I have been meaning to get to this interesting article Heidi N. Moore wrote over at Marketplace radio. “They Are Day Traders. Hear them Roar.” A terrific looking commercial for OpenTrader accompanies the article (video here).

The video is pretty slick. But as intriguing as it looks, it overstates what I believe is the true criticism of trading — not that its all luck, not that no one can beat the market — but rather, that the odds are very much stacked against you. The truth is it is really, really hard to do professionally.

I have always found that for newbie traders, a better analogy than a casino is the possibility becoming a professional athlete. Trading and athletics have many parallels. Both require a combination of natural skills, discipline, and very hard work. Both require an ability to deal with elements of randomness that is challenging in a competitive environment. At the NCAA level, just about any team can beat any other on any given afternoon. A lucky bounce, a bad call, a hot streak, and the underdog wins.

It is no coincidence that many trading desks are stacked with former college athletes.

I believe the odds of going on to be a professional athlete are similar to being a successful trader at the highest levels of the profession. The NCAA puts out a statistical analysis looking at the “Estimated Probability of Competing in Athletics Beyond the High School Interscholastic Level.” If you have some natural talent and work on your skills, you can probably compete at the High School junior varsity level. More skills, hard work, a little luck, and you make it to Varsity.

The talent pool gets much more competitive at the college level. The NCAA estimates approximately 3% of HS basketball players, and 6% of HS football and baseball players make an NCAA team.

If those number look daunting, the cut is far more challenging at the professional level. In basketball, only 1.2% of NCAA senior players get drafted by an NBA team. NFL drafts 1.7% of NCAA senior football players; Baseball holds the best odds, where 8.9% of NCAA baseball players will get drafted by a Major League Baseball club — but that includes minor league farm teams.

Lets crunch the numbers to put this into full context: A mere 0.03% of high school basketball players eventually get  drafted by an NBA team. Football, its 0.08%, and baseball its 0.44% (including farm teams).

Are the odds identical? Not precisely — there are many more people scratching out a decent living as semi-pro traders than there are semi-pro ball players earning enough to feed their families. And if you find you have a specific talent for it, and are willing to put in the long hours of work required, trading can be incredibly rewarding.

But the fantasy of being the next Michael Jordan, or in trading parlance, Steve Cohen? The odds are very very long against it . . .

>

Estimated Probability of Competing in Athletics Beyond the H.S. Interscholastic Level

Student-Athletes Men’s Basketball Women’s Basketball Football Baseball Men’s Ice Hockey Men’s Soccer
High School Student Athletes 540,207 439,550 1,109,278 472,644 36,475 391,839
High School Senior Student Athletes 154,345 125,586 316,937 135,041 10,421 111,954
NCAA Student Athletes 17,008 15,423 66,313 30,365 3,945 21,770
NCAA Freshman Roster Positions 4,859 4,407 18,947 8,676 1,127 6,220
NCAA Senior Student Athletes 3,780 3,427 14,736 6,748 877 4,838
NCAA Student Athletes Drafted 44 32 250 600 33 76
Percent High School to NCAA 3.1% 3.5% 6.0% 6.4% 10.8% 5.6%
Percent NCAA to Professional 1.2% 0.9% 1.7% 8.9% 3.8% 1.6%
Percent High School to Professional 0.03% 0.03% 0.08% 0.44% 0.32% 0.07%

Note: These percentages are based on estimated data and should be considered approximations of the actual percentages.
Source: NCAA

Category: Apprenticed Investor, Philosophy, Trading

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.

43 Responses to “How Hard is it to Become the Michael Jordan of Trading?

  1. [...] Barry: Trading’s mad hard, y’all.  (TBP) [...]

  2. crutcher says:

    One of the best posts here ever. Helps explain why it’s necessary to pay pro athletes huge salaries – how else to pick out the ultra creme-de-la-creme amid an epic sea of failure? Taleb made the point in the Black Swan, but your presentation here is perhaps ever clearer.

  3. Petey Wheatstraw says:

    Day traders and athletes: Neither contributes substantially to our bottom line. To abuse a quote from Jerry McGuire: Show me the work product!

  4. crutcher says:

    @Petey Wheatstraw

    Athletes don’t contribute to our bottom line? Are you nuts? They create massive value in terms of the spectacle that so many crave – eyeballs floating in space are big, big money. Yeah they aren’t digging up oil fields, but value is much more subjective than that.

  5. Greg0658 says:

    as much as I tout music over sports for the “make music not game” .. this chart thread is the perfect opportunity to dispense with a dose of “get real” to the budding musicians

    the chart would have headings such as .. divided by: Solo / in a Band
    play @church
    play @weddings & partys
    play @venue (small / meduim / major / tv)
    play @school (teacher / experience related)
    play @background (commercials / movies)

    stats would be hard to find for many – as I expect much of that income is below the table

  6. kenny powers says:

    I like your analogy here Barry, good post!

