Sell Stocks, Become A Trader

Reader Question

I sold all my stocks on Friday taking advantage of the rally. I probably lost money anyway, but I can't take the volatility any more. Do you have any advice on becoming a trader?

My Reply

I definitely have advice on becoming a trader: don't do it. It's a very bad idea, unless you realize perfectly well that trading is simply gambling and will likely lose you money over time. If you treat it like playing the lotto, then it can certainly be fun entertainment. But if you are seriously thinking of trading as a way to make money then give your head a shake.

You may think that you have enough insight into market's movements to profit from them or you may know somebody who (allegedly) does or at least you believe that you can acquire such insight over time. But the fact is that you are deluding yourself (and are very likely being deluded by others). This whole blog is devoted to exposing this simple fact.

The stock market at all times incorporates all known information that has relevance to future stock prices and profits. You'd have to know something that nobody else (or at least very, very few) people realize. It's useless to know that Europe is having a crisis because the market knows it just as well, which is why European equities are trading at nearly 50% off levels of 5 years ago. All the known news is already priced in. And more often than not, "known news" includes all sorts of rumors and even inside information.

So if you happen to know with absolute certainty that, say, French bank Société Générale's accountants are about to discover an irregularity in their books which will lower bank's Tier 1 capital by $5 billion, then heck yeah you can make money on that. But how exactly are you going to obtain this insight into Société Générale's accounting practices? Simply knowing that Société Générale owns a lot of questionable securities isn't nearly enough. Every trader in the world knows that already and it's all priced in. To benefit from your knowledge it has to be extremely exclusive.

Stories you may hear about people getting rich by trading are virtually all lies, plain and simple. There're so many people who benefit by spreading these stories, financially or psychologically, that you should be hugely skeptical of all such claims. Not only are these stories spread by anonymous internet posters, but also by virtually every investment professional, from your broker to your financial adviser to your fund manager. Their livelihood depends on your believing that they have some magical investing skill (which they don't in 99+% of the cases and possibly full 100%). Every time you see the E-Trade baby tell you to start using E-Trade's tools to make money you believe those lies a little bit more. After all, there's no way a reputable corporation would spread lies like that, right? Wrong! And I don't mean to single out E-Trade. TDAmeritrade, Fidelity, Charles Schwab, you name it have the same asinine commercials that imply more or less directly that they have the secret to making money by trading and are willing to share it with you. All lies.

There are two ways you can go from here. You can swear off stocks forever and stick to safe instruments like cash, CDs, and bonds. These truly are safe (as long as you stay away from high yield junk bonds) in the sense that you will get your principal back. But the interest you earn in the process may be rather pitiful and after taxes and inflation you may well end up with less purchasing power than you started! Such is the situation today -- interest rates are so low across all types of bonds that after taxes and inflation you'd be lucky to keep the purchasing power of your "safe" portfolio.

Alternatively you can learn how to invest and start again, hopefully with a relatively conservative allocation so you don't get spooked and sell out when the next crisis comes (which it surely will).

You could also look into less conventional options like real estate -- just keep in mind that landlording is very much a job and not a fun one. Owning simple stocks or bonds requires next to no time or effort. That will not be the case with real estate.

What you should definitely not do is buy stocks when things look rosy (think late 1990s) and sell them when the crisis comes (think last few years). That is the surest way of all to lose money.