Tom Brakke's work is a consistent source of ideas and inspiration. He recently challenged some of his many admirers to provide a few thoughts for a book project. I eagerly await the result, and I am delighted to be included as someone whose ideas might be useful.
This is a question that I get quite frequently. My answers are often private, and occasionally on the blog. Since Tom invited us to cite or include prior material, he has stimulated me to collect various thoughts from the past, and perhaps to add a few others.
Here is the summary from my past work and thoughts:
- It is not easy – not nearly as easy as you think. The failure rate – even among those who are intelligent and talented – is extremely high. Remember the TV show about law school where you were invited to look left and right? The odds are even worse. I taught the classes to beginning options traders. The success rate was below 10%, and they had the best preparation from me, from our on-floor team, and plenty of financial backing.
- The investment business is about sales, not trading. This is the toughest thing to understand. If you want a successful investment business you need to attract customers. The methods to do this are not really correlated with your returns. Many of the most successful managers have poor returns, but they have a good story.
- Trading is not glamorous. The media picture is that you sit in front of your screen and spot great opportunities. You are constantly cashing in and exchanging high fives. Anyone contemplating a trading career needs to test themselves and their methods.
- Book knowledge does not matter. Most TV pundits can recite the basic themes from that morning's Wall Street Journal. This has no edge. None! I would never hire someone whose only "game" was knowledge of the current theme. If you have no idea of where the hockey puck is going, you cannot play in the NHL.
- Be willing to help people. If you think about every account in terms of profit and loss, your attitude is warped. What goes around, comes around. I have some small accounts that do not generate much revenue, but the clients do good work. I respect that.
- Honesty is essential. There are many temptations in the investment world. I have heard countless tales of great "insider information." Most of these tips were wrong, but that is not the key point. If you violate the rules, you might be prosecuted, lose your credentials, pay restitution, or even go to jail. That is still not the key point. If you cannot take pride in what you are doing, the money will not be enough to substitute. It is possible to do well and also to do good. That should be your objective.
- Learn how to accept adversity. I saved the toughest for last. Even if you have a great method, you will encounter tough patches. Things may not seem to be working. Clients will be edgy. Your main challenge is often to help them fight their basic instincts – selling at the wrong time.
If you want to be an investment professional you must stand for honesty and integrity. Your edge should come from service and research, not from illegal moves or misleading clients. You should look in the mirror every morning with pride. If you can do this, you will enjoy your work and meet challenges with confidence.
In reviewing my thoughts I see that it all has a theoretical quality. Here are the best specific things you can do:
- Get hired by Fidelity Investments (or the like). They take the best and brightest and you can manage a lot of money as a young person if you prove out.
- Get an internship somewhere where they will not make you cold-call people and set up dinner meetings. Learn how the decisions are really made. Maybe you can impress someone with actual hiring authority.
- Do some paper trading. Make sure that your "brilliant" methods actually work. Start early, so you can build a real record.
- Do some writing, and expose your ideas to public review. Try to contribute at Seeking Alpha, where they wisely embrace many ideas and also expose writers to public review and comments.
I realize that my advice is rather discouraging, but that is the reality. There are many easier and safer things to do.
If you get past the hurdles I have described, you can have a career that combines financial rewards with helping people achieve their goals. What could be better?