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Unresolved Quandaries (Part 3)

Today I will finish mulling over ideas brought up during a 2016 conversation with my friend CJ.

At this point in my trading career, much of the discipline comes from engagement activities. I mentioned flexibility. That flexibility comes from my non-trading activities—questioned in the past because they seem optional or unnecessary. Although they do not translate directly to profits like clicking the execute button, they keep me on-track with related projects. Without this engagement I may lose interest in trading [new strategies]. Maintaining a high level of engagement requires commitment.

“Commitment” calls attention to the declining length of my workweek. The hardest part of my trading career was 2008-2011 when I spent 60+ hours/week to learn, to backtest, and to develop my strategy. Trading for others would represent a new business direction and a renewed sense of obligation to “recommit” by working more hours.

CJ and I eventually discussed management fee: another sticking point I must figure out before taking steps to manage other people’s money. How much I earn will determine whether my flexibility and spare-time sacrifices are worthwhile. The traditional hedge fund commission structure is a 2% management fee and 20% of the profits. I may or may not deserve to be in that category. The average adviser these days charges closer to 1% and with some “robo advisers” charging 0.5% or less, the average fee might be falling even further.

Suppose I charged 0.75%, which I think would be a tremendous bargain for someone in the “alternative investments” category. Raising $10M in assets (that’s a lot!) would amount to $75,000 gross revenue per year. I am uncertain whether net profit on that would cover my annual living expenses. Would this motivate me to sacrifice a flexible lifestyle?

In the beginning, I could charge a lower fee as enticement for people to give me a chance. One possibility would be to offer 0.75% (or free) with the expectation to increase fees over time as I prove my worth.

Perhaps the target fee structure should be proportional to my Sharpe Ratio relative to the industry average.

Aside from fee structure, I also need to come up with a marketing plan. Advantages to my trading approach include a consistent lowering of cost basis, a margin of safety, and getting time on my side [not the case when owning stocks]. When I lose I can lose big, but most of my trades are winners. On average I do better than most stock indices with a lower variability of returns. This means less risk, which has value.

Aside from fee structure and marketing plan, other unresolved quandaries include what kind of business structure to create and how many [if] partners to take on.

Unresolved Quandaries (Part 2)

Today I continue review of my 2016 conversation with CJ about transitioning into the investment adviser (IA) industry.

I agreed with her suggestion that most people might not be capable of trading for themselves and suggested most do not even have the motivation to outperform.

CJ agreed and said even if I could average 20% annually trading options as opposed to 10% with stocks, this would not make a marketable difference. Most people don’t have the financial literacy necessary to understand what a huge long-term difference this would make without being scared off by the specter of derivatives. Far less than that additional 10% per year is needed to motivate money managers and IARs (salespeople) because institutional money will gravitate like moths around a flame but an appreciation for options requires a higher level of understanding.

In addition to the financially literate that can calculate compounded returns and understand options, the value of outperformance might appeal to those with a more competitive drive. Beating the “benchmark” has always motivated me because it represents personal accomplishment. Many wealthy individuals also have high degrees of ambition as evidenced by the hard work getting them to where they are. They just don’t have any desire to [learn how to] manage their own wealth, which could go back to what CJ said about brushing teeth or what I previously wrote about doing a brake job.

My preference would be to trade for a handful of wealthy individuals rather than a multitude of people with less to invest. In trading options, I would want to give each account individualized attention like I do my own. To make it worth my while, I would need a sizable amount of assets to manage.

“People aren’t going to give you a whole lot of money since you are just starting out with no track record,” CJ said.

Another good point…

As my optimism dimmed, I started to reflect on some big lifestyle sacrifices I might have to make. With my current trading strategy I have great flexibility. I must check in with the market at the same time every day but I can do non-trading activities at my convenience. I can go shopping or to the gym during the business day. I can travel and work remotely. For better or for worse, in managing other people’s money I would feel obligated to have my finger on the pulse of the market all day long.

I am disciplined now by holding myself to a 30-40 hour weekly schedule but in managing money for others I would feel the obligation to be even more so.

Unresolved Quandaries (Part 1)

On May 8, 2016, I met up with my friend CJ and got to talking about other trading-related activities I would like to be doing. I took notes and due to its continued relevance, I am now formalizing this as a complete blog post.

