Success – whether it be in trading or life – comes from focusing on your “one thing”.
- Look at the most successful investors in this world. Warren Buffett focuses on stocks, and mostly U.S. stocks. He doesn’t go around trading commodities and bonds and currencies and crypto and stocks.
- Look at the most successful companies in this world. Apple didn’t get to where it is today by being a conglomerate and doing 30 different things. Conglomerates are dying because their business model doesn’t work. In a world that is INCREASINGLY COMPETITIVE, you can only succeed and compete by focusing and being the best at one thing.
- Look at the best athletes in the world. The best athletes in the world aren’t jack-of-all-trades athletes. Usain Bolts focused on running. Michael Phelps focused on swimming. Michael Jordann focused on basketball.
You cannot succeed and compete by trying to focus on 10 different things. Because in each of those 10 things, someone will focus solely on that 1 thing, which means that you will be at a disadvantage in each of those 10 things.
Focusing on “one thing” means that you should avoid Shiny Object Syndrome. Don’t chase after the hottest-market-of-the-month.
By avoiding Shiny Object Syndrome in the markets, you will miss out on some opportunities. But that’s life. You will always miss out on a lot of opportunities. However, you will avoid even more fads that turn out to be coal. For example, Warren Buffett admits that by not chasing high-growth stocks and fancy things, he missed out on Amazon and Google. But at the same time, he avoided the disaster that was cryptocurrencies.
By focusing on 1 or 2 markets that you’re the best at, ON BALANCE the coal that you avoid will exceed the missed opportunities.
Good investors don’t diversify too much, the same way good entrepreneurs don’t diversify too much. Diversification is a strategy employed by people who don’t know what they’re doing. Think about it this way. If you have something that works incredibly well – your number one thing – why would you dilute your investment into this thing? Why would you dilute your #1 so that you can re-allocate those resources into your #30?
Everyone has a market that they’re best at. Every market has its most suitable trading strategy. You need to focus your energy on finding the best strategy for the 1-2 markets that you are trading. Why would you take away from your best thing and put it into the worst thing? The only time people diversify (trade multiple markets at the same time) is when they don’t know what they’re doing. FOCUS is the key skill to have in the modern world. In the modern world, it’s not about how many different things you do or pay attention to. In a world that’s flooded with noise, it’s more a game of how many things you can ignore and not do.
You should not be a full-time investor or trader unless you’re managing other peoples’ money. Contrary to “common sense”, dedicating yourself full-time to investing or trading does not have a >50% chance of improving your performance. It has a >50% chance of hurting you.
How can this be? In every other endeavor and business, being full-time is better than being part-time because you can spend more time on it.
Being an investor/trader is not like other careers. In business, the more hours you dedicate to it, the better you’ll be. E.g. imagine you’re a salesman. The more hours you dedicate to practicing and training as a salesman, the better you’ll be. But the same is not true about investing. Otherwise, the average professional investor/trader would not do worse than “dumb” buy and hold.
The problem with being a full-time investor/trader is that you end up losing sight of the forest for the trees. That’s why when Warren Buffett says “the key to investing is being right and SIGHTING TIGHT”, it’s hard to do. Good investors often spend 8 hours a day doing nothing except waiting! That’s why many traders feel “itchy finger syndrome”, whereby they always want to trade and react to every small movement in the stock market.
That’s why Warren Buffett lives in Omaha and looks at the stock price once a day. He doesn’t want all the crazy small distractions impacting his thought process. “HOLY SHIT THE STOCK MARKET WENT DOWN 2% TODAY!” or “HOLY SHIT DID YOU HEAR ABOUT THIS RISK” or “HOLY SHIT SOMETHING HAPPENED HERE”.
Living in Omaha, far from the financial center of New York, Buffett can get clear, independent thinking. He doesn’t stare at the price every hour, because doing so is detrimental to his thinking process and long term performance. “HOLY SHIT THE S&P WENT UP 2%!” and “HOLY SHIT THE S&P WENT DOWN 3%”. It’s madness.
With investing and trading, you want to look at the markets from a distance and remain dispassionate.
- Have you ever been in a situation where you can’t seem to figure out what you’re doing wrong, but then you’re spouse comes along, and easily pinpoints the root cause of your problem? That’s because your spouse is looking at you from a distance. He/she is not YOU.
- Coaches can help the team make better decisions by observing from the sidelines. All the players on the field are in the thick of it – they can’t clearly see the forest. The coach, sitting on the sidelines, can easily see the forest and ignore the trees. The coach can easily see the big picture. It’s much harder for players in the field to do that. Looking at something from a distance gives perspective.
Another very important point to remember is that going full-time as an investor/trader is much harder than you think. Unless you already have a lot of money, it’s probably not worth it.
So how do you decide if you can go full time as a trader?
This is really just a numbers game. By quitting your current job and going full time on trading….
- Will you make more money?
- Or will you make more money by keeping your current job and trading/investing part-time?
Here’s the math:
*The math is different if you have a spouse with a stable source of income.
Consider the following things:
- What are your living expenses each month? Include everything for you and your family. Obviously, this depends on the size of your family (how many people), where you live (city vs rural), what country you live in, your lifestyle (e.g. how many cars you have, how big a mortgage you have).
- Then consider the average % return you make as a part-time investor/trader
- Then consider the average % return you COULD POTENTIALLY make as a full-time investor/trader. Be conservative, because you don’t want to quit your job and then land into full time trading, while realizing that you overestimated the numbers.
Here’s an example. Let’s assume that you’re single and you have $40k in annual living expenses.
Let’s be optimistic, and assume that you make an average of 20% a year going full-time trading (this is optimistic – most traders don’t average anywhere close to this).
How much pre-existing capital do you need to go full time as an investor/trader?
To make $40k a year on 20% returns, you need $200k in pre-existing capital. But if you have $200k and make 20%, ALL OF YOUR PROFITS go towards merely maintaining your lifestyle. You don’t have any profits left for growing your capital account. That’s why you need to 2x this capital number. I.e. $400k in pre-existing capital. So if you have $400k and make 20%, you make $80k. Of that $80k, $40k goes towards paying your living expenses, and $40k goes into growing your capital account.
As you can see, by going full-time, you are merely increasing your capital by 10%, not 20%. If you had a job and made 20%, the income from your job would be enough for you to live on, and the 10% made on your portfolio would grow your portfolio. This doesn’t even take into consideration the fact that having a job is much more stable in the short term than trading.
Then you also need to consider that you should have enough $$ set aside to cover your living costs for 2 years (in this example, $80k). All traders go through good years and bad years. It’s normal for good traders to lose money 2 years in a row, because no strategy works equally well in all environments, regardless of how good it is.
Moral of the story: don’t forget the opportunity cost that full time traders face. In order for full-time trading to be worth the effort, the extra money you make from full-time trading needs to more than make up for the income that you could have earned from a job.
Don’t put all of your savings into the stock market
Because you shouldn’t get emotional when trading/investing. When you put all of your life savings into the stock market, you are going to get emotional with all the ups and downs. There is no way to avoid that because we are all humans.
Getting emotional often results in making wrong decisions.
The last thing you want is to NEED something to work. When you NEED something to work, that’s when it’s probably not going to work, because you’re going to panic from all the short term ups and downs.