10 Foolish Things a Trader Can Do
01. Try to predict the future movement of a stock, and stay in it no matter what.
02. Risk your entire account on one trade with no stop loss plan.
03. Have a winning trade but no exit strategy to get out, no trailing stop or exhaustion top signal.
04. Ask for and follow the advice of others instead of trading with your own trading plan, method, rules, and system.
05. Trade your emotions instead of signals: buy when you are greedy and sell when you are afraid.
06. Trade your opinions, not a quantified method.
07. Do not bother to do your homework on trading, just jump in and trade, you are smart, you will figure it out.
08. Short the best and most expensive stocks in the stock market and buy the cheapest junk stocks.
09. Put on trades you are 100% sure are winners so you do not even need a stop loss or risk management.
10. Buy more of a trade that you are losing money in and sell your winners quickly to lock in small profits.
Byron Wien’s 20 Rules of Investing & Life
Lessons Learned in His First 80 Years
1. Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten Surprises, which I started doing in 1986, has been a defining product. People all over the world are aware of it and identify me with it. What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year-end. If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.
2. Network intensely. Luck plays a big role in life, and there is no better way to increase your luck than by knowing as many people as possible. Nurture your network by sending articles, books and emails to people to show you’re thinking about them. Write op-eds and thought pieces for major publications. Organize discussion groups to bring your thoughtful friends together.
3. When you meet someone new, treat that person as a friend. Assume he or she is a winner and will become a positive force in your life. Most people wait for others to prove their value. Give them the benefit of the doubt from the start. Occasionally you will be disappointed, but your network will broaden rapidly if you follow this path.
4. Read all the time. Don’t just do it because you’re curious about something, read actively. Have a point of view before you start a book or article and see if what you think is confirmed or refuted by the author. If you do that, you will read faster and comprehend more.
5. Get enough sleep. Seven hours will do until you’re sixty, eight from sixty to seventy, nine thereafter, which might include eight hours at night and a one-hour afternoon nap.
6. Evolve. Try to think of your life in phases so you can avoid a burn-out. Do the numbers crunching in the early phase of your career. Try developing concepts later on. Stay at risk throughout the process.
7. Travel extensively. Try to get everywhere before you wear out. Attempt to meet local interesting people where you travel and keep in contact with them throughout your life. See them when you return to a place.
8. When meeting someone new, try to find out what formative experience occurred in their lives before they were seventeen. It is my belief that some important event in everyone’s youth has an influence on everything that occurs afterwards.
9. On philanthropy my approach is to try to relieve pain rather than spread joy. Music, theatre and art museums have many affluent supporters, give the best parties and can add to your social luster in a community. They don’t need you. Social service, hospitals and educational institutions can make the world a better place and help the disadvantaged make their way toward the American dream.
10. Younger people are naturally insecure and tend to overplay their accomplishments. Most people don’t become comfortable with who they are until they’re in their 40’s. By that time they can underplay their achievements and become a nicer, more likeable person. Try to get to that point as soon as you can.
11. Take the time to give those who work for you a pat on the back when they do good work. Most people are so focused on the next challenge that they fail to thank the people who support them. It is important to do this. It motivates and inspires people and encourages them to perform at a higher level.
12. When someone extends a kindness to you write them a handwritten note, not an e-mail. Handwritten notes make an impact and are not quickly forgotten.
13. At the beginning of every year think of ways you can do your job better than you have ever done it before. Write them down and look at what you have set out for yourself when the year is over.
14. The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons. Short-cuts can be construed as sloppiness, a career killer.
15. Don’t try to be better than your competitors, try to be different. There is always going to be someone smarter than you, but there may not be someone who is more imaginative.
16. When seeking a career as you come out of school or making a job change, always take the job that looks like it will be the most enjoyable. If it pays the most, you’re lucky. If it doesn’t, take it anyway, I took a severe pay cut to take each of the two best jobs I’ve ever had, and they both turned out to be exceptionally rewarding financially.
17. There is a perfect job out there for everyone. Most people never find it. Keep looking. The goal of life is to be a happy person and the right job is essential to that.
18. When your children are grown or if you have no children, always find someone younger to mentor. It is very satisfying to help someone steer through life’s obstacles, and you’ll be surprised at how much you will learn in the process.
19. Every year try doing something you have never done before that is totally out of your comfort zone. It could be running a marathon, attending a conference that interests you on an off-beat subject that will be populated by people very different from your usual circle of associates and friends or traveling to an obscure destination alone. This will add to the essential process of self-discovery.
20. Never retire. If you work forever, you can live forever. I know there is an abundance of biological evidence against this theory, but I’m going with it anyway.
