You may be David against Goliath, but you’ve got a slingshot that can take out the big guys. It is hard to believe, but there are distinct advantages to being an “amateur.” Yes, the pros generally have money...a lot more money, access to information and research, contacts in the industry whom can clue them in on big moves, and better technology, but even with their Bloomberg terminals, they often fall short of what better than average “amateurs” do all the time.
Let’s not kid ourselves. The pros make mistakes. They lose money, and most trail the indexes when their yearly performance is measured. They may have bigger cushions to fall back on, but when you fall in that game, you have failed, and it’s often out the door you go, on to another profession. The amateur normally works for him or herself, and if they have the patience, marshal their resources and take the long term view, they can replicate if not surpass the so called professionals. Here are a few points:
The Pros have to be conservative. Despite the public perception, traders are not throwing around billions of dollars like Las Vegas gamblers. They wouldn’t last long in the game if they did. Nor would the banks and institutions they work for. Most traders are looking for longer term trends and using indicators to judge when the best time to get in and out is. They play the odds most often. The real pressure professional traders face, is for their banks and funds to be profitable at the end of the year so they can collect their bonuses. This can drive traders as much as the fundamentals in the markets (some would say even more), and the professional trader is under conflicting pressures that the amateur may not have to be concerned with. The first is to make money within a certain period. The second, is to distinguish him or herself from other traders. You might say that profits do this, but it’s a bit more complex than that given that the vast majority “revert to the mean.” It is the same way with money managers on Wall Street. Very few beat the market, and even fewer do it year after year. Reversion to the mean, is indeed mean.
Most Pros hedge. While hedging can limit risk-which is why the pros are often required to do it, especially when trading huge sums of OPM (Other People’s Money)-it also limits the upside. That’s why hedge fund managers break open the champagne when they do 30% in a year, while some amateurs do it regularly in a much shorter time. Amateurs have greater flexibility in what they can accomplish, while many pros are hemmed in by the market, institutional and legal constraints. Think of the filings that large funds must do which make up the Commitment of Traders reports we amateurs can view to see their sentiment. Harder for them to view ours.
The Pros have to please their bosses. Even if they are named Soros or Paulson, they have people to answer to. Recently, John Paulson’s funds have seen redemptions, particularly as his large bets on the price of gold have foundered. Moreover, it is harder to trade large positions without the world knowing about it. The only time it works well for the trader, is when people don’t support your view or position.
You can manage a fund too. You don’t need to don the suit and tie every day and trudge to some corporate office, to manage and trade money on behalf of clients. Though it’s a bit challenging for U.S. based traders in the highly regulated environment there, many forex brokers offer PAMM or MAMM accounts which let traders become money managers on behalf of multiple clients. Essentially, traders can promote themselves and their skills to the public as well as solicit funds from investors. This is becoming increasingly popular in several emerging markets, where investors are attracted by the incredible performances of amateur trading stars, whom are generally independent and not affiliated with any bank or institution. A quick scan of several of these accounts on brokers websites confirms that many amateurs are consistently doing better than many of the famous traders one hears about in the financial news. While the account sizes are generally smaller than those of professionals, this has some advantages. Traders whom gain a sold reputation for turning profits, will have little challenge in attracting capital, while maintaining their independence.
You can pivot. Trading smaller accounts is much simpler, and often much faster than trading the large accounts. Moreover, you don’t leave a large footprint which could have repercussions for other trades. In some senses, the amateur trader is a stealthy one. He or she can trade without telegraphing their intentions, while it’s often a given as to the direction the pros are going to take. They tend to stick closer to fundamentals and that’s why the financial news has even greater relevance to what they do, and how amateurs can take advantage of the moves that professionals make. The best amateurs are usually those that mimic the professionals to a great degree, and can read the charts to determine what the pros are up to for any given period. In a sense, the amateur with experience IS the professional.
You can do it longer. Nobody is going to fire you. When you trade for yourself, you don’t have to listen to anyone but your gut, while pros often trade with constraints. They need to justify what they do, particularly if they work for a bank or institution. Ever since trader Nick Leeson sunk Barings Bank back in the bad ole 1990s, traders have been on a tighter leash. Many banks are dispensing with traders altogether in favor of automated trading with mathematical algorithms at its core. It might change again when all the banks have them (we are almost there now) and the edge is gone. Think of what happened after all major league baseball teams adopted the techniques shown in the American movie “Moneyball” with actor Brad Pitt. Reversion to the mean.
You don’t need to beat the pros. The reality is that retail traders don’t really compete against the pros. Their competition is with or more precisely, within the general market, which does not care whether they are professional or not. What really separates the amateur from the pro is how good they are and if they are doing it for a living. The amateur however, doesn’t need to be university graduate with a degree in economics or finance. He can be a laborer whom apprentices to the trade, and develops his or her skills to the point where he can make a living, or a fortune using his meager resources.