Monday, October 31, 2005

Full-time investing / trading 20 comments

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The buoyant stock market may have got some investors/traders who have made good money to consider quitting their jobs and doing investment/trading full-time. This is evident from the enthusiastic response to a thread with the same title in one of the share forums ( I believe). Judging from the comments of one or two of my contacts who have gone down this path, I would think there are pitfalls that one has to be aware of to avoid being sorely disappointed and suffering heavy opportunity costs.

Firstly, one's risk appetite changes tremendously when going from part-time to full-time. Any entrepreneur would tell you this: that when they start their own business, every cost component becomes magnified to them because it all flows toward their bottomline. So it is for one trading/investing for a living. In general, return is directly correlated to risk, which means the eventual returns may not be what was projected at the onset of turning full-time. For traders and investors alike, the level of volatility which previously worked fine for them might now seem too risky; the change in risk outlook is subtle but palpable. It is a psychological barrier that is difficult to overcome.

Secondly, mental discipline is compromised. An investor previously too busy to track stock prices suddenly finds all the time in the world for his own allocation; the temptation is too great for him to follow the path of least resistance and monitor stock prices since his fortunes are tied to them. Routine office work, whether one likes it or not, gives a definite structure to one's mental framework and hones useful skills. Social interaction and the exchange of ideas with other people (colleagues, clients) also augment this. All such activities are lost when one turns inward to one's own investment portfolio.

Thirdly, one's investment horizon is shortened as there is a definite pressure to "bring bread home every day" or at least every month. While buy-and-hold is hardly the way to go (except for people like Warren Buffett), one should also not be primed to sell every time a portfolio stock rises by 10-20%; as Peter Lynch advises, let the profits run. Worse, one might buy a stock for the wrong reasons as a result of the shortened investment horizon; where previously he used to buy an illiquid stock for its long-term prospects and wait for it to be recognised, he might now start buying highly valued, highly traded momentum stocks to reap quick gains in a highly risky musical chairs game (or the "greater fool" game). Patience is a virtue highly relevant to investing; that virtue is often attenuated when one depends on and consequently focuses excessively on one's stock portfolio.

Fourthly, one has to reconcile within oneself the role of a trader/investor in contributing to society. This social pressure cannot be underestimated, especially from the older generation. This view is understandable, and indeed, one will have to assess his motive for turning to full-time investing/trading. Is it mainly due to push factors (job dissatisfaction)? If so, it is time for a rethink. As for contribution to society, there is none: all that talk about bringing liquidity to the market and helping to ensure efficient resource allocation and prices is just plain bollocks; traders or investors bring nothing to society, unless they reach a certain scale of operations akin to that of venture capitalists. One has to be comfortable with that.

All things being said, there are people who trade or invest successfully on their own, in various areas such as equities, commodities, futures. I would think to overcome the psychological barriers described above, one has to have at least one million bucks to consider this avenue as a complete full-time option, or at least half a million with another additional source of passive income to be comfortable with this chosen path for the long-term. Assuming an annual dividend yield of 3% (typical for the Singapore market), one can collect $30K in dividends on a million-dollar portfolio which is adequate for covering the household expenditure ie. capital gains will be the main instrument for growing the portfolio and the full-timer will have to be confident of making this happen. Additionally, the drive to constantly enhance one's knowledge in this field should be there; there are so many ways to improve one's reading of stocks, from enhancing one's knowledge of the various industries through reading, to locating sources of information to enable monitoring of the environment in which one's stocks operate, to streamlining the stock selection process, to understanding the global or regional markets with a view to assessing global supply and demand dynamics. It would be fair to say that the level of discipline involved is similar to that in operating one's own business.




Blogger Quest said...

"As for contribution to society, there is none"

a battery has a negative net energy return. being an energy drain on the system, is its contribution to the system is zero?

being a trader or short-term investor akins to being a battery of capital in the market. even if the holding period might be for a minute.

11/01/2005 8:42 AM  
Blogger DanielXX said...

