Friday, March 30, 2012

This pretty much sums up why I trade stocks.

THE GREATEST MYTH ABOUT TRADING.

Posted by Brian Lund in Trading and tagged with Day Trading, Risk Management, Stock Market,StockTwitsMarch 29, 2012

Elementary school can be a brutal place if you are not careful.  It’s not so much the possibility of being bullied, shunned, or made fun of as much as it is the fear of being “branded.”

Yes, this is the place where if you didn’t play your cards right, you could end up with a nickname that would scar you for life.

Enjoy your grilled cheese sandwich a little too much at lunch one day, well guess what….your new name is “cheese.”  You might as well just get it tattooed on your forehead because it is going to follow you wherever you go for at least the next 20 years.

This nightmare scenario became a reality for a guy I knew named Chris Stevens.  To be honest, Chris wasn’t really a friend of mine.  In LinkedIn terms he would have been considered a “2nd degree contact,” meaning I was acquainted with him, but really only hung out with him because one of my good friends was friends with him too.

Back in the 70′s they had this weird annual event called the Presidential Fitness Council Test, where elementary school kids would be tested to see how many push-ups, pull-ups, and “line straddles” they could do.  Arnold Schwarzenegger was even Chairman of the Council for a while.

The winners in each grade would get a medal and a certificate signed by the President. There were always a couple of pre-pubescent ├╝ber-athletes at each school that took it seriously, but most of the kids just sleepwalked through the process, doing enough of each exercise to be deemed respectable.

The test started out okay for Chris.  He got through the line straddles with a decent score and was able to post a reasonable amount of pull-ups.  But it all fell apart at the push-up mat.  He did seven.  Seven measly push-ups.  I still can’t figure it out to this day.  He wasn’t a weak or scrawny kid, but for some reason that was all he did…..seven.

I’m not a religious guy, but I will swear on a stack of Pumping Iron DVD’s that I never heard anyone call him “Chris” again after that.  He was simply known as “Seven.”

There was no committee meeting to decide it.  No decree from on high.  Just an instinctual understanding from all those who knew him that this numerical scarlet letter was to be his new and permanent moniker.

The transition through intermediate and high school did nothing to erase its hold.  Just like with Norm on Cheers, in any room he walked into, the occupants would simultaneously raise their heads and shout “Seven!”  And eventually, in some twisted linguistic derivation, the nickname ultimately just ended up morphing into “Sev!”

Sev was a solid guy, but not too smart and the one thing I remember about him (besides the push-ups), was how on one 4th of July he tried to pull a stunt that would have made the Jackass crew shudder.

We all had few packs of firecrackers, and like any normal young male pyromaniacs we were trying to see what the “coolest” thing we could do with them was.   One guy threw some in a hole, another put a few in a tin can, and still another chucked a whole lit pack into the air at once.

Sev thought he could do everybody one better, and decided he was going to light one and drop it in the gas tank of a car.  Like I said, Sev was not the brightest guy, and since I am actually writing this post you can infer that his plan did not work out, but it was one of the riskiest things I ever saw anybody do.

Risk is something that most people associate with trading.  In fact, to the public at large, you are often likely to get the response, “isn’t that risky,” when you tell them that you trade for a living.  However, I think that is one of the biggest myths about trading, and I assert that trading is no more risky than most other jobs.

When I ran my own business, on the first of each month, the moment I woke up I was 60K in the hole.  That meant that in order to just “keep the lights on” I had to generate 60K in revenue each month, even before taking a dime out for myself.  And every month that I decided to keep my company going, I had to take the risk that I would not meet my nut.

Trading has no operational costs (or very minimal ones), which makes the decision to pursue the endeavor a relatively risk free one.

“Yeah, but where else do you have the possibility of losing more money than you started the day with,” is the lame rebuttal I often hear.  Really…?  These people obviously have never run a business.   If one of my employees damaged a client’s merchandise or backed a truck into a parked car I could easily lose more money than I started the day with.

Trading has no operational risk.  No employee is going to hurt his back and jack your workman’s comp rates up.  No douche from OSHA  is going to unexpectedly show up at your office and tell you that you are not in compliance with a new law passed the previous week and are on the hook for a large fine.  And you are not going to have a piece of equipment go south on you that you have to drain your bank account to replace.

But that is only for business owners right? What if you do the “dance” by getting a four-year degree and going to work for a solid blue chip company?  Well in some ways that is one of the riskiest things you can do.  Now you have turned over the fate of your continued employment to some mid-level management asshats or fair weather board of directors. Take a look at how many people took that “safe” path to corporate security and got tossed out on their ear when the economy imploded in 2008.

Trading has no asshat risk.  Nobody will even come into your trading room and tell you that you are being downsized, or that the macrame conglomerate you work for is going out of business after 75 years because the board of directors couldn’t resist getting involved in arbitraging high risk CDO’s.

At the end of the day, trading is one of the rare businesses where ONLY YOU DECIDE THE AMOUNT OF RISK YOU ARE WILLING TO TAKE.

The reason that most people go off the rails and blow their account out is not because there is any outsized risk associated with trading, but because the barriers to entry are so low, they are able to jump in feet first without really knowing what they are doing (or they are a seasoned pro who lets their ego get the best of them).

Being a pro football QB is risky.  Being a firefighter is risky.  Being a jet fighter pilot is risky. But the average Joe can’t just jump into those positions without a shitload of training and without attaining a high level of competency.  And thus the risk is less for a Tom Brady, for a fire Captain, and for a Top Gun pilot.

Trading gets a bad rap due to the “Sydney or the bush” portrayal it has received in pop culture and OWS type propaganda.  It’s perception has been “Gekkoized.”  But in reality it may be one of the safest professions if you do it properly and make the choice to keep your ego in check.

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