My last post was about what makes trading so attractive, and so dangerous. It marks when I decided to put to bed the idea that if sufficiently advanced software would make me money in markets. It’s a common character flaw of engineers1. I very much wanted to make market money so that I wouldn’t have to earn at a $/hour pace anymore; this is exactly the same as people buying lottery tickets.
This post is an poor socratic attempt to convince you to join me in quitting speculation, if you happen to also be striken with the same disease.
What Does a Good Trader Look Like?
To me, a good trader is:
- never exposed to unlimited risk
- never over-leveraged
- does not steal from people for their return
and, a good trader is someone who can:
- pay their living expenses with trading alone
- sustain that living over a 10 year period
- and can make a personal internal rate of return in excess of the total return of an equity index
If you can’t do all of these things, I’m just not interested in how you trade.
So, for starters a good trader must also be someone with at least $200,000, assuming they could sustain Bill Ackman’s best record forever.
If you don’t have at least this much money, you’re wasting your time trying to trade. You will get much more reward out of career-based income, for less effort, and a lot more certainty. Risk and effort adjusted returns matter.
However, we’re going to find other reasons to not trade, below. Money is just the first hurdle.
We are only interested in “Good Traders”. Everyone else is either reckless, foolish, or both.
Why ten years? Well, the average time between recessions since World War 2 has been about 5 years. That’s absolutely an arbitrary measure, but if you make money in a “bull market” and lose money in a “bear market”, you’re just leveraged equity and I don’t care about all the complexity you layer on top of that.
A Thousand Monkeys at a Thousand Typewriters
TradingView had over 3 million monthly active users as of 2017, and that’s not the only online community for traders. A good trader knows that base rates are critical to keep in mind when evaluating probabilities. When you see a successful trader that you want to emulate, are you considering the probability that their success is due to randomness?
What about lying?
There’s certainly enough incentive for it. You can’t Google anything today without landing on some random person’s trading course or private Substack.
We want to be good traders, so we’re skeptical. We know that:
- there are millions of people that are interested in trading
- they have an incentive to appear like good traders
- and some of them might just be stupid and lucky at the same time - there’s enough out there that we’ll see this sometimes
We cannot have sufficient information to determine if anyone we see online is a good trader; they may have been dangerously overleveraged or liars.
This implies that we must disbelieve the success of others; which in turn implies that:
We cannot know that other traders are good traders.
Long Term Gambling is a Rich Man’s Game
Famous traders are people with remarkably large net worths relative to even very well off people. If you have over 10 million in your account3, you can probably afford being long or short a few futures contracts without coverage. Sometimes you make an insane amount of money, sometimes you are in drawdown for an entire year.
Regardless, you certainly have better access to people and information than chucklehead retail traders do. Try Googling anything and tell me the Internet has changed this; it’s pretty difficult to learn from good sources for this topic. Lots of services will sell you the idea that they are a good source - but then will flood you with crypto FOMO, technical analysis voodoo, and other irrational approaches to managing your assets.
Besides having better authoratative information, illegal collusion happens all the time, and only some is caught. You’re up against sharks that can afford to pay the SEC’s wrist-slapping fees and the fees of the smartest people in the industry.
Those fees are less than the unlimited risk bad traders expose themselves to. Crime can give good risk-adjusted returns to the wealthy, and so can hiring the best and brightest.
High net worth traders have access to deeper, broader, and stronger social networks than retail traders can aspire to.
Some successful traders are successful because of crime. They are not good traders.
When you trade, you presumably have a strategy, a plan, or theory. You place trades and as a consequence you make or lose money. What makes trading a wicked problem is that you will NEVER know if your PnL is due to skill or chance; there is no clear feedback loop for improving your strategy. It is remarkably random - the best anyone hopes for is an “edge”, not the ability to consistently win. It is not possible to disentangle random wins and losses from ones due to your thesis. The best we can do is look at long-term performance, hence my time horizon section above.
If you can’t evaluate your own skill, how they heck are you going to evaluate the skill of some random person on the Internet that can pick and choose what they share with you?
You can’t even know if you are a good trader.
Chances are, dear reader, that you cannot afford the kind of risk trading entails. More than that - chances are, the traders that can afford it make poor long term returns. Even if this statement isn’t true, we must believe that it is, for prudence’s sake. Overconfidence and greed is enough to keep people trading at a loss. Traders are gambling addicts, they don’t care if they lose money - it’s more interesting than anything else they’ve ever done. If you’ve ever won big on a position, you know exactly what I mean. If you attribute your big wins to your intelligence, that’s huge validation - that’ll be absolutely destroyed when you lose.
When you trade with enough skin in the game to be emotionally linked to your performance (i.e.: overexposed, overleveraged), you’ll experience highs and lows on a weekly basis. Eventually one of those lows will knock you out and you’ll know it’s coming.
Keep your trading to a minimum amount of exposure so this doesn’t happen, and you’ll just trail the equity index. It’ll be boring. It doesn’t scratch the same itch. Maybe you’ll make 20% on a position on a rare occasion, but if you’re appropriately exposed, leveraged, and diversified, it won’t amount to much money.
You do not get massive returns in excess of the equity market’s average without dangerous leverage. Can you afford dangerous leverage? Can your family? Even if you had the money, who wants to live with that emotional volatility?
Prudence is accepting that you do not have an edge. Swallowing the idea that you might, because it is not worth the cost of finding out; that cost is nearly infinite.
A good trader is prudent, not reckless. It is reckless to believe that you are a good trader.
It is prudent to believe that good traders do not exist.
Wicked problems are infinite. They are wells with no bottom. They are addictive, and destructive. They are all-consuming. Freedom from wicked problems is freedom to pursue things that will actually enrich your life.
If you consider yourself a rational person, I urge you to avoid the black hole that is trading.
Put your money in a boring index and collect that 7% long term inflation-adjusted return. I’m currently getting a savings rate of 5% in a high interest savings account which is a fantastic risk-free return4. Be risk-adverse with your money - and be risk-adverse with your effort. You’re going to have to be satisfied with less return. Focus on your income from work if return is important to you. Trading will not free you from work.
Trading is a commission-producing, course selling, life-stealing, ego-capturing, industry of gambling bullshit; it’s a capitalistic power fantasy. Jack Bogle had it right.
P.S.: another “wicked problem” is changing the minds of people who have their minds made up.