Hi quest,
That is an interesting analogy. Of course, that is true: investors can be considered commodity traders, the commodity being shares. My point is that we should not harbour any grandiose notions about our role in society, since our starting point is to make money and not to provide a service to other people or to society; it will be much harder to convince ourselves or others otherwise, compared to other professions where it is easier to argue a case for altruistic intentions.

11/01/2005 3:55 PM  
Blogger Quest said...

my reasoning for deducing that analogy stems from the persistent existence of the traders.
if they are so unwanted and unneeded, why do they exist?
there must be a reason that the market supports their existence.
ultimately what is the role of these traders?
they provide their own capital and/or assume the margin risks in order to assign to and back the value in the market for brief periods of time.
collectively all participants in the market agree on what is the exact value of an asset or liability at a given time. we have since known this as the 'efficient market' hypothesis.

"our starting point is to make money and not to provide a service to other people or to society"

are you familiar with the term 'invisible hand'?
here is a quote from Adam Smith, one of the earliest proponent of free trade and capitalism:

Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it... By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

11/01/2005 8:05 PM  
Anonymous Anonymous said...

Hi there DanielXX, I just stumbled on your blog and your post about Full-time investing / trading was quite an eye-opener. I have been searching for information on advanced teaching degrees online so your post, although not exactly what I was looking for, has given me some food for thought. Thanks for sharing your ideas.

11/03/2005 4:14 AM  
Blogger DanielXX said...

Hi quest,
Yes, the oft-quoted invisible hand. Let's consider another analogy. You buy a car and you claim that you are contributing to the economy by consuming its goods. One cannot say that you are wrong because it IS true, you are creating demand. However, can anyone, including yourself, really reasonably believe that you are adding value through consumption? Because if you say yes, then basically one can argue an economic case for any kind of activity, including smuggling (fulfiling market demand), bribery (the economic ends justifies the means, right?), casinos (hold on, the economic case for that has already been laid out?!)

11/04/2005 7:20 AM  
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11/04/2005 1:19 PM  
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11/04/2005 1:58 PM  
Anonymous Anonymous said...

Hi there DanielXX, I just stumbled on your blog and your post about Full-time investing / trading was quite an eye-opener. I have been searching for information on investing in distance learning so your post, although not exactly what I was looking for, has given me some food for thought. Thanks for sharing your ideas.

11/05/2005 2:46 AM  
Blogger Quest said...

i do not see any correlation between being a trader and buying a car.

if a car exists, it is because the demand for it exists.
if smuggling exists, it is because the fair legal means to obtain the goods does not exist.

a trader exists because the market calls for its existence.
if there is no benefit, there is no existence.
my theory for its existence is that it serves as a battery of value and risks.

11/05/2005 5:12 AM  
Blogger DanielXX said...

Hi quest,
Traders fulfil a need to provide liquidity to the market, yes I concede that. In the same way that a casino needs gamblers to play the games, or that an economy needs people to consume the goods (that's where my analogy on buying cars came from). Yet I don't really see gamblers or consumers being feted or honoured for their "important roles".

That's where I'm coming from; that's my point.

11/05/2005 7:27 AM  
Blogger Quest said...

i imply that you view traders as gamblers or consumers, where a commodity is being bought and depleted. in the gambler's case, the service rendered is a thrill. or entertainment. or hope.

i view traders as merchants who buy a good and then sells it to someone else at a markup. the merchant provides the service of delivery.
the traders clearly have no delivery service. the good is not physical. so what service do they perform?
they hold the risk till someone else decides to hold it.

11/05/2005 9:00 AM  
Anonymous Anonymous said...

May be the only time I ever visit this site, but...

I say the greatest way for a trader to contribute to society is donating a portion of profits (assuming one has them) to a cause/charity that will act using those funds. Should someone have a great deal of profits they might even consider "diversifying" amongst several charities.

Best of luck to you.


11/09/2005 10:40 PM  
Anonymous Anonymous said...

Traders contributed to society, too. If not for trader, there is little liquidity, market will be dull, and few people will buy shares because when market is not changing, there is no money to be made. More companies will not be able to bring their idea to market because IPO market is affected.

1/17/2006 11:13 PM  
Anonymous Anonymous said...

