This is a guest post from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
(Props to Myownadvisor for the idea for this one)
Professionals have advantages
There are aspects to the job of trading for a firm that definitely give traders an advantage over the average at-home investor, when traders manage their own portfolio. The primary one is the size of the investing toolkit that a trader has at his or her disposal. Traders know all about shorting, options, futures, ETF’s, etc. They can look at a chart, watch volume trends, and quickly scan company reports. Traders know the ins and outs of each tool and it is at a huge advantage because traders then get to make decisions based on the market direction and fees related to each strategy. Traders are not limited to the smaller amount of products some at-home investors are, simply because the at-home investor doesn’t usually have the depth of knowledge a professional trader has. Every decision a trader makes in his or her own personal portfolio is market driven. They pick of the best tools to execute their idea or portfolio strategy. Many investors limit themselves purely because they have only a few tools to pick from. This is a big problem in my view with the advising community. They only inform a client about an investment vehicle as part of a sales pitch. Investors need to gain knowledge and make choices based on everything out there. The larger your financial toolkit, the better your portfolio will be. You will be making market based decisions, not decisions being made due to lack of knowledge. The financial world has changed a lot in the last 15 years and traders are on top of those changes. I encourage all investors to educate themselves as much as possible to expand their toolkit. Don’t view it as learning about a tool to use tomorrow, but learning about something for six months down the road, a year from now, or even never. Give yourself choices, otherwise some decisions will be happening out of default.
Super plugged in
The 2nd advantage traders have is that they are very tuned into the market (sometimes to a fault). They are on top of more market news, sector movement and corporate balance sheet health than most people who trade from home. The at-home trader can pay for expensive charting systems and news wires, but what they can’t replicate is the large trading floor and the large rumour mill that traders are surrounded by and apart of. Watching the price of gold move 5% is one thing anyone can witness but a trader can walk himself or herself over the guy who has been trading gold stocks day in and day out for 15 years and ask him what is moving now and what does he think will be moving well next week. You can’t replicate that home. This encompassed view of market sentiment is an advantage to traders and filters its way into the trader’s own portfolio. This is an advantage in good times, bad times and especially in volatile times. To the at-home investor, it feels like traders can see things coming before they happen. What actually happens most of the time is that a market event has generally been brewing for a while and traders have the potential to adjust their portfolio before the mainstream begins to act. It’s not about one piece of news a trader may get first, it’s about 10 small things happening that changes a trader’s view of a sector or even the market as a whole.
Against the grain? No problem
The 3rd plus is that traders have no problem being contrarian. If a seemingly random stock has been up 30% each day for 5 days in a row it tends to hit the regular business news channels. That is when I get many at-home investors asking me, “should I buy it?”
The only thing a trader wants to do is short it. They are salivating for the time when they think it’s time to jump in and short it. Traders have no problem jumping in to buy a dip or market slide. They will short a “hot” stock that has gone too far too fast.
You still need a coach if you’re in the NHL
So traders must have great portfolios that grow in a hockey stick shape then…..right? Nope. The biggest problem that many traders have is Risk. They are so used to the risk they take on at work for a firm (even though it is very managed) that they lose that warning bell in their own head when managing their own portfolio. The risk tolerance of an average trader is far greater than a personal portfolio can be braced for. They become immune to a portfolio swing that would terrify most. If the venture exchange has been very active, and traders are focusing on it at work, many of those stocks seem to also appear in their own portfolios at home. They get an idea and they act on it. Traders need an advisor just like everyone else but not for all the same reasons as the at-home investor. They don’t need an advisor to bring them a ton of ideas; they need an advisor who has the mojo to rein them in when necessary and to offer the necessary suggestions to create a balanced portfolio. They need an advisor who has strong knowledge outside of the trader’s focus. An equity trader needs an advisor who knows the bond market like the back of their hand. These advisors are hard to come by, as they need to have the market knowledge that matches that of the trader. It can be tough to find that fit. Trading and Investing are different and traders need an advisor who can meet them in the middle.
Happy Holidays everyone! It has been great starting a dialogue with the investing community. Please keep the comments and questions coming in 2012.