    Let’s have some more candidates: Who is the greatest trader ever? What do you think?

    In Stevie’s case, there might be some uh, performance enhancing measures involved according to some.
    I have no idea whether there is any truth to this.

    IMO, it is James Simons of Ren Tech that is the G.O.A.T.

    Who has done better over time, the systematic way or otherwise?

    I haven’t heard of anyone that’s even close to his/his firm’s track record.

    So how easy is it to be a math genius? What are the odds of a person being one? Slim to none. But you can make a decent living as a math professor, too. But you’ll probably never be really rich. Doesn’t mean it is not a deeply fulfilling career.

    I chose trading for a living because of the immense challenge it is, every day, and because I have never done anything more interesting, professionally speaking, in my life. I’ll probably never get filthy rich doing it. But I do allright, and I love my job.

  7. Greg0658 says:

    ps – missed a big field (altho after fame has been somewhat achieved by above) @recorded sales outlet

  8. kenny powers says:

    Nice post, Barry. The answer is: It is obviously almost impossible.

    But the question us mere mortals should ask ourselves is also:

    How hard is it to become a consistently profitable trader? Can I do it?

    My answer is, it’s very, very hard. But not impossible. I also think there are many greater traders out there than Stevie Cohen, and many with less dodgy reps. In my opinion, Jim Simons takes the prize. Nobody comes close to Ren Tech.

    An important point: Many math professors who do not run hedge funds probably make a decent living and lead fulfilling lives, too. I chose trading not because I think I will be the top trader in the world, but because I love the challenge and the job. And I do make my living doing it.

    Who do you think is the Greatest Trader of All Time? Let’s have some more candidates.

  9. Semiconscious says:

    Athletes and traders maybe rare individuals, however they are not more rare than any endeavor where winning is very hard. I happen to be in the sciences, and we compete to tackle scientific challenges. This is very hard and only the very very best make a true difference, and you’ll have to be lucky as well. The odds of you becoming Einstein is certainly less than 0.01%. What I don’t understand is why traders get the outsized rewards. Athletes pack them into the house, and sure they get a cut. Why traders get a cut of trading revenue is beyond me. They don’t make anything, the whole purpose is to dupe someone else into giving you money. How’s this different from legalized card sharking? Is it ok for a doctor to say to you: “Well I’ll cure you, but you’ll have to give me 20% of your future income for the rest of your life since you owe me your life?”

    I think traders get paid because the return is immediate and easy to quantify. In sciences, the return is less obvious right away, but the overall return is greater than all the traders put together in history. Think about the invention of the transistor, how many trillions have been generated? Are scientists entitled to a cut of that? Should you pay a scientist a penny every time you touch the computer?

  10. royrogers says:

    “Petey Wheatstraw Says:

    July 14th, 2011 at 8:19 am
    Day traders and athletes: Neither contributes substantially to our bottom line. To abuse a quote from Jerry McGuire: Show me the work product”……

    i get more pleasure seeing a gifted athlete perform than a trader.
    Statistically, with so many traders, there is always going to be a top
    percentile that are deemed elite.

  11. Petey Wheatstraw says:

    crutcher:

    Massive value? Lets see how that works out in the next few years. Like everything else, you have to have customers who will pay to see elite athletes play a game, and we’re already subsidizing the industry. When the crapola hits the fan, professional sports as a driver of the economy will fold like yesterday’s newspaper (newspaper!).

    Look to Rome and their “games” for an example of how important professional sports are to a culture in decline. TPTB had to give it away.

    I could be wrong. Stay tuned.

  12. snapwizard says:

    Becoming a top athlete than a top trader is much harder. Consider this:

    1) I suspect many more traders get drafted into trading desks every year than pro athletes
    2) Its much easier easier to make a living wage out of trading as opposed to becoming an athlete even if you are not a “top” pro.
    3) You can use your trading skills lifelong.

  13. crutcher says:

    Petey Wheatstraw: Look I completely agree that the people’s excessive interest in theater and sport while the political system rots is a recurring theme in history, and we are definitely seeing that now.

    But the play (or the game) is the thing. And people will always shell out for it if they can afford it. Could declining revenues transform professional sports like the internet is transforming the media industry, forcing it to become leaner, and to provide more for less? Obviously yes. Will we cease to seek news and spectacles? Never. And the top, outlying 0.01 percent of talent will always command an outlying salary.

  14. BenE says:

    Also consider that you are not working just against humans but also ‘high frequency’ trading computers that can analyse vast amount of price data in a split second and can read and linguistically process data feeds, tweets ands media article in real time, model psychological variables of other traders and calculate a probabilistic distribution of the future price of securities. Every time you are going to do a less than stellar trade, one of these computer will be there ready in less than a millisecond to sell to you at the too high price or buy from you at the too low price and make money on your back.

