Nice info graphic from Martin Kronicle on why so many people fail to succeed at Trading:

 

click for complete graphic

 

 

 

click for ginormous graphic
http://www-martinkronicle-com.zippykid.netdna-cdn.com/wp-content/uploads/2013/01/innervoice-e1357971514904.png
Source: Martin Kronicle

Category: Digital Media, 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.

14 Responses to “Kronicle: Why Most People Fail at Trading”

  1. wcvarones says:

    Volatility is not risk. That is a myopic construction of eggheads. I don’t care whether my stock or portfolio goes up and down 1% or 3% every day. What I care about is value and dividends and what my portfolio will be worth in 20 years.

    I don’t often agree with Warren Buffett, but he is right on this issue:

    http://www.wcvarones.com/2012/02/in-trashing-gold-warren-buffett-makes.html

  2. WFTA says:

    I think it’s the dopey hat and Fu Man Chu that make him a looser.

  3. pm2416 says:

    I am a dedicated amateur poker player, and have had analogous discussions along these lines with many pros and near-pro level players. The overlap is striking. The chemicals released by the brain in response to winning or losing can be devastating over time, and most people are simply not equipped to handle them. The ones that are equipped often have multiple leaks in their real lives in regards to relationships and all other social skills.

    Also, any time a group in any field gets together, it is very easy to differentiate between the real pros and the clowns: real pros talk about their mistakes and failures, and the clowns crow about their brilliance and their victories.

  4. capitalistic says:

    I’m glad you posted this. I think amateurs (including “sophisticated” investors) don’t understand the price to value concept of trading or investing. I’d rather walk away if I don’t understand the price or perceived value or perceive to overpay because I understand the value. It’s always behavioral.

  5. Roanman says:

    I seriously doubt that “price” is anymore trust worthy than anything else having to do with Wall Street, and I way double seriously doubt that the “Pros” think it is either.

    ~~~

    BR: Disagree — price is price./ Everything else is blahblahblah

  6. Frilton Miedman says:

    wcvarones Says:
    January 16th, 2013 at 3:30 pm
    “Volatility is not risk. That is a myopic construction of eggheads. …”

    ~~~

    Your mistake…the infographic compares amateur and pro traders, not investors, traders.

    Buffet is an investor, as long term as it gets, to him volatility is a buying opportunity (“When others are fearful”)

    If you’re in stocks for years, depending on yield for income, you’re NOT a trader.
    The “trading vs investing” argument is an entirely different debate.

  7. wcvarones says:

    Frilton,

    Indeed. I posted my comment based on the first graphic, which didn’t make clear that we were talking about traders, not investors.

    I don’t believe in “pro traders” unless we’re talking about inside information, HFT front-running, or the like.

    I think the vast majority of people who call themselves “traders” are wealthy from inheritance, real estate, or something else and don’t actually earn a living by trading. I’d like to see the P&L on their tax returns.

  8. Larry W says:

    This gives me hope because I am clearly moving towards professional trader.

  9. legorf says:

    “The pro modulates his positions size by volatility. The higher the volatility, the less of a security and vice versa.”

    This is probably why most hedge funds (supposedly pros) hold AAPL? Or is it “do as I say, not what I do”? ;P

    Otherwise, it all depends on what kind of volatility you are able to stand BEFORE you enter a position, your conviction on that call and if your job/retirement money is at risk. If you are a pro trader entitled to generate profits every day, you probably hate to lose 3% in a single day. If you are a fund manager, one day doesn’t make a month or a year. A long-term investor such as Buffet doesn’t have the same constraints others may have (he does have constraints, just different ones).

    Also, I think within your portfolio, you can have a portion to “invest” and another to “play with” if that gives you extra happiness the same way another would play video games. Some like to go at the casino, set aside some money they can afford to lose and have fun with it without jeopardizing their savings. I’m ok with that (I don’t do it but I understand some of my friends who do just that).

    In addition, the most important thing, I think, is to keep track of your trades, good ones and bad ones, and to learn from both your mistakes and nice shots. Many retail investors keep losing money because they repeat the same mistakes. Losing money (not too much and not too often), somehow, is not bad in itself if it enables you to make better decisions in the future. We all make mistakes. The differentiating factor between investors is that some learn from them and others just don’t.

