“I’m rapidly losing faith in this whole game, Barry.”

>

I received a disturbing email from promising young man who works at a well known shop. He expressed his frustration with the entire absurdity of his job, with Wall Street, and with the ridiculousness he sees swirling all around him.

My reply to him follows:

>

XXXXXXX,

I cannot restore your faith or improve your morale (Only you can do that). What I can do is share with you what I have learned over two decades, and perhaps in these words you might find some small comfort.

Yes, there is an insanity to the markets that can make you mad if you let it. Instead, learn to see the delightful absurdity of it all. Revel in the stupidity, learn to read when the ‘wisdom of the crowd’ turns into an angry mob. Find some Zen in the foolishness of others.

Step back and look for the variant perception . . . then wait for it to become a money maker.

Consider this was an issue from 1996 or 97 until the collapse in 2000, and from 2005 to the collapse in 2008-09. It is a 3 or 4 or even 5 year time lag between the earliest inklings of recognition of mass stupidity/insanity, to any eventual collapse.

Time is always on the side of the patient. Study, learn, absorb all you can. You are waiting for the next opportunity to make your bones, your fortune, your reputation. It will come along eventually — if you wait for it and are in a position to take advantage when the moment arrives. As Pasteur said, “Chance favors the prepared mind.”

You must become a philosopher, a historian, a statistician, a trial lawyer, and a psychologist when looking at Mr. Market. Simply reading the data and trying to trade/invest off of it is a sucker’s game. The noise so totally outweighs the signal that it is easy to get caught up in distractions. For the vast majority of investors, dollar cost averaging into Indexes — then forgetting about it til retirement — is their best bet. Its not my favorite strategy, but anything else is too complex for mom and pop to work for them.

But you work in the business, and your clients want/need to outperform, so you must give them something value added. You need to be able to comment on the madhouse — and you can do so acerbically, mockingly, derisively at times — while recognizing, acknowledging, and waiting for the technical set up to bet against the crowd.

The saying goes “The trend is your friend.” The smart money adds ” ‘cept the bend at the end.” The momo crowd, the lemmings, the mad money all pile onto that trend as the trees grow to the sky. Especially at the end — that’s when the weight of the sheeples, the johnny-come-latelies ultimately pressures that tree, and is what causes that deadly “bend at the end.”

You must learn patience, young grasshopper. You must have faith that EVENTUALLY, the sorta kinda, almost efficient market will figure it out. That is when money returns to its rightful owners. There will be long periods of time when the blowhards, the jackasses, the arrogant, the ignorant will be eating better than you. During the dot com bubble, the dumber you were, the more money you made. Many of those who understood how silly things were missed out on the boom.

But this state of affairs is temporary. Eventually, the knaves starve to death under the oppressive force of their own ignorance. Be patient. The day of reckoning is often surprisingly late in its arrival, but it will not be denied. The beast must be fed.

Trust me when I tell you, its worth the wait . . .

Category: Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

74 Responses to “Advice to a Young Market Participant”

  1. I was thinking about this subject for a few days due to an unrelated issue, and so when I got the email, it was at the tip of my tongue waiting.

    I love when a post simply tumbles out complete . . .

  2. Ken says:

    About the grasshopper:

    TS: I know you also wanted to discuss the current interest rate environment. Who benefits here, who gets hurt, and what are you doing at Contango to make the best of this situation?

    KP: Contango is currently investing $75 million in overnight T-bills and earning one (1) basis point or .0001. That means in 12 months we will have earned a whopping $7,500. We’re losing money on this investment after inflation and taxes. In short, the prudent savers in our society continue to subsidize the big banks that bet too much on financial instruments they didn’t understand, homeowners who lied about their net worth and thought their houses were ATMs, and our federal government, which is fiscally and monetarily dysfunctional and determined to print us into poverty.

    It’s like the parable we learned as school children except that we’ve decided to punish the ants and reward the grasshoppers.

  3. Adult Franklin411 says:

    Copy this letter and send it to 10 of your best friends and you will have good luck in the markets for the next year — guaranteed!

  4. postman says:

    Excellent reply, Barry. Your young friend is lucky to have you as a mentor.

  5. Andrew says:

    Wow, Barry, thank you man. I needed that.

  6. Robespierre says:

    That’s beautiful —

    I always thought of you as a clever trader and a savvy wiseass — I had no idea you were a poet also.

    ~~~

    BR: Um, thanks (I think)

  7. You must become a philosopher, a historian, a statistician, a trial lawyer, and a psychologist when looking at Mr. Market.

    …and occasionally, a baby sitter

    It is funny you should write this Barry because just the other day I was thinking about one of Warren Buffett’s trading quotes.

    To paraphrase he said something like: Treat your trades as if you have a five punch card for your entire life. One punch for every big trade.

    That began to resonate with me as I applied it mentally to my trading. Having survived the nasdaq boom and bust (barely) and then the Bush boom and bust I am beginning to understand what he means by the big moves.

    Buying at the bottom of those busts with as much cash as you safely can has made a lot of people a lot of money (I’m thinking specifically if people had bought some of the best dividend stocks at that time and what kind of cash flow they could have created for themselves). I thought about how you want to accumulate your cash until you get an opportunity like that so you can jump in with the most cash possible.

