I have (to my perpetual surprise) never been asked this before, but I’ve heard this logic grenade tossed at others who purport to possess investment expertise, so I’ll assume that at least the thought has been directed at me.
The logic grenade goes something like this: if you’re such a good trader, why are you spending your time here and not sitting on a beach watching your money grow?
Fair enough young tosser.
I’ve talked about my motivation for keeping this blog in the past (which can be summed up as “it keeps my head in the game”), but there’s a far more pragmatic and sinister reason too: it keeps my trading capital trading and not putting food on the table.
[linearly-scaled]
Warning: extreme oversimplification for the sake of making a point ahead!!!
The graph above shows two hypothetical investment “gurus”.
Both of our gurus will start with $1,000,000 in trading equity with annual living expenses of $150,000 (excluding taxes and withdrawn at year’s end), and we’ll make a rather modest assumption of 20% after-tax trading returns per year (these are gurus after all).
Note: The assumptions above are in no way a reflection of me personally. I could actually be an elusive billionaire writing this post from my bat cave, or a homeless guy using the free wireless at the public library. That really misses the point.
There’s just one difference between our two gurus: our retired guru (in grey) is living entirely off of trading capital, while the other (red) is putting food on the table being a public guru rather than a beach-going one.
After 20 years, our retired guru has reached a terminal account value of $10.3 million (12.4% annualized), while our working guru’s account has swelled many times larger to $38.3 million (20.0% annualized).
This example is ridiculously oversimplified (inflation-less, constant trading returns, etc.) but the point doesn’t change and is applicable to all of us, guru or not: the power of compounding benefits the trader who keeps his capital doing what it does best – trading – not putting food on the table.
The logic grenade is a total dud (unless of course said guru purports to consistently make 100% a year, or trades a very, very large account, or eats canned beans every night, in which case, none of the above holds true, and yes, said guru should be sitting on a beach somewhere).
Happy Trading,
ms
P.S. The follow up logic grenade says that if we share our ideas or our strategies in the public domain, that they’ll become less effective. Anyone who makes that argument just doesn’t understand how incredibly large the U.S. market is (or alternatively, just doesn’t understand how small MarketSci is). This grenade, like the first, is a dud.
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Filed under: Random Stuff | 26 Comments
Good post, Michael.
So I guess this prompts the eternal question: if I show you mine, will you show me yours?
P.S. With my iPhone, I find it so much easier to trade from the beach these days…
Egad…I think Bill Luby just asked to see my junk.
In all seriousness, I have no idea what that meant =)
Now that I’ve given you a full day to be worried, I thought I might mitigate (some of) your concern by letting you know that my comment was a hopefully-not-too-cryptic offer to show you my *trading strategies* if you show me yours…
Apologies for the unintentional hand grenade.
Cheers,
-Bill
Why would you even bother to respond to the question that precipitated today’s blog post?
RE to Ven: because I think dispelling trading myths is an inherently good thing (and this is a common one).
How about this for a reply: some people love that they do, so why retire and sit on a beach? Winners love the game…money is mostly just a way to keep score. Why would anyone just want to sit around and do nothing when they could be playing the game?
Michael,
I guess you don’t know the meaning of tosser in in brit. English?
It stands for someone who is jerking off.
Cheers,
Markus
RE to Markus: I live abroad, so I’m pretty familiar with crass british english =) The “tosser” was intentional…just waiting for someone who speaks the queen’s english to catch me on it. michael
Michael,
Are the results that you show in the “Strategy Performance” update for the RH S&P 500 strategy representative of the 2x leveraged or unleveraged version?
RE to Kraig: 2X leveraged. Side note: I’m assuming based on the fact that you mentioned the “unleveraged” version that you are working with Scott Daly – note that he is (I believe for 100% of his RH clients) trading a mix of the S&P 500 and Russell 2000 strategies. michael
michael, I’m 52 and fall into the retired catagory having made a killing from 1995-2000 and quite honestly understand why someone would ask the question. let’s be honest, the problem with all of these quant models (and I continue to trade my own acct) is that over time they ALWAYS degrade regardless of “adapting” or not. just look at the THETA website for proof. the leaders always change and there are few to none who do well over a long period. truth be told, there is more discretion in trading success than you’ll admit-at least in when to pull a blown out system. so therefore I think to be blunt you’re a pro because of a LACK of confidence not a confluence. I mean let’s face it, if you don’t have at least $10M by the time you’re 50 in your trading acct you have not been very successful and if you do have at leasy $10M why trade OPM?
respectfully
steve
RE to Steve: very good comment and I agree with most of what you wrote…particularly the bit about being a pro because of a “lack of confidence” (or I would say a “healthy respect for the unpredictable and unknowable”).
