The ACTUAL Point of Active Investing and Trading

Posted on Apr 17 2015 - 10:00am by Sharpe Trade

And by all that’s holy, it’s not to ‘have fun’.

So I have read articles that discuss “investing for fun”.

I’m just going to go ahead and say it right now.

I am dismayed.

To say the very least.

My thoughts are primarily directed towards the bewildering, illogical obsession I see with the S&P 500 Index on a one year time-frame.   Some people obsess about “the market” on a six month time frame!  I’ve even seen people concerned about ‘what the stock market is doing’ on a three month time frame.  That obsession with “the market” or the Index … betrays a lack of understanding in simple mathematics, and the reason for a benchmark on such a periodicity.

So my thoughts?

Make no mistake.  Ones will try to defend ‘not’ beating the S&P 500 Index.  That is really what is being discussed here.  And this betrays a lack of basic cognizance of the most important principles of investing and trading in the capital markets.  Which are …

  1. Do not lose money
  2. Do not lose money
  3. Use an implied edge via probability and statistics to make money
  4. See rule number one, and rule number two.

If the above factors are adhered to with investing and trading, one will beat the market quite easily, given enough time.  Yes, you read that right.  If the above factors are adhered to with investing and trading, one will beat the market quite easily, given enough time.

Let me prove it to you.  And I’ll pick on myself as an example.

In 2013, I publicly returned 2.834%.  The entire portfolio, which has a few ‘segments’.  My valuation investing earned 4.956%.  Short-term trading only returned 2.229%.  I also have tier capital in reserve, and as it was a part of the portfolio … again, I count all of that cash.  So the total return was 2.834%.

Oh my God did I hear how supposedly “poor” my performance was …

“The stock market beat you !!”

“The stock market earned 29.11% !!”

“The stock market beat you!  The stock market beat you!”

“The stock market beat you !!”

It was incessant.  And worse yet, it was wrong.  It didn’t ‘beat me’.  Well, maybe for that year it did.  But the stock market beating me?  Are you kidding?

How can I say that?  Because for me, investing and trading is a career.  A life-long endevour that does not stop, and the market?  The holy “S&P 500 Index”?  It is somewhat known for it’s volatility.  I’m not sure if ones are aware of that, but it’s sort of common knowledge.

I do not lose money over what it considered normal draw-down that we have to allow for (5% annual maximum draw-down is considered … rock-star status, 8% is still pretty good, and 15% annual maximum draw-down may be considered average).  Statistically speaking … the stock market experiences around 10% drawdown once per year, and at times, up to 35% maximum draw-down.

Do you see it yet?

Let me help you to see, with a table containing very simple addition and subtraction …

SPY vs Patient Investor

Who cares about an individual year!  It’s a year!  That’s all!  All you need to do (are you ready?  I am about to hand you the holy grail of trading) … all you need to do … is to stop losing money when that occurs … and to continue trading when you are on a good streak. As the chart says … if you limit your downside risk, then the upside deviations will take care of themselves, and wa-la … you beat the “precious” S&P 500 Index.  Probability and statistics teach us that if you experience bad periods, then the reverse is true.  You simply need to learn to ‘lessen the blow’ of the bad periods. 

That’s all.  That’s ‘it in a hand-basket’, as they say.

Not only did this trader ‘beat’ the stock market in terms of basis points for his career, but he also beat it in terms of volatility of the returns.  People do realize there is more than one way to beat the stock market right?

But wait a minute Dan, you could have cherry-picked that data by inserting the one stellar year of 79.80%

Ok, well in truth … that leads me to my next point …

Even passive investing that does not contain wild upside deviations can “beat” the stock market

Again, allow me to prove it to you.

In the 1970’s, Harry Browne publicized his “All-Weather”, “Permanent Portfolio”.  It has never experienced an 80% year.  It has never had a 60% year.  Or even a 30% year.

It does however, limit the downside risk.  

So how has it performed over the years?

Permanent Portfolio Performance 1971-2011


Look at that chart long and hard.   Permanent Portfolio destroys the stock market.  It rips it to shreds.  In the end patient ‘Permanent Portfolio’ investors enjoyed what the stock market returned, without all of the volatile ‘chop’.  

Isn’t that what we all want?  Don’t we want the holy-grail of earning what the stock market returns, without all of the chop?  Well … there it is!

The point of investing and trading is to make money.  If the basic investing principles are adhered to with investing and trading, one will beat the market quite easily, given enough time.  And if even an all-weather, passive strategy like Permanent Portfolio can beat the stock market?  Why would you actively trade if it is not to beat the stock market?