    So that is where I am today. We are in an in between time and who knows how long it will be before the next punch ticket opportunity comes up. So what do you do? Capital preservation and income production is paramount while you wait for the opportunity to come to you. It will come again though and for those who have experience in the market it will have a label on it

  8. solanic says:

    So you’re saying one should not worry about the gigantic unregulated CDS market, foolish deeply ingrained moral hazard, lack of political will for real financial reform, and the stupidity of the American people arguing about the wrong things?

    The world will not come to an end at the next blow up?

    ~~~

    BR: Heh heh

    No, what I am explicitely saying is be patient in setting up the trade that makes that bet on the world coming to an end at the next blow up!

  9. bondjel says:

    You say: “For the vast majority of investors, dollar cost averaging into Indexes — then forgetting about it til retirement — is their best bet. Its not my favorite strategy, but anything else is too complex for mom and pop to work for them.”

    Here’s another strategy for Mom and Pop, not as replacement but in addition to your suggestion, because what you recommend for Mom and Pop is what Buffett also recommends. Additionally, Mom and Pop can go to Buffett’s shareholder letter:

    http://www.berkshirehathaway.com/letters/2009ltr.pdf

    and just look at what his largest stock investments are and ride his coattails by buying the top five or so that he’s been purchasing in volume recently. At least you can do this till he kicks the bucket.

    And if you doubt this is a good strategy just take a gander at his 55 yr record of more than doubling the S&P 500′s returns on the first page of the letter. If that’s not good enough for you buy Roger Lowenstein’s fabulous book, Buffett: The making of an American capitalist. There you can see his even better returns with his private partnership between 1958 and whenever he closed it (1969?). If this isn’t the best investing record in world history, and a record honestly kept without fudging, then please someone direct me to a similarly documented record that is better.

  10. Through the Looking Glass says:

    I would have told him that he’s young ,find something you like to do. The market will rob you of the satisfaction of using your instincts and common sense to come to logical conclusions. Find a job where money isn’t the goal but a byproduct of it. As some wise person put it “Money is a good servant but a poor master” and “What does it profit you to gain the world but lose your soul?”
    All the financial problems of the day were concocted by those type people who put money, greed and prestige ahead of being a good human. Do you really want to join those ranks? You only have about 80 usefull years here , find a job where you can feel comfortable knowing that your job is not totally in the hands of manipulators trying everything they can to make you wrong so that they can take your money.

  11. MorticiaA says:

    BR: great reply. Thank you so much… while I don’t work on the Street, I DO work in the industry and, frankly, I have been fighting the same feelings as the author of the email. Your reply helps me as well.

    Also, kudos to the author of the email. A conscience is a great thing.

  12. Find a job where money isn’t the goal but a byproduct of it.

    Yes, like trading!

    uhhhh…….never mind

  13. PeterR says:

    This question is one that only a very old man asks. Does this path have a heart? All paths are the same: they lead nowhere. They are paths going through the bush, or into the bush. In my own life I could say I have traversed long long paths, but I am not anywhere. Does this path have a heart? If it does, the path is good; if it doesn’t, it is of no use. Both paths lead nowhere; but one has a heart, the other doesn’t. One makes for a joyful journey; as long as you follow it, you are one with it. The other will make you curse your life. One makes you strong; the other weakens you.

    The Teachings of Don Juan
    Carlos Castaneda

    [not a complete quote of this section, but the best I could find online right now]

  14. BuffaloBob says:

    I would also advise this young man to find a new line of work. After 30 years on the retail side as a broker, manager and analyst, I am completely disgusted. If you want to be successful in retail, you need to resign yourself to the fact that your job is to steal from Mom and Pop investors. New products and methods are regularly devised by Wall Street to implement this business model, but the model never changes. If you can make a good living if you can ignore or rationalize your unethical behavior. Mom and Pop may do OK averaging into index funds, but there is no profit for the banks/brokers in such a strategy so it will never be marketed.

    This young man should also be aware that even if he is successful and somehow retains his ethics, he is being a completely unproductive member of society. Wall Street long ago ceased being an efficient allocator of capital, its only useful purpose, but has transformed itself into a casino for the somewhat knowledgeable and a con game for the average Joe looking to retire some day.

    Do I sound bitter?

  15. bondjel Says: March 5th, 2010 at 10:38 am
    You say: “For the vast majority of investors, dollar cost averaging into Indexes — then forgetting about it til retirement — is their best bet. Its not my favorite strategy, but anything else is too complex for mom and pop to work for them.”..

    maybe I Failed the last installment of the RIF correspondance course(?), but, ‘bondjel’, where was that, ‘said’, at all?
    ~~
    past that, if yon’ e|mailer’s intent is to continue ‘hoeing the Row’– BR, your advice is well-laid, and well-proffered..

    http://www.thefreedictionary.com/proffer

  16. cognos says:

    Hmm… I kinda disagree.

    I work in LS equity and macro hedge funds (when I’m not blog posting). I’ve worked at top places with consistently profitable people.

    IF it all seems crazy to you. STOP, change what you’re doing. Either start reading different people or approaching it differently. Or maybe the markets are just not for you?

    SOMETIMES events and price action seem crazy to me (thats one source of opportunity). But mainly I am looking to be >70% correct, and more often then not when I am in the other 30% – I AM WRONG.

    This basic instinct to say, “eh, but thats crazy”, “thats not fundamentals, that technicals”, etc. Its all just an EXCUSE for being WRONG. My job is to: “be right”, “predict future price action”, “make money”.

