On the morning of 11th September 2020, for some unknown reason it came into my mind about the kinds of Returns that people can make on Leveraged Spreadbet Accounts - and I got a bit carried away and chucked loads of Tweets out. I think there was some really valuable stuff in there and as a result I have copied the Tweets into this Blog and embellished them with some further comments and hopefully more clarity where appropriate.
The original Tweet text (with spelling errors corrected !!) is shown in italic and the new text is not in italic !!
‘This puzzles me. Show me the Money !! On a typical year I expect my Spreadbet Account to do at least 30% a year & that’s with my lazy, inactive, ill disciplined, Approach. I won’t bore you with the simple maths behind this. So an active Short-term/DayTrader should be at least 100%.’
Strewth, that reads like a Donald Trump tweet – you can tell it was early in the morning and I clearly couldn’t sleep. Later on I do “bore you with the simple maths” which is quite ironic. The 100% figure is based on the Starting Capital in a Spreadbet Account (or CFD – Contracts for Difference or any other type of Leveraged Account) on January 1st. I must also stress that my Approach is extremely inactive and I am certainly not an aggressive Trader in any sense.
‘But I see little evidence of Short-term Traders who actually achieve this. Maybe I can think of a tiny number but even they don’t drive Lambos and drip with Cash. But they should. It’s puzzling.’
It is a strange thing that I know almost no Traders who are wealthy. I suspect quite a few are just about limping along and many are losing money hand over fist. That was one of my motivations for writing this string of Tweets – it is obvious to me that many Traders are working themselves to be bone and getting immensely stressed and strung-out and achieving not very much. On the flipside, I know loads of Long-term Investors or even Short-term Traders who have a longer Holding Period, who are doing very well and making good money consistently and they are sat in the pub.
‘OK many Short-term Traders spend their Profits to live but it still doesn’t stack up. For example, on £100k 1st January they should make £100k a year. Even with a Family you could easily control spending to £60/70k a year.’
‘So being generous, you spend £80k a year which leaves £20k. On next Jan 1st you now have £120k which should generate at least £120k….and so on. You could say “I only have £20k” this is nonsense, if you’re that good you’ll find the Capital.’
Those Tweets explain themselves. Even if a Trader is making just 50% on his/her Account, then they should be having no money issues. The key of course is consistency and sticking to the process and being able to make money year in, year out. It could be that is part of the problem that appears to persist and I have definitely seen evidence of this over the years. It seems like some Traders can do well for a while but then they have a bad year and it all goes very wrong. Again this doesn’t make sense; if you have a robust System and Execute it pretty well then really you shouldn’t be able to blow-up your Account and you should be able to make money in Down Markets as well.
‘It’s the Nick Leeson issue. Barings Bank in London must have been pig-poo thick. If NL had been making so many great Trades then it would have thrown off Cash and he’d be sending them Cash. In reality they were always sending him Cash. It doesn’t make sense.’
That’s exactly right. If you run a Leveraged Account then it should be throwing off Cash if you are being successful. If you are always putting Cash into the Account then you are failing. Sorry to be so blunt, but that is the reality. Don’t fool yourself; if you are continually having to feed fresh Cash into your Leveraged Account then you are not making a success of it and you need to stop what you are doing and have a total rethink – which could involve giving up on such Trading anyway.
‘So a moderately successful Short term Trader should be awash with Cash. What are they doing with the excess? I know @stealthsurf puts it in Premium Bonds and he’s a rare example of true success but even he is unlikely to do 100% a year. You see why it puzzles me?’
Jason @stealthsurf runs the website www.tradingbases.co.uk and he is a very successful Trader. His Holding Period is probably longer than most Traders but he is very much driven by Price Action rather than Fundamental Valuation which is the Investor’s domain. I wrote a Blog about Jason’s process here (there is a link to Part 1 of if at the start):
‘A moderately successful Short-term Trader using Leverage (if they don’t then they are a bit stoopid) must be sat on so much wealth after just a few years. If they had sense they would have other Properties and Stock Portfolios for Long term. I see little evidence.’
This builds on the Tweet above. In essence if you are Trading as you should be and not spending it all on Ferraris, then you should have a lot of spare Cash that needs to be invested somewhere. The obvious places are Property and Cash but of course you don’t get much, if any, return on Cash these days. A long-term Income Portfolio sort of Equity approach is an option of course.