The one bit I would disagree with is that if you’ve been a good trader, you’ll have X amount by X date and wouldn’t manage OPM. I think the love of the game is enough to keep a lot of us in play regardless of our acct balance. And even if it’s not (meaning the folks who do this purely out of love of money), I don’t think enough is ever really enough…one man’s $10m is another man’s $10.
michael
hi michael,
first off, great site. im a long time reader, and i wanted to say thanks for all the great content on here.
regarding this post, i just think that most people have a skewed perception of what it means to be a “good” trader. they believe that if you have an edge, you can just jack up your leverage and print money from the markets every day. the traders look for an edge in the markets (this is where the skill comes in) and then bet the house every time. if your good enough to find the edge, then the logic is, the money should be flowing in. the media has largely helped perpetuate this fallacy by highlighting trades by paul tudor jones, george soros. (imho, the trade that broke the bank of england was a gross exerageration of risk -> he had a $10 billion position with an aum equal to a fraction of that. he literally bet his entire fund)
but anyways, my point is that from what i can tell, being a good trader means managing your risk enough to stay trading day in and day out. in other words, playing defense to preserve your capital is as important, if not more important, than gaining additional capital. so you may not be on a beach somewhere, but at least you don’t have to start from scratch because you bet it all on one particular trade.
to answer the original question, you can point these tossers to your statistical edge in the market and your accurate risk management. you can also show them that the beach gurus are an example of survivorship bias and not neccesarily measures of skill – given millions of people consistently betting it all on 00, your going to have a handful of billionaires due entirely to chance. since you don’t have the beach gurus’ risk-adjusted returns, you have to assume it’s the former and not the latter.
also, steve, ,
would you care to share a link to the THETA website? or perhaps some google search terms? it sounds interesting.
thanks
-allan
RE to Allan: agreed on everything you wrote. I’m sure some folks read my original post where I talked about 20% annualized after-tax return and thought, “geez, I heard from such-and-such-banner-ad that real traders are making that much a month!”…this guy must really suck. But you’re right…here in the real world, trading is a plodding, cautious game.
Thanks for the comment. You can find Theta at http://www.thetaresearch.com/. We have a couple of programs tracked there. They are similar to Timer Trac (which is the track record I show on this site).
michael
Well from this post, we can deduce that you’re not “a homeless guy using the free wireless at the public library”. Free wireless won’t get you anywhere- you’d need a laptop to use it. Which most homeless people I know don’t have (small sample set though…I don’t know many). Instead, you’d be using the public computers (which don’t run on wireless). I think we can safely assume that if you were indeed homeless, you would have pointed there instead of to the wireless that was actually useless to you. But who knows, maybe you were using reverse psychology to throw us all off :-)
Proof positive that the MarketSci Blog attracts analytical types =) michael
First of all, I think that it’s kinda funny that the post that has attracted the most comments in a long time is a non-geeky (or is that geekless?) one. There’s probably some message there…
The point I want to make is that I think the original blog post misses an important concept: sure, the retired guru winds up with ‘only’ $10M, compared to the working public guru’s $38M, but guess what? The retired guru had 20 years of sitting on the beach (or painting his guts out, or climbing the most difficult and exhilarating mountains in the word, or…. you name it). Meanwhile, the “working” guru never gets a trading day off, has to produce a set of trading signals every day, has to manage accounts, has to answer emails from clients who didn’t get their signal or don’t know what to do with it, has to write periodic blog posts (and respond to verbose commenters), has to collect bills, pay taxes, and just generally run a small business. (which if you’ve ever done it, you know is not easy)
So sure, you wind up with $28M more after 20 years, but you know what? I’d take the $10M and 20 free years every time!
(actually, I might even settle for less, but don’t tell anyone)
RE to CarlosR: we’re getting a little philosophical here, but I agree with you (to a point).
On one hand (and I’m speaking for me personally) it’s important for me to keep my head in the game and not disconnect from OMP (a) because it makes me a better trader, (b) as this post talks about, keeps my trading capital trading, and (c) is something that I genuinely love doing.
On the other, I’m very, very protective of my work-life balance. I’ve intentionally designed my trading (and my business) to require as little of me as possible. My flavor of trading takes literally 10-15 mins a day. I have partnered with folks like Scott Daly to take care of the daily grind of dealing with clients. I write when I want to write, (and as anyone who has emailed me knows) connect when I want to connect.