    The first step to eliminating weak thinking and really learning is to be 100% honest and clear about the process and goals. Eliminate the mental tendencies to make excuses, justify, and mentally revise numbers to protect your ego. Track performance very simply and directly. Work to be profitable every single month OR to be so proftable in the long-term that your losses are worth it. Study the best people… how do they work? how well do they perform? set a goal to be EVEN BETTER?

    Here is a great interview from Paul Tudor Jones that covers it ALL:

    http://chinese-school.netfirms.com/Paul-Tudor-Jones-interview.html

  17. JustinTheSkeptic says:

    It aint easy when it’s easy, but the uninformed think that it is. Is that what your saying Barry?

  18. bondjel says:

    Mark Hoffer: I copied it right out of Barry’s letter.

  19. JohnDoe says:

    Thanks for this Barry. Very helpful.

    Recently I have been pondering whether I should go back to grad school for my MBA or if I should get a CFA instead? Any thoughts?

  20. jz says:

    Excellent response, Barry. It sounds like that fellow just needed to have some faith.

    The only thing I would like to add is that I am a little concerned with how many folks have flooded the money management system. There seems to me that there are way too many people buying and trading stocks these days and too few interested in building a great business.

    On a personal note, I looked at a serious of investments and have concluded that one of the best things to do with my money was invest in myself and ramp up a business. The returns I think I can get far exceed those of the investments I was looking at. I also like the fact that the return on my investment will have much more to do with my effort than the effort of others.

  21. Brendan says:

    How the Common Man Sees It @ 10:45 – You nailed my feelings there!

    I’m not in the finance industry, but rather in the home-building/construction industry. The publicly traded home-builders are completely dysfunctional because the stock market prices are driving the industry rather than the industry driving the prices. It’s better now that things have calmed down, but I saw horrible decision after horrible decision being made based on what was being shown on the books rather than what was happening on the ground. A lot of good long term decision making is highly discouraged at the publicly traded builders by Wall Street. I would talk to people at the local office and they would know what they were doing was going to kill them, but basically had to throw up their hands and submit to the guys back in NY. Sure the mom-and-pop shops got caught up in the frenzy too, but not anywhere close to the same extent.

    I’m sure that much of the young grasshopper’s frustration is with the fact that the market is no longer working the way most of us non-traders understand that it was intended. I guess some are naive enough to believe that investment is supposed to be the vehicle to growing a business, not the driver.

  22. dead hobo says:

    1) congos, usually you’re just a joke and nothing but noise to me, but your post above is perfect and on point. If you’re going to bet for a living, then do it well and filter out the distractions. Don’t let a need for doing something with ‘meaning’ get in the way. Although, I’m a little surprised you didn’t say anything about putting a little profit in a coffee can regularly for a rainy day or a comfortable second half of life. Nobody has a perfect lucky streak, no matter how professionally they approach the problem.

    2) I suspect the whiner (sorry, you’re a whiner) confused the profession of finance with what the textbooks described (raising capital, investment banking, living by one’s wits) instead of what it really is … a way to earn commissions and a compensation system. I suspect you frequently hear comments like “Get the money from them now and collect the fees” and “they know the risk” and “it’s not illegal so we can do it” and see the embodiment of the greater fool’s theory many times a day … passing hot paper for a profit because someone’s might be convinced it’s worth more is probably routine (and it’s legal and easy if you approach it properly). You came in expecting to be a professional but you found out you’re just a higher level of insurance salesman beating the bushes for commission.

    Are you one of the people who try to convince 80+ year old people with lizard brain to get back in so you can earn commission? If not, your successful co-workers are. Whiner.

  23. Fats Trader says:

    That’s beautiful man.

    * sniff *

    I think I love you

  24. bondjel,

    no foolin’, I don’t see it..could you post the before, and after, ”context”?

    wow, on 2nd thought (~5th look) : “..For the vast majority of investors, dollar cost averaging into Indexes — then forgetting about it til retirement — is their best bet. Its not my favorite strategy, but anything else is too complex for mom and pop to work for them..”

    must have been(might be) “cognitive blindness”..
    ~~
    “Buy ‘n Die”, for mom and pop, or anybody else, to use BR’s parlance, “is a sucker’s game.”

    I think it’s funny that ‘mom and pop’ can understand the utility of ‘Auto’/'Home’/'Life’-Insurance(s), but “Put”-Buying–to protect their long-only 401(k) is “too complex”?

    Selling the Right to Buy/Premium Harvesting/Covered-Call Writing is from w/o their ken?

    if ‘mom and pop’ are, in fact, so enfeebled, they belong ‘in a home’, not ‘in the Market’..

    http://www.thefreedictionary.com/ken

  25. alfred e says:

    @brendan:

    “I’m sure that much of the young grasshopper’s frustration is with the fact that the market is no longer working the way most of us non-traders understand that it was intended. I guess some are naive enough to believe that investment is supposed to be the vehicle to growing a business, not the driver.”

    Core fact. THAT is what Charlie Munger is getting at when he says it’s basically over.

    Thanks.

  26. @PeterR

    Both paths lead nowhere; but one has a heart, the other doesn’t. One makes for a joyful journey; as long as you follow it, you are one with it. The other will make you curse your life. One makes you strong; the other weakens you.

    Just remember, the one on the left, that leads to the outhouse. That could lead to joy or curses. It really does depend on you ;)

    Of course, if someone forgot to refill the toilet paper then curses, guaranteed! That’s life though.

  27. dead hobo says:

    cognos, I believe the proper term for those traders who don’t put a little in the coffee can every week is “degenerate gamb*er”. Those who do manage to maintain a savings account are going about it the right way. As I mentioned before, the others are just glorified insurance salesmen and one call closers.

