Check Your Morals at the Door of the Trading Floor
Deep uncover still, exploring the world of investing and trading. Six months now. Don’t get me wrong, It isn’t just research; it’s also a way to make money. But it isn’t as easy as it once was. Those days are long gone. Yes, with the right amount of capital it isn’t difficult to make anywhere between $500 to $2000 a day actively trading. But it’s intense and stressful. And always a risk. You’re on the edge of your seat the whole time. Every minute seems like an hour when you’re in the middle of a trade. When you win, it’s exhilarating. When you lose, it can happen in an instant and there’s nothing that feels worse.
This is our third exploration into the world of active trading. The first was the period between ’97 to 2004, when I was still a kid, wet behind the ears and green as a newborn. Then 2005 to 2007. By that time I’d already made my fortune and investing was just a way to have fun with money. And now, once again we’ve jumped into the pool with the sharks. But this time it’s different. There are motives here much bigger than just to have fun or make a little extra money. And things have changed in this world. A lot. For everyday readers of the Transcendence Diaries, this isn’t going to be as transcendent as usual, but give it a chance. There is learning here. Just a very different world than what you’re more accustomed to here.
Yes, indeed, things have changed tremendously in the world of trading and investing. And yet things are seeming more and more like the old days. More on that in a few. For one thing HFT (High Frequency Trading) has been invented and is solidly embedded into the system; hell it is the system now. It makes trading operate at a rapid fire speeds. Mili-seconds matter. Pico-seconds in fact. [Many of the things I make note of will need to be Googled if not understood. For the purpose here is to post observations and lessons, not define terminology.] When I first started actively investing it was in the mid-nineties as already established here in The Diaries numerous times. We were in the process of a giant economic recovery in America which many mistakenly believe to be the effect of the Clinton White House or Alan Greenspan, when in reality it had a lot more to do with Silicon Valley and the advent of the internet age and modern technology becoming a regular part of the everyday man’s everyday life. Not only that, something amazing was invented, something truly revolutionary. eTrade. The ability of the average citizen to invest their own money their own way, in real time, without the need of a middle man or a broker.
eTrade was the first such system. Trust me when I say it was truly revolutionary. Up until that point you really did have to call a broker to buy or sell any kind of investment vehicle such as a stock or a bond or an ETF. Hell, ETFs barely existed back then. I was one of the first eTrade clients, coming on board in the beta stage as an early adaptor the same way I did with PayPal and eBay. Elon was still with PayPal back then. eBay was still a home based business. You became friends with the people you bought from and sold to. It was a small community. eTrade too. I still use the same eTrade, ebay and PayPal accounts from 1997 and 98. People are amazed when they see the date attached to my accounts. As if these are relatively new inventions. But to many people they are. That’s something that we always have to remember. The reason why companies like eBay and Netflix are still so valuable is because they’re nowhere near mainstream market saturation. Most people still don’t have a PayPal account; just as most people still don’t have Netflix accounts in their home. So there’s plenty of room for them to grow.
But back to the real meat of the story. Now eTrade is considered the old guard. The old dog that can’t learn new tricks. Try as they might they are having difficulty keeping everyone on board, though they’re still the most used platform out there overall. There’s something about being the first and the oldest that can backfire on you, whether product or service. The same way that Facebook ate MySpace who ate Friendster. Only time will tell if Tumblr will eat Facebook. I’m going to say no. But hey, they made their billion so at this point, who really cares. (Herein lay one of the main points of this post, along with a few dozen more, i.e. how similar today is to the dotcom crash of 2001. But that’s for later.) There are a hundred of these types of electronic home trading platforms out there. Scott Trade, Cool Trade, Ameritrade. Think Or Swim or TOS for short seems to be the popular kid in school these days, the current flavor of the month. Especially with the career traders, the ones who wake up every morning in their bathrobe and actively invest for a living all day. I’ve been there. I know what it’s like. I’m doing it now, though more for research and learning than for a living obviously.
