Occasionally I’m asked about my performance numbers and how they compare to the indexes. Lots of traders get this question, usually from either their peers or simply the market-curious. My answer varies a bit depending on who’s asking; for those that I don’t know it’s usually some form of “I do just fine, don’t worry about me”, to a bit more of an explanation for those that I know.
At the end of the day, I work for myself. And one of the perks of doing so is not having to answer to anyone…except myself (and my family). Beyond that, I don’t have the stress of impressing anyone or fretting over beating my previous quarter so as to thwart off angry shareholders at the next TraderVancouver Inc. AGM.
But let’s look at the question with a little more detail.
1. Traders/Investors should worry less about relative performance and more about absolute performance. What I mean by that is whether someone beats the S&P for 6 years in a row, or lags it for 6 years in a row isn’t relevant. It’s not relevant because a trader could beat the index for a number of consecutive years and have a nasty draw-down in year 7, wiping out so-called outperforming profits, all with poor risk management. And conversely, a trader could experience a 50% draw-down and still continue to make a consistent living for years to come if his trading method is still sound and he follows it prudently. As a trader, my job is to worry about MY numbers, and whether or not I’m following my plan, my system, and then determine whether it’s working for me. My job is not to focus on the performance of other traders or even the performance of the indexes. That simply isn’t relevant to my success or failure.
It’s also worth remembering that mutual fund investors love to chase the latest hot mutual fund, but are routinely disappointed when the fund fails to repeat it’s previous year’s performance.
2. When people ask what my return is, what they are really asking is, If I follow your trades, how much will I make? To which the answer is…drum roll… I have no idea. In fact, I could show someone exactly how I trade, give them access to the same information, and even sit them in the same room, and their results would almost certainly be different than mine. They may fair poorer, or they may even outperform me. The reason is: human nature, or free will.
When the original Turtle traders were trained by Richard Dennis and his team, they were trained at the same time in a classroom setting, taught the same material, given access to the same market quotes, and even given desks in the same trading room when trading commenced. And yet, how do we explain why some of the traders outperformed others? If they were all trading with supposedly the same criteria, should their performance not have been relatively equal? Everybody interprets and reacts to information slightly differently.
As Dennis said, I always say you could publish my trading rules in the newspaper and no one will follow them. The key is consistency and discipline. Almost anyone can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick with those rules even when things are going bad.
All of which is to say, my results are unfortunately meaningless to you. I post the majority of my trades (like other traders, I do it because I want to, not because I’m obligated to do so), and fellow traders can agree or disagree as they see fit. Following me into and out of trades won’t yield the same results as me (another reason that’s the case is because I mainly trade options on the underlying securities I invest in. So unless you’re risking the same amount per trade as I am, purchasing the same expiration and strike as I am, at the same price I am, then sell them at the same time and price as I am, it’s highly unlikely our results will be correlated). And that’s OK. Learn a system, or develop your own trading plan, cobbled together from others and research, if you choose. But trade with a plan and a system you can grow to rely on. Because the only performance numbers that really matter are your own.
I know it’s hard sometimes. Maybe you’ve seen posts of some trader boasting of a $20,000 day, and thought, why can’t that be me? But bear a couple things in mind:
1. Did he really make $20,000?
2. It’s relative to his account size. Did he start with $50,000…or $500,000? That’s 40% return….versus 4%. Big difference.
3. Traders that risk big continually, will eventually fall. If you routinely bet 20%, 30% or 50% of your account on each trade, you can have a winning percentage of 90% and still go broke in a very efficient manner.