I was only 18 years old when I first heard of “derivatives trading” when my late father tried to explain the concept to me after having had a discussion with one of his friends. Quite honestly, I had absolutely no idea what it entailed but a part of me just knew that I wanted to do it for a living though there was no clear cut way or indication of how I would go about it.
It wasn’t until roughly 10 years later that I managed to get my first break into the industry when I started working at a broking firm run by traders. They taught me many useful things and gave me a lot of insights into how things work and what to look out for etc. After almost 4 years of doing this professionally, I have come to realize how. in spite of what I’ve learned and experienced in trading ranging from incredible highs to incredible lows, pure elation and utter frustration, it dawned upon me that trading is just like life in so many ways.
As a practitioner of Brazilian Jiu-Jitsu (BJJ) I thought I’d draw some parallels between BJJ and Trading:
• BJJ: You need to have a good, solid base set of skills in order to understand the game and also manage your breathing. Trading: If you don’t understand how markets work and what drives them, you won’t know how to progress going forward and will end up making decisions based purely on emotion.
• BJJ: Being bigger and stronger doesn’t guarantee victory at all against a more skilled opponent. Trading: You may have the biggest account on the market but if you blindly charge in you will lose it all a lot quicker than you think.
• BJJ: When rolling with skilled opponents, you need to take your time to set up your attacks/submissions and know how to defend against theirs. Trading: You need to set up your trades very carefully by picking your levels where you want to get in, whether going long or short, and then hedge yourself against any potential downside by going long using put or call options or buying/selling a strongly correlated asset.
• BJJ: Always respect your opponent, even if they’re a lower ranked belt than you are because you never know what they are capable of. Trading: No matter how good you may think you are, nobody is bigger than the market and it will beat you to your knees if you don’t treat it with the respect it deserves.
Getting back to trading we can say what we want about numbers and fundamentals ruling this game, but the truth is that 80-90% of success in trading is psychological/behavioural management with the rest being knowledge and skill. Given that markets are primarily driven by sentiment based on a set of fundamentals, it is reasonably safe to say that a stock/index/currency chart is a rough representation of how traders “feel” about a given asset or asset pair at that point in time based on what is happening in the world.
Now I know that I will obviously receive a lot of criticism for my statement given that value investing has been the benchmark for successful portfolio management and wealth creation for as long as we can remember. Plus, most people in this industry, present company included, admire or at least respect Warren Buffet for his value investing approach that has made him the multi billionaire investor that he is today. However, there are arguments in favour of buying into growth stocks with high P/E ratios and low cash flows provided that the company is poised for serious cash generation in the future.
I often come into contact with people who genuinely are interested in investing on the stock market, but don’t fully understand why stocks are priced the way they are or how the value of a stock is calculated. It wasn’t until roughly a year ago where I began to fully grasp that a stock’s value is the sum of all projected future cash flows discounted to today’s price. In corporate finance terms that would be known as the Net Present Value (NPV).
Therefore, it goes without saying that value investing isn’t the only way to profit from the stock market and also proves that conventionally solid fundamentals aren’t the only thing driving the price of a stock. If it had been the case then all stocks in this category would be flying sky high at all times and yet this isn’t the case. Hence bringing me back to my point that trading is like life.
Life is not always fair, you can do all the homework and all the “right” things at that particular point in time and yet still get burnt. What may appear to be a brilliant decision can completely backfire when a large, powerful financial entity releases a report that has a contrasting view to yours. I saw this happen a month ago when a major bank released a report that the big FANG (Facebook Amazon Netflix Google) may be overvalued which led to a panic sell-off in the market in spite of everything looking fantastic just moments before. It reminded me of how our nature towards things can be the exact thing that ends up hurting us given that we are dealing with one of the most emotional of topics here…money.
We can say what we want, but we all get emotional about money in some way or form. It is after all our livelihood and sustenance without which we cannot survive in this modern world. Our very society is largely based on this golden rule, whomsoever has the “gold” makes the rules. This is why we see fear and greed being the two main emotions driving markets and no matter what, no matter how or who we are, we’ve all been caught on the right and wrong side of those two at some point in our lives. This goes to show how the “Wall Street” character, Gordon Gekko, was right when he said “Bulls make money. Bears make money. Pigs get slaughtered.”
In a future article I will highlight some of the incredibly crucial lessons that I’ve learned the hard way I might add, which some people may find really useful going forward. I believe it was Thomas Edison who said that “there’s always a better way of doing something, all you need to do is find it.“
I’ll end off with a quote that I saw in a brilliant film called “The Big Short” which I feel is required viewing for anyone who wants to dip their toe in this great, albeit sometimes harsh and brutal, game.
“It ain’t what you don’t know that gets you into trouble. It’s what you know, know for sure that just ain’t so.” Mark Twain
Adrian Alberts can be contacted on this link: Adrian Alberts