Trading, investing and portfolios

This is a guest post on trading 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

Happy 2012!

New Year’s resolutions are scary things, especially for people like me who eat too much and move too little. When laying out your financial goals for 2012, think of how you will reach your goals just as much as the goal itself. My last blogpost before the holidays was about the differences between the at home trader and the professional trader who works for a firm. There is one critical difference I left out and it is one that I want to highlight now. I hope it helps to add clarity to your financial goals for the year ahead.

When I am out on the party circuit and other party comrades find out I am a trader, some people seem compelled to tell me about the last trade they made on their personal online trading account. It flies out of their mouth faster than a puck off of a Russian goalie’s post. Some people are generally earnest in getting my opinion on a particular trade while others are just spreading their peacock feathers (or at least that is my best guess about why they would tell me). If I think they are just bragging, I usually just say nothing. But if I think they are genuinely asking for a helpful comment, I ask them the same question every time. “Why are you trading your own account and why do you think your portfolio should have that equity in it?”

I usually get the same general response; that the stock they bought is “ so cheap and going higher”. They have no idea about the why and the how of trading; Two elements necessary for success.

Traders who work for a firm already have the why and the how set out for them when they accept a particular position at a firm.

The how is often derived by the department they work for. Traders can work on equity desks, options desks, bond desks etc. The how is set out by management that builds and runs the department. If a trader works for a long-term bond strategy desk, he or she will be executing and planning longer-term bond trading strategies. If a trader works for an active equity department, he or she will be trading equities and will most likely be in and out of the market much faster. Some trading desks are set up to cover only precious metals, while others can be focused on something as specific as mid cap domestic equities. The point to grasp is that the how is really clear to all professional traders. It is often written on their business cards if they need a reminder.

The why for professionals comes from the goals of the firm or the goals of the division they work in. The why can have both qualitative (market visibility, market knowledge) and quantitative (profitability and ROI targets) elements to it. When a trader is not living up the why element, their manager reminds them…quickly.

To trade successfully from home, you must be very clear about the why and how on your own. The more vague you are, the more risk you are unknowingly taking on. Trading from home should only ever be done as a part of an overall execution strategy for your investment portfolio. I have said it before and it is worth repeating. Investing and trading are different. Know how trading fits into your investing strategy and your overall portfolio. Trading itself is not a strategy, it is an activity. If you view trading as a hobby only allocate as much money to it as you do your other hobbies like your hockey league or your golf game.

The why and how questions to ask yourself:

  • Why are you trading your own portfolio?
  • Why will you trade some parts of your portfolio yourself and not others?
  • What are your investing goals and how is trading helping you get there?
  • What are your specific goals for your trading?
  • What is your action plan if your trading is not meeting your goals?

Professional trading departments are launched and shut down all the time. If you trade for yourself at home, always evaluate whether your trading is assisting or hindering your investing strategy and portfolio and do not hesitate to shut it down or take a pause if it’s not working. Good luck to all in 2012 when striving to reach your own financial goals.

Thanks Tusk. Make sure to check out the site: www.TuskFund.com or follow Tusk Trader on twitter: @tusktrader

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Showing 5 comments
  • Eddie

    Tusk,

    Some great advice. As a newbiew investor, I’ve yet to take the dip into day trading. Mostly because I havent decided yet, if it’s for me. I’m more of a long term kinda guy – “slow and steady wins the race” kinda thinking.

    You do raise some solid points and explain the “why” and “how” of the backend, which a lot of people don’t get. I still fully don’t, but have a decent idea.

    Again, thanks for sharing and looking forward to reading more.

    Cheers!

    • Tusk Trader

      Thanks for the comments. I think day trading is an overall bad idea for most people. The capital, time requirement and risk/reward elements cause it to not a be a very effective strategy for most people. What I do encourage you to look at however, is trading from the execution side. If you are looking a particular stock to hold for 6 months or 6 years, make sure you know the cost difference between going through a broker and doing it yourself. The same is true when looking at a mutual fund compared to an ETF that you can buy yourself in a trading account. Can you execute the same risk/reward and capital requirement for less fees and faster execution? There is no right answer for everyone, but there are right answers for specific people. Learn about your options, and select the right choice. I am happy you are gaining some background in trading and learning new things. The financial world has changed a lot in the last 15 years, and not all of the financial literacy in the market place is reflecting those changes. Thanks again for the feedback. I truly appreciate it.
      Tusk

  • Mike W

    Great straightforward message! I have been a hybrid trader/investor for a number of years now and have achieved some success. What Tusk wrote is absolutely correct. I would add that a person needs to use quality tools as well to analyze both the overall market and individual stocks. I found a solid resource tool for traders and investors called: http://www.marketdatatracker.com
     
    Mike W
    Berlin, PA

  • Connecticut

    I really like seeing websites that understand the need for supplying an excellent resource free of charge. Thank you for this excellent resource

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