Aug

14

It is necessary to separate profits from trading for oneself from those managing other people’s money. Those proceeds derived from fees and percentages of profits from trading other people’s money where those other people bear the risk of loss do not count.Trading is a way of earning a living. The investments are starting capital and time and effort spent trading, with the latter measured against opportunity costs of not have engaged in alternative activities. Results include not only net worth but also the income taken out over the years for personal needs, alternative investments, gifts, etc. The question from a personal view is whether the returns on time/effort and capital have been adequate to justify the risk and emotional impact of such risk.

Extraordinary returns cannot be achieved without taking extraordinary risks as a general rule. Sometimes a small bet like in a lottery that can easily result in a 100% loss but is insignificant relative to total net worth/ income can result in a huge killing, but the odds of that are very small. But for larger sums and as a general rule it means taking major risks to one’s entire net worth in that to make such gains one has to place most to well in excess of one’s net worth at risk. The only shelter is to use legal means to shelter some assets, such as doing one’s trading in limited liability corporate forms. By such risk one not only means that the incompetent will lose. Such risks consist of factors difficult to know in advance, to unknowable. Skill and ability will give one an edge on the former but not on the latter. A certain amount of diversification and skill at cutting and hedging against losses will also help. But given the risks talked about, it means even the best will fail at times either because of a lapse in the skills (mistakes that could possibly have been avoided) or pure bad luck with regard to the unknowable.

Some have developed great skills and abilities and have been able to make those amazing profits over time. Reversals will happen and results have to be judged over a career. One should compare not to the peaks when one really lived well but to what life would have been like had a different less risky course been followed from the start. Better to have lived well for a time than not at all, unless the final result is so much worse than it would have been with the less risky course. (This ignores the possible psychological costs such as the negative effect of letdown vs. a steadier path even if less on average, which have to be considered as the overall criteria should be one’s happiness properly defined. When considering psychological costs one also has to consider the psychological benefits from riding high etc. and utility values placed on different outcomes and timing impact. These will vary with the person, so that only the person himself can really judge, not the outsiders. This is because only the person him or herself will know their preferences and utility values and state of mind, and then only upon much reflection.)

The best course is to know when one has enough, and to focus on keeping that rather than getting much richer. That is if one has gotten rich, know when to stop taking such risks and getting out while one is ahead. As to having someone invest for one, you can only hope to get super rich doing so if the person doing the investments is able to deliver such results for prolonged periods. One time results, mixed track records or no prior success means the odds of the person having the right skills is less and the odds of success are lower. The odds are higher with someone like Vic or Krisrock who have shown evidence of such skills. But one can never know when the risk will catch up with them. So do not place all one’s assets with any one trader over one time. It may just turn out to be when the skilled turn unlucky. Diversify over time and traders. Returns could be higher by concentrating or they can also be a total wipeout. My guess is that chess is mostly skill and not luck, but trading, which is not governed by fixed rules like chess, has a much greater element of luck. Even a chess player turned loser because of personal distractions could come back when those distractions are removed. A skilled traded turned unlucky just has to get lucky. To the extent that losses were due to the avoidable, the lessons learned might have made them a better trader. On the other side, there might be negative emotional scars from the experience that will reduce trading ability (which requires ability to restrain emotions). And new mistakes are always possible. But the odds of one who has shown skills over time doing well again are probably higher than those of one who has never demonstrated such skills convincingly in the first place.


Comments

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search