Self awareness for Traders
1) the recognition that our thinking and our emotions are intertwined and both influence our perception and judgment that leads to our decisions and actions (this view also happens to be consistent what the leading brain scientists are now saying)
2) much of our motivation – the intertwined thinking/emotion that drives our behavior – is actually subconscious, e.g. we assume we are trading the market but on other levels we are also trading our P&L and our feelings about our P&L (and what our P&L represents to us) is just one example.
3) when we understand (self-awareness) the underlying/subconscious motivation for our behavior we are in a better position to choose an alternative.
Obviously, nothing can guarantee change or improvement (contrary to many claims made by pseudo “experts”), but at least an approach that emphasizes expansion of awareness puts the odds in your favor.
And I have to play the probabilities here. Because more people tend to respond to a change process that includes an emphasis on self-awareness, I choose to use this approach in my own trading and in my coaching….it simply has the highest probability
of actually helping.
Common Advice is Ineffective
Looking at the advice, it has two parts. The first part says you need a plan. No argument there. But the second part, about executing the plan, that’s where the problems appear. Why?
The two parts to the advice ‘plan the trade’ and the ‘trade the plan’ require two very different skill sets. Without understanding the different skills required, it’s highly likely that you will continue to regularly veer from your plan.
Here’s the disconnect. Planning the trade depends on your intellect. And most of the time, the development of the plan does not occur in the heat of battle. It’s relatively easily to let your intellect guide you, to be the primary driver when you’re not in the heat of battle. But in the heat of battle, when we have to decide right now whether to enter or exit, an entirely different situation occurs.
At the time of execution, no longer are we cool, calm, and collected. Now, a whole slew of things enters the picture – and many of these things are subconscious to a degree. Our feelings about our P&L, our feelings about our performance, or concerns about how we appear in the eyes of others, etc.
And no matter how smart you are, how much you believe you are not an ‘emotional person’, modern brain science is telling us emotions, including subconscious emotions, are very much a part of our decision making that leads to actions whether we realize it or not. Viewed this way, you can see why the typical advice to ‘plan the trade and trade the plan’ may be well intentioned, but ineffective.
Perhaps to make matters worse, the advice typically offered to help traders stick to their plan is to be ‘more patient’, or ‘more disciplined’. But no one tells you how to become more patient or more disciplined.
Trading ,Not So Simple
One of the biggest problems I see new traders struggle with is the mindset that somehow trading can be approached differently from other ventures or activities. This is something which either comes from too much focus on the prospects of profits and easy wealth building (greed, in short) or from just not considering that it is an activity which requires skill to do well.
In Enhancing Trader Performance, Brett Steenbarger talks about trading as a performance activity. He relates it closely to athletics, but you could very easily extend the metaphor to any other activity which takes time and effort to progress in skill. The point is that you cannot expect to just jump right in and be an expert. You must progress through stages of understanding, competence, and experience.
Trading is easy. I mean pointing and clicking to buy and sell is about at simple as it gets.
Playing guitar is easy too. Just pluck or strum. No one thinks they are going to pick up a guitar and become the next Jimi Hendrix, though. They know it takes hours and hours of practice to develop even a basic ability to play, nevermind getting to the point of having people pay to listen to you.
Why do people think that things are different in trading?
Good trading requires learning and practice – just like anything else you want to get good at. There are no quick solutions. Don’t expect them, and don’t let anyone lead you to believe that there are.
And after hitting a couple of buckets of balls, you’re still no Tiger Woods.
How to Pick Your Money from Trading
There is a famous saying about trading the markets;
“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.”
I always thought that it was first said by Jim Rodgers in Market Wizards, but someone told me the other day that it was actually Jesse Livermore who said it (or a version of it) first.
I really don’t care who said it, so for the purposes of this post let’s just say it was Joey Heatherton who said it after a two-week sold out run at The Sands.
It’s a good saying, but it’s a little deceptive. Nothing in the market is that easy. Even if you see the money sitting there and you go to pick it up, how do you know that it’s not booby-trapped with a napalm grenade, ready to blow your face off and send you writhing away in agony like some flaming blob of melting flesh?
And don’t forget, it’s in the corner. What happens if you are not paying attention and turn around with your spoils only to be confronted by an angry bear or bull move? Where you gonna go? What you gonna do? You done dropped your pistol when ya busted the window!
Anyway………….
The convoluted non sequitur point I am making here is that if you want to “pick up money,” in addition to being patient, you have to work out all the angles, know the risks, know how you will minimize them, and what your escape plan is if things go bad. And that is done by taking a “script” for a setup and making it meet certain criteria before you trade it.
