I watched Scott Redler on CNBC a week or so ago, and I was struck by how banal this argument about Day Trading has become. There is so much more to Day Trading than sitting in front of 8 monitors double-clicking your mouse or your “hot keys.” It can mean many things to many people and you might consider thinking of it as “active risk management to keep your losses small.”
When I started trading, full commission on a trade was a whopping $1.50 per share at the retail level for a round lot, and the institutional rate was 1/16th.
Chuck Schwab was new on the scene and his discount commission rates were approximately $30 per trade. Wirehouse guys bitched and complained about the “commission-dumping,” but with their lack of stock-picking skills (which are still prevalent today) it was hard to stop the client from churning themselves for $30 a trade at Chuck’s house, rather than have the retail broker do it upstairs in the wirehouse for $150. This is before you collared the living hell out of the trade. Chuck was in on that too.
Commodity trades were equally high, with round turn trades at $125 per contract (for overnight positions), and something like $75 – $90 for day trades — per contract. (A round-turn trade is the buy and sell combined, regardless of the order, so total cost, ie, the round turn, to the client was $125 per contract).
Even with what would seem to be mafia-like commission rates, we traders made money for our clients both day trading and position trading. That’s why we’re still trading today.
Since then, commissions have fallen greater than 90% in some cases, yet 7/8 (87.5% for those of you who miss trading in 8ths…and collaring trades) mutual funds still underperform their benchmark indices. My take on mutual funds is that they are convenient buckets for your cash, but that’s it.
In the video with Mark Haines and Redler, Charles Carlson sounds like a union organiser who is unclear about what the long-term perspective actually provides: it’s not positive. Something can be out of favour for many years, if not decades.
Furthermore, you cannot expect “average” returns in your portfolio. When I started trading, the “average” returns for the Dow and S&P 500 were 10.1% and 12.25% respectively. Where are those “averages” now?
Here’s a look on how the averages change:
Chart Source: Simple Stock Investing
Read Taleb. Americans are horrible at predicting the frequency and magnitude of economic events. When you’re done with him, read Tetlock — who showed that the most famous experts are actually worse at predictions the more famous they become.
I think the mutual fund industry is more of a Lobby who’s job is to promote the “gathering of assets,” not the “management of them.” With Johnnie Cochran –“If it doesn’t fit, you must acquit” – logic, mantras like “you gotta buy and hold” because “you can’t time the market” that keep people in a risk-management-less stupor. I was actually surprised that Mark Haines did not grab Carlson’s throat through the TV monitor and choke the truth out of him. Haines normally calls people out on their BS.
You can absolutely time the market, and you should want to. Mebane Faber’s great book “The Ivy Portfolio” delineates how momentum is more important than diversification (it’s on pages 195-197). If you think diversification is synonymous with risk management, you are already a victim to the Lobby’s propaganda. If you hear “We sell when the fundamentals change” redeem your mutual fund shares and withdraw all your money. Price moves first, and the fundamentals follow.
Remember Al Harrison’s “V-Factor Methodology”? He bought Enron all the way down and got sued for $300 million. His firm? Alliance Capital. He was the Vice-Chairman.
I challenge you to name ONE person who you know who has made substantial wealth investing in mutual funds? I’ll help you b/c it’s still early in the morning (4:30 am here in LA). No one, except for the Bogle clan or the Johnson family. You can name many traders who are Forbes-listed though.
Telling the public that they can’t trade or manage risk is condescending and arrogant. Not every trader has to trade like Scott Redler or Mike Bellafiore from SMB, and author of a great book One Good Trade. There is a lot of middle ground. Don’t forget Gil Blake, who traded mutual funds as a market timer as depicted in Jack Schwager’s “The New Market Wizards.”
Keeping your losses small is the single most important aspect of risk management that traders and investors alike can accomplish, yet investors go to bed at night as if everything will be the same in the morning. It will: they will remain clueless to how risky it is to own any type of security without a defined exit plan.
The discipline needed to keep your losses small is something that can be accomplished with 15 minutes of your time each night. You can “set it, and forget it” while you work each day, and come back the next night to establish the next day’s plan of action.