Trader’s Narrative

The chart below is from James Montier. It shows the average holding period for NYSE stocks (expressed in years) from 1920 to today.

Montier is an economist and global strategist who uses behavioral finance to make sense of the financial markets. He started his career at Dresdner Kleinwort, moved to SocGen and just recently moved to the hedge fund world. Montier has written several books, among them, Behavioural Investing: A Practitioners Guide to Applying Behavioural Finance.

I’m not sure where exactly Montier got the raw data for this graph but considering the caliber of research he does, I’m assuming it is an accurate reflection of the underlying change in the structure of the market over time. The chart is remarkable in setting out what we all intuitively know to be true. Driven mostly by high frequency trading, we’ve seen an explosion in advance decline volatility.

It seems I was wrong, when I said this isn’t your grandfather’s stock market. This is exactly your grandfather’s stock market. Indeed, your grandparents would readily recognize the sort of stock market we’ve had recently. What I should have said is this is not your father’s stock market (1950’s - 1960’s) where people actually invested by holding stocks for years at a time. In comparison, what we do now is push buttons with the attention span of a housefly:

Source: James Montier formerly of Société Générale

It is absolutely remarkable to notice that the turnover in 1929 - a time where trading was done over telegraphed message or scribbled notes and hand gestures - is equivalent to recent times when trading is done by blazing fast computers interconnected directly via FIX to the exchange.

If you enjoyed this, don’t miss Montier’s brutal take down of EMH (via John Mauldin’s Investor Insights). Also, in a world where we are all traders, the least we can do is be better traders:

• Why do traders fail?
• How to Fail as a Trader in 10 Easy Steps
• Dennis Gartmen’s Rules of Trading
• The Definitive Guide to Trading Mastery & Success
• 5 Fatal Flaws of Trading

Oops! You mistyped and made a fat finger trade

There is so much ink and pixels spilled on how to succeed in trading. So I thought, being a contrarian, I would zag instead of zig and outline how to fail as a trader. Without further ado, the 10 vital steps you must take in order to fail in trading:

1 Start out undercapitalized
Become enthralled with the romanticism of taking $500 to a $1 million - ignore any pesky thoughts about the improbability of such a Herculean task.

2 Ignore risk management
Always value conviction over discipline. Don’t worry when a trade goes against you, just put it aside and think of it as a long term investment. Or double down. It has to come back eventually.

3 Compare yourself to other traders, not yourself
Don’t use R or any of that weird stuff like MFE/MAE. Instead compare yourself to other traders using dollar amounts.

4 Look for the right system
Rather than gaining an understanding, search for the killer trading system - it is out there and it will make you rich beyond your wildest dreams! Take someone else’s system, seminar, etc. never waste your precious time in doing your own research. Don’t ask too many questions or push boundaries; crush your sense of wonderment and your natural thirst for learning.

5 Don’t keep a journal
Or in any way, try to learn from your previous trades.

6 Be secretive
If you stumble on an idea or insight, keep it to yourself. Never ever share it with other traders or ask their input on it.

7 Be casual
Don’t take it seriously, do it on the side, part time - don’t devote a lot of attention or resources to it. See #4

8 Fill your charts with as many indicators as possible
More information means more signals and money so make sure every chart is so complex that price action is hardly visible through all the indicators.

9 Trade with your emotions
If you’re feeling greedy, push your trades and buy more. If you’re fearful, stand aside or sell. If you don’t have strong emotions, go with the crowd. If they’re fearful, there must be a good reason, sell. If they are buying, join them. They must know something you don’t. And if you don’t know how to monitor the crowd, let a TV personality do it for you. Buy what and when he says.

10 Be inconsistent
Try to be completely random (that’s what markets are like after all, right?). One day trade based on news, the next day on candlestick patterns, the next day on fundamental analysis. Each day trade a different market: Monday: corn, Tuesday: the spoos, Wednesday: FX, Thursday: gold, etc.