As a continuation of the two articles “Becoming A Trader”, I am prepared to jump into a very delicate subject: finding the balance between the professional trading career and the personal life. Needless to say that one has a better chance of winning the lottery than becoming an accomplished trader and concurrently having a successful personal life. For me, there is no magic one-size-fits-all solution when solving for the optimal balance of the amount of time spent earning money and the amount of time spent with the family. Bottom line, it is all about time, not about money. Whether we are at the beginning of our career or toward the end of it, we are constantly trading our time for money. Everyone knows that the amount of time we have at our disposal is limited and irreversible. If we could find ways to earn more money, we could never make more time or turn back the clock.
As previously discussed, successful traders possess three main qualities: the drive, the discipline and plenty of quick thinking. When a fresh trader is asked about the reason for getting involved with trading, the typical response is “I want to make money”. There is nothing wrong with that reason, but if that is the sole driving force behind pursuing a trading career, over time the enthusiasm of making more money will slowly fade away. Early in the career, one of the obstacles in the path of successfully mastering the art of trading is the tedious learning curve. That step happens to be very challenging and at times it could be very frustrating. It is overwhelmingly time-consuming and, unless you are single and socially impotent, it will negatively impact your personal life. On top of that, the frustration will be amplified after a series of unsuccessful trades, which could happen very often at the beginning. At this stage, you have to be extremely driven in order for you to persevere and overcome those challenging times, and most likely a family might deter you from the normal path. Trying to manage both lives could prove to be, in most of the cases, a daunting task and eventually it will end-up it as complete failure.
Once the initial stage is completed, the road to real wealth is paved. That gives you options in life – you can indulge yourself with expensive things, you could buy gifts, or even help less fortunate fellows. Despite their apparently glamorous life, many traders tend to become self-destructive, physically and mentally exhausted, and ultimately aware that they have sacrificed their health and happiness. Over the years, they realize the fact that, beyond the trading world, they have never learned to enjoy life in a meaningful way. Along with money, alcohol, drugs and other addictions, there are few other events (i.e., divorce, loss of custody) which could cause a loss of community. Not only, they have difficulty relating to their spouses and children, but also do they find themselves very isolated outside the trading floor. When the family is trying to push for a change of priorities, traders generally come up with the eternal promise “one day, when I give up trading, everything will be all right”. The saddest part could happen with the retired traders, who could sometimes get frightened about their future perspectives.
For me, the quality of personal relationships has a far stronger effect than a large rise in earnings. At this point, I would spend more time looking for a quality friend rather than trying to double my total compensation.
Toni,
I’m right now studying equity valuation techniques like multiples valuation and dcf … after reading some theoretical aspects, I did not find any mention if they can be applied to banks too since their balance sheet and other aspects are different from the regular companies … can these methods be applied ? Thx
Anton
Anton,
If you want my unbiased opinion, those models are as good as the candle to a dead man. Theoretically, you could apply to any company in the world. Practically, they are obsolete and useless.
Toni,
Hmmm … I never heard this one … then why are on the curricula of major uni’s around the world or certicates etc etc ?
Anton
Anton,
Good point: academia vs. markets. If you could come up with a “fair price” for MBIA, without checking against the market price I would pay you a zillion dollars. Get real my friend! Especially with those certificates…To this day, I do not understand why Romanians love getting an endless list of certificates.
Tony,
Interesting article, but instead of using my own ignorant words I’ll quote from one of the best trader pshychologist, Dr. Brett Steenbarger (http://traderfeed.blogspot.com/), from the articles: “Trading and the Brain: Trauma and the Amygdala” (http://traderfeed.blogspot.com/2010/02/trading-and-brain-trauma-and-amygdala.html) and “When Trading for a Living Becomes Living for Trading” (http://traderfeed.blogspot.com/2009/10/when-trading-for-living-becomes-living.html)
- An interesting research report suggests that a particular brain region, the amygdala, is highly involved in loss aversion: the fear of losing money
- An important insight that I came to when first working with traders was that many of their emotional reactions were similar to those who suffer from mild to moderate degrees of traumatic stress. This includes people who have been the victims of physical abuse, violent crime, or life-threatening accidents. It appears that threats to one’s money and livelihood may be as emotionally impactful as threats to significant relationships or even threats to physical security.