Something has definitely changed though. Now everyone and their brother has access to a computerized home trading platform. And everyone who does fashions themselves an expert. I’ve joined about two dozen investing services over the last few months in order to get a real feel for what’s going on behind the scenes with these retail investors, the average Joes, versus the big dogs. Whereas the big fund managers that we smoke cigars with every day at Barkley Rex or De La Concha are trading huge amounts of cash in the hundreds of millions and billions, the owners and members of many of these trading services are small players. One thing I’ve noticed is this: the big guys, the ones worth seven figures or more who have taught me much of what I know about wealth and finance are quiet, humble, and careful with their words. They volunteer at their church on the weekends. They do their best to keep a low profile. The smaller guys are the exact opposite. They talk a BIG game. They really believe they’re “the shit”. Or at least they talk like they believe it. Totally the opposite of the guys that manage at the big houses that I’m friends with. These smaller guys prey on small fish through seedy posts on social media like Twitter and Facebook and StockTwits. They claim to be able to make you “a fortune overnight”. Obviously this kind of attitude and activity is not new. It’s been around forever. Back in the day our friends at Agora Financial were the masters of it. They’ve turned it into a gigantic business now. Almost to the point where one could call them, dare I say, viable or nearly reputable. El Infinito is working there now. Learning a lot. Some decent minds are now contributing to their content. Very different than the small team that once was back in ’04 and ’05 when it was just Bill and Addison.
But I’ll tell you, this new breed, see they don’t manage money for any big firms. They’re traders. Pirates. But many of them are also professional hucksters. They need the money brought in through monthly subscription fees from small mom and pop investors to make their living. Whereas the guys we hang with over the weekend wouldn’t sell a subscription to their investment advice if you paid them to. And I’ve offered. They’ll talk to you free. But they would never sell you any advice. Why? Because it’s a very closed and private environment number one. And number two, they know how risky it is and how lucky they are to be in the position they’re in, so they’re humbled by that. And three, they don’t need or want that kind of money. They’re in the game for entirely different reasons. It’s more a professional sport to them. They’re in it for the Superbowl Ring. Not for a monthly subscription fee. Obviously we can’t name names here and I never have; we wouldn’t have any friends left if we did. But I have always been amazed at how cool and humble most of these guys are at the Big Ten. I’ve spent ten years smoking and drinking with them and they’re some of the nicest guys you’d ever want to meet. They’re not what you think, the way it’s portrayed in Hollywood movies. I’ve been to their homes, been to their vacation houses in the Hamptons, been on work trips with them, building houses with Habitat for Humanity or with church, and you wouldn’t believe the kind of effort they put in. You can tell they’re fighting some inner demons of guilt for making the kind of money they make when most everyone else is struggling just to get by. So they work their butts off on these work trips. You have to admire this.
Then there’s this whole new breed of guys out there now. Hundreds of them. Maybe thousands. They sell subscriptions to their “expert advice” to anyone and everyone who is willing to cough up 20 to 99 bucks a month for it. Some of them are as high as $5,000 a year. It’s an amazing market. For who doesn’t want to make it rich over night? These guys, they fight with each other over Twitter about who’s the better investor, who made the right call on the right stock. Verbally pounding their chest like apes, bragging about their latest great call. Things like that. Constant bragging. It’s silly kid stuff. One thing I’ve noticed is that they are more concerned with being right than they are with being smart. This is definitely a lose-lose way of operating in the world. And this is where it gets really concerning. You’ll notice that their real teeth in the game is in feeling “right”, as opposed to making money. I’ve heard some say “I’d do that trade a hundred times and even if I was wrong about it 100 times I’d do it again.” That’s actually a favorite tag line of this lot. It’s the “asserting identity” gone wild. The ego seems to take over for the being and runs on auto pilot, while the being itself is only God knows where. Very different than the large fund managers who will spend an hour with you explaining how often they are wrong and how careful we all have to be because “no one can time the markets”. This is experience and maturity speaking. They don’t have to brag because their title does the bragging for them.
[It actually reminds me a lot of the music business. When we’re kids, we swear we’re the greatest thing since the Beatles or Dylan. Then we get a few years under our belt and a few Billboard hits and before you know it, we’re taking three years to finish an album because we’re so damn aware of how average it most likely sounds. Our maturity informs our humility. We take on a humility that is more rooted in the reality of being in the business rather than wanting to be in the business. I assume most industries are probably like this.]
Another trend I’ve noticed now is that social media has really taken a prominent stake in the world of small time investing. People go into various social media outlets and tag the name of companies with a dollar sign. Such as this: $AAPL, when referring to Apple Computer. You see no end to the kind of treachery that one will partake in to make a buck. They pump up a stock the first half the day to trick average investors into believing it’s a great investment and right when it reaches the top of the day, they turn around and dump it — it’s called the Pump and Dump — leaving the average investor holding the bag with a giant loss for the day. Very sad.
