Trading For A Living
Q: It is my dream in life to be able to trade stocks for a living. I would like to know if anyone out there is doing this right now? What can you tell me about it? What is you methodology for knowing how to pick when to buy and when to sell?
A:
Let's say you were very, very good at trading and could generate 30% per
year (about equal to Peter Lynch's record at Magellan).
Say you need $30,000/year to live on, after tax. So, you'd probably need
to have at least $40,000 in profits to live. Plus, you'd need to add to
your capital base every year by 5-7% just to keep the purchasing
your stake from diminishing due to inflation.
Adding this all up means you'd better have at least $150,000 in capital
to even have a minute chance of success - and that's if you live very
humbly. Since there will likely be big ups and downs in your performance,
better double that amount to be able to sleep at night.
All in all, the best bet (oppinion only) is to keep your day job, invest
your $150,000 and let it work for you. This way, you'll be mostly assured
of success in the longer run.
It's very hard to earn 30% annually on average - few have done it. There
are many folks who are eager to sell you a trading technique. But, if it
really worked they would be the wealthiest people on earth within 10-15
years.
It took Buffett a lifetime and he started with a larger amount. The main
ingredient is time, not trading strategies. Although, a good strategy
helps to keep you from losing.
Hmmm..."Trading for a living"...sounds like a catchy tune...unfortunately, a very sad one. I wish you good fortune...there are other jobs less stressful. I could see the pressures of success alone taking 10-15 yrs off one's life.
As my first bit of advice - Read all the books you can on investing.
Start with one entitled: "HOW TO MAKE MONEY IN STOCKS IN GOOD TIMES AND
BAD." by Wm. O'Neil. This will get you started. Then, I suggest you buy
some sort of computer program i.e. TELESCAN etc. to help you with timing
and technicals.
Other suggested reading TRADING FOR A LIVING by Dr. Elder,
CYBER INVESTING by Brown & Bentley, and MARKET WIZARDS by Schwager.
Each of these books notes that finding a methodology that works and
sticking to to that approach is the KEY to REAL results.(DISCIPLINE!!!)
I am curious. Is it equally tough to make 30% on 150,000 as with tens of
millions of dollars. There is one luxury small investors have over big ones.
A small investor can buy or sell without affecting the market. When a big
investor tries to sell he will afect the market. Consequently, a trader with
lot of money has wait for bigger swings in price before buying and selling
than a smaller one.
First let me say that I do not know all, but I have been actively
trading for about fifteen years. So I will attempt to answer as best I
can. I think the idea of affecting the market is not a major factor
unless one is trading in lots of many millions, or trading very thin
stocks. Also, I learned years ago that scaling into a position is by far
the best rather than plunging into it all at once. If you take a small
position and add to it as it increases in price, then you minimize market
distortions and decrease your chance of making a big mistake. I also like
to remain well-diversified. I view investing as a business of mine, not
as gambling or as something to do for excitement.
You are quite right that it is far easier for a small investor to achieve
high returns than it is for a fund manager, who always have all sorts of
trading restrictions and their sheer size is also a limitation. As an
individual, I have no committees to please. I have never been a ultra
short term investor, but typically hold positions for months and
sometimes years as long as I am having things go my way. My return has
averaged about 20-25% annually, but of course Uncle Sam has been my
partner in every one of my gains since they are typically short-term. So
my after-tax return alas been considerably lower.