  28. crunched says:

    It’s easy to lose faith when the markets are being brutally manipulated by the government. The attempt to spin the jobs number has been in the works for days. Ramp GS through resistance on heavy volume yesterday for absolutely no reason. Ramp APPL in after hours in spite of bad news/product delays. And of course, the go to method of manipulation for the past four or five months. Ramp the futures after-hours. Including this morning BEFORE the jobs number came out.

    Ultimately all this deceit from those in power will have a disastrous affect. People are becoming more and more cynical and eventually they won’t believe anything the administration, or GS analyst, or JPM analyst, say… even when and if the news actually begins to be truly good. I know I already don’t. This is exactly what happened during the depression and wound up being the REAL cause of despair. People lost faith in their government.

  29. Thor says:

    DH – Always a pleasure to read your posts my man ;-)

  30. iratherbe says:

    You left out that it’s okay again & needed for young capable people to be teachers, engineers & doctors. It’s of no great sustained value to continually groom so many highly educated new generations as well dressed, over-paid, self entitled vultures & thieves (er, I mean investment bankers, lawyers, et. al.).

  31. Bomber Girl says:

    Interesting topic. I would tell the kid think about a few things regarding whether or not to stay in finance 1) like what you are doing 2) add value in what you are doing 3) don’t call it a game; you CAN call it a mess at the moment, however.

  32. cognos says:

    DH -

    If you’re an amateur gambling in markets, then yes… keep some cash, or a 50/50 mix of bonds and equities, dont quit your day job.

    In professional circles (read the PTJ article) we work for a multiple of controlled downside. A good downside limit is -10%. So >30% annual returns with 10% worse drawdown. This is not at all gambling. It is a controlled risk-taking process where hard work x creative intelligence = performance. We do this for clients at 2/20 fees (or more) and typically put >100% of our own money in the same fund. PTJ has 2 down years in 25… the worst about -10%, and he has a bunch of 50% and 70% years.

    More than “put a little in the coffee can each week”… I would say, “gradually get more conservative when things seem to be going VERY well” … AND … “gradually get more risk-friendly when things seem to be going VERY poorly”. Fear = opportunity.

  33. wpw says:

    Great answer Barry, but I must disagree with one point: “Eventually, the knaves starve to death under the oppressive force of their own ignorance.”

    No they don’t. Many of them will face that fate, but some of them, too many, survive and proper beyond reason. That is just one of the things we have to accept in this imperfect world.

  34. farmera1 says:

    Barry, a good short term road map. Long term, not so much.

    “I’m rapidly losing faith in this whole game, Barry.” Grasshopper has a good point and IMHO is justified in his loss of faith long term (say 4-6 years).

    Short term (just like short term profits can be “managed”) we can make do and some will thrive and even enjoy the game. But long term (4-6 years out) I think this country has truly jumped the shark.

    We as a country may survive and even thrive for a time (hopefully I’ll get my share) but with debt up to our ass (the whole system is built on ever increasing amounts of debt according to Greenspan) , medicare going down along with other unfunded mandates, the working and middle class sinking, assets migrating to the top 1%, rampant greed everywhere, corporations now allowed to give to politicians freely, multiple front wars: I don’t like the long term odds for a healthy and prosperous country. So yes I play the game short term, but I have thought long and hard about what the long term plan might be.

    Some longer term options I’m rolling around in my mind:

    1) Buy physical gold, platinum silver with a healthy amount of other commodities.
    2) Become as independent as possible, by generating your own food and energy for example.
    3) Move to another country (haven’t figured out where) that has a better probability of long term stability and health.

    I’ve done number one for years. I am investigating doing number two this year. Number three is a stretch with our family roots firmly planted for centuries in this country. Leaving is tough. It would be much easier if I were alone, but family comes into serious play here.

    So short term eat, drink and make money, long term I think is an entirely different situation. One best be prepared for what life throws at us. And right now Bob Feller as a young pitcher is warming up in the bull pen with is 100+mph fast ball and absolutely no control. I feel like I’m on deck with only a small probability of surviving what Feller (or fate) has to offer. Better wear a helmet this could be ugly.

  35. Mr.E. says:

    Beautiful! And based upon my experience very sage counsel.

    A few thoughts of mine …

    ■ “You must become a philosopher, a historian, a statistician, a trial lawyer, and a psychologist when looking at Mr. Market. Simply reading the data and trying to trade/invest off of it is a sucker’s game.”

    All true, especially the psychologist. Learn to read market behavior as a reflection of human emotion dominant at that moment. Recognize that the greatest opportunities are born out of panic and euphoria. Learn to see what those look like so that you will recognize their onset the next time, then have the courage to act. In between those two states, see and use the prevailing emotion of the largest segments of the markets to stay competitive in a long-term winning game by taking very calculated risks that if the worst happens nobody gets hurt. Understand that risk is not your enemy, and learn how to embrace and use it as your friend.

    ■ “You must learn patience, young grasshopper. You must have faith that EVENTUALLY, the sorta kinda, almost efficient market will figure it out. That is when money returns to its rightful owners. There will be long periods of time when the blowhards, the jackasses, the arrogant, the ignorant will be eating better than you. ”

    Again, extremely true. It takes a lot of patience and restraint. Forget the popular media as it will only serve to bias your observations and thinking. Instead, focus on fundamentals that actually do matter over the long haul and what market action is telling you about how people are thinking about today vs. the future. Listen, but don’t follow the popular noise.

