Do Traders Really Die Broke? -- By: Bill Kraft
Copyright 2008, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
Last week, in response to my invitation to submit market
sayings, one anonymous commentator who identified himself as one who
had spent 16 years on the floor of the NYSE suggested a saying he
attributed to folks who worked there. The saying is: "Traders die
broke." Of course, I've heard the saying before as well as its
companion: "Traders drive Fords, investors drive Cadillacs." Since I
am a trader, and since I have a book out entitled "Trade Your Way to Wealth" , the saying is of definite interest.
Incidentally, I DO have a Ford (along with 4 other vehicles and
5 homes) so I am speculating on how it will come about that I will die
broke because I am a trader. First, I should note that trading does
involve risk and the trader who trades as a gambler is, I agree, quite
likely to die broke. Trading, however, can be done with limited,
measured, or, at times, even no risk depending upon the strategy
utilized. Since I have long been concerned with people who trade with
little or no awareness to the real risks they are undertaking, I wrote
"Trade Your Way to Wealth: Earn Big Profits with No Risk, Low Risk,
and Measured Risk Strategies." I also write these Newsletter articles
with the hope that readers will incorporate things like business
plans, money management, exit strategies, and risk awareness and
control into their own investing and trading.
In general, it is probably fair to say that the lower the risk,
the lower the potential reward. A trader who uses no risk or very low
risk collars, for example, may not make as much as fast as someone who
chooses a very high risk strategy like simply buying a stock with no
exit for example. However, the high risk trader stands a greater risk
of dying broke than the risk aware or risk controlled trader. A trader
can take wild swings hoping to hit the home run (that seems to be what
most do) or he can use an approach with a lesser measured risk and
attempt to generate wealth in a safer manner. Personally, I chose the
latter. Success comes in trading the market much like the way one
would eat an elephant, one bite at a time. The wild swinging trader
may, indeed, hit the home run, but in my experience coaching and
speaking with traders, it is the wild swinger who is most likely to go
broke. Even if they do connect for the home run, they seem to take
yet another wild swing with the proceeds of the first success and let
it go down the drain.
It is important to understand who we are listening to. When
someone who worked the floor of the NYSE (assuming not as a janitor)
says "traders die broke," who is this person. Is it the broker who
recommended you hold Enron to the bitter end? Is it the person who
was urging you to continue to buy tech stocks coming into the 2000
crash, or is it one of the brilliant minds at one of the big firms
that recently have had to write off billions of dollars because of the
stupidity of their investments in the sub-prime markets?
When did the saying arise? Was it at a time when a trader had
no chance to make a buck on a spread because commissions were so
outrageous, or was it in more recent times when commissions were much
more manageable? After all, it would be awfully difficult making any
money writing covered calls if you had to pay a $200 commission on a
single contract. Today, it can be done with a $5, $10, or $15
commission, giving the trader at least a better chance.
Finally, I do agree that traders may die broke if they trade
like gamblers, do not discipline their trades or do not know how to
discipline them; if they fail to incorporate principles of sound money
management, or fail to enter positions with an exit strategy. On the
other hand, I believe traders who apply discipline, money and risk
management, and don't constantly swing for the fences do have a decent
chance of doing well provided they expend the effort to educate
themselves -- at least as a trader who has done those things
successfully so far, I hope so.
Good Trading!
Bill Kraft
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