Join our investing community

Trading Trading With the Big Boys

Discussion in 'Shares' started by Tropo, 1st Feb, 2009.

  1. Tropo

    Tropo Well-Known Member

    17th Aug, 2005
    Trading With the Big Boys

    Tough market!
    That's something I hear in the office every day -- from professional traders, money managers, and hedge funds. These markets have been brutal, and the competition has been relentless.
    For the individual investor, it is important to understand who your opponents are on the field of battle. Sports and war metaphors abound, because they are consistent with what you are going up against each day. In addition to always battling Mr. Market, as tough an opponent as there is, your rivals are also anyone else buying or selling stocks. They, too, are looking for ways to produce positive returns.
    Consider what Charles Ellis, who helps oversee the $15-billion endowment fund at Yale University, said:
    "Watch a pro football game, and it's obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, 'I don't want to play against those guys!'

    Well, 90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared -- the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either."

    That's a brutal and very honest observation. The institutions Ellis refers to are mutual funds, hedge funds, and program traders -- and all of their professional staff, mathematicians, and researchers. The pros are deploying every possible tool to give them whatever edge they can get. And even they can have a hard time, as most of them will testify to the difficulty of trading in 2008.
    Despite this daunting opposition, many individuals unhesitatingly step onto the playing field with the pros. To carry the sports metaphor further, they end up receiving season-ending injuries to their investment and retirement accounts.
    My "day job" is finding money managers for clients. It is fair to say I have looked at many hundreds of managers and funds over the last 20 years. I have also talked with countless people who want to break into the investment management business. I must admit I am not always the most encouraging, as my experience says it is a tough world. But there are those who do indeed make it. Some very successful traders are small shops, while others grow into large management businesses.

    But they do have one thing in common.
    They have an edge. Somewhere, somehow, they have developed an edge which gives them the ability to eke out profits, whether from trading stocks or commodities or currencies.
    That's why it is so important to be prepared -- mentally, physically, and with the right equipment. It's not just guns and ammo, but intel and recon tools as well. The explosion of cheap PC power and web-based market data may have given everyone similar technology, but it did not grant them an equal ability to use them. Just as picking up a 5 iron doesn't make you Tiger Woods, sitting in front of a PC doesn't make you Jim Simons (Renaissance Technologies). There is a huge difference between accessing data and the knowledge of how to use it.

    I have asked Barry Ritholtz (you may know him through his blog The Big Picture and appearances on CNBC) to write today about his new trading and statistical platform, FusionIQ.
    Barry is a successful, no-nonsense, take-no-prisoners type of trader. His rather blunt manner that you see on TV is what you get in real life. We have become good friends. I have watched him develop this software for the last few years, and I like it, as it marries fundamental and technical analysis.
    This is what Barron's had to say about the software:
    "FUSIONIQ'S MODELS blend fundamental and technical metrics to determine the strength of some 8,000 publicly traded equities. They identify the most tradable issues and sectors with the lowest component of risk. FusionIQ also finds issues with unusual short-term strength or weakness, issuing Buy and Sell signals accordingly.
    In general, FusionIQ recommends subscribers hold a rolling portfolio of 15 to 20 issues for the intermediate term.
    "Beyond that, it identifies trading opportunities. FusionIQ models pinpoint highly ranked issues whose prices suddenly gap up 5% or more on high volume (and other conditions). They also issue alerts when analysts with good track records offer earnings forecasts outside peer estimates, and when short squeezes are in the offing -- that is, when a highly shorted issue exhibits enough relative strength to force short sellers to cover their positions and boost the price further."
    There are three reasons I am bringing this to your attention today.
    First, there are tens of thousands of investment professionals out there who have lost their jobs in recent months. I was told last month that the number of people sitting for the CFA exams is the highest on record. The explosion of young people coming out of school looking for a job in the financial world is at an all-time high. I get calls and letters from them all the time asking for advice.
    I feel somewhat uncomfortable with myself when asked what to do. I know the odds, as the financial world is down-sizing, and there are some really capable and experienced people on the street today. There are just going to be fewer jobs. That is the reality.
    But I also know that if you can make it, it can be a very rewarding and fascinating career, with some of the most exciting and switched-on people anywhere. I am literally having more fun than I ever have. And telling someone not to chase his dream? I don't want to do that, but I do want to be honest.
    So, if you want to be a trader, listen up to what Barry is talking about, and know that you are dealing with people who AT A MINIMUM are armed with technology like this. I have been on some of the largest trading floors in the world.
    The tech at their disposal, the data they can call up, the research they can marshal, is impressive. Barry and his partners have spent literally millions. The big trading houses have spent tens of millions. It is not as easy as those commercials on TV make it sound. These pros spend hours learning their systems in front of a screen.

    Second, Tiffani and I have been interviewing millionaires for our new book. I can't tell you how many have ridden this market down. The size of their portfolios does not make them better money managers. They or their managers had no discipline for selling.
    Seriously, buy and hold in a secular bear market like we are in is a losing strategy. On an inflation-adjusted basis, you are down if your holding period has been 30 years! Most of us would think that 30 years is the long run! On a nominal basis, you are about where you were ten years ago, if you are in a broad index.
    Even if you are a value investor, you have gotten creamed in this market. (Some great value investors are down 60%. Their experience of buying and holding solid companies, which had worked so well for so long, needs to be married with some risk discipline.) You need a sell discipline. Barry's system, or others like it, can at least get you thinking about selling rather than riding a stock all the way to the bottom and hoping it comes back.
    Hope is not a viable investment strategy.

    I don't know much personally about trading. My stomach won't allow me to trade, although I have watched and met with the best. But I do know this. The best traders and managers have risk controls and sell disciplines and they stick to them. Period. They don't fall in love with a stock or a commodity position.
    If you are going to manage your own portfolio, and there is nothing wrong with that if you will spend the time to do it right, then you have to learn to manage your risk.
    And while simple systems are better than nothing, a little sophistication here will pay for itself.

    Third, a small set of you in the professional world will find FusionIQ something that you should use. As a professional tool, it is relatively cheap.
    Finally, for the regular investor, realize that you are trading against thousands of people and funds who have tools like this -- and many have far better tools. This is just one version. If you or your manager are not getting the results you need, maybe you need to figure out how you get your stock and fund "tips." Maybe you should find a manager who "get's it."

    John Mauldin
  2. AsxBroker

    AsxBroker Well-Known Member

    8th Sep, 2007
    Sydney, NSW
    That's a very long winded ad...