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After a few years of reading Daily Speculations, I find a couple of things remarkable. One is the reaction to the dumb-bomb that Mr. E. drops on the young and the brilliant. They lash out like they never heard anyone call them stupid before. Pure emotion fires out from their pride.
Marcellus Wallace to Butch the Boxer, "Pulp Fiction":
The night of the fight, you may feel a slight sting. That's pride #$@#ing with you. Forget pride. Pride only hurts, it never helps. "You see, this profession is filled to the brim with unrealistic mothers. Mothers who thought their ass would age like wine. If you mean it turns to vinegar, it does. If you mean it gets better with age, it don't.
The second remarkable thing is how insecure traders are about their position size. Everyone wants to be bigger. That is as bad as those spam e-mails how to increase your size by taking a magic pill.
I had a discussion with a pure stock scalper this week. He reminds me of me. Note from scalper to me:
I sent you my sheets from last quarter so you can see how much always moving costs me. Iím only talking about trying to go from real scalping to day trading in the minutes to hours. I agree than I am smaller than a freckle on a flea and can't compete against any kind of real money. but I can try to ride their tail coats a bit. I hope that the scalping tells me when there is real strength on one side or the other. if I can bet on that maybe I can augment my income some. I want to make bars. but Iím finding that getting to the next level isn't easy. Iím certainly held back by fear and inexperience etc. sad thing is at Strathless LLC, I could take down 50k shares on a clean up with no sweat on my palms. today 10k shares and Iím trying to get into my diaper while I look for the exits. even if Iím not in Vic's universe, am I a natural born piker or can I be glorious?
The gist of my reply was, you can't just increase your size, do the same trades and be more profitable. You must take two steps back to make the giant leap forward. All beginners look at their annual P&L and say, "If it wasnít for those two big losses, I would have made money. Next year I will not take big losses." It's like saying, if I traded 50,000 shares, vs. 5,000, I would make 10 times the profits.
His buying power and his gross/expenses are remarkably the same as they were for me five years ago in the bucket shops. Let's call that 50-50 to costs. Yet, due to the lack of movement in stocks, even though costs that are some one-fourth of what they were five years ago, the gross/costs and net are exactly the same per volume of trades per day.
Here is the gist of how all this back-and-forth began. It started with a post I did on credit cards, where I stated I was lucky in the '90s -- .lucky that Vic saved me from certain ruin. The scalper took it as a severe hit to his pride that I said scalping stocks today is impossible. I had a similar reaction in 2001 when Vic explained to me what I was doing was ruinous. His advice was to read, "Letters from a Self-Made Merchant to his Son."
A note from a stock day trader to me:
Hi Lack, This is such a negative view and sadly all too accurate. But for those rare individuals who are struggling to make it work, deep in debt and making and losing but for whom a little longer will get them over the hump, I hope all the 'realism' doesn't push them over the edge to quit just when it might have worked. there is so much deviation in the actual mean of profitability that it takes zillions of iterations just to see if one is lucky, stupid or actually doing it. as for coming back on one's cc's, it seems to be a rite of passage for 'indie traders.' As a guy who gets his ass kicked on a daily basis, I encourage you to think about your audience a bit before asserting that electronic equity day trading is impossible etc. Who knows who reads this list and how discouraging is. Let a guy put his balls on the table and take his lumps like a man without taking his legs out from under him. We all know this bizness is brutal. But for a guy who can do it, it's all the glory even if all the headaches. True, the indie trader can negotiate his own rates, but for him, alone in a 6x8 room with his monitors and his pain, the value of a group or MBA or some sort of security -- even if it comes with the downside -- is worth a lot. I respect your posts and your history, but I can't deal with so much negativity from what should be members of the same team. Sure you came back from hell. So has every trader who can be green at the end of the year. I gotta let go of my pain. I can't be reliving coming back from $250k in debt with no assets on a $7500 cc loan. Iíve got to get on with my life and if it means diversifying my income stream all the better."
I am usually diplomatic. I didn't mean to discourage anyone in trading. I was very diplomatic in the Army. I was so good at it that when I saw "Forrest Gump." I cracked up. "Gump, you are going to be a General someday." I was given so many different opportunities to succeed if I would only make the choice to be a lifer, a career soldier. The same thing goes for this stock day trader above. Even though others failed, everyone told him failure was imminent, the markets push him to fail daily, he never, ever gave up and is, remarkably, profitable today.
He dug into me for my take on, "diversifying his income stream by earning an MBA." My solution for my passion to learn was to go to the college book store and buy all the books and learn. I misunderstood his point. It wasn't the knowledge he wanted. It was the earnings stream. He stated, "Maybe that makes me a wussy, but I need a back up plan." Well in that case, work on cars at night, be tired, greasy and have that feeling of a hard day's work and keep trading during the day. We have all had the pressure, the advice especially when down to "get a real job." Sometimes we think a trader does "no good." If it is for education to better yourself and take a good position, by all means do. However, please reread Atlas Shrugged first.