- One need not be a full-blown trading junkie, however, to reach the point at which trading takes over life rather than adds to it.
- It is one thing to have “a passion for trading”; quite another to neglect important spheres of life in pursuit of market success.
- The sad truth is that living for trading generally interferes with trading for a living
- Similarly, I know many very dedicated traders who are also immersed in other work, family, and spiritual spheres.
- People who spend huge amounts of time consumed with an activity may romanticize their monomania, but most of the time I find that they are simply inefficient
- Trading for a living can bring a high degree of personal autonomy and freedom. That is exciting. Living for trading is the antithesis of freedom and autonomy: you can’t be a free agent if you’re a slave to the screen.
Ovidiu,
Thanks for your feedback. At the end of the the day, the whole secret is around the eternal question: “how much is enough?”. Right?
Toni,
Not just academia … I mean all analysts use all sort of valuation techniques otherwise we would not see in the press “target price X stock Y Price”, otherwise they would consume some hours of their job for NOTHING. Of course you check the market price against also but do I understand that is there some sort of conflict of ideas between traders and analysts ? If the analysts work including valuations besides others would be useless, what is their point in the same place ? Certificates in finance are looked over mostly by non-romanians since as you know the market here is not that developed …. or ?
Anton
Anton,
What I am saying is not discounting 100% the theory, but taking strongly into account the real markets. It is your call which one plays a bigger role.
Toni,
Nice article. You want money, forget about having a life, you want a personal life, forget about money. Probably true in a larger generality than only for traders…
Anton,
Toni is a bit harsh with you because he’s right, but don’t get discouraged. You need to learn the basics before you learn the nuances. Just to answer your original question, if you do the valuation for a company that manufactures socks, you have to project production costs, salaries, sales, cost of funding, competition, and of course the price of socks in the future. There is uncertainty in all of these. Sufficient to render the exercise useless, and that’s Toni’s point. However, it’s good to understand how this calculation is done.
For a bank, you can project deposits, interest income, salaries, etc. But when it comes to derivatives, short of knowing exactly how each derivative is structured, you won’t be able to make accurate projections. And even if you do know everything about the derivatives, the task is still difficult (if not hopeless).
So for valuing banks, only a comparison with the peers is useful. That’s what David Einhorn did when he concluded that Lehman is much worse than all the other banks, and he shorted it on a massive scale.
Best of luck,
Viorel
Viorel,
As always, you clear up the skies.
Vioreal & Toni,
In the DCF xls model that I have I can work the numbers easily for a regular company … but like I said I’m lost when it comes to doing that for a bank in the sense that in the model there is the operational cash flow input; for a bank I cannot input such a thing. Where is the trick may I ask ?
Anton
If you want I can send you by email the exact DCF model I have if that helps … Anton
No need for that. I had those “models” back in B-school. I do not find then very useful.
Toni,
I understand … Maybe I’m asking too much but could you provide me please a dcf model for a bank/financial services co’ ? From there I can figure out for myself what are the differences … Thx no matter the answer
Anton
Anton,
I do not have such model. I could tell you that back in the days I was trading financials, I had my own way of assigning “value” to a bank. In 2002, I used to short JPM @18 and C @30, sucessfully. I had my reasons back then. Today, we have a totally different story.
Anton,
I’m about to finish a dcf and multiples valuation of the co’ within the BSE BET … however when I took BRD and TLV I only used multiples and other comparing with its peers … it seems like Viorel said that, it is more reliable doing that then dcf …
BogdanC
BogdanC,
Using multiples has its own drawbacks too. Especially on BSE where you have a handful of stocks. At least here, we can look at a larger universe of stocks within the same sector. Even then, I am not that happy with that approach. If you trade based on multiples you could end-up losing your shirt.
Toni,
Do you have at a glance without too much effort somehow the median BVB&Rasdaq for PER P/B P/S EV/EBITDA ROE ROS EBITDA margin or a free source from where I could find that out by not going through all the …
Thx
Anton
Anton,
I repeat myself. I am in New York and I have no links to the RO market.
On a different note, the terms “w/o too much effort” and “a free source” do not make sense to me. You should know that what you pay is what you get.
Anton,
I understand you are excited that you have an xls file. However, I stick to my initial feedback. That table produces an output with a large probability of error. If you do not believe me, do the following valuation without checking the market price: MBIA.