So in short, yes there are things money can’t buy. And I would (again, personally) never sacrifice happiness for my business. But really, what the hell would I do on a beach in my waning days? I’d probably be reading about trading and itching to share my ideas about it. Wait…that’s what I’m doing now… =)
michael
There is a great book named “The Money Game” that is based on first-hand experience on Wall Street during the 1960’s. It is a great read, but I want to highlight one excerpt that has always stuck with me. The author comments that most people “in the game” won’t admit it, but they wouldn’t trade the joy of being in the game for guaranteed 20% annual returns…despite the fact that their odds of achieving such returns are statistically minuscule. Meditate on that, and I think you will find the underlying concept presents a real opportunity for self-actualization.
Bottom line: some of us love the game. It is helpful for us to admit it, and recognize that we derive enjoyment from the process, not just the results. Some of us are cognitively predisposed to seeking puzzles to solve, and the market is an incredibly stimulating, never-ending puzzle. If it weren’t for the joy of trying to solve the constantly-evolving “market puzzle,” then we would be bored. Sitting on the beach indefinitely (or climbing mountains, or whatever) may sound appealing to some, but for others, real satisfaction lies in being engaged in cognitively-challenging activities.
P.S. Scott Daly *does* offer the ability to participate in RH strategies that are *not* a mix of the S&P 500 and Russell 2000 variants.
Also an explanation: you have several times emphasized that markets are dynamic and you have to adapt to them – quite difficult sitting on a beach…or put another way: I have several times witnessed people loose their businesses and fortunes on the golf course. thinkning they were safe because they had invented a money making machine…
Michael,
I recall you mentioning Condor Options in a past post, and that got me to thinking: I would like an automated way to place a safety net under my portfolio that protects against catastrophic short-term market declines.
Put another way: let’s say I’ve got X number of dollars invested in a variety of strategies that are “normally” uncorrelated with each other and with the market. Since we know that anytime those strategies are net long, they are exposed to the risk of a short-term catastrophic market meltdown (e.g., what would probably happen if there was another major terrorist attack in the U.S.), is there some sort of automated way to use options to purchase “insurance” that would limit that “meltdown risk.”
I don’t want to be constantly manually adjusting a portfolio of puts, so I would be very interested in some sort of cost-effective way to have an automated process that limits short-term “meltdown risk” to, for example, 10%.
Please share any insight you might have on this…
perhaps I should have clarified, while I do own a house on the beach and do spend a lot of time on the beach, like Michael, every day at 3:45 I’m checking the markets and TRADING. I also only trade frictionless funds. the point is once you reach a certain amount of capital and if you reasonably expect a high rate of return (I’ve averaged over 30% since 1995) then trading OPM is illogical, at least to me.
another point, if I could get a “guarenteed” 20% or even 15% return, I’d quit in a heartbeat. The markets are omni capricious and staying ahead is a PIA.
I’m also one of those guys who was retired early eight years ago (notice the passive tense) and have been living off of managing my investments, writing a blog and taking out a salary – just like your hypothetical retired guy.
I’ve been loving it except for the horizontal market periods like the past 3 months when it’s really tough for a trader to make money either on the long or short side. Trying to catch the fashion of the day be it commodities, emerging markets, forex with a significant enough portion of your portfolio to make a difference is too risky. So we sit and wait for the next momentum trend to emerge.
I’ll take a slightly different tack from the above comments. Your assumption that the working guy can get the same return as the retired one is one of the biggest fallacies in your logic. While working, I could never afford enough time to make intelligent timing or selection decisions. It was only after trading full time was I able to do that. Especially, the decision in January 2008 to sell everything and go into an all-cash position for most of the year (except for the odd purchase of SPX double-long or double-short or precious metals and forex ETFs when fear for the banking system was rampant.
I lost a pile during the Tech Bubble Crash because I was working; I saved a pile in the Housing Bubble and Banking Crises Crash because I was retired. Just my humble opinion.
RE to stockchartist: the post is about a trader who does or doesn’t work in the markets, not a doctor, engineer, or garbage man. I think it’s pretty safe to assume that (speaking for myself) Michael Stokes eating and breathing this stuff everyday (working with investors, developing strategies, writing for this blog, etc) outperforms Michael Stokes sitting on the beach. michael
Four problems with the beach.
(1) It’s hard to be good at something unless you enjoy it. Why be on a beach if it’s more fun to be researching market behaviors?
(2) It’s easier to get other people to talk to you if you have something to offer. Why not offer them a way to make money? Everybody likes that.
(3) There’s more profit in “20% of mine, and 2% of 100 other people’s” than there is in just “20% of mine”.
(4) Sunscreen tastes nasty.