Today one such slimy character Tweeted out “$GOGO stock rallying up after FAA approves cell phone usage on flights”. Of course no such announcement had been made. He just wanted to see if he could get a few more suckers to buy some Gogo stock so his shares would go up and he could sell it. Very heinous. The worst kind of pariah. Unfortunately it’s all too common. Lying is about as regular stuff as it gets with this crowd. This is NOT the world of the Avatar or Wayne Dyer or Abraham Hicks. It’s not about being a good person or taking responsibility or helping make the world a better place. It’s about making money. And that’s about all it’s about. Plain and simple. In a post earlier this week, I talked about how the world of investing is destroying the world we live in in the name of making money. Whether it’s the destruction of the environment for fossil fuels or promoting slave labor to improve shareholder dividends, it’s just a very seedy heartless business.
I’ve had a tough time fitting in. But at the same time, it’s the only way we will truly learn all there is to learn about the world of investing in order to better harness the power of Compassionate Capitalism in our quest to create an Enlightened Planet, which is the goal here. Compassionate Capitalism is a growing trend around the world of the wealthy, though very few are as of yet participating. For it takes a lot of self restraint and well, compassion. It also takes a lot of compromise when it comes to foregoing profits in favor of helping. But we’re getting there. More and more are jumping on board. And that’s where we’re headed as a society. It’s just going to take showing everyone else that it’s possible to make a fortune AND be cautious with our investment dollars to avoid contributing to the problems; AND even being pro-active, with a focus on making the world a better place. This might mean investing more in solar and alternative energy rather than oil, fracking and coal. This of course has the potential to lose you a lot of big money. Very true. And I have already experienced the conflict that sets in when trying to stop yourself from jumping into a company that you just know is ravaging the earth while making its fortune. It’s difficult.
A case in point that hits closer to home is that of Pandora. Yes the online radio company. What most people don’t realize is that Pandora has gone public. You can buy and sell shares of the company. And potentially make money doing so. The problem is that Pandora has slowly eroded the very lifeblood of the music industry. The initial deal they structured with the record labels and publishers was for 7 cents a play for each song — try splitting that up ten ways — it was already ridiculously low for as artists. A huge sacrifice. But we were told it was temporary, just until they got their foot in the door, that they were “new and experimental” so we all said yes just to see what would happen; on a temporary basis. Flash forward three years and they are logging tens of millions of listens a day; so they’re no longer “new and experimental”. What was planned was that they would up the ante for us artists once they established themselves and started gaining a bigger listenership. Instead what they’ve done is file a law suit against all the record labels and publishers in the world to ask the courts to allow them to cut that royalty rate in HALF. Yes they now want to only pay about 3 cents per song per spin. That way they can keep the cost down for the listener — it’s already primarily free — AND increase the amount of bonuses they pay to the directors of the company and the dividends they pay to the shareholders.
What’s really heinous is that their primary method of generating revenue — this is classic — is advertising. And who is their main advertising client? Yep. Music business companies. Turning around and selling advertising to US: record companies and publishers in order to promote new albums and singles by the artists. But if WE aren’t making any money from sales anymore, nor from online spins, then what incentive do we have to advertise on their platform? The music business is headed for complete implosion at this point. Not just “gone are the good old days”, but total annihilation. As in no one makes any money at all and everyone just does it for fun IF they can find someone to support them financially. Pandora is one of the reasons why. And what will this lead to ultimately for the average music fan? No good music. Just a lot of random shit gets released — as in whoever can afford to release music of some kind will. No gate keepers. No purveyors. We’ll see. This might be a good thing. But so far all it’s done is muddy the playing field so much that even the most open minded listeners are beginning to recognize that “there just seems to be a lot of really bad music being released these days.” Well now you know why.
[PS — for the record iTunes is not part of the problem. Unfortunately many people are operating under the misconception that iTunes ruined the music business through the distribution of online music and MP3s. But that isn’t the case. iTunes pays one of the best royalty rates out there for artists. And it doesn’t matter who you are or how big or small you are. If people are buying your music, you’re being paid handsomely from iTunes. Kudos to them for this.]
