(1:05) - What Could Investors Learn from Aviation? (7:50) - Lessons from a Pilot: Preparation & Planning (14:00) - Tribute to a Maverick Podcast@Zacks.com
Welcome back to Mind Over Money. I'm Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.
My dad taught me to fly a small airplane when I was sixteen years old. A little over 5 years ago, I think for his 80th birthday, I wrote a small book for him titled "Flight Plan for Trading: What My Dad Taught Me About Markets." Well, the old bird passed away this Sunday and while I look forward to finding the book among his things and sharing it with the world, I wanted to recap some of those lessons this week. In the 20-minute podcast attached to this article, I jump right into the "flight lessons for traders." Here, with more time and space, let me share more about the man and his colorful life. Ole Olson from the Land of Vikings Eugene D. Olson was hired by United Airlines ( UAL Quick Quote UAL - Free Report) in July 1964 and flew an historic career spanning 36 years until 2000. He got his initial experience in northern Minnesota as a flight instructor, crop-duster pilot, charter pilot and sea plane pilot/instructor. One of his notable early gigs was flying Viking quarterback legend Fran Tarkenton around the state in the early 1960s for speeches and appearances. Thus I grew up watching all Vikings football games and probably cried my little eyes out during 4 Superbowls of the 1970s. After he moved south to a Chicago suburb to fly out of O'Hare, "Ole" and his wife Darlene earned extra money taking care of me and my little sister when our mother was at work in restaurants. Their young family of boy, girl, boy, girl between ages 11 and 7 became our family from the day momma Darlene started babysitting us. Around 1970, when I and little sister were 5 and 2, authorities decided our mother couldn't take care of us anymore. And the Olsons didn't think twice of calling us their own from that day forward. Growing Up with Wings and Space According to my big brother Rory, Ole joined the Experimental Aircraft Association (EAA) in 1968 and purchased a 1941 Clipped Wing Piper Cub. He flew competition Aerobatics with it and won the International Aerobatic Club (IAC) Sportsman National Championship in Fond du Lac, WI in 1972. Later the same year he won the ACA Sportsman National Championship in Dennison, TX. These achievements were the first, in the same calendar year, by any pilot ever. This earned him a listing in the record book, Who's Who in Aviation. During those years he taught his teen sons, Rory and Randy, to fly. And he liked to take me upside down in the Cub whenever possible. It was scary and stomach-churning when I was young. Yet I couldn't help but trust and admire him for those amazing skills. When I turned 16, he also taught me to fly -- after he taught me what hard work was around the house and at the local airport. More on my flight training coming up. Prior to that, I grew up with visions of rockets and space. Dad and I watched every NASA mission like it was the last thing happening on earth. I cut out every picture and article I could find about the space program from newspapers and aviation magazines. Going into space, toward the stars, seemed like the ultimate, magical mission for me. I never pursued those dreams, but they live within me and I look for every opportunity to inspire youngsters to study science and math and reach for whatever stars ignite their curiosity. I also have a project in mind to help underprivileged kids take a free flight "ground school" course and then earn the chance for a flight instruction scholarship. Contact me if you have any interest in such a project for your community. In the past couple years, I've shown my Dad videos of SpaceX, Blue Origin, and Virgin Galactic ( SPCE Quick Quote SPCE - Free Report) rocket and orbital technologies because I knew he wasn't getting to see all this magic just from his TV. Over the years at Oshkosh EAA fly-ins, Dad had likely met the Rutan brothers of Scaled Composites who were instrumental in designing, building, and testing advanced, experimental aircraft and who eventually won the Ansari X-Prize in 2004 for SpaceShipOne, thus attracting the dreams and wealth of Richard Branson. I do wish I had more time with him near the end to share all that's happening in the space industry, that will probably soon become its own sector with all the innovation and investment. The new ARK Space Exploration & Innovation ETF ( ARKX Quick Quote ARKX - Free Report) could soon be worth many billions in AUM, even without owning any of the still-private SpaceX -- which could be valued as much as $75 billion. Meanwhile, Morgan Stanley researcher Adam Jonas projects the global space industry could generate over $1 trillion in revenues by 2040. The Catheter is Mightier Than the Scalpel Some of my best stories about Dad are surrounding flight because that's what we did most together. And while I often think of this next story as