Trading Tips

The End of Wall Street?

If you haven’t seen it already, there is a fantastic article by Michael Lewis entitled The End published by recently.

Lewis is someone you should know as the author of Liar’s Poker. If you haven’t read that book, I strongly recommend you do. It’s a fantastically written account of Lewis’ experience getting into the world of high finance back in the middle/latter 1980s when he worked for Solomon Brothers. He’s also very well known as the author of Moneyball.

This new article is typically engaging and a really interesting view on part of the story of how the financial markets have reached where they are today. It includes some references to his Solomon days as well, an a meeting with his former boss. Just be aware that it’s a fairly lengthy piece, so be sure you’re able to give it some time, though it’s not a slow read by any stretch.

As for whether I’m in agreement with Lewis’ basic premise that Wall Street is dying, I’m not ready to make that kind of statement. So long as there is a need for financial intermediation there will be a need for Wall Street. That said, it’s an evolution. The Wall Street of Lewis’ time changed considerably over the years, adapting to circumstances. It will continue to do so.

Personally, I think the geographic idea of NYC as the focal point of finance in this country has long since past. Technology has allowed it to begin dispersing to all different parts of the country, and I think the impact of 9/11 served to accelerate that process. It’s going to continue. A lot of companies are going to look at the cost and potential risk of being located in New York and ask themselves if its worth it.

Deep Posts Reader Questions Answered

How come you don’t just start trading full time?

How come you don’t just start trading full time? Wouldn’t it be more lucrative then working the day job?

This is a question I get from time to time. Actually, on occassion I’m accused of not trading for a living, as if that’s some kind of trading blaspemy.

Guess what? Most traders do not trade for a living or full-time or anything like that. A lot of folks may have aspirations to do so, but it’s a relatively small fraction who actually do so – and no, that isn’t necessarily an indication of success. There have been plenty of full-time traders who have had to go back to real jobs, believe me.

For my part, I’ve never had any desire to trade for a living. My interests are numerous and varied. While I definitely enjoy being in the market, I prefer to do my trading part-time. What’s more, I tend to see my best trading performance away from short-term timeframes. On top of that, my job is as a market analytst. I’m good at it, it pays me well, and there’s basically no risk of actually losing money. Plus, I get access to information and resources that I wouldn’t necessarily have otherwise.

So that’s my position on the subject. I encourage you to share yours as well.

Deep Posts Reader Questions Answered

Do you manage money?

A reader by the name of Mike asked me the other day whether I manage money. The answer to that question is no. I’ve always been a bit reluctant to go that route for the simple reason that if I have sub-par performance on my own money it’s only me who suffers. If I do that managing other people’s money then I’d feel bad for letting them down as well.

You might suggest that’s sounds like a confidence issue. I’d say that’s it’s more about being realistic. Even the best money manager can take a hit. I’m not so arrogant as to believe nothing could ever happen to cause less than desirable returns.

Also, people get a bit crazy when it comes to their money. I’m not sure I want to deal with investors challenging me on my trade decisions, risk taking, performance, and all that. It’s kind of like having parents questioning line-up selections and playing time when their child plays on a team. They don’t generally have an appropriate perspective on things.

But this is mainly a moot point anyway. I work for a Registered Investment Advisor firm. That would make things very complicated when it comes to managing money and stuff like that. It’s tricky even to just express and opinion on things.

Deep Posts Trading Tips

Keeping Perspective – You’re Not “A Trader”

One of the things everyone who trades needs to do is to keep things in perspective. Trading is something we do, but it’s not the only thing we do. There are a great many other parts of our life and what makes us who we are. Trading needs to account for that and be incorporated into your life in a compatible, supportive fashion.

Be cautious about identifying yourself as “a trader”. I say that because when you label yourself in that way you automatically create an association in your mind based on what you have come to think of as a trader. That association will have been built up from all the things you have seen, read, heard about, and experienced in that regard – much of which probably has absolutely nothing to do with you specifically.

That last part is the key. Trading is a very personal thing. No two people are going to trade exactly the same way. When you think of yourself as “a trader”, though, you associate yourself with actions and perceptions and images which come at least in part from other traders. That image in your mind may create internal conflict which hampers your performance.

So thing of yourself as “someone who trades” rather than as “a trader”. It could help to release you to trade the way you are capable.

Deep Posts Trader Resources

Should you treat trading like a hobby? How’s your discipline?

The Winning Mental Edge blog speaks on the topic of deciding whether trading is for you or not. A part of the point is that as much as our society respects and rewards persistence in many ways, it’s not always a good thing in terms of trading. It can sometimes lead one to stick with trades or a strategy (or trading overall) for too long, and not giving up when that’s probably the better course. Certainly, it’s hard to argue against that.

One part of the post presents something which definitely warrants some thinking and discussion, though. To quote:

Here’w an exercise that may help you decide if trading is right for you. Ask yourself, would you trade for no money. Suppose that you did not have a dime to bet. Would you enjoy following stock prices anyway? Would you enjoy reading about stocks, making forecasts, and seeing if you were right just for the fun of it? If the answer is yes, trading may be right for you. But if you think, why bother following the markets just for fun, then you may want to consider whether trading is right for you. In other words, if you are in it only for the money, it may not be right for you. But if you are not losing any money, why not pursue trading? As long as it does not hurt you psychologically (or financially) or consume your time when you should be doing other things, what is the harm?