Regarding my comments about being daft not to use Leverage – this stands to reason. If you are Short-term Trading and just using normal Shares then you are most definitely not optimizing your approach. Spreadbets have the advantage of being Tax Free although if you are classified by the Inland Revenue (HMRC) as being a Trader then I think you would get taxed on them. A successful Trader who consistently makes Money would be crazy not to take the advantages of Leverage though.
‘Robbie Burns ‘The Naked Trader’ shows such evidence although he’s no Day Trader but does do a mix of Short-term Position Trading and some amazing Long term holds. Where are these Day Traders on their Caribbean Islands? My conclusion is obvious !!’
Robbie is exceptional. I doubt many Traders/Investors can emulate him although we can all try in our own little way and get a fair way on the road to the kinds of Results he achieves. He is a clear example of someone who really has made a huge success of his Trading and the spoils are obvious with him having investments in Property and a huge Long-term Share Portfolio.
On the latter bit of my Tweet, this is the nub of why I wrote this flurry on that Friday morning. It is clear to me that probably the majority of Traders are not actually all that successful and many are just about scraping by. I even suspect that many have other sources of Income and that is what keeps their head above water.
There is no shame in this but if you are in this situation then it makes sense to stand back and take some time away and think coldly and rationally about what you are doing. Are you really happy with how your life is going? Are you making the most of your Trading or do you need to take some downtime and have a big rethink about what you are doing? Quite often it might just be a case of getting away from the daily hustle and bustle and the Noise of it all and to really analyse and dissect what you are doing and where you are going wrong – or perhaps you are just not optimizing what you are doing.
These Blogs go on about optimizing your Approach etc.:
Robbie Burn’s Books are the best you can get about Investing/Trading, especially if you are new to the game. If you go to my ‘Wheelie’s Bookshop’ page then you can find several of his Books there.
‘If you’re a Short term Trader and not managing 50% a year on your starting Capital then you are wasting your time.’
‘Simple Maths. My Long Term WD40 does 10% a year. Geared up via Spreadbets that’s 10% on Long Exposure & about 7% after Charges. That’s about 35% a year on Capital Employed. Throw in a few Index Trades & 50% not a huge challenge. A Day Trader who cannot do this is underperforming.’
‘Spreadbets are Tax Free.’
‘A Short term Trader can trade both directions. By this point in the year such a Trader should be about 60% up on Starting Capital 1st January. Are you achieving this?’
Those Tweets are more embellishment on what I have said before. I am definitely of the view that 50% on a Leveraged Account should be the minimum that a Trader makes.
‘This will be partly why Short-term Traders fail. It’s not the Dealing Costs but the Timing Differences where the money is lost.’
[Underneath that Tweet I had copied a Tweet saying that Peter Lynch had earned a 29% annualized return when managing his Fidelity Magellan Fund. He calculated that the average investor in his fund made only about 7% during the same period. That’s because investors sold the fund when it had a setback, and only bought it after it recovered.]
This Blog Series includes what I mean by ‘Timing Differences’. It’s a fairly lengthy Series but I recommend you find time to read it:
‘My suspicion is that there are a lot of strung out, stressed out, Day Traders etc. out there who never sleep and have aching eyes from staring at screens and no social life or downtime. They barely get by or just struggle a few years until Capital all gone. #MoreToLifeGetaGrip’
I mentioned this earlier. I am often speaking to people who are Traders and it is clear to me that they are not really having much fun and it is almost like a harmful addiction. You need to be in control of your habit !!
This also applies to Long-Term Investors – if you are not enjoying what you are doing and you are not happy with the degree of success you are achieving, then perhaps you should take time out and have a careful and deep thinking session about how you can invest in a ‘better’ (read, more suitable) way and perhaps it is a case of lack of control so you need to adjust your approach to something where you will feel more comfortable. Or perhaps investing isn’t for you or you should maybe buy a bunch of Investment Trusts or Unit Trusts etc.
‘And while I’m at it, there’s no reason why a sensible Adult cannot survive easily on £30k a year Spending and that’s hugely generous !! If you have Kids add on maybe £20k for each ? In truth an Adult could live on less than £20k.’
I spend a ridiculously low amount around £18,000 a year and I run 2 cars. If you have paid off your Mortgage and keep a sensible control on your spending then it is remarkable how little you need to live on once you are free of the Rat Race and able to enjoy your remaining years on the planet. In my ‘Scores on the Doors’ blogs that I write every January laying out in detail how my Portfolios have done for the year, I always include a chunk on my Spending.
