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Get the Joke
A story about day trading, from James Lackey
Mike and I are long time spec-list friends. This in no way should be regarded as personal. I will humbly, with a tremendous amount of experience play the idiot.
First, GMAC was prosperous for decades due to one edge. The banks inabilities to become efficient at serving customers needs in terms of financing cars. A typical car loan took 3 days just a couple of decades ago. A finance manager at a dealership could easily determine the risk of the customer, calculate what kind of equity was needed, (down payment), regardless of fico score and deliver a new/used car to the customer that day. It still takes the finance manager 3 days to sell a weekend of sales to the banks. The finance manager has some what of an edge selling lets say 100 cars loans, as a pool to slip through a few questionable fico/equity or risk to loans. Quickly lets take a 5 year $10,000 note at 8%, that is a payment of $208ish a month, correct?
Now lets take a look at a small business. Let's say you want to open a restaurant, barbershop or sell pet supplies. The banks are still basically useless at this task with out the SBA. Lets look at home mortgages, without FHA. Fannie and Freddie what do you think the percentage of home ownership would be today if left to major banks very silly risk profiles? Why is it the same interest rates are charged for the life of the loans? If the loan to equity is 50-50 shouldn't the interest be much lower if it is basically no risk to the bank? Who invented 30 year mortgages? That was back when life expectancy was lower! A 15 year mortgage requires only a 20% payment premium for half the time to payoff.
With the advent of the Internet and pooling all sorts of credit risks globally, American banks are risking Korean banks taking down "future cash flows" of Americans. If you are a Medical DR you can walk into Bank of America and they will offer you a home loan, line of credit, (personal), and a business loan all in one quick visit. My brother in law is a recent Medical Doctor in a great market, BFE Alabama and he is the only specialist, within 100 miles to Nashville, TN.
Now if we are doing personal cash flow analysis, "Lexus and the Olive branch" type of personal IPO, on future income streams, we could classify, education, political connections, family history and personal work experience, then probably dead last would be an MBA and a business plan. Some people just seem to be money makers. Have you ever heard that joke? It is one to get.
Lets take newly minted Dr Ott and juxtapose the idiot day trader, Lack. Let's both walk into Citi, Nations and any bank and say "we want to start day trading. How much will you lend us?" Can we assume the answer is zero? Let's go in the same banks with your experience and fantastic education, (newly minted Dr.), and start a restaurant. We both have seemingly the same experience in that field as kids. I am willing to bet with out the SBA it is again Zero.
Now lets say we are walking down the street and see a bookie break the legs of a local booming restaurant owner that had too much passion for the horses. We would love to "own" that business, lets say the book and the debts are 100k and we do a quick back of the envelope calculation and we think our worst case is break even and the upside is tremendous. We decide to take a year, run it right and sell it. We have both worked all our lives have great credit and CC card lines of over 100k each. We decide that in order to take down the place now the fastest way is to charge it and we go in 50k each. The decision must be now as the bookie demands payments or he is taking the store.
Now the original 0% teaser goes to 9% then 15%, understandable for an unsecured loan. Then the CC card companies find out we financed a restaurant, raise our rates to 25% and triple the payment. Were we idiots to take the risk? Were we idiots not to refinance? Were we idiots not to take on investors and give 50-60-80% of our profits away? What if unforeseen accident happens. I get in a car wreck. The bills are $1,000,000 and 80-20 I am now in 200k medical debt plus 50k CC card debt.
That is how idiots like me, take on risk to profit and can become in a bind, theoretically very quickly. Now of course many were referring to the "Roger Radio" W-2 post office employee taking on 500k mortgage debt and buying Gucci with his credit card. Why not just "ping " them like the Wiz suggested? Lets just see if they have any ability to pay and if not force them off the books, charge off. Well the "ping" on 10k is as much as a standard loan of $208 a month per 10k.
Certainly everyone here might say only an idiot would take a credit card and day trade stocks off of it. How about an idiot with experience that has had substantial profits over many years of trading? Anyone that trades purely off of profits realizes the money comes in chunks. What if a trader has a few bad months. Does he quit or does he take and pay his expenses from a personal loan, a CC? Should he quit and take on a bank job? Should he stay a private trader and trust he will over come this bad cycle?
What is the tuition to becoming a self sustainable profitable trader? Anyone that trades over a year realizes they must serve as an apprentice or have partners to learn the game. Even with backers early on, I had to take personal loans many times to survive. Even in the early days when my expenses were only $2500 a month. How about later in life when your expenses are $8,000 a month? Just a humble house, food and health insurance is $3,000 a month now a days. Try heat, cable modem, gas for a car and car insurance on a cash car and you are up to $4,000. Try piano lessons, sports clothing and now it is $5,000. Pay taxes and now you are $6,000. It is seemingly impossible to be more parsimonious with a family and live on less than 6.. To have any reasonable fun it takes $8,000. What if you have a bad year and make a lousy 50k? You are now 50k in the hole. My goodness what if you have a losing year as a trader?
What schools are available to teach how to profit from the markets as a speculator? Let's say for arguments sake it is Wharton, MIT or Harvard. What does that undergrad and MBA cost? Then how many years must he serve, first as a salesman, then as a market maker coupled with lets say 100,000 in student loans. He may or may not have the ability to be a partner at a real hedge fund. That fund then takes on clients, takes risk for fees and profits from a mutually beneficial risk taking business. Out of all the grads, all the funds, what is the probability of success? What if the fund you work for has troubles; how do you get another job on the tiny streets we call Wall and Broad?