I told CJ that I had considered giving educational presentations in addition to managing money for others. I discussed what I might offer compared to other investment advisers (IA).

CJ felt that most IAs are glorified salespeople. “All they do is sell other people’s funds,” she said right up front. Her husband used to work for a hedge fund and she seemed to be more informed than most on the topic.

CJ next supported the idea that I might bring something different to the table. I come from a trading—not sales—background. This might give me an edge over most advisers who have little to no option trading experience [much less know how options actually work]. I blogged about this previously and concluded it may not actually be the case but she agreed emphatically even before I could offer any caveat. At the very least, her support affirms it to be a decent marketing claim.

I next discussed how I support self-directed investing because much advertised in the industry is not as it appears to be (discussed in my last post). Again, CJ quickly agreed. “Advisers are salespeople and they know nothing. My husband knows more than our adviser and has had to tell him from time to time to make certain changes in the account. They just care about selling their company’s funds.”

If only I could always be addressing an audience with buy-in before even saying a word!

“It’s more than just selling funds. I also think it’s a failure to offer options as part of the trading strategy.” Because long stock is speculative, I view most stocks and funds as having added risk.

CJ now fell off the bandwagon as she came face-to-face with a perceived complexity about derivatives themselves. “Teaching people about options would be very difficult. That could take a long time to understand and is probably something the average person wouldn’t have any interest in learning.”

I lost her further when I tried to explain how the average person might trade options on a casual basis. CJ described how tired she is when she comes home from her part-time job (full-time would be even worse); checking up on her investments is the last thing she would want to do.

“You could probably check the market just once per day,” I said.

“How many people are able to do anything every day? On some days I’m lucky if I can even remember to brush my teeth!”

I will continue next time.


Not that you’d realize but I haven’t typed a blog post in a really long time!

Once I get going on a backtest I tend to get caught up in it. The 2-3 hours of backtesting I can handle daily represent an attention-demanding task that wears on my brain. It burns to the extent that I usually spend the balance doing more passive tasks like watching webinars or reading. Blogging—another concentration-intensive task—tends to get pushed aside.

Once the backtest is over I sometimes experience a complete loss of motivation. This describes the last couple weeks, which were punctuated by my seventh marathon. After the backtest is done I can finally proceed with the data analysis. This makes it somewhat inconvenient that my brain wants to take a vacation.

It is what it is.

I have now finished my second butterfly backtest. This time I looked at a classic butterfly. Data analysis is imminent.

Starting with today’s brief post, I will consolidate efforts to get back into the blogging groove.

I’m starting to feel butterflies!

Welcome Trader Literacy Group!


As I said in the initial e-mail, I trade securities for a living. I’m coming to the end of my ninth year and I’m exceedingly grateful for what I have found. I’ve been able to leave Corporate America: the 12-14-hour pharmacy shifts where I hardly got a bite to eat, where I remained on my feet continuously, and where I was forced to deal with stress over meeting business metrics.

Trading is not easy but I think half the battle is learning, which is the main purpose of this group.

Another key component to consistent trading is commitment. Just like anything else, it will fade away if you don’t use it. That’s the main reason why I’m not offering this for free. People will not pay for something to which they are not committed.

In addition to establishing some accountability, I’m charging because I’m not sure this sort of thing should be free. Trading literacy is not just for cerebral enrichment: what you do with it can potentially lead to consistent income for years and decades. What you can save by not having to pay a financial adviser over a lifetime is itself worth the upfront cost.

The trader education programs I have seen charge thousands of dollars. This will cost $20/session. I can feel good about our exchange by saving you significant money while not disrespecting the material by giving up for free what has taken me years to synthesize.

The initial Meetup message I sent was sent to others as well. You indicated definite interest. A number of people said driving to my city would not fit their schedule. Some expressed skepticism about me.

I will make it easier for all of us by conducting the meetings online. We may or may not get other participants too.

I think skepticism is always healthy when it comes to finance. Before we start I want to give you the opportunity for some due diligence on me. If you have any questions then ask away. If you want to talk to me then let’s have a phone call.

And if you want to confer with each other then I’d encourage that, too. I think working together when it comes to trading can offer significant advantages.


2016 Performance Update

I am very past due for a performance update.

I will focus discussion on the following table:


My first full-time year was 2008, which means I now have nine years of trading history. Through that time I have tried a few different things, backtested a lot, and learned tons. Hopefully I have learned most from my mistakes. Only the future can reveal whether that is true.

