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Are All Traders Useless Morons?

By Barry Ritholtz
January 02, 2014 8:17 AM EST
Photographer: Tim Boyle/Bloomberg
Photographer: Tim Boyle/Bloomberg

Over the holiday vacation, I try to kick back a bit, unwind, recharge the batteries. But I still scan my favorite media sources and blogs for interesting ideas.

One that stood out was a short post from Greg Harmon of Dragonfly Capital. Titled “We Are All Useless Morons that Suck,” it actually made me laugh out loud. Greg fearlessly pointed out a truth that is ignored by all too many investors: This trading thingie is really not your forté:

Let’s face it: You suck at investing. Your adviser sucks at investing, too. If you had picked the best stock to buy every day you could have turned $1,000 into $264 billion by mid December. That is a 26.4 billion percent return. Did you even get a 1 billion percent return? How about 1 million percent? 1000%? 100%? If you did not hit a 100% return then you did not get even 4/10 millionths of what was out there.Translation: You suck at stock picking. People like Jack Bogle will use this type of data to tell you that you are wasting your time even trying and that you should just index your portfolio. Coincidentally he runs a few dollars in an index fund. If you had a ‘good’ year, beating your benchmark, then congratulations. But move on and keep trying to get better, because you still suck.Happy New Year.

Now, obviously, no one has perfect knowledge to be able to pick the best stock of the day (or week or even month!). And swinging any type of size around would have resulted in much worse entries and exits. But the point is that as traders, we don’t come remotely close to the Platonic ideal of the gains that are potentially available on a daily basis. Indeed, anyone picking up a mere 1/100th of a millionth of what is available in the markets is considered a superstar trader.

That should make you realize a few things about your chosen profession or pastime. First, it is a very, very hard task we set for ourselves when we engage in active investing or trading. Speaking statistically, the Beta seekers of the world have a huge advantage over the Alpha chasers. Forget outperforming the market, merely outperforming the median of your peers is a huge challenge.

Second, even the best traders must constantly seek to improve their skills, knowledge and tactics. The markets are an ever-changing environment; what worked last year may not necessarily work next year. Given how much of that 26.4 billion percent Alpha you left on the table, there is plenty of room for improvement.

Last, the markets will keep you humble. Woe to the market participant whose hubris offends the Trading Gods. One must be constantly on guard not to let success go to one’s head. All of us have too many war stories of other traders (never ourselves) who allowed a string of successes to go to their head. That sort of arrogance usually leads to a painful lesson in humility.

Harmon bluntly discusses the importance of modesty in pursuing investing success:

I find it more interesting when some manager makes a killing and convinces themselves that they are geniuses. No one in this game is a genius. 100% return sucks remember? When you dig into more of these people, the elite suckers, the ones that can do it again and again, they all have one thing in common. It is not that they are on television and have great hair. Have you noticed that they usually are a bit modest about their results? The one thing they have in common is that they all have a process and are continually trying to improve it.

That sums it up perfectly for me: One, have a process, and two, constantly try to improve it.

Happy New Year. Try to suck less this year . . .

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