My Life in 4 Trades: Diego Parrilla

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0:35Diego, welcome to my Life in Four Trades. Thanks for having me. So we have four of your trades and the way you organize them is very interesting. We'll jump into them in a moment. But first, tell us a little bit about yourself. Where'd you grow up? What were you like as a kid? Well, I'm originally from Spain. I'm a mining and petroleum engineer. I did my master's in mineral economics at the Colorado School of Mines in the U.S. and the French Institute of Petroleum in Paris. And I did my thesis in something called Real Options, which basically looks at value in real assets using option theory. It's a bit of a side joke.

1:15One of my professors there, Graham Davis, would describe a lettuce as a call option on a salad. And that's kind of how crazy it was. But I guess that really marked me in many ways. It sort of opened up this idea of options. and started to look at life very much, not just the financial options, but through that lens. So everything's an option. Book is an option. It's the right, but not the obligation to read or whatever. And so I was very lucky to have the opportunity to start in financial markets in London. Were you always a sort of math person? Yeah. Oh, yeah. So this really sort of spoke to you from the beginning.

1:59Yeah, I sort of followed a little bit my father, my family, engineer and economist. So for me, it was very natural. But I didn't really - Were you a nerdy guy? Not really. I've been quite balanced, I would say. I was quite sporty. 20 kilos ago, I was okay. Were we all? And yes, I was very lucky to have the opportunity to join J.P. Morgan in London in the mid-late 90s. So I started trading effects and commodity markets. And then I was with Goldman Sachs, with Merrill Lynch, and primarily the macro commodity foreign exchange area. Right. And then I had the opportunity to move on to the buy side with my own firm, as well as working for some large players like Bluecrest or Diamond.

2:46Before I went back to Spain and I set up, you know, continued this path, which we'll talk now a little bit about, you know, following that world of options and volatility and trading and tail risk. And so I've been in that field with my own firm, but also now part of a bigger project, which has brought me back to London. Oh, wow. Which is great. So I'm sort of close circle, you know, having been in Madrid, New York, Singapore, and then back to London. and in addition to my experience on the buy side and the sell side, I'm also a book author. Written two books. The first one, Bestseller on the Energy Markets, which is the first thing that brought me over to Real Vision, I think back in 2015.

3:34And then a second book called The Anti-Bubbles. Yeah, we've talked about that. So you're a real chronic underachiever, huh? Fair enough. putting us all to shame no so wait let me take a step back before you get into your trade so you you sort of came through this sort of mining natural resource engineering part of it yeah but really sort of caught on when you took that options class really took you down the financial route when you went to london so you're from spain you moved to london so that's a sort of different culture and then you're really in the thick of investment banking did you get to to the investment bank or the floor or the trading desk and say, wow, these are my people?

4:19Or was it a little bit of a culture shock for you? I was very much thinking I would work in engineering. Yeah, that's why I asked. Even when I did my master's, that really kind of opened my perspective. I think being exposed to the people, the culture, it sort of opened the world that I hadn't really considered. So when I started applying for different jobs, I took that on as an opportunity, a possibility, and beggars ain't choosers. So when you get your first job in many ways, I think it's probably more important. Your first job marks your career, sometimes more, even what you studied. So in that way, starting the trading role, I didn't fully appreciate what he meant at the time.

5:12To be honest, all I knew is JP Morgan, London, and 27 ,000 pounds, which is what it was at the time. And sometimes that's good to go in without all of that. I had no idea about anything else. No, I didn't know. It could have been any other job, but it happened to be a trading job. So that kind of marked my career from there. But I feel very lucky. I love London. I met my wife there. My three kids were born there. So you were a Spaniard who got there and said, The weather's horrible. It's close. It's close. You know, my mom complained in the early days, like until I went to Singapore and she was sort of hoping that I would get back to London because obviously Singapore was so much farther away.

5:52Yeah, so much farther. But London's lovely. We're happy to be back. Let's jump into your trades. And this is really interesting because sometimes people give us life trades and sometimes they give us sort of a job or an actual trade trade. The first one you gave us was unconscious incompetent. So tell us a little bit. And they're all going to sort of fit, play on that. When you invited me over, I thought, you know, if I was on the other side, you know, what would I in some ways want to hear? So I think on the part of it, there's a chronological side of how you go through your life. On the other hand, there's a learning path.

6:30And that's where this framework of consciousness and competence, I use it a lot. And I think about it a lot. And I also wanted to link it to some sort of lesson learned. So in that sense, the idea was, okay, let's pick four traits in four different stages of my life. And I think this framework starts with unconscious incompetence, which is when you don't know that you don't know, which is obviously the most dangerous one. And so from there, you progress to conscious incompetence. You know that you don't know. and then you move on to, in some ways, conscious competence. You know what you know, you don't know what you know, and then eventually you get to a level of expertise, you know, master level where you just know.

