The Wicked Problem of Trading

Or, why I've been gone for a year

My last post was about what makes trading so attractive, and so dangerous. It marks a turning point in my own mindset towards trying to be a good trader.

What Does a Good Trader Look Like?

To me, a good trader is:

• never exposed to unlimited risk

• never over-leveraged

• does not steal from people for their return

and, a good trader is someone who can:

• pay their living expenses with trading alone

• sustain that living over a 10 year period

• and can make a personal internal rate of return in excess of the total return of an equity index

If you can’t do all of these things, I’m just not interested in how you trade.

To scrape by at about minimum wage with the long term inflation-adjusted equity average, you’d need half a million dollars. Bill Ackman achieved 17.1% over an 18 year period; he’d need $200,000¹.

So, for starters a good trader must also be someone with at least $200,000, assuming they could sustain Bill Ackman’s best record forever.

If you don’t have at least this much money, you’re wasting your time trying to trade. You will get much more reward out of career-based income, for less effort, and a lot more certainty. Risk and effort adjusted returns matter.

We are only interested in "Good Traders". Everyone else is either reckless, foolish, or both.

Time Horizon

Why ten years? Well, the average time between recessions since World War 2 has been about 5 years. That’s absolutely an arbitrary measure, but if you make money in a “bull market” and lose money in a “bear market”, you’re just leveraged equity and I don’t care about all the complexity you layer on top of that.

A Thousand Monkeys at a Thousand Typewriters

TradingView had over 3 million monthly active users as of 2017, and that’s not the only online community for traders. A good trader knows that base rates are critical to keep in mind when evaluating probabilities. When you see a successful trader that you want to emulate, are you considering the probability they their success is due to randomness?

What about lying?

There’s certainly enough incentive for it. You can’t Google anything today without landing on some random person’s trading course or private Substack.

We want to be good traders, so we’re skeptical. We know that:

• there are millions of people that are interested in trading

• they have an incentive to appear like good traders

• and some of them might just be stupid and lucky at the same time - there’s enough out there that we’ll see this sometimes

We cannot have sufficient information to determine if anyone we see online is a good trader; they may have been dangerously overleveraged or lying.

This implies that we must disbelieve the success of others; which in turn implies that:

We cannot know that other traders are good traders.

Long Term Gambling is a Rich Man’s Game

Famous traders are people with remarkably large net worths relative to even very well off people. If you have over 10 million in your account², you can probably afford being long or short a few futures contracts without coverage. Sometimes you make an insane amount of money, sometimes you are in drawdown for an entire year.

Regardless, you certainly have better access to people and information than chucklehead retail traders do. Try Googling anything and tell me the Internet has changed this. Illegal collusion happens all the time, only some is caught. You’re up against sharks that can afford to pay the SEC’s wrist-slapping fees.

Those fees are less than the unlimited risk bad traders expose themselves to. Crime can give good risk-adjusted returns to the wealthy.

Some successful traders are successful because of crime. They are not good traders.

Wicked Problems

When you trade, presumably you have a strategy, a plan, a theory, etc. You place trades, you make or lose money. What makes trading a wicked problem is that you will NEVER know if your PnL is due to skill or chance. It is not possible to disentangle. The best we can do is look at long-term performance, hence my time horizon section above.

If you can’t evaluate your own skill, how they heck are you going to evaluate the skill of some random person on the Internet they can pick and choose what they share with you?

You can’t even know if you are a good trader.

Prudence

Chances are, dear reader, that you cannot afford this kind of risk. More than that - chances are, “successful” traders we see online make poor long term returns and have record keeping too simplistic to notice. Even if this isn’t true, we must believe that it is, for prudence’s sake. They’re gambling addicts, they don’t care if they lose money - it’s more interesting than anything else they’ve ever done. If you’ve ever won big on a position, you know exactly what I mean.

You do not get massive returns in excess of the equity market’s average without dangerous leverage. You cannot afford dangerous leverage.

Prudence is accepting that you do not have an edge.

A good trader is prudent, not reckless.It is reckless to believe that you are a good trader.

It is prudent to believe that good traders do not exist.

Conclusion

Wicked problems are infinite. They are wells with no bottom. They are addictive, and destructive. They are all-consuming. Freedom from wicked problems is the freedom to pursue things that will actually enrich your life.

If you consider yourself a rational person - which you must, if you are reading this - I urge you to avoid the black hole that is trading.

Write it on your heart that you are not smarter than any market. Don’t bother trying to find out; it’s not worth it. Do not entertain the little ego-demon’s idea that you might be.

Put your money in a boring index and collect that 7% long term inflation-adjusted return. I’m currently getting a savings rate of 5% in a high interest savings account which is a fantastic risk-free return³. Be risk-adverse with your money - and be risk-adverse with your effort.

Trading is a commission-producing, course selling, life-stealing, ego-capturing, industry of gambling bullshit; it’s a capitalistic power fantasy. Jack Bogle had it right.

1. though I doubt he could survive on minimum wage

2. This is a small account size. Large traders would chuckle at this kind of AUM.

3. but not great inflation-adjusted right now. Still, it’s what I got.