But Pandora, that’s just one example of the kind of conflict I’m talking about. So, let’s say we have a feeling that Pandora is going to rally on Monday, maybe it’ll go up a buck or two. We have a good chance of making some easy money if we invest a large sum. Jump in Friday. Ride it up till Wednesday or so and sell. Easy. But are we contributing to the problem by investing in the company in order to make a profit? I suppose if we turn around and use that same money to fund the counter-suit against them and spread awareness through PSAs about what a wretched organization they are, which is what just about every musical artist in America is doing at the moment — jumping on board this anti-Pandora train, then I guess it’s alright. Especially if we don’t invest for the long haul but only for a few days, to make some money. Why not? But that’s just one example. What about fracking? We know it’s the fastest way towards creating the great zombie apocalypse and destroying the world as we know it, but there’s BIG money to be made in natural gas. I made thousands trading it this week alone. And I KNOW what it is. I KNOW how it is made. And yet… I couldn’t resist the temptation. Again, if it’s just jumping in and out then is it really contributing to the problem?
Unfortunately I would say yes it is. For if NO ONE invested in these companies then they wouldn’t have any access to capital. They wouldn’t be able to keep going. They’d be forced to shut down. There’d be no more fracking. And there’s the problem. The only people fighting the good fight, against the frackers and the GMO monsters and Big Pharma and Big Oil, are the poor and middle class. They’re the ones out in the streets protesting and demonstrating and occupying. Everyone else is trying to figure out which of the big drug companies is going to be the next one that doubles in price next month and investing in it. Along with all the others. It’s a crazy scene. Trust me. For people like us, it’s just an absolutely insane scene. You check your morals and ethics at the door when you step onto the trading floor. You have to if you want to make big money. At least that’s the vibration that emanates from the room as you enter. Very few people speak of changing the world or taking responsibility or faith or peace or love or anything like that.
It’s a strange world full of animal consciousness. A cut-throat world. Ruthless. You hear phrases such as “chop those bears into little pieces” or “major bull trap” or “we’re going to eat these grizzly bears for breakfast once this stock hits $50″. On and on. Most of it I wouldn’t repeat here. Like I said, it’s cut throat. But remember, we’re here to learn. I do my best to keep the peace and stay true to myself, try to offer some civility into the game while I’m learning.
Another thing I’ve learned is this: no one can time the market. Everyone is guessing, analyzing in hindsight. No matter what kind of analyzing they’re doing, whether it’s technical or fundamental or chart reading, it’s all just made up formulae. Everyone and their brother has a special system that they’ve developed or have adopted from someone else, and they all think it’s “the best system out there”. They speak about proprietary systems and all these rules of the market. But no such rules exist. Every time one of the so-called rules is broken, they’ll come up with a different rule to explain why that other rule was broken. It’s hilarious. But it’s also sad because you can see what a vicious cycle it is of ignorance. A company can be worth a veritable fortune and be ridiculously profitable and still have a stock that is poorly valued. Another company can not even be profitable — they actually LOSE money every quarter — and their stock price can be selling at a price that is in the hundreds. It’s a completely illogical game. Twitter, the little company, is about one-tenth the size of Facebook for instance and yet today it traded for about ten dollars more per share than Facebook. No logic. No reason. Just hype and excitement. This is what makes the world of investing so dangerous. No one is using intelligence or rational thinking anymore.
It’s exactly like 1999 to 2001, right before what we call the dotcom crash. We all know what that was like. Most people weren’t actually investing back then. But they’re familiar with the story. I was smack dab in the middle of it. Though I didn’t do it for a living. It was just fun. But I swear we’d make a few thousand dollars in a day just from jumping into a new company’s IPO at the start of the day and jumping out by the end of the day. Things like that. No one even bothered to check out the fundamental financial health of the company. The fact that it was going public through IPO was enough. It had gotten crazy. Which led to a giant melt down. As I’ve already written here, twelve years ago when it happened, I was one of the lucky ones. I was advised by some friends who managed at Goldmans to get out. So I took everything we had out of the market and put it all into Berkshire Hathaway B shares. At the time these were selling for $3,200 per share. I couldn’t believe that one stock could be so expensive. But after the crash, when everyone around me lost a fortune and my shares stayed relatively the same price, I had a lot more appreciation for quality and value when it comes to investing.