The only answer I can come up with?

Is ego.

The article itself I found, just absolutely bewildering.  One might even say it made me a little angry.  The worst thing about that article is that it’s very construction seemed to make excuses … not even for poor performance?  But excuses for it’s lack of understanding of these principles of investing and trading with a …

“I enjoy it”

Are you kidding me?  Is this a joke that I am not party to?  Let me tell you something about people in finance.

Individually, with our family and friends, loved ones and neighbors?  We may attempt to be ‘good’ people.  But when it comes to business, trading and the grind of the auction?  We don’t care about anyone’s feelings.  Because an ‘auction’ is not about feelings. 

Feelings are the enemy in this business.  If we make decisions, based on our ‘feelings’ of ‘satisfaction’ or ‘pleasure’, we will die in the markets.  It’s as simple as that.  If you bring up ‘feelings’ … we get annoyed.  Why?  Because we are ‘mean people’?  No.  Well, perhaps some are.  Regardless, it is because we recognize that if we ever tune into our ‘feelings’ when we are at work in the grand auction, we suffer.  And thus, feelings … are the enemy.  Those of us in finance abandoned this ‘hugbox mentality’ and ‘infantilization’ prevalent now in society before it ever began.

The point of investing and trading is to make money.

The point of investing and trading is to make money.

Here … let me say it again …

The point of investing and trading is to make money.

If you enjoy this career, as many of us do?  Then great, all the better.  But the article specifically addressed the point of active investing.  Listen … if you want to join the ranks of the elite who beat the market?  Stop passive investing, and learn from the elite (although, the elite will tell you that passive investing has it’s place).  You will not hit your performance mark at first, because the elite who beat the market do not hit their performance marks at first!!  We do not “make money” every day, every week, every month, or every quarter.

The markets don’t care about your enjoyment.

I don’t care about your enjoyment.

The markets don’t care about your satisfaction.

I don’t care about your satisfaction.

The markets don’t care about your pleasure.

I don’t care about your pleasure.

I love the markets, simply because they can be so heartless, merciless, and cruel.

I respect that they are cruel, and mean, and nasty.  If they were not, I could not earn the returns over time that I earn.  Instead of treating it like an auction, we’d all be sitting in a circle talking about our ‘feelings’.  Instead, they teach you how to survive.  They teach you how to succeed in the world that we presently have.  They are the ultimate reality-check.

In terms of performance … I could care less what the market is doing right now.

Or this month.

Because I understand probability and statistics.  And I control my risk.  Me “beating the market” over time is a forgone conclusion.

Now if you want to have “fun” and treat this as a hobby?  Great.  Awesome.  But we are discussing the point of active investing.  And no professional looks at the markets to treat them as a “hobby”.  Professionals are here to make money.  We are patient.  We are disciplined.  We do not become anxious over a simply three month return.   As professionals, we are here for the long haul.  

“Both sides” do not have valid points.

There it is above, in black and white.  I am right.

Others are wrong.

That simple.

2 Comments so far. Feel free to join this conversation.

  1. Eric April 18, 2015 at 11:42 am - Reply

    While the point of active trading may very well be to make money, the journey to become a successful trader and investor is one filled with learning and self improvement. At the beginning of his career, if a trader were to focus primarily on profits and returns instead of perfecting his craft, his account might get destroyed through greed, fear, or ignorance. Like many other crafts, it is not learned in a day or perfected in a year. Whether it’s a swimmer working on his strength and conditioning, a novelist improving on his imagination and storytelling, or a chef sharpening his knives and taste buds, they all have to put in the work to improve their knowledge of and ability to perfect their craft.

    Discipline and patience are learned skills and are on the opposite side of “feelin’s”. At times the markets can tear your heart out, chew it up, spit it out, and stomp on it, and unless you love what you do, picking yourself up could be difficult. While practicing discipline and patience are a vital part to improving your work, getting enjoyment, satisfaction,and pleasure from your work is also important because “the only way to do great work is to love what you do”. You, sir, are doing very subpar work, so please love the markets more.

    And this has just been my thoughts, not yours…

    Disclaimer: As a Sharpe Report subscriber, I find that the information and help that they provide incredibly valuable. The Sharpe Report is by far the best education program that I’ve seen or been a part of (especially on a cost-benefit basis) if ones honestly want to learn trading and investing by cutting through all the bs and mumbo jumbo of other educators.

  2. NewLife April 19, 2015 at 6:22 pm - Reply

    I’m guessing that graph represents permanent portfolio with DRIP off on the yielding assets.


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