how the brain works. This is this is a tweet from twenty twenty three that I remember reading. ⁓ and this is a gentleman we we should have him on at some point called the Chartist. He's a systematic trader out of Australia. ⁓ he's been doing this for for ages, right?

Dave Mabe, MabeKit (14:39)
Mm-hmm.

Michael Nauss CMT (14:42)
⁓ and he said, you know, I've I've always been against withdrawing funds from trading accounts. I remember when Trish, his wife, wanted a new fridge back around 1998, which we funded from the account. For years, I always kept updating her with the value of that fridge based on the compounded return of equities. So he has a chart and it's the value of the fridge they bought in 1998. And from 1998 till when this tweet was done in 2023, his accounts up ⁓

2500% in in a compounded nature. So, you know, a couple thousand dollar fridge is now worth what's that tens of thousands or hundreds of thousands of dollars from that point. And that is, I think, probably the first way to look at any of it, right? If you are very much starting and you are saying, Okay, I want to buy this big expensive thing for my trading profits, or even I want to quit my my job and just trade for a living.

Like you mentioned, hard that becomes so much harder because the person who doesn't and just keeps the capital in and keeps compounding the capital and growing their risk, you know, ⁓ incrementally and slowly over time, ends up getting that, you know, that fridge is probably worth the value of a house now, ⁓ based off the the compounding of of that return. So I think the first thing you always just need to ask yourself, just like anything, is how much do I need this thing that I'm

I'm withdrawing from. And, you know, there might be times where you do. It might be a down payment for a house or or something like that. And you're saying, you know, this is probably not the best mathematical thing to do, but there's some level of safety that that gives you. Okay, I can pay less on my mortgage and ⁓ you know, live a a more comfortable life kind of that way. But it's if it's for something like you mentioned, like Ferraris and stuff and and all of that, ⁓ you know, I just think that that's

That Ferrari, if you are trading well and you take it out early in your trading career, is going to be like a multi-million dollar, like t decamillion dollar Ferrari, if you had just let that money inside the account and and and let that go over time. So I think what we're both saying is that like step one is try to convince yourself not to ever withdraw ⁓ early on, especially pretty much for any reason until you get to that point where that account is.

so large that you're like, okay, I would be really uncomfortable. You know, maybe you're comfortable trading a million dollar account, but you're not comfortable trading a 10 million dollar account, right? Again, all obviously back to the great problems to have. ⁓ but you know, if you keep kneecapping your account when it hits 30K, it's gonna be way harder to get it to a million dollar account than somebody who just lets everything go and and lets everything exist inside that account as long as they physically can.

Dave Mabe, MabeKit (17:35)
Yeah, I think there's a difference between investing and trading for income. ⁓

Michael Nauss CMT (17:41)
Mm.

Dave Mabe, MabeKit (17:44)
You know, I I don't think that much. I I think probably more about generating income than growing the account. And then here's here's the way I think about it.

If there's money in that account, it is at risk. There's no question about it. It is at risk. And if you let that grow ⁓ indefinitely, that bigger amount of money is at risk. So it's it's I don't think that that's I I would not be willing to do that because.

Michael Nauss CMT (18:01)
Mm-hmm.

Dave Mabe, MabeKit (18:24)
Just because I know the that money is at risk. And so I think it becomes, you know, it compounds, but also the risk compounds, even if you may not realize it or may not think about it that way, your your entire account is technically at risk ⁓ as you trade.

Michael Nauss CMT (18:45)
Yeah, and and you know, I'm not saying never take anything out either, because again, some point we're getting hit by a bus, right? Or or or worse. So, you know, there'll be a moment where you're like, Man, I really should have bought ⁓ maybe not that needless ⁓ you know, Lamborghini, but maybe I should have bought the higher trim SUV that I I wanted or, you know, something like that. ⁓ but I'm I'm specifically talking about early on. So compounding is one of those things that

Dave Mabe, MabeKit (18:53)
Yeah.