We’re in a similar place now. You can feel the rabid nature of the whole thing crashing in around everyone. And yet all they want is for the markets to keep going up. It’s a fascinating study of human behavior. All the sell signals are there right in front of us that we are headed towards a major correction — for a variety of reasons, not just one — and yet everyday in all these public forums and chat rooms and even on TV, you’ll hear the majority of the people still speak very bullish about the markets. Only the very few, the currently unpopular, speak logically and reasonably about the possibility of a coming crash. And yet the smart money simply wants to make money. And with the system as advanced as it is now, the way it’s been designed, making money in a down market is just as easy as making money in an up market. So being bullish about the markets being bullish is just, well, being bull-headed. Smart money feeds on making money. Not on being right. There’s nothing more rewarding than leaving “being right” at the door in order to make some money. But you’d be surprised how many people are ignoring the signs right in front of us all.
Another thing I’ve noticed about the game in general, the industry, the business, is that there is this very prominent “us versus them” attitude that is very prevalent. You’ll hear people constantly referring to “they” as if there is this mysterious malevolent force out there lurking in the shadows whose sole mission in life is to defeat them. They believe it to be an us versus them game, with them being the heroic underdogs of the story and “they” being the wicked apparition or monster out to get them. In reality, it’s nothing of the kind. There is no “they”. There are just millions of people putting money in and taking money out of various different investment vehicles. No real rhyme or reason. But the conspiracy theories are legend and there are many.
I’ve read hundreds of books about investing over the last 18 years and studied hundreds of different systems; attended all the big courses and bought into all the secret societies. Each and every one thinks that it alone holds the secret key to how the market works and how to “always win and never lose”. But I’ve never seen one person do it. The closer you get, the more losses you see. People tend to only advertise their wins. So you have to actually buy in in order to get behind the scenes enough to see what’s really going on. And once you do, you see just as many losses in the most expensive proprietary formulas as you do from the average investor. One thing that does seem to help though are the guys who strictly do Options trading. They do tend to understand the market better than anyone else. And they also know how to minimize losses better than most. This has been the primary focus of my research over the last few months. Learning about Options trading. It’s complex stuff. It’s calculated risk because it’s limited risk. Though the timing has to be even better; and because no one can time the market, the losses seem to be more frequent compared to the wins. But at least they are limiting them. Last week I made a small fortune with my first two options trades, both with Apple. This week unfortunately I lost an entire premium — luckily only about $1500 — with another options trade. I’m telling you, it’s potluck. Damn close to gambling it seems sometimes.
But not if you’re smart. And that’s one of the things that I’ve learned from the guys at the big houses. They don’t gamble. Everything they do is very calculated. They keep risk to a minimum. And they pay a lot of attention to fundamentals. If a company isn’t worth a shit, they don’t go there. The average investor speculates. They’ll invest in anything if someone tells them that they might make some money from it. They truly believe that “fundamental analysis is old fashioned; that it’s for the old mom and pops who don’t understand the new game”. But they consistently lose trading these highly speculative companies that are pure “trader’s plays”. Those are stocks for companies that aren’t yet profitable or haven’t yet proven themselves. Smaller companies. It’s become a huge trend. Just as it had in 2000. And just as it had in 2007 with Credit Default Swaps and the rest of it. Personally, I smell a major correction coming. So I almost always sell out of everything at the end of each day. This week every index lost money. It was a bloodbath. And December is supposed to be “most profitable month of the year in the stock market”. Go figure. Like I said, there are no rules. And anyone who believes there are is kidding themselves. There are only rules AFTER. Not before. That’s one of the most important lessons I’ve learned on this most recent venture into this world.
What I’d like to accomplish from this little adventure is two-fold: besides just mastery over all the knowledge of the investing world and global economics — which is what really juices me about all this, I’d also like to be able to understand it all well enough to where I can really help contribute to the advent of Compassionate Capitalism going mainstream. Making money while making the world a better place. We’re a long way from that right now. But we are ON the way. Many have already started. Many more will come on board as older generations die off and the younger ones enter the game. Right now when someone comes on a financial news show who is proposing a business model that helps AND makes money you should see the way that people look at them; it’s as if they’re from a different planet. They are met immediately with suspicion that their business model is no good or is faulty in some way. Just because it has an ulterior motive of doing the world some good. That’s something that needs to change. Together we can do that. We need to continue to spread the meme though mass consciousness that making money and making the world a better place are not mutually exclusive missions. They can easily work together, in harmony and synergistically. It’s the only way we are going to create a world that lasts for a long time to come and is fair and just and friendly to all its citizens. This is the goal. More later.