Saturday, September 06, 2008

Treating Trading as a Business

How do you think of your trading and investing? Is it a hobby? Is it gambling? Is it something you do when Uncle Fred gives you a tip or when you see something exciting about a company on television? Have you devoted time to learning strategies or do you just buy a stock when you "think" or "feel" it is going to go up? Do you have any exit strategy? Are you a buy and hold investor, and if you are, until when will you hold? Do you make your own investment decisions or do you rely completely on someone else? Have you defined certain times that you will devote to your trading or investing?

The bottom line is it is your money and you can do whatever you want with it. As hard as people work to make money, it never fails to astonish me how little time and effort so many are willing to devote to becoming good at investing. It seems like a lot of people I've spoken to about investing over the years do treat it as a hobby or as a gamble. In the sense that all trading involves risk there is some gamble to it, but if done properly, the trader can try to give himself an edge and he certainly can manage risk if he is willing to make the effort. It is beyond me why so many people seem to make no effort to learn or understand investing or even their own investments when the truth is that they are risking hard earned money and have the opportunity to enhance their quality of life and potentially their retirement through sound investment practices.

If you were to open a business, it is likely that you would have done your due diligence. You would have studied the business, formulated a plan, determined where the risks lay, estimated the likelihood and size of potential successes, and decided when and how much time you would devote to the enterprise. Why? Because you wouldn't want to lose your investment and you would want to work to make the business profitable. How is trading any different? It isn't. The investor who treats his investing or trading as a business has an important leg up on most others. It does mean some work as does the creation and development of any business, but the rewards can be fantastic.

In my first book, "Trade Your Way to Wealth", I emphasized the importance of making your trading a business. I set out, in detail, a way to create your own specific business plan and discussed specific elements to include in that plan. I explored risk awareness and risk aversion and concepts of money management. All of these things can help you work to become successful. Who has a better chance to be a successful investor -- the person who has made it a point to learn at least the fundamentals of investing and who has created his own plan or the person who heard something about a company and buys the stock? Anyone can be lucky with an individual stock pick, but it is the knowledgeable trader who cuts losses, applies appropriate strategies, and exercises money management skills who is more likely to prevail in the long run.

Next weekend, I'll discuss a few simple principles that have helped some of my students improve their trading skills.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved

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Dan said...

Good article but I take exception to your statement that in trading "there is some gamble to it." I know what the long term success probability ratio is of each trading strategy I use. This lets me quantify my risk and determine my loss tolerance on each trade. I don't consider this gambling, I consider it a quantifiable, hence manageable risk. If you mean gamble to be synonymous with risk, then I understand what you are saying, but most people use "gamble" when they talk about risking money with only a vague idea of the risk/reward ratio.

Anonymous said...

Mr. Kraft,

I would like to thank you for your weekly newsletter...I thoroughly enjoy it!
I purchased your book some time ago and have read it over and over...also have recommended it to many of my friends.
I have one quick question that you may or may not wish to respond.
All I am wanting to do is to make $50 per day consistently in the market.
Is there a strategy that you like that you might recommend that I could concentrate on and work toward reaching that goal?

Blessings - Protection - Favor

Bill Kraft, said...

Hi Dan and thanks for writing. When I said gamble, I meant that there is a risk of loss on any trade. In Vegas, for example, the players and the house both are gambling, but the edge goes to the house. In trading, the edge goes to the knowledgeable disciplined trader, but each trade does pose a risk of loss.
Bill Kraft

Bill Kraft, said...

Hi Greg and thank you for buying and recommending my book. I am glad you enjoyed it and I appreciate your kindness in recommending it to others. Your question sounds simple at first blush, but definitely has no single simple answer. While there are a variety of ways you may try to make $50 a day, there can be no assurance that you (or anyone else) will. One of the issues is how much money you have to invest, another is your familiarity with specific strategies, and another is what risk you are willing to take. $50 a day is $1,500 a month, so one possible strategy might be to write covered calls if one were able to get a 2% per month return (which is definitely possible), the initial investment would have to be $75,000. The goal might also be accomplished by selling naked puts (which have the same risk graph as writing covered calls) where no money is invested though money must be on hold in your account and you must have been approved to do the strategy by your broker. I'm sure you see what I'm saying Greg. There are a lot of ways to go about trying to accomplish the objective, but none is certain. Some trades will result in losses. My suggestion is to use a strategy you know well and have practiced; one that fits your personal risk tolerance and your investment pocketbook.
Bill Kraft