Michael Nauss CMT (19:14)
There should be kind of, I think, a target that you reach and a level that you reach in your mind. For me, it's I have a number in my head and at that point I'm not going to compound anymore. And I think what you should to get to that number, it should be backing out some percentage return, is the way I thought about this. And I'm open to debate on this one as well. But like, let's say for example, you're like, okay, if I have ⁓ a million dollar account.

If I can make 10 to 20% a year, right? That's six figures a year worth of income. And that's a ⁓ low risk. I'm not risking the boat to make, you know, 10% on ⁓ a trading account, right? You can get 5% right now in in a a guaranteed yield. I think that kind of backwards thinking ⁓ kind of helps with getting to that goal of the account size that you need. And that that is going to be individual to

you know, the amount of money the person wants to to make from their trading, the ⁓ you know, the ⁓ skill or or the systems in which they're trading that they think they can generate some amount of profit from it or something like that. But I think if you start from this is the end goal, which I think for everyone it should be the end goal, should have an account large enough that you can just, you know, very modestly live off it forever, ⁓ then you you

you work backwards from that. Like what do I want to make? You want to make 200 grand a year? Okay. Well, can you make 20% a year? Okay. Well then you need a million dollars. And you can, you can, I think, math it out in a way that will help, again, still talking about these early days, keep you on track to get to that that point. Because now it's just not a nebulous, I'm going let it grow forever. It is I have this goal in mind to generate this amount of money. And I think, you know, this return is possible. Therefore it needs to get to this amount.

And that I think that helps kind of keep people on the straight and narrow and then also gets them to like a big sigh of relief when they get to that point 'cause you had a goal and you achieved the goal and good for you.

Dave Mabe, MabeKit (21:21)
Yeah. Yeah, I think I I'd take it a step further and the way I think about it is what makes me happy? I I I want to optimize for happiness and fun. And money has some part of that maybe, but ⁓ I don't think it should be the most important it's not the most important thing in my life. And

But obviously you need money, some amount of money to fund freedom or fund fun and happiness. So but b but you can also live your life not requiring a whole lot of money. Like there's two sides to this ledger. You don't need you and you you shouldn't need to have a whole lot of money to be happy. And if you if you feel like you do, then

Michael Nauss CMT (21:59)
Right. Yep.

Mm-hmm.

Dave Mabe, MabeKit (22:19)
I don't know, you should you should probably rethink about rethink what you're you know, what mate what re truly does make you happy.

Michael Nauss CMT (22:26)
Well, and I I like your your mention of ⁓ the ledger there, right? Because that's what that's kind of I think what I was very poorly trying to get at is that it's gonna be, you know, dude with six kids in Manhattan versus single man in, I don't know, Ohio. Is that my name name and that is like a cheaper to live place? ⁓ i it's gonna be a different it's gonna be a completely different story. Like I'm in, you know, middle of nowhere Canada. So I don't need

Dave Mabe, MabeKit (22:47)
That'll work, yeah.

Michael Nauss CMT (22:56)
a a crap ton in order to to finance and whatever. So that's why I think understanding that part of your ledger is like super important. It's like, okay, what is the amount that I need in order to, depending on like, you know, I'm in my house and tons of equity in the house. So I'm super comfortable there. Like, you know, where are you in that expense side of things? And then where are you in the the profit side of things? The only thing that I would say is that make sure that you are

Dramatically undershooting what you expect to make off the account. And not to ⁓ diminish your skills or anything, but it's like if you develop something like the reason I use like a 10%, because it should be a fairly achievable overtime, ⁓ you know, hopeful r return from trading. And then you can kind of treat anything above and beyond that as bonus, which is I think another way to think about it that I want to talk about next is that.

Dave Mabe, MabeKit (23:51)
Yeah.

