Essence of Trading: What You Want Isn’t What You Need

iStock_000012959689XSmallA dilemma I often witness from my unique position in talking to potential investors and hedge funds is that people often do not know what they need. I have several interesting stories to share addressing this issue. You may find the story relates well to someone you know.

A Small Hedge Fund Doing HFT

The fund manager wants to develop HFT algos and solicit clients based on a sales pitch that his fund can do great with their HFT program. The fund has several models ready and have been seeking opinions from others whether their models are good enough for deployment. The models of course are showing great performances on the historical data.

I pointed out that their models are not even close to what HFT is. Having technical indicators applied on tick data assuming the best fill possible do not produce HFT and they do not work in general anyway. I directed them to read the basics on HFT and told them nicely these models will not work even if they have co-location servers at the exchanges.

Being the only opposing voice obviously does not help. Last time I heard about them was from a friend who had not been able to collect his coding fees of the models from the fund.

What the fund need are slower daytrading models that they have experience working with. After all, a fund has to be profitable. I understand that the fund has no marketing buzz to sell to the high net worth potential clients. Being profitable in the hedge fund space is not enough to get clients these days.

Entrepreneur Turns Daytrader

A successful entrepreneur who made it in the import/export business sold his business and retired in his early 50s.

Out of boredom he started to daytrade the financial markets. First he tried out forex and gave up shortly after. The volatility during the 2008 crisis cost him dearly. Next he set his eyes on the stock market indices. He made a killing at the peak of the financial crisis in 2009 but he has been losing money since. He bled most of his winnings by the end of 2012.

Some mutual friends learned about his frustrations and introduced him to meet with me.

He asked for trading signals to short the stock market top. What he wanted was that the stock market to top out and keep falling. He also wanted people to agree with him that the stock market was going lower.

I pointed out that he was living in the past. He was replaying the history in his mind so often that a rare event like the financial crisis became something that he thought would happen again easily. Every news or event became a sign that the stock market would top out.

He is still learning to snap out of the past and pay attention to what is happening now. A good sign is that he no longer short the Emini S&P blindly just because of some supposedly negative news hit the media. And yes, I convinced him to learn reading the charts and control his risk.

What this guy really need is the truth about the stock market. He is a pretty smart person who was able to grow a business into decent size and have it sold for good profit. Once he started to see the risk side of the trading business he can teach himself to control the risk as he has the discipline necessary. From there it is just a matter of time for him to find his own profitable way.

Retiree Wanted To Become A Daytrader

I met with this retired lady pretty much out of the blue. She is a relative to one of my old buddies in my hedge fund days. She has been very frustrated with her saving and her money has been chipping away for several years. She called one day asking directly if I can manage money for her. It is a surprise call because not that many people know about my side business.

In short, she wanted a very significant return from her limited risk capital. She was willing to risk up to $50,000 and would like to get a return of 50% on that annually. She was and still is a very conservative person. She understands the importance to protect majority of her money so that her basic living cost is covered. Thus the $50,000 is indeed risk money she can part with.

I explained that it was very difficult for me to do this for her because I no longer taking new clients. It would also be very difficult to find an advisor who can promise her the kind of result she is looking for. At the end, I also declined her request to learn daytrading from me because her character will make it very difficult for her to take on risk routinely.

Funny how things turned out. I managed to convince her to take on a part-time job doing things she loves to do. She is now a sommelier, resolved the cash flow problem and a happy person again.

What she need was a solution to her cash flow problem, not money management service. The angle she was looking at was restricted by her past. Hence she was not able to find a solution to her own problem until she has someone open her eyes to other possibilities.


Arianna Huffington: How To Succeed? Get More Sleep

Not really a trading related video, just a reminder that you cannot be productive if you do not have enough sleep.

One point I have to make though – it is possible to sleep just a little and still have enough sleep.

It is well known that if you have rigorous exercise regularly you can sleep less.

It is also well known that people who meditate often can go on days without sleep and still keep a very sharp mind like those people who exercise a lot.

The reason I am including this video here is to remind traders that it is not a good idea to exhaust yourself just because you wanted to find the edge you want so badly that you spend many sleepless nights doing research and/or monitoring the markets. Sometimes it is better to step back and look at the whole issue from a different angle. You will grow into a better trader by simply not doing the things you find not working.


Nick Hanauer: Rich People Don’t Create Jobs

A controversial TedTalk from Nick Hanauer. It is so sensitive that it is pulled from TedTalk website.

Time magazine have a piece on this talk, Was Nick Hanauer’s TED Talk on Income Inequality Too Rich for Rich People?

I do not totally agree with the point of view of Mr. Hanauer.

He raised a valid challenge on the inequality issue with lower tax rate on the rich people and that it has not resulted in improvement in job creation. His understanding that the middle class people is the actual fuel in driving the economy is also plausible.

Two things he mentioned on corporations are definitely true. First, corporations always try their best to minimize the need of expensive labour resources. Second, when labour resources cannot be avoided, corporations tend to seek for the place with the lowest total labour cost to hire workers.

Mr. Hanauer’s point of view is biased because of his experience in profitable companies does not represent the nature of all businesses. It is also not possible to have middle class families to spend more money as a group when middle class the concept itself is disappearing in every part of the world.

Taxing more on the rich people will not necessarily transfer those money into creating more middle class people. It may as well be transferred into the hands of another group of rich people who work closely with the governments. No offense intended, but just increasing tax on the rich is not a solution.

I see the real issue is not just a matter of rich being taxed unfairly, it is the treatment of capital in such naive way by the governments that highlights how out-dated the politicians are. Throughout history, it is those economies with middle class families coming from owners of small to medium size companies that have the better overall growth and stability. Yet, these small to medium size business owners are the ones hated most by both right-wing and left-wing political parties. The right-wing politicians are in bed with big corporations to crush the small businesses while the left-wing politicians mistaken the small business owners as capitalist pigs in the same class as the large corporation evil-doers.

By allowing big corporations to exist in part of the economy that is best serviced by small to medium size businesses, the governments around the world routinely destroy the small to medium size businesses that are the essential engines of their economies. The original middle class population has now mostly disappeared.

The replacement middle class coming from the big corporations do not have the same characteristics like the original. The new middle class mainly coming from big corporations do not have independent survivability as their existence is a function of the big corporations.

There is no real solution to resolve this problem.