Mr. E. talks about false beliefs. OK, how many just rolled their eyes and said, "Oh shut up, Lack?" Do you know how many times I have heard that quote in the wrong context, about member's stocks? They use it to justify a stock position, saying, "But everyone has a false belief." What I can testify to is once you lose your belief in yourself, which is your trading system, you will fail. It is the same in sports. If you do not attack and play aggressive you will soon find yourself either injured or benched.
Vic warned me back in 2001 that what I was learning here would somehow throw me off my game. Coupled with Laurel Kennerís intimate knowledge of day trading firms ("They are dropping like flies", circa: 2001). I lashed out at Laurel and was compelled to apologize to her for my rudeness. Once I discovered she was right, I sold everything, reduced and looked to change.
I keep in contact with a few old day trading friends. Every quarter or so we exchange e-mails and ask how everyone is doing. Remarkably, a few guys that made it through 2002 are still with us today. They are doing what they have always done. They have the same gross/expense to net as we always did. The joke here is the most important point of all, "they make money"
Everyone comes to the markets to "make money." How they do that is any man's personal choice. The only guys that used to really burn my hide were those who trade five E-minis on a scale, take in $200 a month per new recruit on a chat room, write books and act as they are a big fish. They don't bother me anymore. I have come to realize that if they can accept making a living that way, however as sad that may be to me, the markets need the new blood every year. Most importantly I finally get the joke. I need these people to profit from.
I have heard a zillion times, "I am nowhere near Vic's league." Of course. We're not silly, he has been looking at the markets since he was a kid. He has been studying and trading the markets for more than 40 years. Perhaps this is a good rule of a thumb: Your age in the markets is how long you have been passionately involved. If you have been trading for four years, you are a 22-year-old kid. It doesnít matter if you are 50 years old; in market years you are just a 22-year-old kid. If you have been in for 10 years, you still do not have the wisdom in the markets that a 30-year-old does in life. There have been a few posts of late about brilliant 30-year-olds, managing billions off of new computer models. Vic said, "Perhaps there is hope."
My advice to the guy was to be very careful when attempting to move to the so-called "next level." I said: "You are making good money -- what is it that you are so upset about? Drop the "I am a piker" trade. Make profits, pay off all debts, earn a reasonable stake for trading, "get waaay ahead" before trying to be one of the "big boys." I finally accepted a compliment this year when he retorted, "You sound like Vic." Thank you very much.
I used to work every night, especially Sunday, on finding the new hot stocks. I never used charts except for a Sunday retrospective view of new action. I always looked for a new stock or a new sector to move in. In order to succeed you must know everything you can find on that stock. A good example is biotech, because Phase I drug trial approval or news would affect other stocks and or the index. I told my scalper friend he can work much harder and become an expert in a few stocks, let's say 200 of them, and always have a list of the hottest 50 on the screen and move in five of the best that day. Good examples today are GM/F with a long list of parts suppliers that might be tradable off of good bad GM/Delhi moves. How many parts are there in a car?
The gist is knowledge is an edge. Do not depend on buying GM on good news because everyone is short GM and there was good Delphi GM news this weekend. If you are a small stock speculator, dig down and operate where others do not have the ability to move. A big fish cannot buy a million shares of a stock that has 500,000 shares of average daily volume. You are not a piker. You have an edge, take it.
Back to those Sunday nights: I read "Barron's," IBDs from the prior week, the IBD Nasdaq weekly chart book that arrived in the Saturday mail. New ideas for stocks I have never heard of and say small float stocks between 20-50$ per share that had increasing price action. I never looked for predictions on price. All we ever wanted was movement.
There are only two questions we all have as speculators: How much to buy, and when and where to take profits or losses? Other than that, there are infinite ways to approach the markets. The math boys seemingly gravitate to options. The fast movers end up with futures. The steady are long-term buyers of stocks. Some are so brilliant they not only can profit in all markets, they build firms, manage employees, run money for clients and seemingly the most difficult, manage to manage the clients. I would highly recommend that you find your place, stake a claim and focus on making money.
I told Tom Ryan's joke to GZ at the Spec Party: The funniest thing in the world is stock buyers making seemingly predictive statements about the bond markets. George laughed and said, "Yeah, same thing is bond guys talking about stocks." The funniest are the bloggers who donít take a position in anything yet talk about everything: the Fed, China, oil, stocks, GM and pensions, US budget/trade deficit. The joke is from my perspective: Unless you are brilliant enough to have the ability to trade all markets profitably, run your own firm and raise funds, the only other guys that can profit off talking about all markets are bloggers.
