How do you know if you're ready for full-time investing in the financial markets?

Smurf1976 said:

But if I sit at home day trading shares in XYZ all day then arguably I haven't really added to society. I've put my time and effort into something that whilst it has made me a profit, hasn't changed anything else. XYZ would still be running their actual business with or without me buying and selling their shares every few minutes.

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I agree with all of your post. But no one is obliged to contribute to society. People generally contribute because they get satisfaction from helping make the world work. Driving a truck (your example) helps others, and we can't do without it. Since trading offers no such contribution or satisfaction, I honestly don't believe it's attracting all the world's 'best and brightest'. I find trading interesting but its only real reward is money - nothing else. It's very solitary and emotionally draining at times. I'm very glad I have another [non-trading] job to work at.

CanOz said:

a trader provides liquidity

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True but 25 years ago there weren't too many people day trading but there was still an active market for shares, commodities etc.

I wasn't paying attention back then but I don't recall too many people screaming that there was some desperate need to create a lot more trading and liquidity in the market. Shares in BHP didn't suddenly become worthless because someone wanted to sell and there were no buyers. It might have been an issue for small cap stocks (?) but certainly not for anything major.

Gringotts Bank said:

I honestly don't believe it's attracting all the world's 'best and brightest'.

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Agreed it's certainly not attracting all of them but no doubt it's attracting some.

Someone could go to uni and study science or engineering. After a few years and with a bit of luck they'll be earning as much as a tradesman (another thing I find somewhat odd) but they'll never catch their mates who studied finance and who will end up being their boss.

I just think that, as a whole, in Australia we're placing too much emphasis on moving money around and not enough emphasis on actually creating things in the first place.

Smurf1976 said:

True but 25 years ago there weren't too many people day trading but there was still an active market for shares, commodities etc.

I wasn't paying attention back then but I don't recall too many people screaming that there was some desperate need to create a lot more trading and liquidity in the market. Shares in BHP didn't suddenly become worthless because someone wanted to sell and there were no buyers. It might have been an issue for small cap stocks (?) but certainly not for anything major.

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The need for liquidity comes with the size of the business, the float, and the average daily turnover. Remember now you have lots of funds involved too, you didn't have as many big players as you do these days.

Smurf1976 said:

If I buy shares in XYZ and hold them then I'm deploying capital into something that creates value via producing whatever the company produces.

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No you're not. Well, if you are buying shares in the original float of the company then I would agree with you, however if you are buying shares in a company that has already floated, then your capital is going to the investor/trader on the other side of the trade, not to the company. The company already has the money from the original float. You are just shuffling shares around between other investors/traders. So what you would be doing would be no different at all to what a day trader is doing. Whether your holding period is years, or seconds, is irrelevant.

AlterEgo said:

No you're not. Well, if you are buying shares in the original float of the company then I would agree with you, however if you are buying shares in a company that has already floated, then your capital is going to the investor/trader on the other side of the trade, not to the company. The company already has the money from the original float. You are just shuffling shares around between other investors/traders. So what you would be doing would be no different at all to what a day trader is doing. Whether your holding period is years, or seconds, is irrelevant.

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Exactly, in fact he is also proving liquidity....maybe for the original investors to cash out.

Suppose that nobody held shares in BHP (for example). Would the company still be able to carry on business without shareholders' collective capital? Only if the company had some other source of funding and effectively owned itself, having no external owner as such.

Now suppose that nobody sits at home frequently trading shares in BHP but that anyone holding the shares for a longer period continues to do so. What happens then?

In practice I doubt the company would even realise anything had happened until someone wanted to know why trading volume had dropped. Apart from that curiosity, it would be business as usual for the company, it's workers and physical production.

The way I see it, BHP is creating value by digging up minerals (natural capital) at a cost lower than the market price of those minerals, thus making a profit through that operation. In contrast I don't see how someone repeatedly buying and selling the stock over and over is creating any actual wealth at all, they're just shuffling it back and forth with no net gain.

Hold a stock for 10 years and you're intending to make a profit from the underlying business. You intend to receive dividends and/or growth in the share price due to the company's business activities. You or I holding the stock hasn't created wealth, but the deployment of shareholders' collective capital most certainly has (assuming of course that the business is actually profitable).

Now if a day trader made however much money today, can anyone explain to me where exactly that money has come from?

At a personal level I really don't care if someone "contributes to society" or not. If we have freedom then how individuals live their lives is their choice and I take no issue with it.

I do however see an interesting economic debate surrounding it. If shuffling money creates actual wealth then we ought to be able to do away with things like mining (hard work and not overly good for the natural environment) and taxation (nobody really likes it) and just replace all that with money shuffling. Employ a few thousand public servants to shuffle the money on behalf of us all and with the wealth produced the rest of us can go fishing (or whatever else you like doing).

