Came across this great article and it is definitely my obligation to share with all traders out there.
The financial markets are complex and dynamic, and actively managing money as an investor or a trader demands energy, tough work and a lot of discipline.
Portfolio Manager Bruce Bower understands this, and in an article last year from SMB Capital’s SMBU website, Bower shared his early years of experience when he first joined the investment industry as a trader.
Many of the lessons and interesting insights shared by Bower echoes throughout what has been shared thus far on BillionaireInvestor. Here are some of the key takeaways that we can learn:
(1) Find A Mentor
Trading and Investing is a skill, half art and half science. Like any other skills in life; whether its cooking or writing or martial arts, they all require huge amounts of discipline, time and effort to be able to acquire, much less master them. A surgeon becomes good at surgery through years of study and experience. A musician studies and practices for many hours everyday to become proficient at his instrument. Being a good trader or investor demands the same amount of discipline, practice and effort – making money is simply not as easy as what many think. But all forms of skills requires a mentor to impart and facilitate. Finding a good mentor for your investment journey will shorten your learning curve, and guide you along the way.
Bower got a job at Citibank’s currency and fixed income trading desk, and he found a mentor in one of Citibank’s best proprietary traders, and he utilized the opportunity well to learn as much as he could.
(2) Stick To Your Investment System: “It’s OK not to have a position”
Be sure to take positions that meet your investment criteria. Traders are often biased towards action and believing that they always must have a position. However, if one diligently read about the great traders of our time, one will undoubtedly realize that they spend most of the time researching and taking positions that only strictly meet their investment criteria. The size of their positions are usually directly proportionate to the amount of conviction they have with regards to their views of the market.
Another way to view this is to always monitor the risk/reward metrics of any investment idea that is being generated. If the upside potential / reward isn’t worth the downside risk then it simply doesn’t count as a good trade. Some traders like to go for 2:1 reward/risk ratio: meaning that they only take trades that have an asymmetric profile in terms of profit and loss.
(3) Sit With A Position If It Remains Valid
Traders are often impaired by emotional and psychological fears when faced with adverse price movements or when the market moves against their positions. A healthy and bullish price movement often contains corrections along the way, normally within a range of 20 – 30%. Traders who ride through the move normally feel anxious when corrections occur – with good reason, as traders would want to lock in their gains.
One way to ensure that one could stay in a position is to list out the reasons for the investment thesis or the reasons for taking a particular position. Markets are prone to adverse movements from a lot of ‘noise.’ When markets do move against positions or undergo corrections, Bower said that the Citibank trader that he understudied often goes through his investment thesis again to see if it still remains valid. If it is still valid, the trader holds on to his position. If there are market events that knocks out the reasons and hence makes the position invalid, it simply has to be cut. Going through the list of reasons for taking the trade will help you to remain disciplined and calm when your emotions might otherwise get the better of you.
There are other insights shared by Bower, and the above three points are major and familiar points that have been echoed time and time again by the investment industry and their professionals.