Michael Nauss CMT (23:54)
You know, if it's to the point where you have to be like top performing absolutely all the time to make your expenses, I think you're gonna you're screwing yourself, right? Because you're gonna your your systems are gonna underperform sometimes. You are gonna break down, you're gonna, you know, get mental problems and family problems and and you know, whatever. So I don't think you need to be going full tilt. So I would say, you know, this is the life you wanna leave and this is how much it's gonna cost. And the account.

that you need in order to fund that has to be so much larger that a s tiny amount of return will pay for that. And then anything else is okay, I get to, you know, get the nicer thing and the, you know, the time off or the the whatever after that. But ⁓ yeah, understanding that cost part of the ledger I think is is step one for sure.

Dave Mabe, MabeKit (24:31)
Yeah.

Yeah, and I think I think there's probably a lot of traders out there where the best return they can get on their money is reducing their expenses. Live with a reduced ⁓ expenses. So I remember there was there was a guy that we you and I used to work with, Dave. He he liked to cook. I like to cook. But

Michael Nauss CMT (25:04)
Mm.

Dave Mabe, MabeKit (25:06)
We talked about what to optimize on. I was optimizing on something completely different in my cooking than he was. So he would have he would make some really awesome, you know, extravagant meals. Where I would the way I like to cook is I'm optimizing for the ratio of taste to cost. So I'm trying to get that as as big as possible. And I just have make it sort of a game with myself.

Michael Nauss CMT (25:13)
Mm-hmm.

Mm. Yeah. G give me a good snake. Yeah, give me good steak, not a a good T bone instead of like a something I can't pronounce steak. Yeah.

Dave Mabe, MabeKit (25:39)
Yeah. ⁓ so I I think it's you know, people are different, people have different preferences. and I sort of make it a game with myself to to go through life thinking about this way and you know, probably thinking about it in too micro decisions ⁓ or you know, too many micro decisions about, you know, what's the what's gonna make me happy here. I'll probably think about that too much. ⁓ but

think it's a good way to go through life. I think I like I'm I I always I always feel like I'm sorta playing on easy mode and I won I like that, right? ⁓

Michael Nauss CMT (26:20)
Well and I I think another part of that too is how much do you hate your job? I I think is is a big part of it. And this is I I think can affect this in a lot of ways in more ways than people initially think because so I was I was listening to this one youtuber, he's like one of these personal finance guys or or something, right? I've always got something in the background when I'm working. And he used to be a doctor and he was like I hated being a doctor. He was in the ⁓

He's in the UK. He's I hate it being a doctor. And then he became like a really big successful YouTuber, like millions of subscribers, probably making a ton of money. And at that point, he was still a doctor, just part-time. And he's like, Now I love it because I don't need to do it. It's way more interesting. And also, I can tell people to go screw themselves if if they're, you know, a boss is being mean. Another example I'll give is I I worked at Canadian Tire.

Dave Mabe, MabeKit (27:05)
⁓ yeah.

Michael Nauss CMT (27:19)
You you're an American, you don't know what it is. It's like a I don't know, like Walmart hardware type store or whatever. I worked there many, many years when I was in university and all of that. And one of the managers there was an ex, he was like the chief of police for a while, ⁓ where we live, like really high up. ⁓ and you know, I'm sixteen year old kid and I'm like, Well, so you should have a good pension. He's like, yeah. and you know, he always drove a nice car or whatever, and it's like you're not making any money here. I'm like, What are you doing? He's like, One.

get away from my wife. It's like, two, I I kind of like the extra money. And he's like, and mainly because ⁓ it's fun, because if a customer really pisses me off, I'll tell him to go pound sand because I don't need to be here. And I I think that's another way to look at it, where ⁓ for myself, you know, the the analysis work I do and and showing up on different, you know, broadcasts and all this kind of stuff, I do enjoy that.