The table includes three sets of data. I start with my yearly performance and the compounded total return. I then repeated these calculations for the small-cap and large-cap indices. Green (red) numbers indicate where I outperformed (underperformed) the benchmark. Standard deviation is a measure of risk (as discussed here and here) along with max drawdown (MDD) (as discussed here). Risk-adjusted return is total return divided by standard deviation. CAR is compound annualized return, which makes CAR/MDD another risk-adjusted metric.

I have outperformed the benchmark in five out of nine years.

I have generated profit in seven out of nine years.

My average return significantly outpaces the indices. Mostly for that reason, the risk-adjusted returns are much better too.

My biggest disappointment is the relatively high standard deviation. To this end, my 2012 return of +52.39% hurts. I can’t say exactly what was going on with my trading that year without looking back and scrutinizing the records. Yes it’s a great number but my preference would be to have stable returns like I have the last few years.

I very much like the fact that my worst year was limited to just over a 10% loss. This is the kind of stability somewhat lacking to the upside. I experienced three catastrophic losses over the last nine years and the overall performance suggests I have bounced back quite well.

Graphically, the comparison looks like this:


The outperformance is clear.

Although I was in negative territory and underperforming after four years, my preference is to have a relatively flat equity curve in volatile markets as opposed to a curve more jagged than the coastline of Buzzards Bay, MA. This is something I have managed to accomplish thus far.

On the Need for Improved Financial Literacy

The need for improved financial literacy nationwide is conventional wisdom: a simple internet search will bear that out. I challenged this in my last post because people seem to have little interest.

Although I criticized this challenge based on limited sample size, it may have some merit. People are generally uneducated about investing and they seem quite willing to let professionals do the job for them. In terms of value, financial literacy differs from functional literacy. Many people who cannot read or write have felt the squeeze over their lifetime from those around them including prospective employers. Hiring financial advisers is much more socially acceptable than functional illiterates asking others to read/write for them.

This pertains to a blog post I wrote in January where I decided it wasn’t the result of a brainwashing perpetrated on the American public by the financial industry. Rather, the decision to hire investment advisers is a delegation of duty. The cost of this delegation includes management fees and lower investment returns.

We could ask whether the real issue regards a need for improved financial literacy or a choice about how people wish to invest. I don’t think the average person has enough education to decide on the latter so perhaps it does come back to financial literacy. I could also argue that most financial professionals don’t know as evidenced by the fact that so many of them do not employ options.

In the last post I pointed out that trader education is a subset of financial literacy. One can know a lot about finance, understand the role of investment advisers, and know how to interview/select a knowledgeable adviser. Even someone educated in finance may elect not to take that next step and manage his/her own investments.

I think the basics of financial literacy aim to keep people out of a “paycheck-to-paycheck” struggle. This involves how debt works, proper budgeting, savings/interest, etc. Investment management pertains to savings above and beyond that needed for annual living expenses. Getting a large proportion of the working class to establish and maintain a rainy day fund would represent a significant move higher in terms of financial standing. Having surplus capital available for trading and investing, though, is still a whole other level.

For those in possession of surplus investment capital, financial literacy may be channeled into a business. This is what I have done in order to retire from Corporate America. The pharmacist in me would point out a similarity to the way some have turned “medical literacy” about dietary supplements into a business. Despite having no customers, I would argue that my product is supported by data whereas many claims regarding dietary supplements are baseless and invalid.

Giving Back (Part 3)

Before continuing forward, I want to clean up a couple things—the first being the need versus achievement debate. I’m not really in a position to assess achievement. You could also make the case that I’m not really in a position to assess need. I therefore will not be deciding whom to teach based on those criteria.

I have discussed two monetary factors with regard to a trader education program. I have the previously stated reasons for charging a per-session fee. I would also recommend having ample savings to eventually open a real account. Both of these are included to try and prevent students from dropping out, which would result in time wasted for me [preparation of presentation material] and for them [education never applied].

I have thought about giving back by taking an entirely different avenue: teaching high school students. Kids are generally means-challenged so I would not charge a per-session fee. Neither are they likely capable of opening live trading accounts. They do have a solid potential for future income, however, which is wealth they could later manage on their own. Because option pricing models and considerations of probability and statistics all fall under the “advanced/theoretical mathematics” category, I would target advanced math students. This would also get me academically-disciplined students to work with who would be more likely to complete the program.