7:17It's a bit of wisdom at that point. It's unconscious competence. You just know, right? And things come up very naturally. And I think the fascinating thing about this is, you know, we learn in silos. So you might be an unconscious competent person in sports, but you could be unconsciously incompetent in politics or economics or whatever. In my view, and this is something I work on a lot, is sort of bridging those worlds. That's why I've done a lot of work in linking engineering and concepts. For example, when I talk about volatility, I talk about fluid mechanics and how you have effectively nature and the market's transition from laminar regime to turbulent regime.

8:00There are a lot of similarities and a lot of things we can learn. So in some ways, the idea is, can we connect those worlds? Can we effectively take areas of competence and apply them? And that's why I think analogies, you know, anybody who knows me knows I use tons of sporting analogies, I think is a very powerful way to explain concepts. So I thought, okay, let's start with one of the big mistakes, perhaps very early in my career. And it was one of my early trades from a personal trading perspective. And this is back in the late 90s. It's dot-com-ish. Things are very bubblistic. Everyone's making a lot of money.

8:42I think everyone's. It was crazy. Everything was just going up. Everyone thought everyone was a genius. And I think at that time, the idea of the market collapsing was, you're young, you're inexperienced. And so you understand the options and the market's paying you money for effectively taking the risk that something would collapse. And so the idea of selling options, particularly puts, look very enticing because it was all one way. You're naive. You don't know that you don't know. And it's almost like the worst thing that can happen is that you are successful in the beginning. And so you might do it once.

9:25You might do it twice. And I think the key message I want to leave with people is do not confuse strategies that are selling options with income. because what tends to happen is people start to build the house from the roof. They say, look, I want to make whatever, a thousand or 10 ,000 or whatever it is a month. So what do I need to do to generate that? And so you end up potentially selling optionality and risk in a very high notional, very leveraged way. And it could work for a while. You build confidence, you start trading bigger and eventually, boom, things happen. And so ultimately when you are selling options, it's an insurance play.

10:05You could be collecting premium for a while, but it's an expectancy game. So at the end of the day, particularly if you're doing it with leverage and without delta hedging or other ways of protecting, it could be extremely dangerous. So I was very lucky and very blessed that I was hit in what was a large amount for me at the time, but not big enough that it sort of knocks you off. Wipe you out, yeah. And yeah, so I think that really was a very valuable lesson. I think since then, you know, it really, these things help you, you know, gain a bigger perspective and it woke me up into the next stage of, okay, you don't really understand what you're doing and so I think that's part of the process.

10:53So it was a very valuable lesson. I've seen so many friends over the years, you know, starting to trade and being involved in options. And I think the temptation of selling options, thinking it's almost free money, or I want to generate income from this and sort of building the house through the roof is extraordinarily dangerous. If you want to do that, you need to do it in the right size. And the right size may not generate sufficient income, but you need to focus on the actual level of risk and what you're doing rather than thinking, I want to generate X. What do I need to do about it? And so I think that was, it's something that I suspect many of the people might be in that phase.

11:34So guys, if I can help you avoid that experience, I think it's lesson learned. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? You'll be able to trade it in just two clicks. Feel ready? You can move to real money with as little as$100 once your account is approved.

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12:52Do you think that that unconscious incompetence is very something that is really equated with youth or can we all fall victim to that all the time? Certainly when you're young, you don't know what you don't know. But is that something we have to be on guard for throughout our lives? 100%. I think we're all in different stages and different things. And I want to say something may or may not be fair, but it's almost like if I look at my boys and my daughter, somehow my daughter was born in conscious incompetence. So the boys were more reckless in some ways. So you would see them do things and crash and do things that the girls, my daughter was a lot more cautious.

13:42So I think it depends with people's personalities. It's not a boy girl thing, but some people are more naturally aware that they don't know. But I think in general, most of us tend to overestimate a little bit what it is. Think about skiing, you know, who goes like down or riding a bike. Or I think the key thing is when you, when I hear how hard can this be, I go like, alarm. Alarm, alarm. Alarm. How hard could this be, you know, to make money trading and generating? That looks easy, usually from a distance. We're looking at other people doing it well. And how hard can this be is generally a sign of unconscious incompetence, I would say.

14:19So again, no rule, no boy, girl, no age. I think we're all... But watch out for that. If you're saying that to yourself. Yes. How did you feel when you had that setback? Because clearly, as we just established, you're very smart. You're succeeding at mastering not only engineering, but options, get a good job in London. So you're firing on all cylinders as a young person. This lesson was also linked to fear of missing out in a way or how everyone's doing it. Everyone's kind of making money. I mean, I remember back in the desk, a bunch of us analysts and associates and whatever. And people were making at the time more money trading outside of the office.