writing my newsletter and and helping out traders, all of this I enjoy. ⁓ so I don't feel the need to stop doing it, I think ever. but I don't have to do it, I don't have to be like a a a dog at it and like and sell and like hit everyone with promotional emails every 30 seconds to try to you know, drum up sales or whatever. And so it's kind of this self, I guess, feeding cycle. So if you have a job that you kind of like and then you get successful

Trading, especially us as systematic traders who don't necessarily need to spend the whole day staring at the screen, I think it kind of feeds off itself. So, like a programmer, if you kind of like programming, and right now you're working as a full-time programmer, I look at it as like a scale. The better you get at trading, the less you should potentially program. But maybe you go from working at a company where your boss is a a dick or whatever, and then you start.

like consulting and doing like really cool projects that you weren't able to do before. But now you've got the money and the income from ⁓ consulting or in and doing these cool programming tasks or whatever. And you have the more sporadic income, I guess, from trading. And as one grows, kind of the other shrinks and you're able to balance it based off of whichever one of these is doing the best or interesting you at the time. And that is, I think, like super easy mode on both sides. Cause you don't need

As long as you've scheduled your life correctly and one of those incomes is enough, then you've got your income and your bonus income. And it might flip back and forth, whichever one is making you more at any given time. But I think what happens is you end up enjoying more, both of them more, because the drawdowns in trading hurt you less because you have this other income that's making that's making up for it. So you don't need that side of things. And then you also like whatever your job is more.

Because you don't necessarily need the job either. So it gives that kind of freedom of I get to work on things that are interesting to me. I get to, you know, I I'm I don't have to put up with the dickhead boss like that type. So I the way I that's the way I think I'll always be doing trading and something else because I think both of those things I like more because both of those things, you know, feed off each other. If if I explain that in a way that makes sense at all.

Dave Mabe, MabeKit (30:32)
Yeah, I think that's a great way to put it. I've never h heard it put quite that way, but that is kind of the way I feel too. I always felt like

I don't know. I feel like I am pretty motivated. I think I have a kind of a capacity for hard work that other people probab may not have. And I've always felt like I can do three things really well at a given moment in my life. So but if I get more than that, I I I start dropping packets, is what I call it in the networking term. But ⁓ yeah, so so here's

Michael Nauss CMT (31:06)
Mm-hmm.

Dave Mabe, MabeKit (31:12)
I've recently I have, you know, when I quit trade ideas, I went from I like I had a pretty steady income there. And now it's there's it goes up and down, right? So that that's a big psychological shift. And I've come up with a system to sort of cushion that. And ⁓ because, you know, like I said, my whole upbringing, my my dad was like very conservative with money and

Michael Nauss CMT (31:29)
Mm-hmm.

Dave Mabe, MabeKit (31:42)
And he always had a steady salary. So ⁓ it's it's a it's a bit foreign. It was it took some getting used to. So what I do now is I I I take a small salary from my trading income, pull that over to the checking account that that covers all the expenses, and but I also

will take half of my earnings and put it in the tax account. Half of gross. Okay? So

Michael Nauss CMT (32:18)
Okay. So unless you're in like an awful tax thing, you're overpaying the crap out of that, right? Okay.

Dave Mabe, MabeKit (32:25)
Right. And I want to I want that to be the case. I want to set this money aside. I want to feel like I'm kind of living like a pauper. I need you know, I need to keep an eye on expenses and you know, I want to have that mindset, even though I don't really need to. And then that money collects. ⁓ and at the end of the year, I I pay myself like what I'm trying to what I'm trying to do is maximize the amount of bonus I can pay myself.

Michael Nauss CMT (32:29)
Mm-hmm.

Mm-hmm.

So you're like four savings. So at the end of the year when the government says you owe this and you have double that inside your account, you go, good. It's like found it's like when you find twenty dollars in your pants pocket kind of thing.

Dave Mabe, MabeKit (32:54)
At the end of the year. Yeah.