The question I would bring up here is one of whether trading is a hobby or a wealth/income creating venture. I’m not saying it couldn’t be both. It’s just that doing trading and tracking the markets for fun (hobby) isn’t necessarily in line with treating trading like a business, as so many folks advise. Is that advice faulty? Or is it dangerous to think put money at risk as a hobby?

On a somewhat related (sort of) subject, Brett Steenbarger says the following in his The Fundamental Error of Trading Coaches post.

The fundamental error that trading coaches make is to assume that, because such problems interfere with trading discipline, they can be solved by imposing stricter discipline.

It’s always rubbed me the wrong way when people have said the solution to trading problems is “be more disciplined”. It fails to ask (never mind address) the question as to why the lack of discipline is at issue. Brett speaks directly to that in this piece.

Here’s another interesting bit from a fellow blogger. One of the subjects I discuss in The Essentials of Trading is the concept of risk-adjusted return. Bill Rempel takes that in in his post Sharpe Thinking.

Minyanville has a nice little article on The Investor Psychology Cycle.

Deep Posts Trading Tips

What are three things traders can do to coach themselves?

Brett Steenbarger asked me to help him with the new book he’s writing on the subject of trader self-coaching by answering the following question:

What are the three things you’ve found most helpful that traders can do to coach themselves?”

Here’s what I wrote up in response:

The first thing a trader needs to do is step back and take a big picture view of things. This is extremely important for new traders as they need to figure out how trading is going to fit into their lives, but even folks who have been doing it for a while need to do this from time to time as well. Trading is part of one’s life, not separate from it. What part it plays must necessarily define how it is approached, and that can change over time. Periodically taking the 30,000 foot view allows one to maintain perspective.

A second important thing is the commitment to performance improvement. That may seem like an obvious thing, but it’s something easy to stray from at times. It’s often hard to not become complacent with one’s trading, especially when a level of success has been achieved. In order for self-coaching to have any value, though, the realization that one can keep getting better, and the desire to do so, must be at the fore all the time.

Finally, setting good goals and assessing how one is progressing toward achieving them is critical. These are things coaches in other activities like athletics do as external observers. The advantages there, however, is they don’t have the direct link to the individual’s psyche which complicates things when one is doing self-assessment. The most challenging aspect of this process for the individual is not allowing it to adversely impact one’s confidence level. That means the process needs to be as objective as possible and the trader needs to be able to disconnect their ego from it.

This stuff might all sound pretty high level and non-specific and that’s true. From what I’ve seen, though, one of the big problems with many new and relatively inexperienced traders is that they never take a look at the bigger picture. They get too caught up in the minute details.

Trading Tips

Bank Fed Borrowing Doesn’t Mean Rapidly Rising Money Supply

Do me a big favor. Don’t be this guy.

“Banks’ borrowing at the rate climbed to a daily average of $13.9 billion in the week ended July 16 from $7.84 billion three months earlier.”

So currently banks are borrowing about $417 billion per month from the Fed? Where did the Fed get trillions of dollars to makes these loans?

If this rate of borrowing continues for the next 6 months will they will borrow 2.5 trillion? Against what assets?

Is this the biggest money give-away of all time? (and completely illegal/unethical as well)

If this money keeps flowing we should see massive inflation soon. Perhaps this is why the Fed stopped reporting M3 and why the CPI has been monkeyed with so much.

What do you guys think?

This is from a post on Trade2Win after the poster had read a Bloomberg article.

What you read above is about as solid an example of being ignorant of the facts as you’re likely to fine. The author here clearly either doesn’t realize or had failed to take into account the fact this borrowing being done from the Fed is generally short-term in nature. Sometimes the term is as quick as overnight. It’s like a revolving line of credit. While there might be some net increase in the borrowing, as the numbers indicate, the loans are being rolled over. You cannot aggregate the into the massive figures noted above.

I particularly love how the poster then spins it into a conspiracy angle. The increasing money supply angle he’s playing there is wrong too.

The fact of the matter is that banks have to put up collateral when they borrow from the Fed. At a minimum they have to put up approved securities of equal value. In many cases the Fed requires more collateral value than what they will lend out if the posted securities are of a higher risk of a decline in value. What this means is that at best when a bank borrows from the Fed it’s a simple asset swap and there is no net increase in assets in the system. Since some of the collateral is of lower quality, though, it’s really a negative asset situation because the Fed is providing assets of lesser value than the ones it receives.

What the Fed is doing with this lending is creating liquidity thing because it’s taking in some less liquid assets (like some mortgage securities) and providing more liquid ones (like Treasury securities). Since these are not long-term loans, any impact on money supply is temporary and automatically reversed once the bank repays the loan.

The point I want to make here is that you need to understand all the facts before you make any conclusions – especially ones with investment/trading implications. Do not trust what you read on the web. I see examples of folks operating on unconfirmed or plain incorrect information so often that it becomes laughable at times. Confirm and verifying from alternate, reliable sources.