“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.”
I always thought that it was first said by Jim Rodgers in Market Wizards, but someone told me the other day that it was actually Jesse Livermore who said it (or a version of it) first.
I really don’t care who said it, so for the purposes of this post let’s just say it was Joey Heatherton who said it after a two-week sold out run at The Sands.
It’s a good saying, but it’s a little deceptive. Nothing in the market is that easy. Even if you see the money sitting there and you go to pick it up, how do you know that it’s not booby-trapped with a napalm grenade, ready to blow your face off and send you writhing away in agony like some flaming blob of melting flesh?
And don’t forget, it’s in the corner. What happens if you are not paying attention and turn around with your spoils only to be confronted by an angry bear or bull move? Where you gonna go? What you gonna do? You done dropped your pistol when ya busted the window!
Anyway………….
The convoluted non sequitur point I am making here is that if you want to “pick up money,” in addition to being patient, you have to work out all the angles, know the risks, know how you will minimize them, and what your escape plan is if things go bad. And that is done by taking a “script” for a setup and making it meet certain criteria before you trade it.
5 Rogue Traders -They had Broke Banks
So, who are the rogue traders that have experienced all of this? Here’s a small sample (the ones we know of!). They are not in chronological order but in order of how much money they actually lost their banks (from the lowest to the highest):
1. John Rusnak
The guy that brought down the Allfirst Bank and incurred losses of $69.2 million.
He was sentenced to 7.5 years in prison on January 17th 2003 for hiding the losses that he incurred as a currency trader. He hid the losses for a year. He is now under confinement at his home (since January 2009, meaning that he served almost six years for his rogue trading).
He was ordered to pay back $1, 000 per month after his release from prison and despite the fact that he remains in debt to the full sum of $691.2 million he will probably never be able to pay it back. How did it all happen?
Allfirst Bank wished to make its forex operations go from just hedging to bringing in a yield of profits and thus increase the total profits of the bank.
John Rusnak was hired to do this.
Rusnak was bullish on the Yen. He believed that the Yen would not fall any more after the bursting of the Japanese bubble. He believed that the Yen would rise against the Dollar.
He neglected to hedge his forward contracts believing that the Yen could not fail to rise.
With the onset of the Asian crisis, the Yen fell.
He thus entered false options into the systems to make it seem as if the positions were hedged. He also asked for more money from high brokerage accounts in order to try to win back the money that he had already lost.
The management granted this to him and he invested even more money.
Rusnak made a personal gain of $550, 000 in bonuses plus his salary.
The losses only came to light when the bank asked for capital to be released and they realized that Rusnak had been working in the red all the time.
Rusnak was fired from his position and along with him he brought down 6 senior executives for failing to detect the scam.
One thing is for sure: Rusnak has kept his nose clean since getting out of prison and has managed to fall into relative anonymity. Nobody knows what he’s doing today for work.
2. Toshihide Iguchi
The guy that brought down the Daiwa Bank of Japan and incurred losses of $1.1 billion.
Iguchi was a government bond trader in Japan who made 300, 000 unauthorized trades between 1983 and 1995. As early as 1983 he in fact lost $70, 000 but concealed this from his management for fear of losing his job. He wrote a thirty-page letter to his boss in 1995 explaining that the losses had just got bigger and bigger and that he was unable to do anything to rectify the situation. It seems strange however that for 12 years Iguchi was able to carry on regardless without any control or surveillance from anyone.
Iguchi wrote three books when he was released from prison: The Dollar Conspiracy, My Billion Dollar Education and Confessions. But, he spent four years in prison and his $2.6 million in debts were eaten up by the royalties. He went back to live in Kobe, Japan. He started an English-language school there.
3. Nick Leeson
The guy that brought down Barings Bank and incurred losses of $1.3 billion.
Nick Leeson was a derivatives broker at Barings Bank (the oldest investment bank in the UK). The bank had been founded in 1762 and ceased to operate in 1995, when the Leeson scandal broke.
Leeson was appointed general manager (futures markets) on the Singapore International Monetary Exchange in 1992. One interesting thing is that Leeson had already been refused a broker’s license in the UK due to reasons of fraud in his application. He obtained one in Singapore, however.
Leeson was earning £50, 000 a year in 1992 and bonuses exceeded double that sum: £130, 000. He was undertaking unauthorized speculation on behalf of Barings, netting profits for the bank of up to £10 million (which was about 10% of their annual income). When things took a downturn he used an error account to try to rectify the losses. The account was the infamous number 88888. The account was used to hide his bad debts. The losses were easy to hide since Leeson was working on his own and had no control from anyone.