With regard to the “trick”, it is not like that. Do not expect to be cell E6 time cell G18 plus 2…
Tony,
You are right with the eternal question
. I remember Buzzy Schwartz in his book ‘Pitbull’ that at the end of day, before getting to sleep, he was always complaining about the trades he made and that he didn’t make the best of it. But his wife got used to it and it was a normal trader behaviour.
I try to ask myslef at the end of the day if I did the right things, regarding of the P&L, but unfortunately I don’t have this level of objectivity.
You made a very interasting observation:
“Despite their apparently glamorous life, many traders tend to become self-destructive, physically and mentally exhausted, and ultimately aware that they have sacrificed their health and happiness. Over the years, they realize the fact that, beyond the trading world, they have never learned to enjoy life in a meaningful way.”
I suppose this is based on your practical experience with traders?
Ovidiu,
Do not forget that I, myself, traded professionally, both proprietary and flow. In 2003, I decided to get out of trading and move into the Quant Risk Management. You are right: some of my observations have to do with what I have seen around me. If you are interested, I could share some very spice stories on that topic.
Btw, where are you? If you prefer, we could take our conversation offline. Send me an e-mail anytime at tonicany@yahoo.com
@ Anton
Would like to add a copule of points to what Toni and Viorel already mentioned.
The bigger problem is that people to whom the whole thing is a “black box” have more decision power than is safe for banks, or that people have the wrong incentives. It’s very convenient now to blame models and mathematicians, however there is a lot more to the story.
1. Models maybe useless in real life, but you can only conclude that once you’ve understood them yourself. You can’t just say “I don’t need to study them, they are all wrong, real life is too complex for any model”. Understanding them, however wrong, will still help you have an idea of what’s going on in the finance world.
2. Also, understanding the theory will help you get the job. Maybe for a regular job a typical interview question would be “name three of your strengths”… if you want a derivatives job, a typical interview question is “how can you be long vega and short gamma at the same time” – try answering that by saying “models are useless”
3. Studying mathematical finance is actually not a complete waste of time. The theoretical foundation of say option pricing makes for very interesting study, in my opinion. Contrary to common belief, the whole idea behind it is not at all how to guess the direction of the market or how to guess probabilities of possible outcomes. Under precise and quite restrictive conditions, some models do actually work, amazingly
Bogdan,
The models I was talking about were those equity DCF jokes. It helps to understand some things, but long run I am sure you don’t land a job at GS by claiming you could handle a DCF model.
The pricing of derivatives it is a different ball game. Viorel and I are on the same side of the fence and I am sure you agree with us too.
btw toni and viorel, I’ve been having driks with one of your friends over here. it’s a small world!
I reckon our body you mentioned it is Adrian…
Viorel and Borat,
Thank you for the details in your answers, I really appreciate that … Details are essential for me at this stage of learning. Now I have a better picture even though at first I had a feeling I was discounting cflows and comapring comapnies with valuation multiples for nothing … like I was wasting my time …
Toni,
The idea is that this stuff is next on my learning curve (it is what it is for now) and with valuation multiples and dcf I was not planning definitely to tame the markets or something similar … Anyway I appreciate the objectivity and the reality based on your experience. Anyway, when learning this multiples and dcf jokes I feel like I’m learning something no matter anybody says. I do not intend going in derivatives and all that … equity is enough for the moment at least, I’m just 20 years old …
You all make sure you have a good one and thx once again,
Anton
Anton,
I hope you did not take my observation too personally. My point was simple: these equity models are good as a base. It is up to you adding more building blocks. As long as you are so young now, the future should look bright. Keep it up!
Toni,
No I did not … it is just whenever I ask somebody with some finance backgorund (more or less) professor or professional maine street wall street ro us whatever …they are all like “ahh well yeah that does not work … ehh that is easy c’mon … ohh I did that when you left playing toys … ohh you did that little research but it is useless, that is nothing really too big etc etc etc … I understand the fact that in finance there is this fascinating/fatal ideal to tame the markets with some new “discovery” “model” “technique” and thus, nobody found the path to the nirvana of finance …. but that does not mean every research or project that I’m doing in college or masters or whatever it is useless or whatever … sometimes i’m so sick about this attitude even though I’m just starting …
In a nut shell, I will try to build up more blocks just like you are saying … It’s the only way forward even though I keep hearing discouraging voices all over me in regards with stocks forex bond commodities etc
Anton
Anton,
Be tough! Do not pay attention to anyone who might interfere with your road in life. Do whatever you think is good for you. Believe me, I did not listen to anybody and I did not turn out that bad…However, a good advice at the right moment is worth its weight in gold…
Toni,
The story goes that Buffett once declared “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer” … “If past history was all there was to the game, the richest people would be librarians” or Peter Lynch “Charts are great for predicting the past”.
