I’m about to commit some ‘trading blasphemies’, so I’m going to warn you of that before we begin. What I mean to say, is that I have some things to get through here that may shatter a few closely held beliefs that the public has about the career of a trader.
What sparks my need to utter such blasphemies is that I made some statements in last weeks “Week in Review” podcast, and I feel obligated to make a few clarifications. As I look back on it, it seems to me that at one point the discussion indicated that one needs extremely deep knowledge of all financial markets, 25 years of experience, an understanding of Bayesian Financial models, one needs glued to the charts so that your eyeballs rot out from LCD glow, and only after years of doing this will one truly unlock some secret to the mystery that surrounds trading and investing profitably.
I do enjoy such topics that lead to a sort of top down view, but that’s simply because I am weird. Ok? We’ve gone ahead and just said it. Dan’s weird. So from this point forward, if you hear me break out into a discussion of Markov switching multifractal’s? You have my full permission … no … my encouragement … to dismiss everything that follows with a simple “Dan’s being weird again“. And the truth of it?
You need none of that to trade and invest profitably. You don’t. To those of us that are ‘weird’, it provides an intellectual satisfaction and a way of looking at markets. A way to ‘frame the context of our discussions’. That’s all it is.
That is the first point of trading blasphemy. To admit that such modeling techniques are not necessary for trading. Can you use them? Sure. If you want. But please do not misunderstand or believe that because a some traders use such models, that this is the same as it being ‘necessary’. In fact I’d go so far as to say that I personally believe attacking the markets and trying to ‘beat them with an Intelligence Quotient’ will actually hurt you. You can’t ‘out-smart’ the markets. There’s nothing to outsmart. It’s an auction. It’s random and chaotic and always changing. You cannot beat that with a high I.Q. If you can think on your feet, you may do well. In some respects, it really is that simple. It really can be quite difficult to convince very intelligent people of this. They take pride in their intelligence and sometimes it seems that nothing you can say or do will ever convince them that they are losing in the markets because they think there is some secret differential equation to unlock. There really isn’t.
My next point of ‘trading blasphemy’? Is that I think investing and trading, once one learns the nuts and the bolts (and we admit there are more than a few ‘nuts and bolts’ to learn) of the markets … I don’t really think it is that hard.
There. I said it.
Now, there are a few rules. And if you break those rules, the markets will have no mercy and absolutely grind you into a blubbering insane lunatic who can barely compose three sentences logically. And I’m only slightly exaggerating. But this shouldn’t overly ‘scare anyone away’. Can you imagine trying to run a business in an impatient, undisciplined manner? No. But are markets overly ‘hard’? No, I don’t think so. Are there rules? Yes.
Yes, you must be patient. If you come to the market’s and check the charts for some sort of ‘junkie fix’? They will pummel you. They will grind you into the dust. You’ll become nothing more than an uncontrolled gambler, instead of an investor of your own funds.
You must be persistent. If you try to float to the markets and check in on them once every three or four months, you’ll only gain enough skill to be dangerous.
You must be disciplined. If you float from method to method, and constantly try to “tweak your method” to make it absolutely ‘perfect‘, your account is going to die the death of 1,000 cuts (losses). When it’s time to put on the trade, it’s time to put on the trade. When it’s time to step back for a while, step back and make no apologies for it. I say …. be the lion. The lion is not Neils Bohr. He’s not a genius. He’s a lion. When it’s time to hunt, it’s time to hunt. No if’s and’s, or but’s. Yet Lions have been reported to sleep up to 18 hours a day. But are they lazy animals? No.
They are exceedingly economical when it comes to the decision of either expending their calories to hunt or resting up. You’ll never see a lion on the savannah, apologizing for taking a nap. But when it’s time to hunt, they’ll kill without a seconds hesitation. In a word, they are efficient.
And this leads to my last point of ‘trading blasphemy’. Truth be told, I am a guy that is all about lower-effort investing methods.
Yes, there are entire methods and approaches that are not very … intensive in their implementation. In other words, you don’t have to ‘fiddle’ with them every two days, or even two minutes. You do not need to stay ‘glued’ to the charts. And this does not mean that for a lack of intensive day-trading focus, you suffer less in the way of returns. In fact, I make one whole section of my portfolio about a passively managed ‘core’ of assets, that I may not need to touch but once in a year. One of those lower-effort pieces this year has produced over 12% in terms returns, with very little drawdown and I’ve only had to touch it once. So no … lower-effort does not mean lower-return. Lower-effort methodologies can do well all on their own. I have lower-effort methods that I use that have literally worked for the last 80 years. No, I’m not kidding. They’ve been used in the industry for at least that long. And yes, I can stack on active ‘trades’ around that passive core for even grater gains. As a matter of fact, as I write this, I have a short term short on YHOO. I like active trading as well.
But going back to those lower-effort strategies, if you stop and think about it this has incredible advantages. If you need to, you can stop all active trading, leave your passive core of assets on the table, making gains, and take a vacation. It means less stress. Such lower-effort (notice I did not say low effort or no effort) investing frees up your time, so you are not left obsessing over every tick of the market, which only helps your discipline. If a prolonged emergency arises in your life, you can take care of it and at the same time not worry that your portfolio is being overly neglected.
So there they are. My blasphemies. Do not allow one’s to put you off from this career with a lot of jargon, if you are interested in learning how to trade and invest. Do not think you must have the mind of Einstein to be a trader. You don’t. It requires some qualities that I think anyone does well to obtain, and make you a better person overall.
As I said earlier, if you can think on your feet you’ll probably do well. This is probably why people who have successfully run their own businesses before investing and trading, and military men and women who were in special operations do well as investors and traders. Such people know how to think on their feet. How to adapt. How to control their risk. And that if there is an easier, low-effort way of doing things? That’s the way things should be done, rather than a long convuluted process in order to impress someone else.
I’m telling you, you’ll hear me preach it’s virtues quite often around these parts.