If u hv $1Mil, a risk-free (thus stress free) approach would be to invest in govt bonds. Long term bonds coupon rate is 3-3.5%, which will generate interests of $30k-$35k/yr.

If $30k/yr is enough for u, even $500k is good enough if u invest in high yield stocks (of course it's not risk free). For eg., REITs, SP AusNet, MIIF, u can get good net div yields of aro' 6%. Thus, the $500k invested would generate $30k of net div/yr.

If u hv some additional recurring income (eg. giving tuition or even working part time) of at least $1k/mth (or $12k/yr), u then need another $18k/yr fm stocks investment (which translates to $300k invested in 6% net yield stocks). The higher the amt of recurring income, the less capital u need. So, it's possible to get out of the rat race and away fm yr high paying, stressful, long hours job to a less stressful, low paying, flexible, short hours one :D

Yes, u don't really need $1Mil to 'retire'.

Of course I don't advocate putting all the $500k or $300k on just REITs or other yield stocks. I'd still spread my money amongst diff classes of investments with diff risks and returns, for eg. SGS Bonds, T-Bills, REITs, High Yield Stocks, Growth Stocks,....and even 10% for speculative stocks to add excitement to an otherwise boring life. Open up a spread sheet, put in the diff classes of investments and diff yields, work out the worst case, typical case returns and if u r comfortable with the returns, then act on it. Simple as that to retire early :D

PS. Make sure u start yr investing on a part time basis while u r still working and make sure u consistently make more than the risk free rate before u even contemplate investing on a full time basis. If u r unable to achieve that, then u'll need $1Mil and pls DO put all that in SGS Bonds :D

1/18/2006 11:13 PM  
Blogger DanielXX said...

The thing is that not only must a full-time investor make adequate profit to sustain his lifestyle (eg $30k per year) but the more important thing that he must grow his capital. If he has a small base, say <$500k, he will be so hard pressed on the "lifestyle sustaining income" (usually dividends) that he will tend to buy safe stocks and lose his risk appetite. A strong capital base facilitates a stronger stomach.

If one wants to "retire" then of course that is an acceptable approach, but that's another thing.

1/19/2006 4:18 PM  
Anonymous Anonymous said...

I fully agree that having more money will definitely give u more leeway to take higher risks for higher returns. Yes, I also fully agree that u need to not just make enough to sustain yr lifestyle, but should also tgt to make extra to increase yr capital (to acct for inflation and possibly higher healthcare needs as u age).

Still, $1Mil is a lot of money and would be out of reach for most. For some, by the time they acquire that amt, their risk appetite may also hv dropped accordingly due to their advanced age.

A possible solution for those who are married, with a working spouse, would be for one person to continue working full-time and the other to invest full-time. In this case, u need not worry excessively on the bread and butter issues while u r doing the full time investing.

Ultimately, the lower the amt of money u hv, the bigger would be the leap of faith (in yourself) u'd need to take. U'd also need to be very thick skinned (esp. if u r male and need to rely on yr wife to bring in the stable part of the dough). Lastly, it does require you to hv a very understanding and supportive spouse.

Take heart, if u hv a good and consistent track record in part time investing for say, 5-10 years, u ought to hv the confidence to continue to do what u'd been doing when u turn full-time.

1/21/2006 8:34 AM  
Blogger DanielXX said...

Well, 500K plus a steady source of income (doesn't have to be from day-to-day work) is also good enough. If one cuts down on unnecessary expenses, he should be able to do it at about 35, I feel.

1/22/2006 3:34 AM  
Anonymous Anonymous said...

There was an argument whether trading in stock contributues to society. IMHO, it does because it creates jobs. However, the money that you invested does not contribute directly into the company's cashflow. The company cannot use your money to generate more profit (except IPO). After IPO, it is just "gambling" legally.

A good reference book is "What if boomers can't retire?" by Thornton Parker (English 332.02401 PAR).

Based on his estimate, the stock market will have major crash sometime in 2012 due to massive withdrawal of funds for retirement. Robert Kiyosaki also predicted similar outcome in his book "Prophecy".

5/21/2006 7:59 PM  
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