Archives for posts with tag: trading

A little deviation from regular programming.

For some reason (reporter ran out of sources? strategically paid for advertising?), the daily paper here in Singapore recently ran two very similar stories in their Invest section.

Story 1 (published 25 Dec 2016) had this as part of the blurb:

Investor learnt about value investing using options a few years ago and has since built up a $2.2 million portfolio.

While story 2 (published 22 Jan 2017) had this to say:

“When buying options, you need to be making directional trades all the time, but I got rid of that by selling options on either direction. I don’t care if the stock goes up, down or doesn’t move, as long as the price stays within range.”

MR BHARATH JAYARAM, on how selling options on equities and indices that are not very volatile has worked for him.

Thing is, I really used to like that section for profiling successful investors or business people but in recent years, that section has fallen by the wayside. I don’t doubt the authenticity of the stories featured but I highly doubt the value of the stories. At best, the stories featured will get more people interested in options trading and some of those people might make it but it’s highly likely a majority will probably lose money. What’s worse is if a majority dive head in, thinking it’s easy money and then get burnt in a horrendous crash in the markets.

First, let me say that the timing of the stories point to what I suspect is a bigger problem for any investment. In the foundational economics class that I teach, this is what we call the Fallacy of Composition. The fallacy is in thinking that what works for a few people will work for everyone else and therefore when people start to follow in the footsteps of a few highly publicised cases, that very act of following ensures that the initial method stops working. For example, when a place with a bargain gets publicised enough, the ensuing crowds all but guarantee that the bargain won’t last too long.

Given that both stories were about people making money through trading options and that trading options is usually limited to the US markets, I’m beginning to suspect that the days of making easy money through options may be over for the least savvy investors and those who have just joined the party might just find the reason to swear off the financial markets for the rest of their lives.

Of course I could be wrong, the way the story may play out would be that an investor new to selling options start by selling puts, make some decent money on those puts as the market runs up, then decides to go all in by selling puts and buying calls only to see the markets drop off a cliff and wipe them out completely. Some close variation of that scenario could also play out.

I don’t know for sure but what I’m sure is that the Straits Times isn’t doing anyone a service by publishing those two stories.

An acquaintance of mine posted this (along with a picture of the book ‘Reminiscence of a stock operator’*) on his facebook wall the other day:

“Retail investors quote Warren Buffett. Fund managers quote Jesse Livermore.
Who would you rather trust?”

I’m not sure why these two financial market personalities were even mentioned in the same breath but given this particular acquaintance’s recently found interest in trading I think the point he was trying to make is that if you want to make serious money, go down the path of the fund manager and not the retail investor.

There are a couple of ideas implied in that sentence that I find terribly misinformed.

First off, not all fund managers are going to have short holding periods (and therefore, should be classified as ‘traders’). Most do but that doesn’t change the fact that different fund managers have different styles and mandates.

Second, studies (championed by financial market luminaries such as Jack Bogle) have shown that fund turnover correlates strongly with worse returns.

Next, I like to present to you Jack Macdonald.

Jack who? Well, Jack MacDonald was a retired attorney from a Washington State who left close to US$200 million in his trust to three charities. That’s right. You didn’t read that wrongly, he left almost US$200 million. How did Jack do it? He didn’t do it by running an extremely profitable legal practice. Nor did he trade his way to those riches. He just stuck to good old fashioned investing and playing really strong (financial) defence. So strong, in fact, that no one in his retirement community even figured he was a millionaire, much less a hectomillionaire. The beauty of what he’s left behind is that his trust will probably be able to generate millions of dollars to disburse year after year to his charities in perpetuity. This is the kind of legacy you can build through proper investing. (you can read more about himĀ here. h/tip: Joshua Kennon)

Trading might be a way to get you to riches but ultimately, to leave behind a legacy that lasts, one will have to adopt proper investing.

Lastly, I thought I’d mention that Jesse Livermore died penniless and of a self inflicted gun wound while Warren Buffett looks likely to eventually pass on a wealthy and happy man.

I think I’ll continue to listen to the retail investor in me.

*This book, of course, is the biography of Jesse Livermore.