just about him, maybe he fought back so hard not only because he wanted back in the cockpit, but also to see his third son earn his pilot's license. My flight training was interrupted in the summer of my 16th year when my first and best flight instructor had a mild heart attack at the age of 47. Per federal regulations, Ole was not allowed to be a commercial pilot anymore. Heart attacks were typical career-enders for pilots before 1980, even if they didn't have open-heart surgery. But innovative science was offering new experimental treatments for heart disease. Since he didn't require surgery, Dad decided to undergo a new procedure called angioplasty. He became, in essence, a lab rat undergoing demanding testing at the Mayo Clinics in Minnesota and Florida. During almost two years of being grounded, he was the first airline pilot to ever go thru this process. And after passing rigorous FAA medical exams, he returned to the Captain's Seat in the Boeing ( BA Quick Quote BA - Free Report) 747 paving the way for all airline pilots to follow. I've written often about the amazing catheter technologies of Edwards Lifesciences ( EW Quick Quote EW - Free Report) in heart-valve replacement and Penumbra in stroke aspiration. You could say that Ole the maverick helped validate the potential power of those wonderful technologies. More importantly to me forty years ago, was that my first flight instructor was still there with me. Even though he couldn't officially instruct me in the airplane because neither one of us could be PIC (pilot-in-command) with a passenger, he guided my ground instruction and set me up with a new instructor such that I eventually earned my private pilot's license at age 18 in June of 1983, right after high school graduation. And Ole returned to the "right seat" next to me as my instructor, less than two years later, to give my first check-ride in a Cessna 172 in August. Preparation and Planning Now let's talk about flight training and what it might offer investors and traders in terms of mindset. Preparation and planning are two habits of all pilots, ingrained in you from the start of your training. Nothing good in flying comes without good preparation, of both pilot and aircraft, or without good planning of every aspect of the flight. Before your first flight lesson, you've attended several hours of "ground school" to learn the basic mechanics of flight, aviation regulations, navigation and weather dynamics. And before you even grab the keys to the plane, you've checked the weather extensively to be certain that conditions will suit your skill level and objectives for that flight. More on weather coming up. Assuming your aircraft is current on all its maintenance requirements, what's the pilot's job before he starts the engine? The pre-flight inspection of the plane. From physically moving the control surfaces like ailerons and rudder to checking the fuel for water, a pilot must know that his equipment is safe and ready for flight each and every time before take-off. It's a completely different mentality than hopping in your car to drive to work or run errands. How different? How about visually scanning every square inch of the plane, looking for a loose rivet or screw, a new dent, leaking fluids, ice or snow, a birds nest by the engine. And how is a pilot trained to make certain everything gets checked? Is he required to memorize all the steps and procedures? Maybe, but more importantly he or she is trained to use a check-list so that nothing is left merely to memory. That's because so much can go wrong in flight that could lead to a life-threatening situation. So nothing can be left to mere chance. Once inside the cockpit, there's a new checklist before you start the engine (I don't think check-list was one word when I started flying 4 decades ago, but it is now). In essence, a pilot's life is checklists. Prep and Plan, Part 2 The next levels of planning and preparation involve an on-going process of training with your flight instructor where you learn new skills and how to handle the most common contingencies and emergencies. This would include aborting a take-off and rehearsing procedures for engine failure. After a few hours with a good instructor, your mind is already looking for cornfields or roads where you might be able to land in such an emergency. Then there's training for events like stalls and spins. Your instructor teaches you the mechanics and procedures by demonstrating how to stall the aircraft and how to induce a spin -- and of course, how to quickly recover from both. And then he or she asks you to repeat the procedures. You need to have at least 40 hours of basic flight training like this before you are qualified to take an exam that might grant you a private pilot's license and allow you to carry passengers. This training includes many takeoffs and landings in various conditions like crosswinds, the aforementioned stalls and spins recoveries, and three hours of instrument flight training