The 25 most important lessons I have learned from life as a day trader
One of my clients retired at 50 to become a full-time trader, hoping he could shrug off the rat race and the typical work-sleep-work life.
Fifteen years later he is still "retired" and still trading full time. Now he calls it what it turned out to be: trading not investing. That's what happens if you do it daily. There is no set and forget - it's just a series of individual stock-based battles and if that's investing, so be it, or if that's trading, so be it. It's just an endless, but enjoyable (for him) financial survival exercise, in any stock over any time frame.
He says long-term investing is mostly born out of denial, a convenient high-brow excuse for doing not a lot of research, doing a moment's stock picking and then a lot of hoping.
"Being a bad investor is for rich people," he says.
He is not rich, but he owns himself, which includes playing a lot of tennis and golf and being "free" to do what he wants when he wants. "There is a lot of good stuff to do between Monday and Friday when everyone else is busy," he says.
He has written an unpublished "book" about how to survive as a private investor, a beginner's guide as it were. It would never make it past the publisher in its current form because it wasn't written to sell, it was written to clarify his thinking. And as he will tell you, there are more talented traders, better systems and superior wisdoms out there, but this will do him, and it might just interest you.
It was written by a man, for himself, without boundaries. You might find there is something in it for you. Here are some of his themes:
- It's not gambling. Understand the difference between what you're trying to do and gambling. Gambling doesn't deliver because it revolves around luck, and luck is doomed as a means of reliable progress. If the government wants everyone sucking on the state pension, then it has done the right thing. It has made superannuation savings accessible to often unqualified and impatient individuals who are now bombarded by investment platforms with endless advertising dollars that say clicking buttons on your mobile phone, and betting on currency and stocks, is smart and clever and it is easy. It is all the utter opposite of the truth.
- If you want to gamble, gamble. There is nothing wrong with that - most people love a bet - but don't gamble with super money. Far better you open an online betting account and lose $10,000 a year fulfilling your gambling urge in the open than you take the same approach to the money that has been painfully collected over decades to buy groceries and pay electricity bills when you are a retiree.
- Money is time. Making money is buying time, and losing it is giving away years. The core purpose of trading activity is to earn time, time without a job, time without pressure, time without worry, time to do whatever you want when you want. Money is freedom and freedom is measured in hours, days, weeks, months and years.
- Superannuation is real. People lose sight of the value of super because they do not have access to it, so they take a devil-may-care approach to investing it. But it's precious. Superannuation money is real money. It is cash. You will be withdrawing it from an ATM one day. Treasure it. Take it seriously.
- Learn to earn. There is a base level of trading knowledge you can, and should, acquire before you go trading, but it does take time to acquire. If you don't have the time and interest and are impatient to set up your trading account and start hitting the buttons, you are taking unnecessary risks. Risks you can avoid with a bit of application to the cause. It is about learning a process, and you need to start with a clean sheet.
- Get a comfortable chair. Buy yourself a comfortable chair. You will be spending a lot of time sitting in front of a screen. Make your environment as welcoming, fresh and pleasant as you can. If you have a view, so much, the better. You don't want to be doing "the stockmarket" in a windowless room in the dark.
- Do not trust yourself. You do not know what you are doing, don't pretend you do. You are not a hero; you are a risk to your retirement. Protect yourself from yourself. We are not wired to win naturally. You need to unplug from emotions, from gut feel, from machismo, from confidence and from anything that isn't logical.
- You don't have to be smart. Understand that it is not a matter of intelligence, it is a matter of learning, and your brain needs practice. Give it the time to learn. Travel at your own pace. It's not a competition with anyone else but yourself. Don't rush it.
- Treat it as a business. Set a target like "I will finish the first year with the same amount of money I started with". If you can manage that you will have done well. If that means sitting in a room doing nothing for a year but reading books, learning systems and paper trading, so be it.
- Develop your gospel. When you first start your trading education, you will doubtless begin by reading about other traders (the Market Wizards books would be an example). Every idea seems fantastic, and you quickly decide that you will adopt this process or that process. Don't. By the time you read all those books, you'll realise that all traders go through a journey from naive enthusiasm through bitter experience to hardened realist. Don't you dare press those trading buttons until you get to the end.
- Include all costs in your results. Subscriptions, brokerage, memberships, fees, computers, internet, the opportunity lost from not working. It is all part of the retired trader equation. It is the bottom line that matters: the profit minus the losses less costs. It is not just about the profits.
- Minimise costs. If money is time, costs are time lost.
- Read the truth tellers. If you can, find people who are prepared to tell you what you don't want to hear. The plain truth is gold in an industry that has one purpose - to sell you something.
- Mentoring. Pay for training if you can find it, and if you have the time. Any learning, even if it isn't the Holy Grail, even if you don't adopt it, even if it's wrong, turns on the lights and lets you see all the other lights that are off. And, by the way, a free seminar from a platform provider is not education, it's a client acquisition strategy.
- Get out and about. Interaction is essential to being objective and having your ideas. Interact with other investors. Email, investment clubs, forums and anything that gives you objectivity. You can do that online but doing it in person is a good game. You might (will) find some like-minded people, your future friends await you, people who are not your friends now but may end up at your funeral, people who are looking for people like you to share their common interest. You are not the only smart investor out there who is a bit lonely.
- On the way to success expect to fail, fail, fail. Expect failure. Failure is good. Failure is progress.
- Do it on paper. If you are worried about failing or can't afford failure, do it on paper. When you start succeeding on paper, start with $10,000, not $100,000, but only when you think you have a process. Prove the process a few times before trading with more.
- Write it down. Write down your process, the steps you will take when deciding what to trade and what to do after you've bought. Start with something simple, and add to it, improve the process, from experience, with every trade. It will continuously evolve. But you have to start it, and the way to do that is to write it down.
- Attrition. Analyse your results and make corrections to the process that would have improved the outcome. Learn. Adapt. Develop the process.
- Be brave enough to do unusual things. Everyone tells you how to invest, as if there is one way, the only way. But it's not working for most people, and just maybe the Lord has been waiting for centuries for someone as dumb as you to come along and prove something else was possible and works. Do what you think you should do, not what someone else tells you to do. You will never learn from that.
- There is no Holy Grail. There is no one way of succeeding in the stockmarket. Even if there was, it would expire as conditions changed. The Holy Grail is found by constantly adapting what currently works, not sticking with it forever.
- Eradicate emotion. You cannot operate the process when you are annoyed, desperate, upset. Step away if you are not in the mood.
- Risk management is half the game. In the end, after many years, you will realise that the goal is not to end up as a good investor. Eventually, it becomes more important, and it is central to success: to end up as an effective risk manager. Managing your investment is more important than picking it.
- You are not alone. Everyone else goes through what you will go through. Everyone else has failed to take an early loss, everyone else sells only to see the price rise immediately, everyone else has sat like a stunned mullet when they are losing money. But you will learn, and you will get better. Expect those mistakes. Allow yourself to learn.
- Nothing comes easy. Expect it to be hard, but if you have the motive (freedom!) and genuine intellectual interest, then investment, or trading, or whatever you want to call it, can become fantastic, absorbing and intellectually stimulating.