"Why Economists Don't Make Good Traders" and other Nuggets
My ideas for educational feature topics usually come from readers' suggestions or from tidbits I have gleaned from many years of studying and trading futures markets and stocks. I also get educational topic ideas from discussing markets with my peers in the newsletter and trading advisory services industry. For this educational feature, I don't have any one topic that I will focus upon, but instead will give you a few more trading "nuggets."
Why Economists Don't Make Good Traders
Are you a little surprised at the headline of this nugget? When I first started in this fascinating business I was a reporter right out of college, working on the floor of the Chicago Mercantile Exchange. Just before my very first trip onto the trading floor, I suspected I'd find that floor traders were a bunch of academics (or economists) in pinstripe suits, conducting business quietly with their noses stuck into a notebook full of trading statistics and charts. Wrong! Instead, I found that floor traders were more like construction workers than academics, in that they were "regular" guys or gals, many of which did not conduct business quietly, and who read the sports page first--and even told a salty joke here and there.
Actually, I found that a bit refreshing because my background is rooted in a blue-collar-type work ethic. (I was also a construction worker before and during my college days.) Anyway, my point is that successful floor traders (and other traders) are good at what they do not because of their extensive studies of economics or business principles or related text books. Stock and futures traders are successful because of their trading experience and their realization that markets are a reflection of human nature--which tends to repeat itself.
Let me provide an analogy with the famous "Old Faithful" geyser at Yellowstone Park. An academic (economist) may study what makes the geyser work and all the physical elements involved in producing the big shot of water and steam. However, all the trader really cares about is one important thing: When the geyser will produce its next big plume of steam. Most economists tend to be "behind the curve" when it comes to pegging economic conditions and market moves. Traders are forced to be right out there on the cutting edge of market trends and trend changes. (And yes, that "edge" can be very sharp!)
Baseball and Trading Futures: Both are a Big Boy's Game
Trading futures is not a game for the faint of heart. I read a story on the ODJ newswire the other day that succinctly put the specter of losing trades into perspective. The greatest baseball hitters in the world do not even bat .400. In other words, the best baseball sluggers are successful about 3 out of 10 times they step up to the plate. The same is true with futures trading. The very best traders in the world lose on well more than half of all the trades they make. The key is limiting losses on the more numerous losing trades and maximizing profits on the fewer winning traders. Some individuals' egos cannot accept the fact that more losing trades than winning trades are a part of trading futures.
Barry Bonds, Hank Aaron, Willie Mays and Mark McGwire all suffered hitting slumps--and more than just one. I'm sure they didn't like those slumps, but they persevered and eventually broke out of them. Futures and stock traders will also almost certainly experience periods of poorer trading performance. And, of course, there are the many men whose dream was to make it to "The Show" in the Major Leagues, but did not have the skills required. Those men who did not make it to "The Bigs" were not "losers." They were the ones who at least gave their dreams their best shot. And then they went on to pursue other things and found their successful niche in life. I believe the same is true in the very challenging fields of trading futures and stocks.
Some People Never Learn
I am going to describe to you a CNBC TV interview that I saw aired a while back, and then I want you to figure out what's wrong with the analyst's approach.
The interview was with a stock analyst/advisor. He was asked by the CNBC reporter to provide his stock picks that he saw as good bets to perform well in the next year or two. The analyst went on to describe several stocks. He went into detail about how one stock had been beaten down too far the past few months, and that another stock was a bargain at its current low price level and was sure to rise from the depths. Still another stock had been "underperforming" but was likely going to kick into higher gear once some kinks were worked out and the economy picks back up. He described a couple more stocks that were also "due for rebounds."
What's wrong with this investment approach? The stock analyst is a bottom-picker! So-called bargain hunters for beaten-down or cheap stocks only have slightly better odds for success than bottom-fishers in futures markets. When a stock or futures market price is low, there is a reason why it is so low: The collective marketplace has determined the price to be a fair price at that given moment.
One of the best stock-trading books I've ever read is, "How to Make Money in Stocks," by William J. O'Neil, the founder of the Investors Business Daily newspaper. O'Neil's trading principles are very much like those of many successful futures traders.