where you wear a hood to block your vision outside the aircraft, forcing you to pilot and orient the aircraft only by reference to the instrument panel. Even though you are only qualified to fly in clear skies, clouds could come out of nowhere and reduce visibility drastically. Flying seems easy when you can see the ground and the horizon to keep the plane level, climb, and execute turns. But learning to rely on the 3 "A's" can save your life Airspeed Indicator: How fast you are flying relative to the air (in knots and MPH). Attitude Indicator: Also known as the artificial horizon, this instrument quickly tells you the pitch of the airplane -- is the nose pointed up, down, or level to the ground? Altimeter: Your altitude based on barometric pressure. Another handy indicator is the Turn Coordinator (or "turn and bank indicator" in the Cessna 152), which is a very cool gyroscope that tells you how much you are actually turning horizontally to alter the aircraft heading vs. "slipping" sideways with little change in heading. And I would be remiss not to mention a fifth crucial instrument, the Vertical Speed Indicator which quickly tells you whether you are climbing or descending and at what speed. All this instrument talk brings to mind another secondary training tool that flight schools will use, the simulator. More on that coming up. Concurrent with all this instructor-supervised training, you also begin solo flights which eventually culminate in the big kahuna: a 5 hour solo cross-country of at least 150 nautical miles, connecting 3 airfields in a triangle (for a total of 3 takeoffs and 3 landings). Lost in La Crosse Speaking of big, solo X-country flights, I spent two weeks in the summer of my 17th year getting my trip delayed on what appeared to be optimal summer days because of thunderstorm activity in the west. Finally the day arrived where all systems were "go!" My first leg was a cruise from northeastern Illinois to La Crosse, Wisconsin. When my inexperienced navigation brought me to the place where I should begin to see the local airfield, all I saw were low wispy clouds -- as one apparently does near the mighty Mississippi River. So since I estimated only an hour of fuel left, I also began looking at the ground for potential landing spots in case I didn't find the airstrip. But all I saw were hills. Not a cornfield in sight. Luckily, I tuned up my transponder skills and found the field. It was a slightly scary moment, but I didn't panic -- because of my training. And my solo XC totaled nearly 400 nautical miles in the triangle connecting Crystal Lake, IL with La Crosse and Oshkosh, WI. Quite an accomplishment, I thought, for a still wet-behind-the-ears teen. What's Flying Got to Do With Trading? Well, it wasn't until about 12 years after I got my pilot's license that I entered the world of markets. But what I immediately recognized was that trading was extremely tough and fraught with hazards that would steal your money. Actually what I discovered was that 95% of new traders fail because of their own mental behaviors which make their money go away. Like reacting emotionally to big price swings that cause average folks to buy high and sell low. Think of the time you took on too much risk, or the time you panicked and sold good stocks at fire-sale prices during a correction. Fear clouds our thought process and overrides sound decisions. So what's the solution? Exactly. Think like a pilot. Have rules that override your fear. Have systems and routines and that support your decision making and your mental health. Here's the Wikipedia intro for "checklist"... "A checklist is a type of job aid used to reduce failure by compensating for potential limits of human memory and attention. It helps to ensure consistency and completeness in carrying out a task." From this discussion, I hope you take this away at the minimum: never enter a trade without a checklist, including a rationale, the position size, risk (mental stop loss at least), objective(s), and upcoming events (earnings, expected news, regulatory environment, M&A potential, FDA, etc). Contingency is the Word Everything in flying is about "what if?" What if this or that goes wrong, fails, surprises, etc. Because when you assume all the stuff that can go wrong, and then practice procedures to deal with them, you are calm, cool, and collected in carrying out the steps of a contingency solution. A pilot knows exactly what he or she will do in any possible situation. They've rehearsed it physically (if possible) and they've certainly rehearsed it mentally too. They have to because so many lives depend on their skill and steady reaction. Trading and investing are rarely life-threatening. But many have felt like their lives were destroyed by stupid mistakes in markets. And stupid mistakes, or even persistently bad habits, are preventable with systematic attention to training, rules and procedures. Speaking of training, how many beginning traders practice with small amounts of money to simulate their potential interactions with markets and emotions before they start betting big to get rich? Not many. And how many experienced traders have "instruments" they check every morning and evening to tell them their market risk profile and ability to withstand market shocks? Even less. Think About the Weather Since weather is such an important force in aviation, it also offers some lessons for investors and traders. A few hard facts should set the tone of this thought experiment... 