Losses in 1992 stood at £2 million.
By 1994 they were at £208 million.
Leeson placed a short straddle (a strategy that means that he sold a put and a call at the same time).
Losses neared £827 million or $1.3 billion by 1995, when Leeson jumped ship leaving a little note just saying“I’m sorry”. The bank was declared bankrupt in February 1995. It was sold for a token £1 to the ING banking group.
Leeson wrote two books when he got out of his six-year stint in prison. One of those books was turned into a film, Rogue Trader. He went back to school and got a degree in Psychology and now gives conferences. Whenever a rogue trader gets mentioned in the press, Leeson is there to tweet.
4. Kweku Adoboli
The guy that brought down UBS and incurred losses of $2.3 billion.
This guy is the most recent rogue trader to date, but only the second highest in terms of loss and debts incurred. He was a trader at the Swiss UBS bank and was charged on September 16th 2011 with fraud and false accounting. He was found guilty on 20th November 2012 and was sentenced to seven years in prison. On March 1st 2013, Adoboli appealed against the sentence. Adoboli’s salary and bonuses combined stood at £360, 000 before his arrest.
Adoboli admitted during the trial that:
He was trading in excess of limits.
He was booking fake trades to hide behind.
But, he also stated that this was in line with recommendations of the bank.
He said that his colleagues knew of his hidden account and that his managers were aware of the losses and had pushed him to make sure that he recouped on them (all five of them were fired immediately).
UBS was fined, however, the sum of £30 million when the City of London financial regulators (Financial Services Authority) decided that “UBS’s systems and controls were seriously defective. Failures of this type in firms of the size and standing of UBS not only damage the firms concerned but also wider confidence in the integrity of the markets and the financial system.”
UBS cut its investment side of its operations and trimmed the workforce by 10, 000 in 2012.
5. Jérôme Kerviel
The guy that brought down Société Générale, and incurred losses of $6 billion.
Keviel was a French trader. He was accused of breach of trust, forgery and unauthorized use of IT systems. He was earning bonuses of €60,000 along with a €74,000-salary (2006), which quite honestly is relatively little in the financial world.
The bank that brought the case against Kerviel states that he was working without the authorization of his superiors and the bank had no knowledge of this whatsoever. He began creating fake trades as from 2006 (and he started working for the Société Générale in 2000).
He is accused of having traded at levels that exceeded the market capitalization of the bank. It certainly begs the question as to how it would be possible to trade at over the market capitalization of the bank without anyone at the bank actually finding out. Was he the scapegoat or the rogue trader of the SG?
Apparently hundred and thousands of trades were carried out by Kerviel, hidden behind false hedge trades.
Kerviel was charged on January 28th 2008 and his trial began on June 8th 2010. His sentence has been suspended while appeals are made.
Kerviel got three years (five years with two years suspended sentence) in prison and was banned from working in finance for life. After his arrest in 2008 he was hired as an IT consultant for Lemaire Consultants and Associates (with a salary averaging at $1, 200 a month) as he appealed against the sentence. He also wrote a book called Trapped in a Spiral: Memoirs of a Trader. But, he was banned from making any profit from either books or films and has to hand over any royalties to the Société Générale. Kerviel lost a court case today (July 4th 2013) in Paris in which he was demanding that there be independent experts to look into his case. That means the final sentence will be pronounced on 24th March 2014 and his fate will be sealed. In an interview he gave to French television July 4th2013 on leaving the court he said that it was “impossible for him to be solely responsible for the $6 billion that had been lost”.
Conclusions
Some might say that the rogue trader should only limit the losses by taking the profits before they turn into losses, rather than continuing to take that second option of double or quits. The rogue trader should use tools of analysis rather than going with gut feelings and intuition. Intuition only works by a stroke of luck. They should not hide the trades that make losses and learn by their mistakes. All very easy to say, but harder to do! But, that would be reason talking, not the drug-addicted investment and playing the markets that stop them sleeping.
Like wolves, traders establish territories that are greater than they really need to survive. Just like the prey that tries to escape from the claws of the wolf, with the rush that ensues, the wolf pursuing it, the rogue trader attempts to catch up with his losses. This is the most critical stage of the trader’s hunt for profit. Once the prey is caught, the trader feeds excitedly, ripping at the carcass of the profit, tearing off chunks and bolting it down. The profit is nothing more than an ephemeral feed. When the losses set in, the lone-wolf trader usually avoids howling in the presence of the alpha-male or the dominant wolves in the pack, it would do no good to get caught. But, thankfully, there are whistleblowers that still exist to trumpet and proclaim loudly what has been going on and just how much has been lost in investments that turned sour.