  36. cognos says:

    But I also have a few other anecdotes that I think are helpful:

    1) You have to SEEK and FIND upside. This is the key to performance. Everyone misses, everyone has losses. Too many are focused on “not losing” in certain periods or in certain trades. The good investors dont really have “fewer misses”… (although they do)… but the real KEY… is that they FIND 10x, 20x, 50x trades.

    - Internet stocks from 1995
    - Real estate from 2000
    - Cyclical stocks from 2002
    - EM stocks, China/Brazil stocks from 2002
    - Mobile smart phone companies and assoc infrastructre (AAPL, RIMM) from 2002
    - Short ABX subprime, mortgage related companies from 2007
    - Short overleved companies from 2008 — casinos, media, PE plays, cyclicals
    - Recovery plays from Q1 2009

    EACH of those presented opportunities for 10-50x returns.
    Like PTJ says… diverse (small!) set of “highly skewed reward/risk trades”.

  37. dead hobo says:

    cognos, only a degenerate gamb*er and an idiot keeps it all on the table, thinking that the way they play is science and the other people on the other side are outclassed by your superior strategy. Unless you are just proffering droll satire by claiming that your retirement money is always on the table because your system is so good can’t lose, or unless you’re just making shit up (which means you have a different problem), you are a certifiable idiot.

  38. Arequipa01 says:

    “That is when money returns to its rightful owners.”

    Mr. Ritholtz,

    That is not what happens. What is, is. However, ‘rightful’? Rightful has nothing to do it with it.

  39. No BS says:

    @dead hobo – CNBC is now spelled COGNOS

  40. DL says:

    No good substitute for living through a few market cycles.

  41. [...] (Good) advice to a young market participant.  (Big Picture) [...]

  42. socaljoe says:

    Thank god for the stupidity of others. It would be a whole lot harder to make money if Mr. Market were rational.

  43. blueoysterjoe says:

    Awesome, awesome letter, although as someone who works in another field, I despair that I will probably be relegated to “mom and pop” investing, like index funds., for the rest of my life. There’s just not enough hours in the day..

  44. DeDude says:

    I am with BuffaloBob@10:59. Tell the young man to quit and find something productive to do with his life. No matter what you do in the financial sector it is, one way or another, all about taking money from honest hard-working mom-and-pop investors. So before losses his soul and buy a ticket to hell, he should get out of it and start doing something that is good for others than himself.

  45. Cynic_FA says:

    what is the difference between Buffalo Bob and Cognos?

    Buffalo Bob (like myself) is an old fashioned financial advisor trying to help real families make a return on their money. I deal with the mass Affluent $500,000 to $5 million. I have worked with most of my clients 15-20 years. Went to their weddings and Bar Mitzvahs. Retail FA’s like Bob and I use a dull tool set of long equities and bonds, maybe a little hedge.

    Cognos is the new generation of hard trading WTF money boys. They play with OPM for 2/20. The clients don’t even have a name, just a big check book. They are the uber wealthy or institutions who managed to avoid Madoff. If you lose a few million $ of their money they are still filthy rich by Obama standards. I applaud Cognos for what he does with more intelligence, cunning, and sophistication than I can imagine. but don’t call it investing. Munger was right “Basically it’s all over” when the country turns into a casino.

    The game is broken and Bob is right. A retail FA is less than an insurance salesman, client’s won’t see their 2007 principal again even if they die. Like DeDude says above “all about taking money from honest hard-working mom-and-pop investors”

    You miss the point when you call the young man, and me, “whiners”. I don’t believe in what I am selling. Barry says to wait patiently and make a killing when the world collapses as it logically should. You can’t do that with a retail client. How long can you wait in cash with ZIRP. How can you buy bonds when the Fed owns 1.9 trillion (now that is overhang) and the states are worse than Greece. And how do you invest in stocks for retail clients and prepare for the exit when the S*&T hits the fan?

    Thanks for sharing the letter and the forum Barry. I told my shrink a year ago, I can only stay to guide my clients with less risk because they would be abused by the “Successful” retail FA who took my place. Won’t be long before all the old timers are gone and all the money is managed by Cognos and Vanguard.

  46. ES says:

    I wish more people in the financial industry felt the way that young man feels. Then they might find something else, more productive to do. In the end, most of the financial industry is nor producing anything of value, they are jusy middle men., an overhead. And there is way too much overhead these days. Do we really need so many traders, financial analysts, securities analysts to porsper? Not really. So those who have calling to do something else more productive should be encouraged to do so.
    In the end, most of financial insdurty jobs can be divided in 2 categories: 1) professional gambling and 2) sales and marketing. Is neither one is for you, move on.

  47. Cynic_FA says:

    Barry,

    This may be one of your most thought provoking posts. Great to read the battle between the old guys like Buffalo Bob lamenting that the game is broken and “Mom & Pop” investors don’t have a chance and the new WTF gunslingers like Cognos who are playing the money game for 2/20 with OPM.

    The investment market for mom & pop is broken. Charles Munger was right “Basically it’s all over” when the country turns into a casino

    Probably would have been interesting to read my own post from 2:35 but looks like you might have hit the Delete button on me.

  48. Simon says:

    @DH I thought the paul tudor jones article posted by cognos was quite good. There really is no escaping that trading does not really generate any value accept perhaps by creating a market. But with interest rates so low there is not much choice for some.

