Americans once again seem to be warming to the stock market. Retirement plan participants are once again two-thirds of their contributions in equities. Individual investors are also trading stocks as well. Per this report online broker TD Ameritrade is seeing “very robust retail engagement.” Some of that engagement is also coming in the form of record levels of margin debt.
If you have been reading this blog or my book realize that becoming a competent, let alone accomplished trader, is no easy task. Even those that do become successful should recognize there are trade-offs involved. From the Abnormal Returns book:
So before putting hard-earned money into the market, aspiring traders need to think about whether they have what it takes to be successful. It is not enough to want to be a successful trader. Everybody who sets out wants to be a good trader. We cannot say in advance which 10% of traders are going to make it through the market gauntlet and find profits on the other side. We can say that the other 90% are going to experience some real costs in their attempt to become accomplished traders.
An issue largely overlooked in the trading literature is the concept of opportunity cost. The time and effort spent in trying to become an accomplished trader, by definition, come at the expense of other activities. The biggest cost to the 90% or so of traders who fail is not necessarily the financial costs, but rather the time lost to other opportunities. Money can be made in a number ways, trading only being one of them. However, time is not something any of us can get back. For this reason and this reason alone, aspiring traders need to recognize that the costs involved in failure are not always in dollars and cents.
For those still willing to put the time and effort into trading it is worth it to invest some time in educating yourself before putting $1 to work. In that regard there are no shortage of resources. The recently revived TraderFeed by Dr. Brett Steenbarger is a great resource for traders, new or accomplished. For newish traders the Little Book of Market Wizards: Lessons from the Greatest Traders by Jack Schwager boils down the lessons from the popular series of Market Wizards books all into a convenient and easily readable package.
For those who want it boiled down to a few principles, Carl Richards at the Bucks Blog, has a post up laying out seven rules for new-ish traders. Richards, in general, is no fan of trading for most investors but his list is well worth considering. Two of his rules are things I have discussed here on the site a number of times.
1. Track your results. (Just a couple weeks ago I wrote about the importance of this, even for Nobel Prize winners.)
2. Don’t confuse practice trading with real trading. (In short, paper trading is not unlike fantasy football.)
The whole list is worth considering. However a good list of rules still omits the messy reality that is the financial markets and trading in general. To bypass this novice trader often focus on the most popular stocks in the hope that this will make it easier to succeed. Paradoxically the opposite is likely true, as it often is the case in financial markets.
Some of the resources above may deter you from trading, which is fine. If not, for those still willing to make a go of it make sure your follow Richards’ last rule and ensure you: “Contain the damage” from your trading. Your portfolio make very well thank you later for this consideration.