Exactly. Yeah. And that keeps me, you know, that keeps my spending reined in. You know, I never really I always I want to apply pressure to myself because as as my life goes on and my account gets bigger, I you know, I've passed the number I had in mind many years ago. So I've sort of moved the goalpost. And

Michael Nauss CMT (33:25)
Mm-hmm.

Which you always do. You always do. Right. I I think I've passed my number three times. I think, yeah. You just keep doing.

Dave Mabe, MabeKit (33:33)
Yeah. So I I do think I'm pretty good at like applying pressure, like real pressure to myself. I f I I feel like you know, it's an emergency and I I when when something's going wrong or a strategy is you know needs some work, I really feel I feel it deeply and and I think I have some systems in place to do that, even though like if if none of this worked out, like I could retire right now.

But I want that pressure. I want to feel that pressure because it's motivating.

Michael Nauss CMT (34:02)
Mm-hmm.

Well, and so a couple things. A, I think that links in back to my thing of like how how much do you like the things that you're doing, right? Like if you hate it if you hate trading, then yeah, you get to the number and you stop, right? You get enough that you could throw into T bills that are making what five and a half percent right now, and you you know, wave your hands and you sail off and good for you, sail off into the sunset. ⁓ I generally don't find that ever happens in trading because I think just the the guy who got to the number.

didn't get to the number because he really wanted to get to the number. He got to the number because he loved trading. And so that person never stops, even if you hear these stories of ⁓ these market wizard guys turning, you know, 50k into a hundred million and they're still trading. It's like, well, why? Right. It's 'cause you like doing it, right? And ⁓ that ⁓ so the but the other comment I wanted to make about the constant withdrawals, I think that is a motivating

That's a really good motivating factor as well if you're pulling out money anyway, regardless of what happens in the market. Cause I think the default way that people think about it is okay, they they use like a high watermark system. I have this number, and then every time I get above that number, I withdraw to get back to that number. And then I think mathematically, that's probably correct because you know, then in drawdowns, you're not withdrawing in drawdowns making your drawdowns deeper and and harder to recover from.

Dave Mabe, MabeKit (35:23)
Mm-hmm.

Michael Nauss CMT (35:35)
⁓ but it does do kind of what you mentioned, where it doesn't apply that much pressure. Where if, you know, you're down in your account that month, and then you're still gonna withdraw from your account that month, that would feel gross to do. It would like feel hard to do, which I think would really give you a kick in the ass to say, well, that didn't feel nice to be down hypothetical numbers, but I'm down 10 grand this month, but I still had to pull 10 grand out in order to make my expenses.

Dave Mabe, MabeKit (35:55)
Mm-hmm.

Michael Nauss CMT (36:04)
So now I'm down 20 grand and that really sucks. And I think that would be, yeah, be a really good kick in the ass to say, okay, you gotta fix this so that your your next withdrawal, hopefully you're back at whatever kind of high watermark you have. But ⁓ if you I I could see both sides, right? It's one of those mathematical correct versus like the guy who sets his clocks like three minutes early, so he always thinks he's late and then shows up on time.

Dave Mabe, MabeKit (36:27)
Yeah, yeah, yeah. Yeah.

Michael Nauss CMT (36:29)
It that's that's what the other one feels like. It's like a little you're hacking yourself to try to keep yourself on your toes all the time, which I don't think there's anything wrong.

Dave Mabe, MabeKit (36:37)
Yeah, so so there's another concept that comes from the prop trading space. I l work with a lot of prop trading guys. And

Michael Nauss CMT (36:45)
Mm-hmm.

