Trading For a Living

There was a point in my life when I was choked on spermatozoa and full of Ayn Rand up to my forehead, and I wanted to be a trader. I pictured myself sitting at my desk, surrounded by twelve computer monitors, full of charts, ripping around stocks and futures like a jerk.

The older you get, you realize how hard that is.

It’s not hard when things are going well. It’s not hard when you are making money. I don’t think people are “right” or “wrong” in the markets—I think that your view is either “in favor” or “out of favor.” Given enough time and capital, your view will eventually come back into favor. But during the period of time that it is out of favor, you are experiencing stress. Trading is full of stress. During the time that I was a trader at Lehman Brothers, I was basically operating in a perpetual state of fear. A lot of people think that the markets oscillate between fear and greed—not really. Greed is just another form of fear, the fear of missing out, the fear that you’re not going to make as much money as someone else. The financial markets are one big terrordome, and the people who work within them are very spiritually sick. Very few people are able to achieve the right balance between work and play and rest.

I run into a lot of people who want to trade for a living, and I always tell them the same story. Some academics did a study of day traders in South Korea. They took a sample of 1,000 or so day traders, and charted their progress over the course of a year. At the end of six months, 90% of them had quit. Given up. Of those that remained at the end of the year, they had only earned enough to cover their expenses and pay their rent. There was one guy—one—who earned supernormal returns. Everyone wants to be that one guy. The odds are obviously not in your favor.

Of course, there are a lot of hedge funds who make some money. Some of them are big institutions who have a lot of technology and infrastructure and information. They have an enormous advantage over Joe Shlabotnik day trader. Even just being in a room, surrounded by people who are looking at the markets, and sharing ideas, is a huge advantage. Sitting in your laundry room with a computer, alone, with CNBC as your only source of social interaction, is not a recipe for success.

Why do people want to become traders? Because money won is sweeter than money earned. There is nothing in this world more satisfying, even pornstar sex, than putting on a trade, supersizing it, winning spectacularly, and making enough money to fund your lifestyle for a year. The trouble begins when you think those sorts of things are repeatable. But it takes money to make money. If you start out with a stake of $300,000, and your expenses are $100,000 a year, then you have to make 33% just to cover your expenses. Stan Druckenmiller would be happy with 33%. That’s just to break even, and a lot of people start with nuts smaller than that. Really, the only time trading for a living makes sense is if you’re starting with $10-$20 million, your expenses are minimal, so even if you make 10-15%, it is meaningful.

For the record, I don’t think Stan Druckenmiller is the best investor in the world. Or Steve Cohen. Or Jim Simons. No, I think the best investor in the world is some dude sitting in his underwear, at home, in front of a computer screen, drinking Mountain Dew. There is an anonymous, highly talented trader out there, putting up triple digits every year. So why doesn’t’ he start a hedge fund? Because he can’t put on a suit and raise money. Because he can’t articulate his process. He can’t make a slide deck. He can’t deal with all the compliance and regulation. Jack Schwager did a book on people like this, called Unknown Market Wizards. I didn’t read it, but it was a good book to write. Managing money is a business, and some people aren’t so good at the business aspect of it. But they are gifted traders. Two different skill sets. When you have people with both skill sets, those are the people who go on to be Wall Street legends.

One thing that a lot of novice traders lack is patience. Trading takes an inordinate amount of patience. People spend 1% of their time actually trading, 9% of their time doing research, and 90% of their time waiting. Waiting for something to happen. Waiting for the poison to take effect. This is where I advise people to go play a round of golf. Or go swim at the Y. Or walk the dog. Sitting in front of the screens for 10 hours a day is just not healthy. I have my own theories about this, and this is my personal trading style: the less information, the better. I don’t trade with the TV on. I’m not watching YouTube videos, or reading the newspaper. All I have up on my screen on a daily basis is Bloomberg, and my email. That’s all I need. Too much information will cloud your judgment, and inject doubt in your process. It’s hard to have conviction on anything when you’re being bombarded with other people’s opinions all the time. To the extent that I consume any information, it is only raw news. I do not read other people’s opinions. I write a newsletter, and the last thing I want is to read other newsletters. I don’t want other people’s views to influence my process. Lots of people read newsletters for ideas, but ideas are only 10% of the trade—the other 90% is execution and risk management. You can make money on a bad idea with good execution and risk management. You can royally screw up a good idea with bad execution and risk management. Honestly, I get my best ideas being out in the world, talking to normal people. If you surround yourself with smart finance people all the time, you will be in the smart finance bubble, and you will lose perspective.

Trading is also very lonely. Someone explained this to me one time: have you ever noticed that there are lots of courtroom dramas, and lots of police shows, and lots of shows about medicine, but nobody ever makes a show about trading? It would be very hard to make a show about trading, because all the drama takes place in your head. There’s nothing to see. The Big Short successfully pulled it off, but that’s one in a row. And that is the thing about trading—there is a lot of drama in your head. Every day, you’re going to battle with your own mind, which is not a lot of fun. It requires you to be deeply introspective. You have to think, but you also have to step back and examine your own thoughts, and then you have to step back again and examine your thoughts about your thoughts. It is a mindfuck. The technical analysts on Twitter make it look easy. They’ll post a chart going from the lower left to the upper right and say, look, all you had to do was hop on this trend. You’d be rich. And of course, then you buy the stock, and it reverses 20% in your mush. That’s the thing about trading: it’s never easy. And if you ever find it is easy, you’d better sell everything and take a month off.

Aside from the making money and winning aspect of it, there is not much in the way of psychic benefits. Nobody is giving you any awards or recognition. Your friends and neighbors think you are weird, or else they are asking you for stock tips. One thing I’ve found is that people tend to get pretty dogmatic about their process. They think that their way is the only way to make money in the markets. One thing I’ve learned as I’ve aged is that there are a ton of ways to make money in the markets. What I do is considered to be pretty unconventional, but it works for me. I would never say that my way is the only way, but it is a way. It all depends on your risk tolerance.

I’ve found that there are three things that make a good trader: intelligence, experience, and emotional fitness. Smart traders tend to make better traders (but not always). Experience counts for a lot, which makes puzzling why Wall Street blows out 47-year-old guys with 25 years of experience. But emotional fitness is paramount—happy, confident people make good traders. Neurotic, troubled people don’t. Boring people with stable marriages and happy kids tend to outperform the drug-addled strip club guys, at least over the long term. I speak from experience—I’ve been both.