  49. Through the Looking Glass says:

    One response stated that he works for a “top hedge funds with consistent wins” . This proves my point being that if you have enough capital and market tweakers its not hard to manipulate the market with as little as 10 million. Here Ill show you how its done:

    http://www.youtube.com/watch?v=HRa0B34jMOQ

    I like where he says”by the way,Im the only guy that’s going to admit this because I just don’t care” .
    Why care? , you already made your first hundred million or so.

  50. hidflect says:

    When I provided IT support for R_____, the Japanese arm of the Carlyle Group here in Japan (run by a total of 3 people) I did good tracking down an IR intrusion hacker and the principal operator and CEO took a shine to me. He explained his unique email issue showing the 1-2000 mails he received daily. He explained 98% of it just a constant stream of insider tips/info/rumor/whatever from CXO’s and the like all over the world. Just poured unbidden into his mailbox like a waterfall.

    “And I don’t even know any of these people!” he laughed. He admitted he never read even 1%. How it had all been set up I never inquired of course. But I had to back it all up to make space. About 2 Gigs a week, every week. The next month he called me over and let me watch as he executed a trade for $40 Million profit. He laughed the whole time repeating over and over “I’m not special… I don’t know anybody…” Over and over like a mantra. The picture over the printer with his arm around Bush I suggested otherwise. Stocks are rigged. It’s a mugs game. You can get lucky betting the right way but I wouldn’t delude myself that some complicated looking Elliot Wave chart is gonna get a leg over this guy and his gifted network setup for him like a monstrous global octopus.

    Now if this comment makes you angry and you feel like any kind of ad hominem rant calling me a liar then I would suggest that this INFORMATION has butted up against one’s dearly held World View about how the world must work to validate one’s activities and focus and has thusly triggered an emotional chord. It won’t stop what I just wrote being a fact.

    Also, please don’t bore me with tales about how much you’ve made. The casino is full of winners. Do something else.

  51. Moss says:

    Good advice.. what is a shame however is that not many people get that advice and that this type of advise is what is needed to make sense of it.

    Buffet says it all with the simple statement of being greedy when everyone is fearful and fearful when everyone is greedy. Of course that is much easier said then done.

  52. John Clarke says:

    Very Genuine and well written reply Barry. I’m sure it will help the Kid out.

  53. Sunny129 says:

    I am self educated investor (learning never stops!) and have been investing since 1982 gone thru all up and downs. I am a realist, pragmatic prone to probe for fundamentals before investing. I didn’t want to market but meet my goals for retirement which is more than I thought I could do especially on my own!

    But for the past 2-3 years the investing environment is riddled with Govt interference, and manipulation of both equity and bond markets, suspension of M-to-M accounting, banning shorting of any kind but only for dozen or two in the middle of game, favoring Wall street over Main street, imprudent over prudent ones , nothing short of giant casino!

    In 2007-’08 I was able to deflect the bear with almost no loss but I got ‘hit’ big time in 2009! Why? I was naive enough to believe that US Govt will never interfere with ‘holy grail’ of Capitalism and Free market. Boy was I wrong in all my calculation and anticipation events, some times right calls but wrong timing! I got two lessons, which I will never forget for the rest of my life.

    1. What WILL happen vs what SHOULD happen in investing and planning!

    2. PERCEPTION is everything, tosome extent perception do become the REALITY for a longtime, especially when the rules are RIGGED for vested interests, like NOW!
    (This is another way of saying: Market can remain irrational, more than you can remain solvent!)

  54. cognos says:

    hidflect -

    That story is just a lie. You made it up in your imagination, which is sad.

    The very rich… mainly are extremely poor investors. CEOs and business types are some of the worst. Bill Gates and Michael Dell both probably had more money in 1999 than they do today. Why is that, if there is some 2GB “inbox” streaming with rigged tips? Why did Goldman’s stock go to $52/shr? Why do the top guys continue to work at Goldman and Bear when they have a few 100M, if they can trade on these tips? Why did they lose so much money in 2008, personally and professionally?

    Inside info is mainly for suckers… because CEOs are NOT good at trading their own stock. Sumner Redstone was doing buy-backs, from his office!!! in 2007 and 2008. He thought that Viacom was undervalued!

    Why doesnt that guy at Carlyle just trade his own money into Bs and then 10s of Bs? (20% returns compound pretty fast). Answer — he cannot. He loses money as often as he makes it.

    One of the dumbest things I ever heard. Its like, “this guy at the supermarket told me “Dont go to work on Sept 11th”.”

  55. eaglepilot says:

    “the mad money all pile onto that trend as the trees grow to the sky”

    Here’s a comment from a fellow that I follow-he’s not normally bullish nor bearish-he just follows the money.

    “I want to stress that after today’s close I strongly believe (yet, need to confirm) that a brand new Marty

    Zweig 9-to-1 up day bullish signal has been triggered”

    http://bit.ly/bWiXpH

    Could this be a haringer ‘of the the bend at the end.’

    As always, DYODD (Do Your Own Due Diligence)

  56. Thor says:

    Cognos – you actually believe the shit that comes out of your mouth don’t you?

  57. hidflect says:

    @cognos:

    Your reply as predicted… Why would I waste the time concocting that story and paste it on this board? To “torment” a few people I never met? Sounds dull. Or it’s true and something I’ve been indignant about ever since it happened? Possibly your comment is a clever goad by you for more info? Fine… I’ll waste a few more moments and answer your “killer” question:

    “Why doesnt that guy at Carlyle just trade his own money….”