Someone made the point this week that trading isnít about the money. When I hear that in business, itís always about the money. Yet, if it was just about making money, wouldnít being a salesman be the best way to profit? What does every firm need? No matter what cycle, no matter what firm, everyone needs capital to trade, everyone needs a good salesman. Yet, too many salesmen want to be traders. Why not take pride and have total passion for sales? Yes, it is very difficult, but that is why it is highly profitable.
That's the joke in life. We are totally incompetent in most areas of life. We all gravitate toward what we are good at an early age in certain subjects at school or in sports. Some of the saddest stories in life are those who forget to dream, like we did as children. We settle down, then as weak men, blame the wife for our loss of passion.
Last summer, one of the fat old dads at the BMX track told me how old I was. I was recovering from injuries. "You must realize how old you are! We just don't heal as fast as we were kids." I retorted, "The surgeon says for a guy about 35 in great athletic shape it is not as slow as you would think in recovery times for broken bones. If you smoke, drink and are overweight recovery times go exponential." Yeah, that was me being a jerk for him calling me old. Truth is the guy scares me.
It just occurred to me last week that for over two years I didn't talk to the guy. He owns a flooring store. The housing boom here has been incredible. I remember two years ago he said he bought plasma TVs for the play room in the store to entertain the kids while the parents did business. I remember telling my brother, "sounds like us in 2000 with stocks, huh?" I am still embarrassed at my lack of humility. I didnít get the joke. I thought the Nasdaq might drop to 3,000, not fall over 3,000 points. I avoided the guy like the plague. He is so insecure it is obvious. He isn't at all humble. I didnít want to listen to him complain once business turned. It hasnít turned for him yet.
For the past two years some have been calling the end of the housing boom. Even Prof. Shiller is on the bubble book wagon again. During those two years, the flooring guy here has bought a new million-dollar house, a $200k motor home for BMX and to tow his new racecars! Well, now we are talking. Another guy I race BMX with is a mechanic. He helped the flooring guy build a Ford modular engine (Mustang type) with a supercharger to make 600 HP. They blew it up on the first pull, threw a rod on the Dyno. I laughed at my buddy and said, "Jeeze, dude, is he paying you by the hour? You know better than that. Those engines can't be built up." He said "Yeah, he wouldnít listen"
Now they are building a killer engine and they told me all the components and I said, wait, wait, wait. I just couldnít keep my big mouth shut. "Do you realize that the entire drive train and front suspension needs to be rebuilt? You are going to need a roll cage and a parachute by the rules, etc. There is a rule of thumb, 500HP street, 700hp for super stock racing and no more than 900HP for a full-tube race car. For 1,000 plus horse power you need, Vasco type parts for your trans, a modular rear end, 4 link, 1,000$ each adjustable Koni shocks, that might cost as much as building a $100,000 dollar race car." He looked at me and said, "Wow, I didnít know you knew about racecars."
I said, yes, why do you think I am out here riding a used 300$ bicycle and racing on 7$ entry fees? I blew all my money on racing my entire life. Please be careful, racing is addictive -- that is why I am on a bicycle here tonight. I have some good books and great notes on all forms of drag racing I will give you. I've been around race cars since I was 11 years old. You need to figure what outcome you want for the car, then make a plan, seek advice then build it. Oh and by the way, go to racing school."
I told the wife about his car and told her give him the books. She said, "Yeah, all his friends are very worried about him spending all his money. Now he is going into debt with the race car. Can you talk to him, can you help him? "
Later, I explained to him he could rent the best prepared race car and crew in drag racing and enter a race school. He said how much? I said well if you want $5,000 for the weekend. He said "Five thousand, what a rip off. I'd rather just build my own car and drive it" The engine he blew up before it was ever in the car was $5,000 and his new engine will cost over $10,000. Used racing parts is never a seller's market.
The best question? Will he even realize if he loves racing until he races a few times, much less a few years in the game? He is like a new trader who has read "Barron's" or "Hot Rod" magazine. All he knows is bigger is better, what a disaster waiting to happen. That reminds me of one of those 100-year-old books I paraphrase. "Men come to Wall Street with hopes of riches, reputation and good credit." They leave racing with debts, a garage full of blown-up parts and divorced.
After thinking about all of this, I realized the horror Vic must have felt advising me and hundreds of other kids in trading. That flooring guy is starting off on the wrong foot with his racecar and going to lose a fortune. He could begin with a good base of operations, buy a good used car, race for a bit and see the herculean effort, money and time it takes just to race at the amateur level. Then, he can look to increase his size.
I canít even imagine trying to start a racing career against the pros. Yet, he will not listen and wants to do it his way. Guys like us grow accustomed to lessons learned from the school of hard knocks. My worst fear for this guy with my love of racing is he will drop $100k, end up hating racing and quit.
There is such a fine line to walk in trading: be humble, be aggressive, be patient, donít be proud, donít beat yourself up, panics are bullish, but donít try to catch a falling knife. LACK
James Lackey is a Florida trader.