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.