    Because this network wasn’t his. It was provided to him in situ by (I presume fairly logically) the fund, built up over years through their connections with the govt./members/whoever. You know, that might be why it has members like er… GHWB and John Major (ex-UK PM) etc.?

    The funds he draws down and invests are “possibly” monitored as the trading of any in-house trader might be? The other pictures including one of his private yacht on a Swedish lake(?) suggested he wasn’t exactly getting factory labor rates. You’re query is “why didn’t he just try and scam this incredibly connected organization with some of his own private stash, hehehe? ” That would sound like the riskiest golden goose execution anyone could ever try…

    I won’t say more on it. A thousand pages won’t alter the conviction for those with minds made up that what they do is valid because no bourse trade could ever be sullied by acts ungentlemanly.

  58. foxmuldar says:

    I hope your friend was riding GOOG this week. Weekly chart is looking very bullish.

    Tell your friend that when he can walk the rice paper without leaving a trace, he will be ready to leave the temple and join GS.

  59. Pat G. says:

    Okay. Who are you? And what have you done with BR?

  60. mitchn says:

    @cognos

    I’ve been reading your comments for a while now. Clearly, you’re a smart guy, the world is your oyster, and you’re feeling pretty darn good about being a master of the universe. But, dude, even you must get tired of boiling it all down to the trade, the vig, the chest-thumping, fang-baring, fuck-you-I-beat-you credo that seems to prevail in what passes for our “financial system” these days. You’ll leave (or, more likely will get booted from the game) sooner or later. And what will you have to show for it? Friends (don’t make me laugh)? A big-ass house and a car that you can’t afford to drive? Three wives? A bunch of kids who don’t speak to you? And a tombstone inscribed “He made a lot of money.” Zzzzzzzzzzzzzzzzzzzzzz.

    @DH –

    Your post @ 11:25 a.m.? What can I say? I think I love you, man.

  61. rfk says:

    This may not resonate with someone who has not crossed the bridge, but one piece of advice to a young person starting out would be to read a good book or two about middle age and read it every five years or so.

    Most of us live our lives on autopilot and do not become consious until mid life – and by what I’ve seen some never clue in. A great author to start with is James Hollis, his Middle Passage, though a slim book, is a expansive read with depth and breadth. As Richard Russell may say an examined life is a life worth living.

  62. philipat says:

    I’m not a trader. Is “Investing” dead?

  63. cognos says:

    mitchn –

    You (and others) dont understand the “work” that is done in my business. Its boring. The office is like a library. I read, and read, and read. Then I run alot of numbers and analytics. I hate meetings and I avoid the phone. I work with a number of Chinese PhDs from top schools with high IQs. I work with some stock guys who just know their sectors cold. They try to follow as many companies as they find interesting. Its very dry intellectual work. We NEVER take a large postion (mainly 2-3% for stocks) and we are almost always RISK AVERSE.

    Its about grinding 2-3%/month with very few down months. A 5% down month is something we try to avoid having. We try to avoid having down years, at all. We trade in slow motion (+/-1% on positions each day). This is the norm at all the top hedge funds. All my friends are in this business.

    No exciting chest thumping here. Just another day… looking for another good long/short. Here is a story I often coach guys with — “The target is 25%/yr alpha, right? And 250 trading days in each year. So that 10 bps (1/10th of 1%) of performance each day… everything else is noise.

    You could not have a more oddly opposite characterization.

  64. NG says:

    I have been on the Street now for 21 years; I am (in my 40s) years old. When I got my first job at Merrill Lynch putting together prospectus’ for the Unit Investment Trust Department, I marveled at the world that lay ahead of me. I knew with hard work there was a fortune to be made.

    Flash forward a few years: I got promoted to the Merrill Lynch sales desk for UIT’s and after bringing in a shitload more business then I was ever compensated for I decided to branch out on my own and become a broker.

    I knew the horror stories of working for a large wirehouse (this is 1994), so I decided to work at a small bond boutique, XXXXXXX. I started with nothing and within two years I worked my way up to Vice President and I was the number one producer in the office.

    Flash forward two more years when I was recruited to Morgan Stanley as boutique could no longer serve my needs. Within two years, I was a leading municipal bond salesman at Morgan Stanley. I was a retail broker who outperformed the institutional salesman.

    It was about this time that I had fully learned about the seamier side of the Street. Huge bid-ask spreads on bonds, brainless brokers selling even more brainless products to clients, wirehouses offering shit funds just for the sake of it.

    Ok, the final chapter. After four years at MS, and tired of the bullshit that my clients had to put up with, I went over to Smith Barney, which to this day was the biggest mistake of my life. From day one I was lied too about the firm. I saw shit go on at that firm, that if the SEC ever found out would even make them take action.

    My point?

    The Street is a cesspool. (Actually that is a insult to cesspools) I am 100% fully disgusted with Wall Street. It is the most criminal element that exists today. And the last two years we have witnessed the largest single piece of criminal activity in the history of the world: the transfer of taxpayer money to these bastards.

    The sad thing about all this? The assholes that caused this mess, for the most part are still there.

    I know this is very poorly worded, as it is 1:30 am and I am just spewing. But you get my drift.

    Somewhere inside of me is a book detailing all this shit. Hmmmm……

  65. budhak0n says:

    Thanks BR

  66. Arthur says:

    BR, fine post, but in my experience best comment thread ever.