Dave Mabe, MabeKit (36:49)
You know, it's it's a little bit different there because you're not trading your own money, you're trading somebody else's money, and you're sharing the profits. So it becomes pretty important to think about that and to think about how you manage those ⁓ profits and the money you're getting from that if you want to have a smooth ⁓ income stream. So

One thing that you can do is create what's called a risk bank where you let some profits pile up in the firm, and then you say, Okay, only ⁓ above that am I going to take withdrawal. So that'll take a little bit of time to build that risk bank. But then, in theory, you can take the same amount of money out of it or

or have some flexibility with getting paid even on months where maybe you don't make money. So it's an important and it can be really, it can be very, very psychologically important for trading to have that in place. It can really unlock a different way of trading. I mean think about if you're a prop firm and you're you're trading with a prop firm, you lose money,

Not only do you not get paid, you have to make that back before you will get paid in the future. And it can change how you trade given those incentives. And a risk bank having the flexibility to pull, to, to know that, okay, if I don't make money this month, I'm still going to get paid with the way I've designed things. That can really be, that can really unlock some better trading in what you're doing.

Michael Nauss CMT (38:39)
Yeah, 'cause you're kind of double underwater, right? You're underwater in your account, but then you're also probably underwater in in maybe debt and things, taking out debts, ⁓ you know, short going on a line of credit to pay off, ⁓ you know, certain things as well. And it it's kind of similar to the high water mark system where you pick a number and you say, Okay, anything above that account, I'm I'm withdrawing and doesn't necessarily mean you withdraw for life expense. Like one of the things that I do is above a high water amount

I withdraw, I do make taxes if Canadian government, if you're listening, I always put the money away for taxes. ⁓ and then I I split what's left into like what I think of non correlated investments and then expenses as well. 'Cause I think that's the other thing to to look at is that, you know, right now we're kind of looking at as all or none, right? Am I withdrawing for life expenses or am I am I withdrawing for or am I leaving in for compounding?

but I could see a world where there's that third option where you do, for example, you know, the bonds that are paying a high yield right now, maybe you get to the point where you don't need the money, but yet you're also running against liquidity limits and fear, I guess, of the size of the account you have. And I don't think there's anything wrong with then moving that into S P five hundred ETF or a a bond or

REITs or you know, any number again, not financial advisors, any number of things that are separate and passive, and maybe not even forever, but maybe until your confidence improves. And this came from a conversation I had with a trader who's done the same thing. He's like, I am, you know, he was a very successful trader. He's like, I'm doing fine. I don't really need the money. I'm just getting so nervous on the size of my account. And that's what I told him was like, you know, bonds are yielding five and a half percent right now.

and he's like, Yeah, but he's like, eventually I want to be able to size up to deal with that size. Like, okay, until then, bonds are yielding five and a half percent right now. Like, you don't it doesn't have to be a an all or none thing. You can move some out for to regain that level of comfort and then move it back in. And what this gentleman ended up doing, which I thought was always interesting, is he withdraws when his account is above a high water mark.

you know, take some out for living expendance, invest some in, you know, high yield savings or bonds or whatever. And then does the opposite in in tough times. So he he will put his account back up into a high watermark if he has spare investments dealing with on the other side. And that's actually worked out really well for him because he never really feels that clawback need that you were talking about as well. He does he has a bank over there and he's like every time I do it,

Dave Mabe, MabeKit (41:25)
Mm-hmm.

Michael Nauss CMT (41:29)
He's like, I really try to mentally punish myself. Like, I try to like really, you know, be hard on myself for a little bit while I'm doing it. Cause I have to see it as a failure. I can't see it as like hitting the reset on the paper trading account and going back up. But having, you know, that kind of back and forth, I think, is another way to look at it as well. Where especially if your drawdown you think is just normal fluctuation in your system, it might be good to say, well, let me just top it up so that I'm not.

Dave Mabe, MabeKit (41:35)
Yeah.

Right.

Michael Nauss CMT (41:58)
I'm I'm not reducing my buying power or reducing my trade size or my risk allocation ⁓ because I'm underwater. I'm just taking from this kind of reservoir I guess I have of over here of of extra cash to deal with.