    So unless you have a supercomputer in your closet or you have useful inside information and industry knowledge that is not available online for computers to use in their trading models, you are the equivalent of someone trying to win at F1 racing on a bicycle.

  15. tagyoureit says:

    For the rest of us, there are adult sports recreation leagues and E*Trade. :P

  16. honeybadger says:

    @Semiconscious writes: “Are scientists entitled to a cut of that? Should you pay a scientist a penny every time you touch the computer?”

    As a scientist myself, I can only answer YES! As soon as I get my swiss bank account open, I’ll post the account details here for all of you to contribute to.

  17. wally says:

    The odds are very very long against it . . .

    Well, duh. It’s set up that way, isn’t it. Rare is rare because it is rare… and the odds, oddly, reflect exactly the statistical probability of an extreme outlier because, after all, that’s what we are talking about: the odds of being an extreme outlier. In any and all random distributions one will be the best (whether by skill or luck is beside the point – they are not distinguishable) and it will not be me.

    This, by the way, is why ‘instant replay’ is such a goofy concept in making calls in sports. It assigns to skill what is more simply explained simply by chance.

  18. crutcher says:

    BenE:

    “you are the equivalent of someone trying to win at F1 racing on a bicycle.”

    You know the story of the tortoise and the hare? I don’t at all believe that virtue wins in the end, but making rational, long term bets based on comprehensible trends instead of gaming noise is a rational, potentially winning strategy – especially for those who don’t have the ear of the Fed.

  19. Not everyone has the temperament (and it is definitely about temperament) to trade but there are certainly a lot of things you can do and learn to put the trading odds in your favor. Another thing going for traders over athletes is a greater window of opportunity. I literally put ten years into the trading school of hard knocks before I started to grasp anything of the way the markets and trading worked. Once I did it sure got a lot more simple. If you take that long in any sport you are already an old man. Most guys in pro sports are washed up by 28 yet many pro traders aren’t even getting their bearings and grasping the bigger picture of the economy before they are 30. I’m referring to home traders here and not the desk jockeys. Just the basics of money management, what to trade, when to trade, when to buy, when to sell all have a huge emotional component and if you have any baggage in your closet regarding fear and greed it will be a long slog up the learning curve.

    You better hope you learn when you are trading for peanuts and not right after you are given grandma’s inheritance because Mr. Market is a ruthless teacher and will expose every character flaw you have. Even the ones you don’t know about……while he cleans out your wallet for you

    I found I became a much better trader when I learned to disassociate the dollars on the page, treat them as numbers and not something that can actually buy something tangible in the ‘real’ world. That is why I try not to use funds from my trading account to make purchases in the real world

  20. crutcher says:

    “You better hope you learn when you are trading for peanuts.”

    Golden advice, and awesome post, How the Common Man Sees It .

  21. Bruman says:

    Barry, is the distinction between trading and investing relevant here, or are you using the word “trading” to cover both?

    I suspect you mean both, but if not, I’d be interested in how you see the investing process as different. Maybe athletes are better traders and nerds (or someone else) do better at investing?

  22. gordo365 says:

    Would love to see another similar chart

    # High school freshman
    #/% high school seniors
    #/% high school seniors in college prep courses
    #/% bachelors
    #/% Advanced degree

    Break out by doctor, lawyer, wall street etc.

    Then break out by race.

    Point being – I tell my kids – “I want you to play sports and take music lessons – but I don’t want you to be a professional athlete or musician”.

  23. BenE says:

    crutcher:
    Right. But these computers don’t do short term investing only. Sure it is an area where they shine compared to humans, so they do a lot but they also do the long term. They may not have the speed edge they have with short term trades but they still have the ability to analyse much more information much more precisely than humans. The only thing still going for humans is the ability to analyse things that can’t be found online. Humans can get expert knowledge, analysis from people on the inside that understand an industry better than a computer. If you don’t have access to these things though, it must be extremely difficult to beat the market.

  24. [...] Trading is tough.  Just how tough?  (Big Picture) [...]

  25. Kevin says:

    This is one of the best posts I have aread in a long time. Having been an NCAA football kicker, and then fired from the Colts after 3 days, I can completely relate.

    I am an amateur trader with 3 years experience (software engineer by day) and I must say, between golf, kicking, and trading, trading is by far the easiest. Both golf and kicking have so many unknown elements that can completely affect performance outcome (wind, weather, equipment, teammates, etc). While trading performance is affected by a random market, the random market is binary. The market either moves with you or against you. If one trades with the belief that there is truly a 50% probability of each, then trading with this assumption in mind makes it easy to be objective and manage risk accordingly.

