Trade or Trade Not

I got into this business over 20 years ago as an institutional equity salesperson for an upstart investment bank staked by a mid-sized bank. Although I was green as a gourd, I worked with seasonal professionals that had worked on the largest trading floors in the country. Compelling clients to trade with my firm and thus, generate commissions was the name of the game. Admittedly, I proved to be not very good at it, but I understood the motivation: trade. From an individual retail investor to the most sophisticated hedge fund trader the motivation to trade ultimately remains the same – to make a buck or a few million bucks. How do the drivers of trading differ, though, and how might recognizing the motivations to trade aid us in making more bucks (or losing fewer of them)?

As I reflect back on my past trading behavior in relation to the volumes of commentary and research I consumed on the topic over the years, five drivers to trade come to mind:

  1. Fear: something I own is declining in value and I fear it will continue to do so: time to trade out of it.
  2. Greed: more money typically is better than less money: buy it and then, sell it before it goes down.
  3. Overconfidence: the rest of the world just fails to understand: buy it or short it until everyone else realizes how right I was.
  4. Thrill: trading as pseudo-entertainment – it just plain feels good to be in on the action.
  5. Activity: the enticement of participating – action, action, we want action!

Undoubtedly, some of us get lucky and hit a 10-bagger and buy ourselves a great story to tell for years to come about some awesome trade we made. A recent Wall Street Journal article on Mark Spitznagel and his Universa Investments claim he made a billion dollars in a day during the flash crash several years ago. That is a story so good the notoriously reclusive Spitznagel chooses not to tell it!

Terrance O’Dean, a University of California at Berkeley Haas School of Business professor, more or less made his career out of trying to convince individual investors not to trade. He published numerous studies of individual investor trading activities with ominous titles like:

  • Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors,
  • Just How Much Do Investors Lose from Trade, and
  • Boys will be Boys: Gender, Overconfidence, and Common Stock Investment

Despite admonishments to limit trading and stick to investing for the long-term from Professor O’Dean and numerous others, no-commission trades, meme stocks, and cryptocurrencies appear to have super-charged the drive to trade. Regardless of motivation, we suggest investors – traders or otherwise – follow a few simple rules as they go about their business:

  • Know what you own and why you own it, regardless of expected holding period;
  • If trading behaviors place making rent for next month in jeopardy, sell and seek counseling;
  • Keep the voice of your mother or another trusted, sage individual in the back of your head as you go about your trading. If they would call what your doing stupid/careless/unbelievable, reevaluate what it is you are doing in the context of greed, overconfidence, or just plain common sense.