In reality I see it as a zero sum game that can certainly transfer wealth to or from one party to another but isn't creating it as such. Maybe I've missed something here?

Smurf1976 said:

Now if a day trader made however much money today, can anyone explain to me where exactly that money has come from?

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Now as you know, I am a dope, but my answer would be that the money made by the day trader is made at the expense of some sucker that sold too cheap (alternatively the 'greater fool' theory)?

AlterEgo said:

No you're not. Well, if you are buying shares in the original float of the company then I would agree with you, however if you are buying shares in a company that has already floated, then your capital is going to the investor/trader on the other side of the trade, not to the company. The company already has the money from the original float. You are just shuffling shares around between other investors/traders. So what you would be doing would be no different at all to what a day trader is doing. Whether your holding period is years, or seconds, is irrelevant.

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As I explained earlier, shareholders are the owners of all the companies equity, they are happy to let the company keep that equity and even retain earnings and continue using it invest in the companies businesses only because they know when they want money they don't need to extract equity directly from the company, instead they can sell the equity to another investor or trader.

If after the original float it was not possible to sell your shares, and the only way to get your invested funds and profits back was for the company to write you a check, you can bet companies would have a lot harder time retaining earnings, and less new projects and investments would get done.

So yes, the Investors capital is always working in the business.

Smurf1976 said:

But if I sit at home day trading shares in XYZ all day then arguably I haven't really added to society..

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As a group, the traders are doing the same job as the Investors, except rather than 1 long term owner holding a stock for 10 years, you might have 10 traders playing hot potato passing the shares around each trying not to hold it on a down day, either way the result is the same, you have investors holding stock in the company.

The main difference between the two groups is the way their returns are calculated, the investor who held the shares for 10years, is guaranteed to earn the full profit the shares earned over that time, the traders are not.

Imagine if XYZ company had 2000 shares at $10 each with a 50cent dividend each year, and over 10 years of ups and downs it goes to $20.

The an Investor group owned 1000shares, their profit is going to be the full $10 capital gain + $5 of dividends, without having to do any trading they get the full return the companies shares produced.

The group of 10 traders however also owned 1000 shares, and every second day they traded them between themselves, after the 10 years, as a group they would have done a lot worse than the inactive investors, because a large part of the value generated by the shares got diverted to broker costs.

Offcourse you would probably have 1 trader of the group who was luckier than the rest and got returns far better than the investor group, but his over performance is paid for by the under performance of the rest of his trading peers, every $1 extra he earned is offset by a $1 loss of the other hot potato players (and their losses are even higher due to the trading costs)

Smurf1976 said:

If shuffling money creates actual wealth then .

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The logical flaw in that though is, you can say the same about any industry in isolation.

eg. if a chef cooking meals in a restaurant creates actual wealth, then we ought to be able to do away with things like mining etc and just replace all that with catering, we can all just cook each others meals each day and all get rich.

In reality you need all sorts of activities happening to keep the economy healthy and productive, there are all sorts of pursuits we could single out and say that they don't create "real value", but generally they do.

Smurf1976 said:

I do however see an interesting economic debate surrounding it. If shuffling money creates actual wealth then we ought to be able to do away with things like mining (hard work and not overly good for the natural environment) and taxation (nobody really likes it) and just replace all that with money shuffling. Employ a few thousand public servants to shuffle the money on behalf of us all and with the wealth produced the rest of us can go fishing (or whatever else you like doing).

In reality I see it as a zero sum game that can certainly transfer wealth to or from one party to another but isn't creating it as such. Maybe I've missed something here?

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There are many things that don't actually 'create wealth'. If I hire someone to clean my house, how is this really creating wealth? And just because one type of work 'creates wealth', it does not mean we can do away with the other (interplay between various theories/concepts is very important).
In reality, there's a value assigned to all services, even if that function is allowing someone to cash out their ownership in a business (what an investor does when they buy from the previous owner).

When you look at the macro picture, it's as if nothing has changed, but each individual's interests were met at the time (one wanted to cash out, the other wanted to buy in).


Now if we're talking about increasing productivity or bettering society, then there are many questionable services/products - but that's a completely different discussion.

I guess answer to whether you know you're ready or not is when you spend spare time philosophising about stuff - instead of sweating over what to read and who to believe.

I've been trading for over 10 years now full time, here is my 2c:

1. Capital - for longer term investing you will need a lot to be able to survive the lean years. That's why most full-timers are traders as you can get a higher return on capital and have a high % chance of being profitable every year.

2. Social Pressure - I've met many people from all walks of life. Some don't understand it, some are jealous, some think it's awesome, some are morally superior and think I'm an evil capitalist. Does short term trading contribute to society? I really don't give a f**k. I pay my taxes and operate within the law.

3. Loneliness - this is definitely an issue for some It really is a lone wolf occupation, if you are not comfortable with your own company and operating independently you may struggle.