    Trading only has two things that can affect performance: human emotion and random market movements.

    Kicking and golf have 100 things that affect performance: human emotion and weather etc.

  26. BenE,

    Stocks can either go up, down or sideways. Master that and you master trading. Everything else is just noise

  27. Brent_in_Aurora says:

    I once had an interview where the representative described the company as literally an all-star team. I burst out laughing at the absurdity of that assertion. I hurridly explained the statistics when it was clear that he thought that they were indeed all-stars. I didn’t get the job; but they were not all-stars as they were bankrupt three years later.

  28. Actually,

    Master only one of the three and you can make money at trading. :)

  29. Thatguy says:

    HTCMSI,

    That sounds almost as easy as buying low and selling high! I should totally do that!
    It’s a whole lot easier to say it than to do it.

  30. Kevin says:

    It is easy to buy low and sell high. The hard part is buying low but not running out of cash for when things go lower. That is why martingale strategies blow up.

  31. kenny powers says:

    Kevin:

    You better tell Mr Bernanke. Wait, I take that back. He’s never going to run out of cash.

  32. Of course it is that guy. I never said it was easy. Mastering anything is not easy. Especially if it is in a world class arena. Some people like to make it more difficult than it sounds though

    Kevin,

    You can’t run out of cash if you are not on margin, trading options or short. As long as you are buying stable companies the shares will always be there. If they have a dividend then you are increasing your yield as it drops. That is beneficial if you are in a DRIP plan. If you are in indexes then your safety goes up a notch higher and your downside risk goes even lower

  33. Kevin says:

    Kenny: I think you are on to something big.

    HTCMSI: I didn’t mean running out of cash on one trade. I was just referring to ‘scaling in’ as the market drops. If one keeps buying as the market goes lower and lower, eventually you will run out of money to buy. Unless as Kenny points out, you are Mr. Bernanke.

  34. Yes, that is true. That is why you need to limit your positions if you are employing a strategy like that. I trade something like that and I have a set limit on the trading side. Once I hit that I’m done. If it continues to drop then my buy/sell points shift to accommodate the change. It takes emotion out of the decision. It doesn’t mean the position won’t lose money. It just limits the amount you can lose.

  35. socaljoe says:

    Given a room full of monkeys with darts to throw at at a list of stocks… after 10 years there will be some genius traders. They will be asked to appear on CNBC for their stock picks and people will line up to give them their money to invest.

    I think we all know a few “geniuses” who didn’t make it through the last crash.

  36. [...] freedom.” Can you beat the market with algos? Maybe, but be prepared to be ok with playing in Croatia in the D-League. College athletes make great traders? Really? Wow. Tags: athlete, college, impossible, long, [...]

  37. [...] ‘It is no coincidence that many trading desks are stacked with former college [...]

  38. [...] Here are a couple of interesting articles for traders. The first is from Falkenblog and dispels the myth that the trader has to be the best in the market to make money. The second is from the Big Picture and asks the simple question “How Hard is it to Become the Michael Jordan of Trading?” [...]

  39. [...] certain things haven’t changed. Barry Ritholz wrote a nice post on the competition, and the odds of becoming the next Wizard of Wall Street. They are long odds. [...]

  40. [...] on, I like the angle that Barry Ritholz took in his article How Hard is it to Become the Michael Jordan of Trading? and I believe his argument is fair.  He likens trading to professional athletes.  He gives the [...]

  41. AGORACOM says:

    I’m pushing my kids towards baseball now.

    G

  42. streeteye says:

    I tend to gravitate toward poker as an analogy.

    A lot of smart kids can grind it out professionally and eke out a modest living for a year or two, taking advantage of the idiots. It takes brains on the level of a solid engineering student, analytical skills,discipline and self-awareness, a lot of patience and self-improvement, and most people can’t even get that far.

    But to win consistently at the highest levels of the game, multiple WSOP bracelets etc, takes a set of skills very few can develop: analysis, psychology, instinct for well-timed risk-taking and aggression, and a level of talent somewhat incomprehensible to a mere mortal like myself LOL.

    A surprising number of people show up on Wall Street or at the poker table and think they’re geniuses and the world owes them a big success, and are in for a rude awakening.

    Both games are about money management, looking for situations with big upside, but where you can limit your downside, well-timed aggression, betting big when the odds are in your favor, grinding out a superior track record over time with a modest edge if you know what you’re doing.

    There are a lot of similarities between the games, but two big differences are…poker is always a -EV game, Wall Street can be a massively +EV game in the good times; in a bull market everyone’s a genius. And in poker in the right situation you take the initiative and set the price of risk and bluff, in the market you’re generally a price taker and can’t bluff anyone until you get pretty big.