1. You can no more "fight" the market than you can the weather. 2. Weather is a complex system but it has scientific properties and patterns that lend to prediction. 3. Markets, as predominantly social dynamics, are orders of magnitude more complex than weather and exhibit what Benoit Mandelbrot termed "wild randomness." Economics is not a science and most predictions are useless. Given these facts, think of all the people you know who complain about the weather almost every week. It's too cold, too hot, too wet, too dry, and so on. The next fact is, they wouldn't be here to complain about the weather unless it contained precisely the variability it has now. Biological evolution was built on climate spectrums of variance. You can map that variability on bell curves and still keep it fairly predictable in the middle -- the average expected day in the near-term -- even with the tails of hundred year floods and droughts. Now think about markets and their nearly infinite variability. The tails in markets are very fat. So fat, that the averages in the middle are almost meaningless. That's what Nassim Taleb taught us in The Black Swan, with big nods to Mandelbrot and his The (Mis)behavior of Markets. Should we ever be surprised or get emotional about big, fat tail events in markets? Certainly not. My early training as a pilot taught me simple things like "planning is everything" and "indecision will kill you." In markets those might translate as "planning is everything" (still) and the "inability to execute on your plans will make you broke." A Pilot Flies Home to That Big Hangar in the Sky My Dad was the strong, silent type to be sure. But he also had a great sense of humor. He gave me an appreciation for the comedic genius of Bob Newhart. Such that I memorized an entire skit, "The Driving Instructor," and performed it on stage, solo for my 6th grade talent show. And he gave me something more important that I'll never forget -- his confidence. I could never have started, much less finished flight training without his belief in me. He was my first flight instructor and he taught me how to think about planning and risk and contingencies more than anything ever could. He approved me to make solo flights in the summer of my 16th year. As I mentioned, he then had a mild heart attack and our training stopped. Luckily for him and our family, he was able to have an angioplasty procedure to open a clogged artery and then eventually resumed his lengthy career as a pilot for UAL. He went on to fly nearly two more decades as the captain of 747s taking people to Tokyo and Frankfurt. Because he didn't get back in the cockpit right away, when I was 17, he handed me off to another instructor at our local airport. Good thing Dad taught me how to listen and respond to the bark of a flight instructor because the new one I got was a pitbull. Don was short and super friendly on the ground, but mean as hell in the right seat. And that's the way it has to be when you are learning to fly. There are no shortcuts, no baloney, and no excuses because anything can go wrong at any time. Again, investing and trading aren't that serious. But we could all do better with our money, decisions, and emotions if we adopted more best practices of pilots. On my Dad's 87th birthday in February, I arranged a remote video presentation for him via Skype of some things I thought he might enjoy like a short retrospective on Chuck Yeager who had just passed and some video of SpaceX, Blue Origin, and Virgin Galactic ( SPCE Quick Quote SPCE - Free Report) flights. I also showed him a video of my brother Rory talking about their unique aerobatic plane, the Sorrell Hiperbipe, and how he won competitions and then restored the aircraft. You can see the video of Rory talking about the plane and his own amazing IAC wins here. Fast forward to the 4-minute mark. Hopefully you can hear the audio just fine, because when I showed it to Dad remotely through an iPad, I didn't have Skype audio enabled for the video stream from YouTube. About 20 minutes into my birthday presentation he asks "Is there supposed to be sound?" I don't think I was laughing at the time, but I am now. And I bet he is too. Take it from Eugene "Ole" Olson: work hard, save your money, study, plan, prepare, seek adventure, and play. And if something doesn't work out, let's at least have a laugh about it. Kevin Cook is a Senior Stock Strategist with Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators portfolios.