Dave Mabe, MabeKit (42:12)
Yeah, and I think thinking about your one's mindset of ⁓ how they think about money, how they you know, your financial situation, you know, how much you need that steady income, and having creating a system around that, I think can really it can unlock different strategies that you're not really you can't consider now. And

That's to have that flexibility is important. I know that, you know, since I've since I left Trade Ideas, just because of the fluctuations, I realize that I'm tending toward more stable, more high win rate strategies. I can sort of see myself going that way. and

Michael Nauss CMT (43:03)
Mm-hmm.

Dave Mabe, MabeKit (43:08)
I think if I had a different incentive structure, I would be thinking about other strategies. So and I s you see this especially in the prop space, because there's no concept of growing my account bigger so I can trade bigger. It's all like how well you do and they're gonna give you more buying power. So you earn that over time. And if if you're in a drawdown, they'll take it away quickly. So ⁓ that creates a whole different structure. So a lot of times with

Prop traders, they tend toward higher win rate strategies and they're they sort of ignore stuff that is gonna put them or give them some down months where they don't get paid. And yeah, it's understandable.

Michael Nauss CMT (43:50)
Mm-hmm. Well, and I, you know, that's a that's another good place to go as well, where the the the prop space is it's a different question entirely because one of the main benefits to it, and there's, you know, pros and cons all throughout, but it's one of the rare places that you'll be able to do both if things are working. You'll be able to grow the account and withdraw the money. And, you know, when I talk to people both the prop space, I think that is the number one

Benefit of it is that, you know, if you are can performing consistently, but like you mentioned, you have to have that consistency. That's because it's their money, that's the thing they value more than anything. ⁓ having that consistency means gravitating towards those high win rate strategies. And I think that's also the benefit of kind of what I was talking about with this gentleman with other investments or other accounts for different kinds of trading, is you know, you and me both know this one.

And at least follow on Twitter this one ⁓ small caps trader who you know is a systematic guy and he's just been up in arms about he's gotten his account to a certain point and now he's terrified with all these crazy small caps, you know, gapping up and and disappearing and and doing all this crazy stuff that he's gonna blow up. And he's you know, the argument I've always made to him is okay, why not both? Like what he's I'm just gonna go trade large caps from now on. It's like okay.

But why not, you know, you why not reduce your position size in the small caps back to where it was when you felt comfortable doing it, and then have another another strategy over here. So that's a that's another way I I think people should think about think about it is that, you know, say you are like that, you're trading something very volatile when you started with a 25k account, you're able to do really well and the account's worth way, way more than that now.

And you're starting to get nervous with that volatility that that strategy gave you. Maybe the solution isn't withdrawing anything, it is just another strategy. So you have the crazy volatile strategy that you are sizing now appropriately to your comfort level, and you're implementing new strategies with different assets that have, you know, different hold times and and are in less risky instruments. And by

splitting that out, you've done a couple things. You've brought your comfort level back to a place that's fine. And by trading more strategies, you've probably as you find you smooth out your equity rec curve over time. ⁓ so sometimes it's not a in or out thing. It's are you all in or too far in on not just one strategy, but even one asset type, right? Am I am I only trading like the the biggest gap or craziest Chinese scam pump and dump today?

Or maybe should I just, you know, split that out into other things and that that helps with the comfort level as well and then helps with the smoothing out of the equity return.

Dave Mabe, MabeKit (46:50)
Yeah. Yeah. I'd be remiss not to plug our previous episode that we did on buying power. Like is how buy running out of buying power is a good thing. You should be running out of buying power. And if you're not running out of buying power, then you should take some money out of your account because that is at risk. Right. So yeah, go back and risk listen to that episode. It's been a while since we've done that. ⁓

Michael Nauss CMT (47:03)
Mm-hmm.

It it's funny just on on that note. I have ⁓ an AI now and one of the things it does, it helps me with like support for Stats Edge for for my business and everything. ⁓ and it keeps flagging periodically the emails that I get. I've got IB and then I've got this other broker, well simple. that's like a Robin Hood thing where I do some other it's like my play account and it keeps pinging me. It says, You got a margin call.