On a totally different note, I was tempted to argue against the “improve financial literacy” battle cry because people simply did not seem interested based on my recent exercise of getting 11 responses from 54 messages sent. Cost could have been a confounding variable; people may have been unwilling to pay a stranger. I also have no way of knowing how many of my 54 messages were actually received. Over the years, I have gotten poor response rates over the Meetup.com website. For all I know, only 11 people were even aware they received a message.

I do have other reasons for thinking people may not have much interest in learning to trade. Over the years I have approached a few different libraries about conducting a trader/investor program. This was met with lukewarm response because they had not found investing programs to be well-attended in the past. This was the same reason the Ann Arbor District Library gave for discontinuing their subscription to Value Line a few years ago.

Learning to trade, though, is only one subset of financial literacy. I cannot conclude from this that people have little interest in the latter.

Giving Back (Part 2)

The current topic under debate is whether I should give back by trying to teach those without the resources to pay or those who have demonstrated achievement.

I think a significant discount qualifies as “giving back” even if it is not free. I thought about charging per meeting as motivation to stick with the program (it’s harder to abort once we have begun to commit). $20 per monthly meeting would be $240 for a year, which is far less than programs costing thousands of dollars. I would also encourage people in the group to study and practice (paper trade) together. Anytime they have questions I would be happy to answer. This would be a dynamite training package for a steal of a deal.

I am quite convinced that no matter how small, participants must have some skin in the game. I can’t force them to trade and I don’t want to do anything that might put me in an “investment advisor” role because I am not a registered investment advisor. A per-meeting fee helps them—by providing motivation to get through—and it helps me by lowering the probability of dropout. I would be extremely disappointed if I were to compose presentations only to later be deserted by my audience.

People who cannot afford a nominal fee face an additional problem. One must have savings in order to trade. I would probably suggest opening at least a $10,000 account to learn. I would expect interest to wane for someone unable to open a real account. Discouragement would build when trader education could not be converted into actual profits.

This is strike two against giving back to those without means. First, no fee means no front-loaded motivation to get through the course. Second, no savings means no application for the education itself.

I recently messaged people from Meetup asking if they would be interested in a trader education group. I suggested monthly meetings with a charge of up to $20 per meeting to cover expenses and to establish some accountability. From 54 messages sent, two said they would be interested, one person was a definite maybe, and eight declined.

Of the eight who declined, two said they wouldn’t pay $20 per meeting. This could also be a reason more people did not respond. While it may be healthy skepticism toward a stranger, I doubt anybody could find a complete curriculum delivered by a full-time trader for less. And what they don’t know they don’t know is that offering this for free would be doing them a greater disservice.

Giving Back (Part 1)

Over the years I have found little interest among people in learning to trade options. I am thankful for what success I have had with my trading and for the freedom my entrepreneurial trading business affords me. I have given significant thought to how I might be able to “give back” as an expression of my gratitude.

I want to begin by addressing a potential contradiction between giving back, which implies free, and teaching people to undertake a for-profit enterprise. As an inextricable component of the tremendous business opportunity I have cultivated for over nine years, I believe trader education is extremely valuable. Maybe this is not something to be given for free lest its value be undercut. With the domain being strictly financial, an up-front investment seems more fitting with the goal of consistent profit over time. No investment is free and therein lies the contradiction.

I perceive a significant difference in subject matter between offering people what is essentially business training (trader education) and volunteering to tutor after school kids. I also believe the story would be different if the trader education were used to generate profits for charity.

Perhaps academic scholarship can help determine whether trader education should be free or for sale. Scholarships are generally awarded based on need or merit (i.e. achievement). The latter often includes people who would not otherwise qualify based on need. If I want to give back, should I teach financially-challenged or high-achieving individuals?

I believe consumers of expensive trader education services are more likely to stick with the program than those without obligation. I have previously discussed how traders can be a very fickle lot (myself occasionally included). Over the years I have seen people come and go through various Meetups and trading groups. This stands in stark contrast to many students I have seen motivated to complete programs for which they paid a hefty bill up front.

With many trader education programs costing thousands of dollars, people who attend are generally not those in need.

To whom should I “give back?” Score one point for merit-based because those with nothing to pay are lacking a key motivator to get through.

I will continue next time.