    Finally, I don’t think you can make a killing by playing it safe. A bit like playing poker, sometimes, you have to go “all-in” (not literally but you get what I mean) if you have a high conviction on some outcome. I don’t know many investors that became multi-millionaires in a short period of time playing it safe. But I know a couple who did win big, but they did so by taking a hell lot of risk. I know some who lost their shirt too. But they tried, a bit like a start-up business, some succeed, many others don’t. Darwinism at play.

    I’m not advocating in favour of volatility, I’m just saying that it depends on you preferences. I’m relatively young and can stand much more volatility than i.e. my dad. And that’s OK.

    Anyway, nice infographic, I enjoyed reading it. I just think trading rules should reflect your very own preferences such financial goals, time horizon, etc … Agreed, few but nevertheless some rules are good for everybody.

    Last, regarding risk management, it doesn’t necessarily imply setting up a low-volatility portfolio. From my perspective, it rather implies having the odds on your side.

  10. discus says:

    Low volatility and high risk strategies are the ones that bring down big houses.
    Then, Buffett Myth. It used to be a value play story, Graham Way, or Graham and Fisher as he once remarked. That has been exhausted for his book size long time ago. Bought Silver too early, sold it too early. then this naked puts adventure. Anyway, research the subject, just use your own work, not some blog or a book. Meet people who work with him and for him – this will open your eyes. Everything goes through birth-childhood-maturity-etc-death stages and cycles. Buffett as in The Buffett Myth is dead.
    He is properly tax-sheltered, so he can kiss President’s ass in exchange for lucrative railroad contracts.

    Anyway, the above is the nitpicking, does not change the value of [any] pro vs amateur comparison.
    Good work.

  11. Frilton Miedman says:

    wcvarones Says:
    January 16th, 2013 at 9:59 pm
    “Frilton,
    …I don’t believe in “pro traders” unless we’re talking about inside information, HFT front-running, or the like.

    I think the vast majority of people who call themselves “traders” are wealthy from inheritance, real estate, or something else and don’t actually earn a living by trading. I’d like to see the P&L on their tax returns. ”

    ~~
    You have valid points on the statistical probability of lucrative trading, I also agree on the cheating nature of fHFT.

    However,

    There are real ways to gauge impending moves & sector rotations using futures term structure, or seasonal, perennial & secular cycles…i.e. early autumn at the end of the summer volatility is a good time to get into retail in advance of the holiday season, oil usually hits it’s annual high point in the summer, Nat gas in the winter, there are also seasonal spikes for tech and smallcaps at different times of the year, the January effect, the October effect…etc…etc.

    These strategies won’t make you rich over night (as the infographic explains) because they’re not always spot on, or predictable like clockwork, but they can help you outperform the S&P as long as you’re realistic in your expectations.

  12. Herman Sniffles says:

    My father was a fisheries biologist. His first job after WWII was doing “creel checks” on trout streams all over California. He would walk up and down the lovely trout streams interviewing fisherman (and checking their creels – often wicker in those days – for fish) to calculate their fishing success. He told me that over and over and over he found that “10% of the fishermen catch 90% of the fish that are caught.” Later, when I started reading books about investing and trading I read that “10% of the traders make 90% of the profits.” I always thought that this was mildly interesting

  13. cognos says:

    BR: Totally disagree on “price”. Not that important an input as it tells you little to nothing about “future price”. This is something more like “value”.

    Also, important to note that the “pro” often can get it totally wrong and the “amateur” make all the money… like in the late 90s. Lots of financial mkts and RE pros got slaughted in the downturn. Many an ambititous amateur is up 10x on his portfolio bc he bought consumer or some super-high risk, low $ price stuff in 09.

    Templeton himself (what did he die with, $5b?) favored buying a basket of single-digit $-price stuff in market dislocations.

    There type of over simplifications are (often) for “well spoken” money manager types who want to make you feel good as they add little value. I mean, certainly “% is what matter” and I do believe “% vol matter” (take a larger position)… BUT… I rather be a rich fool.