Another way to get in the game is to work, build business and have the ability to lose money to learn. How many years will that take? What if your only passion is to be a trader? How many years of misery would a man have to take in life to finally follow his dreams. How about 10 for the brilliant, 20 for the great, 30 for the rest, 30 years, 30 years to have enough to trade for a living then, god willing you don't lose half of 30 years of savings on tuition to learn, then quit.
It was total luck in the 90's for day traders. All my cohorts and I "grossed" and were so called million dollar producers. Now after tax tag and title like a used car purchase to my check book on a 50-50 deal was 1% a month of the funds borrowed, starting at 100k then later I had 500k cash borrowed, so paying 5 points a month, desk fees, high commissions and the like but after all that you kept half. So it was safe to say that we didn't get 50%. In the year 2000 I did manage to make 50% of my gross because the movement was so huge that the vigorish was easily overcome. Today at 1/2 cent a share it is seemingly impossible to profit day trading stocks at all. Even during those good times there would be months with out profits.
I always judged my performance in quarters as a day trader. Months force you into being too aggressive at some points and the worst for me a coward yellow bastard, conservative at the end of a month to guarantee a paycheck. There was several times I went into debt with CC and the next decent run I paid them off. When I was up big, I backed other traders so I could make more profits. There is no better feeling as a trader, to back a trader, help him and see him profit. Regrettably for every 10 you back one makes it. Certainly, it is higher for the better traders but that was our outcome.
Once you make some money there is always a family member that needs $10,000 here or there. A family member with a reasonable business plan that needs $10-$20,000 for a down stroke. Not to mention the taxes and other traders you have capital tied up in. Let's give an honorable mention to the best partner of all, Uncle Sam that takes from the Rich, even though they are young, have no assets, yet have a good year of income. Suddenly a million dollar year is nothing but upkeep to a trader.
This idiot day trader quickly, (faster than most in the bucket shops here), figured out by the glory of the spec-list he may not have a clue. What does he do now? After growing accustomed of making money it is difficult to reduce. Yet, it was accomplished. Out of total graciousness by Vic and constant hectoring by me he helped me by teaching me the proper way to be a trader for a living. It was total luck. I was unwilling to take any other path.
I did have a few options. Take a job outside of the industry and make a reasonable amount of money, maintain my living standard and find a new passion. I could stick to day trading, which all who did, lost all. I could raise capital start a fund and risk losing investors money. Who would back an idiot day trader? Believe it or not, the men behind the bucket shops in Boca, with zillions, had faith in my abilities. I didn't. I didn't have faith in my own, nor theirs. The huge problem was they were in denial. In 2002 it was very easy to start a fund. I had a backer throw in a million, raise all you want. I'll match that and be 50% in, pay all legal fees which was only 7,000 to start but the catch, "you have to clear through me" Well here we go again with the vig. It was a major firm here full of day traders and he was having a hell of a time keeping traders. So he invented the tiny hedge fund to allow day traders to go where they please and trade however they choose. Many did and I am glad to say I know few prospered.
During that entire year of 2001 I was on the spec-list. My learning curve was strait up. From the "get the joke" line and my ability to make Vic laugh he was gracious enough to help me out. Much better said he pulled me out of the gutter and made me an apprentice. For that he has my loyalty for the remainder of my career. Yea sure, that sounds like something you have heard before? People say these things until they are no longer in need. Then they go it alone and claim all their knowledge as their own.
Please do take this into account. There is nothing more honorable or as close as you can come to being a warrior as being an individual speculator. That is to say, making money purely from trading. Please don't get me wrong. Better yet, please do call me an idiot.
It is much easier to make money by raising a tonne of funds, have a good year take your split and fees and you're set for life. It is a much more difficult task to start with 100 thou; pay the backer, taxes and living expenses and end up with big money. I hope that all sounds stupid to you. That way I do not feel bad about saying I just couldn't take trading for anyone except for a trader, with over many decades of experience. I can tell you horror stories of traders trading for customers, partners or on borrowed money that end up losing all their passion for trading.
There is no better way to trade, from the stress, to the tax advantages than to be a self backed trader. I have always had 10 times the stress losing others money than my own. I remember calling a guy a total "piece of $#!*" one day when he lost big and said "at least it ain't my money"
We are all for individual freedoms, choice and incentives. Let's please do not blame idiots for charging up debts to take risk and build a business. Let's not call public schools stupid for attempting to motivate kids that don't want to read. They don't want to because they are not naturally good at it. To teach them to read and find a way to explain to them what a noun is and how to write, communicate and start a business is tough. We are all blessed here on the spec-list. We are blessed with the passion to learn.
We all have countless other blessings. It's a real lack of humility to find only faults in others. Then on the other hand call it bad luck, "I was right just too early"
The joke day traders have is that we are always wrong. We can never make every tick every day in the markets, however many of us are far too hard on ourselves. Damn it, we do try our best. We bitch on a consistent basis, we lose too much on bad days and never make enough on the good days.
If we all held ourselves to those standards we would be very humble indeed. Mark yourself to market first.
James Lackey is a Florida trader.