And and it's like it's like the the robot scared, and it's like you should deal with this right away. How are you gonna deal with this? And I'm like it's like it's that's good. Like I almost want to send the robot the transcript of the of the podcast episode we did. And so then maybe it maybe it starts going, Yeah, you got a margin call. Good for you. ⁓ but yeah, I just thought that was a funny aside because I'm looking down, I'm seeing the bot, and it's going through the emails. you got a margin call. Well, I bought a bunch of core weave yesterday and it's down 10% today, but it's good, you know.

Dave Mabe, MabeKit (47:46)
Ha ha.

Yeah, yeah.

Yeah, you should. Yeah.

Michael Nauss CMT (48:12)
⁓ yeah, it's ⁓ buying power management is definitely a part of it as well, right? I think the do I withdraw or don't I withdraw, I think first has to be answered with do you need the money? And are you tapped out of ideas is an another way. Like, do you think there's easy ways you can expand into ⁓ to get over that miscomfort kind of hump as well.

Dave Mabe, MabeKit (48:37)
Yep. yeah, I think we've covered covered all the data points that I wanted to get through. ⁓ well, I'll I'll follow up with Chris after this episode goes live and see if he has any thoughts on it or has any further questions. But ⁓ Yeah, it's I think it's a topic that you don't hear a lot of people talking about. ⁓ but yeah, I think it's important to think about and the this you know, we're all systematic thinkers.

Michael Nauss CMT (48:59)
Mm-hmm.

Dave Mabe, MabeKit (49:05)
Creating a system for this can create the right incentives in yourself to do the things you want to do and the things you can do with trading.

Michael Nauss CMT (49:16)
Right. And you know, if you're going to be systematic about your trading, why not develop a system so that you don't have to think about this either? And that's ⁓ I I think kind of a huge takeaway from this. Like we talked about different systems like high watermark trading and and you know, the way that Dave's doing, but ⁓ I think at the end of the day this shouldn't have to be another another decision that you you have to make. It should be automatic in some way.

you're withdrawing X amount a week or a month automatically, or when your account hits a certain value, you're withdrawing or or and think of the good times and the bad and then kind of put that on autopilot and only touch it periodically. Because I think just like we mentioned, if you're ⁓ impulsively doing something with money, period, even if it's not trading, then it's you're probably not gonna look back and say, I'm really glad I made that super

⁓ impulsive decision with my f with my finances.

Dave Mabe, MabeKit (50:20)
Yeah, and th and like I said, a lot of traders, ⁓ the highest value return they can get is probably reducing their expenses. So th think about that first and and think if you know, the the stuff that's going out the door every month, how much of that's really making me happy? Is there some adjustments I can make there? Like like I haven't had a car in over a decade. I ride my bike everywhere just 'cause I love it and

And of course it's way cheaper, way more efficient. It's awesome.

Michael Nauss CMT (50:49)
She's you spring that one at the end of the episode. I feel like that's something we got to talk about maybe in the next one. Jeez, maybe it's because of where I live. I can't there's nowhere I can get without a car. It's just not ⁓ not a possible thing. But yeah, we'll I think we'll leave people with that because that's something that I feel is gonna come up a little later at some point. But ⁓ yeah, so again, if if if you've gotten to this point anyway, just give yourself a pat in the back where if that's your worry.

Dave Mabe, MabeKit (50:52)
Yeah.

Yeah.

All right.

Michael Nauss CMT (51:19)
That you're how do I withdraw my money? Right. Give yourself a little pat in the back and just know that you're you're miles ahead of 90% of of the traders that exist out there. But hopefully this helped you out in some way. And again, we always read the comments and everything down below if you guys got any ideas or suggestions on on ways to systematize that. But as always, I'm Michael Noss.

Dave Mabe, MabeKit (51:42)
And I'm Dave May. Talk to you next week on Line Your Own Pockets.