15:01And it's almost like, why am I bothering coming here? And I can tell you, back in a couple of years ago, three years ago with Bitcoin and crypto. That's just what I was going to say. I could see the movie. I was like, guys, I've seen this. So many people thinking, I'm going to quit my job. I'm going to do this. And I was the other guy. I never went that far whatsoever. I was very mindful. But I think that these cycles repeat themselves. and in some ways, you know, these patterns happen over and over. People forget that that was very much going on in the dot-com. Memories are short. Either if you weren't around, that's fine, but, you know, people were so concentrated on what it was, you know, that it was crypto.

15:44No, it's just, it's something that you're seeing in that kind of new asset. It happens again over and over and over and will continue to happen. Yeah, but it's interesting you talk about FOMO because we're so conscious of FOMO now, but that's also always been around. and it's really powerful. Well, it's human nature. It's behavioral. I think it's part of how we're wired and you need to be aware of it. And it's hard sometimes to see, think that you're missing out and people capitulate. And I think this is part of the process, understanding. I think the other framework I use every single time is similar matrixes, decision versus outcome, right?

16:26This is a world where you control, you know, you can make a good decision and you should expect to get a good outcome. You could make a bad decision and expect to get a bad outcome. The kind of the challenge happens when you make a good decision and you have a bad outcome, right? That can generate a lot of frustration or even worse, you make a bad decision and you get a good outcome, right? So - It's funny you say that's even worse. Yeah, it's even worse. It's a little bit like playing Russian roulette, right? The normal thing is you play, normal things you should win, right? But that bad decision can actually lead you to do it again and eventually things happen.

17:04So yeah, I think these frameworks are very helpful. I think they're actually linked because it's almost like the human behavioral emotional thermometer is also linked to your stages in trading. So stage one of unconscious incompetence tends to come with anger. So when you face one of these situations, be it you're losing money or you're having what you thought was a good idea and something happened, anger is generally associated with unconscious incompetence, right? When you move up, you start to experience frustration. So when you know that you don't know, you're frustrated. So this is your second trait and this is conscious incompetence.

17:43Exactly. So the second level of, I'm linking a little bit this idea is the second level. If you're feeling frustrated when you have things going wrong, it's quite likely that you're in stage two. And I think the emotions is a very good thermometer to where we are. That's true. I would say anger and disbelief for the first one because you're also like, oh, that was wrong. I didn't know. I didn't know. But this one is frustration because you kind of know you're wrong. Yeah. Frustration. And, you know, exactly. I think once you go from there, the level three is acceptance. You know, something happened.

18:15I'm okay. I knew what I was doing, whatever. And when you're truly at the master level, it's complete indifference. So you make money, you lose money. There's no emotion. All right, that's crazy. We're getting ahead of ourselves. So let's talk about when you know you don't know. So for the checker, what was an example for you that you remember? I think there's a very interesting trade, and I'd like to link it to people on emotionals trading. And I was already a bit more experienced. I started to be given, in the beginning, you're just supporting, you're doing stuff. And then eventually you start to get some risk.

18:54So a little bit of allowance to put positions to certain things. We're all managing a common book, but you start to have your own little stuff to play around. So I remember I had a position at the time it was in gold and I was very convinced, you know, that this thing was going a certain way. Things were not going that way. And so the market got to a point where I went to my boss and I said, I'd like to double the position. And he said, why? And it's like, well, because I think this, that, that. And I was like, okay, fine. But I want you to sell the trade and then you buy twice. And I was like, you're crazy.

19:37I mean, why would I sell it and then buy twice? Isn't it just paying bid offers and commissions and whatever? It's like, just do it. I was like, okay, fair enough. So I go to the guy and say, I need to sell 10 ,000 ounces. as well and then i was like and i didn't buy it because once you're out of the trade once you stop out once you're physically out of the trade suddenly it was like do i really want to put the new position again and it was so obvious the guy my boss was laughing like looking at me because he knew what was happening and so in some ways doubling up the position was a highly emotional decision.

20:20And the stop loss, effectively what it did is it got me out. And then he would have been perfectly okay if I had doubled the position as such. But the discipline of exiting and being okay emotionally with losing that money, if someone's playing poker or whatever, it's just folding. If you are effectively racing just based on emotions alone, own, you might be making the suboptimal decision. So what I learned then, I was already more experienced, but I really learned the importance of stops and effectively trying to be as unemotional as possible. And it was like a light bulb that went. And I thought I'd share with - I think that's so interesting because you could literally go through that process, anybody who's thinking about doing something, instead of just adding to an existing, Think about if you exit and had to put it on again and have to go through the sort of process that you go through, even if it's quick, about whether this is the right decision.