Do you know if that is true ? My sources are not that reliable for the quotes. If yes it is true, what do you think about it ?
BogdanC
BogdanC,
The quotes might be genuine, but I tend to disagree with both. Try to stay away of radical statements, unless they are irrefutable. You need both FA and TA for a sound trading strategy. The degree you give more weight to either one varies from trader to trader.
Toni,
Thx … I just found them a bit funny; especially the one with the librarians since the librarian where I’m going to study told me that he passed the 5000 books read (all kind of fields) and he was saying that now he wants to invest in the stock market
. I bet he will be fascinated by AT … let’s see how he’ll play the game …
BogdanC
BogdanC,
Keep in mind one thing: trading is not gambling.
Toni,
AFter all in your opinion who wins between US President and FED Chairman ? I heard some professors talking about “the most imporatant dude on the planet” or something similar ?
Anton
Anton,
There are two different types of power. However, the President could influence more things globally.
A little joke related to …
Q: How many central bank economists does it take to screw in a light bulb?
A: Just one — he holds the light bulb and the whole earth revolves around him.
BogdanC
Toni,
Totally diff story from the perspective of the current environment or the way trading is done nowadays ?
BogdanC
BogdanC,
You are right. Let me throw just one arrow: how are you going to account for theoretical value vs. market value on the B/S item?
Toni,
Yeah that is so true … I intended to use both methods very neat and precise and I will end by cutting what I wanted to do initially because I just couldn’t compare/analyze or whatever … like you say, it is what it is.
BogdanC
BogdanC,
We hsave to persuade Anton that reality is far away from theory.
Could somebody tell me with what do I compare TGN ? TEL is in the same sector and not in the same industry ? Do these 2 monopols “work” together ?
Toni,
I guess you invest on the NYSE … just curious, are you on BSE too ? Or at least, used to be ?
Anton
Anton,
I have never been on BSE. I have started trading in 1997, on CME, then OTC, NYSE, NASD. Just for your reference.
Could somebody still tell me with what do I compare TGN ? TEL is in the same sector and not in the same industry . Do these 2 monopols “work” together ?
Anton
Hello Toni,
I’ve been a long time follower of your blog. Keep up the good work.
I want to share my experience with your friends here, as little as it is.
I’ve started out as a fundamental analysis driven trader in April 2007. As you can imagine, I’ve learned a painful and valuable lesson the next 12 months. Sometime, during 2008, after reading a lot of behavioural finance and technical analysis, I realized that the only correct price for a stock is the market price. Losing 50-70% of your portfolio, puts you in a very bad position for any correction upswing, unless you have unlimited access to new capital.
This is the right path for me, altough it may not be the right path for other traders.
Fundamental analysis may be a winning game for mergers&aquisitions, pension funds and other institutional investors, where they might involve themselves in the management of the target company.
Technical analysis and money management gives me a sense of discipline and rules out emotions. DCF models, Monte Carlo sensitivity analysis, EMT, Markowitz, these are just isolated attempts to find some explanations to otherwise random effects. There is a little more randomness than we are willing to accept in our lives, as Taleb said. Any model is as good as the data fed in. Garbage in, garbage out… We must accept that in any model we might conceive, we are leaving out lots and lots of variables that our minds cannot process.
In this moment, all I’m using is a little bit of EW theory and few momentum indicators in order to try to tilt the balance between 2 price scenarios to give me a sentiment of more than 50% probability in any direction.
This is my point of view.
Toni, looking forward for your posts. Peace!
Robert,
Welcome to my blog! Most of your points are very valid except the Taleb’s comment. Your experience I hope it will help other people too. Theory is good up to a point where you start losing money. Then, it is a different story. Whichever winning strategy you find, stick to it. Then, stay focussed and show plenty of discipline.