  67. marklhessel says:

    solanic says – March 5th, 2010 at 10:37 am

    So you’re saying one should not worry about the gigantic unregulated CDS market, foolish deeply ingrained moral hazard, lack of political will for real financial reform, and the stupidity of the American people arguing about the wrong things?

    The world will not come to an end at the next blow up?

    ~~~

    BR: Heh heh

    No, what I am explicitely saying is be patient in setting up the trade that makes that bet on the world coming to an end at the next blow up!

    Somehow this quote seems appropriate.

    More than any time in history, mankind faces a crossroad. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray we have the wisdom to choose correctly.
    Woody Allen – 1980

  68. marklhessel says:

    I should have put a ~~~ between “BR: … next blow up!” in my previous entry.

    I don’t want to confuse who wrote what.

  69. kcowan says:

    barry – you have stimulated some of the greatest response of any topics. well done.

    The street and the financial sector have demonstrated that it is all a game, and if you are not a player, you will lose.

  70. “…And the last two years we have witnessed the largest single piece of criminal activity in the history of the world: the transfer of taxpayer money to these bastards.

    The sad thing about all this? The assholes that caused this mess, for the most part are still there…”–NG, above

    What amazes me is, that with barely an effort expended, countless, similar, stories, outlining the Heist we have just witnessed, can be found..

    and, we are still entreated to ‘defenses’ of “Buy & Hold”/”di-vesting for the Lonnng Terrrm” by the walking sufferers of Stockholm Syndrome/paid shills of the Status Quo.

    “The street and the financial sector have demonstrated that it is all a game, and if you are not a player, you will lose.”–kcowan, above

    LSS: for those not interested in learning how to ‘swing by the vine’, Stay out of the Jungle, lest you be ‘hung by the rope”..

  71. OscarWildeDog says:

    I don’t know if you’ve gotten a reply like I’m going to give you Barry…

    I’ve been investing on my own for three years. For the year before that, I read everything I could, went to every seminar or workshop that would have me, read tons of books, blogs and whatnot. I set up a $100K trading account to – what I thought – supplement my other investments.

    Simultaneously, I was passively investing (through a well-known, large regional bank’s investment arm) the bulk of my savings, cashed-in stock options, and other revenue I had bottled up over 30 years. In five short months in late 2008, that bank lost 3/4 of my nestegg – despite my pleadings to change my portfolio, the weightings and my investing profile. We’re talking a loss of about $6 mil here.

    After my anger and retching had subsided somewhat, I basically “went into business” for myself, investing in well-planned option strategies and strangling or hedging every one of my trades for an average 3-4% gain. What I’m trying to say, and especially to your young Wall Street friend, is that no matter what your vocation, avocation or passion is, you will definitely hit the wall at some point. Everything will look bleak, pointless and dire. You may not even see a way out for yourself or others. Let me tell you, I was close to that point.

    Boy, I agree with what you said about the contrarian angle – I personally love to short the market during times like these. EVERYONE it seems is bullish and, what I can’t believe is that we’re up over the pre-Lehman Bros. mark – all with a worse economy, with a worse job market (approx 5 million LESS jobs now than where we were in the summer of 2008!)…and most anyone you talk to says we’re out of the recession, the economy’s back on track, and hell, we “only” lost 36000 jobs last month…We’re on our way! Shit.

    But other tragedies and downturns in my life (anyone gone thru a nasty divorce?) led me to think that something was better out there for me and I’ve since made back about 25% of what I lost. Simple, patient, emotionless trading – whatever your specialty or motivation – for yourself and by yourself is the only way out. I will never, ever trust anyone to handle my money again. And, save for you, Rosenberg, Mauldin, Stieglitz and few others, I will never listen to anyone again.

  72. [...] What a great piece of prose and good advice from Barry, make sure you read this one (The Big Picture) [...]

  73. justonepost says:

    Interesting thread. I recently resigned as a trader at a big house, and have worked for others. The choice is personal and I won’t pass judgement on the decisions of others I don’t know. I’m still very young and have time to

    Actions taken over the last few years by my firms, governments and society as a whole (and therefore my role) crossed a line I was no longer comfortable with. If a bank wants to let me gamble with it’s money – great, and I was fairly good at it, but I expected negative consequences to any bad decisions. I’m disgusted with a culture that now pretends it’s sole fuction is not siphoning off as much from the counter-party of last resort, the taxpayer. Perhaps that means I was naive up to this point and that has always been the game? Perhaps, but that was never my game and not what I’m happy spending my life doing.

    We can all pretend and create pretexts. Claim the necessity of capital allocation and risk management. Fundamental debt management and ‘market making’ requirements. Fall back on treasury management, IPOs, capital raising, bond auctions or funding . But that’s not what today’s financial markets and the vast majority of trading is really about. It’s about sales credits and spreads. Commission and opaqueness. Bullying and power. And most importantly today’s PnL. Simply a race to make as much money as possible in as short a time period as possible.

    That anybody acts on the advice of bankers, economists, forecasters or the like still blows me away. That we have reached a point where governments force their own determination and thus gamble the long-term outlook for our offspring on advice from a combination of these people coupled with such short-termism, TBTF and a clear appreciation that joe average has no clue whatsoever how much they’re being stuffed saddens me. It’s ruinous for society and something I cannot be involved in when the game is zero sum but the cards are stacked.

    But good luck to you all as you choice your own paths.

  74. [...] Some encouragement for the disillusioned Wall Street pro from Barry.  (TBP) [...]