21:22That's a completely different kind of part of your brain that you're using. And I think, you know, the idea of, well, I'll skip that part, is actually cutting corners. Yes, because you're not thinking about your framework at all. And I think it's important to have the discipline to exit. There's a bit of additional cost. And then you're looking at that opportunity with a complete fresh look. Plus, suddenly there are many other opportunities that might be better deployment of your capital in cash. So I think sometimes we fall into that trap. We get into corners that is very difficult to get out.

21:55And that emotional aspect of trading or investing becomes even worse. The hole becomes even deeper. And so I think it's extremely important to honor those stops and profits in some ways, although there's no magic formula. but certainly that discipline, putting things in writing, ideally setting the orders, letting them go through and then it re-initiating, it's very powerful. So yeah, I think some of the best traders I've met, it depends on the banks, you know, where trading is different to a hedge fund. It's almost like every morning they looked at the world, you know, from scratch and it's like, but yesterday you were saying, it's like, yeah, but things have changed.

22:37So that's incredibly important. I've heard people, we've had people on who talked about that, especially long-term. Interestingly, commodity people seem to really do that. I don't know if it's because of the nature of those markets and how quickly they can move. But I know Peter Brandt, all of them will say that they sort of like restart and look at everything, even if it's just from a theoretical perspective to reboot. I'm thinking to myself on a much more pedestrian level that it's very similar to if you're out having a really good time and people convince you to keep staying out, as opposed to saying, I'm just going to go home and change.

23:08The chance of you going back out again, because you have to think about, should I really be out this late? Am I going back out? Am I committed to doing that? Do I have to get up tomorrow? A completely different mindset than just carrying on and doubling down. You just brought an analogy that is probably, you know, made the point, brought the point home to a bunch of people. I don't know what it says about my life, people, but that's the one that popped to mind. But so then what happens when we move on to the third trade? Now, this is where they're more positive, because we're talking about sort of the lessons learned and what we would consider bad trades.

23:40So now you're getting into the more positive trades. Yeah. So, you know, you advance your career, you become, you know, more of an expert in certain things. And I wanted, as a third idea, I wanted to highlight, you know, when I wrote my first book. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

24:05Now, this is unconscious. This is now we're moving into conscious competence. Oh, conscious competence. Oh, yes, yes, competence. You know what you know. You know what you don't know. And look, I think writing a book was a big decision. It's a big commitment. And there's so much I learned from it. And I think in some ways, Cicero, the Greek philosopher, said, if you want to learn, teach. And I would definitely agree with that. And in fact, I would say if you want to learn, write. And in some ways, writing the first book, you're kind of naive enough that you think, hey, I know enough and I want to share my message.

24:50And I think I did. I did know. but perhaps through the process of writing you realize maybe i didn't know it as well or it forces you to structure your thoughts and in ideas so maybe i share this this analogy i i use this framework which i compare ideas to like lego pieces right so i you know having been quite experienced in the energy markets i've developed a bit of a investment thesis and and then you're like, how do I tell the story, right? And you can tell the story in so many ways, you know, chronologically, upstream, downstream, in terms of so many angles. And so the beauty of writing the book is you take all those Lego pieces, you put them on the table, and you see literally hundreds of ideas, you know, some are green, some are red, some are big, some are circular, some, they're all complete different shapes, colors, sizes.

25:45Some are tiny ones you can never find when you're trying to build one with your child. But all those ideas are there. And so basically for me writing the book was more like okay let's order these pieces so that my brain you know just start by color right so let's just put the pieces and when you do that suddenly you say what happened where's where's green there's no green when you had all the ideas um scattered on the on the on the table it's very difficult to know what's what where's where but when you order you realize very quickly, okay, because we have a natural order, in this case, the rainbow, you could see there's no green.

26:25And that in fact happened in the book. It was the energy world is flat. It was this thesis of the flattening of the energy world. And the book was already very advanced. I had my thesis. And someone asked me, or I asked through the process, how about renewables? How do they fit? Because I was touching on crude oil and gas and coal and nuclear and many others. like how about renewals? And my answer is like, how about renewals? It's like, okay, let's think about it. So the beauty is that when I put, how about green? When I put that through the framework, sort of magic happened. Because not only it fit the framework, it actually became one of the strongest arguments in favor.

27:07So I feel saving the distance a bit like Mendeleev when he put forward the periodic table, there were actually two holes. if I remember correctly. And there were two elements that, according to his framework, were there, but they had not been discovered yet. And so when those elements were discovered, it was like, my God, it was predicted. So I think I have that sort of moment. And when you actually take your ideas and you structure in other dimensions, you go from size to small, whatever you say, how about the tiny pieces? How about the big ones? How about the shapes? How about... So by the time you've taken your ideas and literally sorted them out in every single possible dimension and you research the areas that you're missing, your story is so much deeper and so much more profound.