‘Oh, and if you swim around in the AIM Cesspool then you should be doing Minimum 20% a year Compound as compensation for the Risk you are taking and that’s on Zero Leverage. (Hard to gear up Garbage).’
Some AIM Stocks (but usually at the Quality end and the kind of AIM Stocks I buy) can be geared up using Spreadbets but lots of the loss-making and more junky stuff can’t be mainly because it is just too illiquid. I wonder how many AIM Junk ‘Investors’ are making 20% a year consistently? The chances are they are inflating their Returns by having a small number of Stocks but that is an extremely high-risk strategy which will likely bite you hard in the backside.
‘If an AIM Cesspool Merchant tells you they are doing 100% a year then they are a Ramper (or lying). It’s not difficult – demand 100% transparency or stop Following. They are exploiting you.’
If you have doubts about a particular Twitter Account then look for the following tell-tale signs:
‘My Top Tip for AIM Trash Rampers is to tone down your Claims of % Results achieved. You give away your antisocial behaviour by saying you do 100% a year ?)))’
A big giveaway that. If you are making 100% in a fair and decent way then you are absolutely stuffing all the best Traders and Investors who have ever lived.
‘Anyway, we talk a bit about Returns on the New Podcast which should be out soon. I’m sure it’s a rich seam that I can bring up in future TPI discussions ?’
That will be TPI 31 which you can listen to here:
‘In practice I think it’s very difficult for a true Long-Term Investor to blow up. OK, they can underperform the Market quite badly but if buying Quality Stocks and enough of them and not churning the Portfolio, it’s gonna be hard to fail because Market wind behind you.’
This was in response to someone who commented on Twitter to me that Long-term Investors blow up as well. I don’t see it really – if you are buying Quality Stocks that make money and you are diversifying etc., then it will actually take effort to lose all your money or even a significant part of it. This is why Long-term Investing is a lot more relaxed and better for most people.
‘A ‘Long term Investor’ who buys AIM Garbage and holds it forever will lose Money’
That’s exactly to my point that as long as you buy Quality and hold it for the long-term then you will do ok. AIM Junk is for Trading in and out of and ‘Selling the Spike’ – there is no point holding on to it for long periods. The Blog below covers this:
‘’Enjoying’ Trading obviously can be very dangerous. You have to treat it as a Business and it’s about making Money. This isn’t Gala Casino. If you enjoy the buzz & excitement of Trading but are losing Money then you won’t be having ‘fun’ for much longer……’
I enjoy what I do but I certainly don’t get over-excited about it very often. What I enjoy is that Investing in the way I do enables me to avoid having a ‘real’ job and it gives me a lot of freedom. I am pretty unstressed (apart from when the Markets tank !!) and it is nice being in charge of your own day and having a lot of flexibility.
If you get too addicted to Trading and enjoy the buzz and the cut & thrust then that could soon become very unhealthy and I remember a TV Show years ago which had a bloke who had been Day-Trading for something like 3 years and he was utterly hopeless at it. He couldn’t accept his ineptness and just made the same errors over and over again. He said he saw himself as a ‘Trader’ and seemed to see it as defining of how he thought other people perceived him, yet he was no good at it and constantly losing money and seemed a very sad case. His sister was really worried about him and he was clearly fooling himself and slowly going bankrupt.
It was awful and everyone reading this should take these comments on board and make sure you don’t fall into the same trap.
‘A vital element of Short term/Daytrading is to take time out and to destress. You need to have ‘bigger picture’ thinking time to mull over and analyse what you are doing and where you can improve. @shiftingshares has an edge – he’s a deep analytical thinker.’
‘Another guy who has applied himself over the years and deeply thought about what he is doing is @fouracreman … It’s been very instructive seeing how his Thinking and Approach has evolved over the years. It’s the key to success.’
‘I have no doubt many Short term/Daytraders never leave their Screens and just keep chasing their tails and constantly repeating the same errors or Trading in a sub-optimal way. Take time out and think it all over. Get a Dog LOL ?’
Those 3 Tweets are all on a similar theme and both the chaps I mentioned are excellent examples of how to do it. Take time out as a regular part of your Trading or Investing week and use the time to think about what you are doing and how you can tweak things to improve your Approach and your Returns and your stress-levels. When you meet up with other Traders/Investors listen to what they do and see if there are gems in there that you can pinch to enhance your own methods. Going for long walks and leaving your Fone at home is exactly the kind of thing to do to help you get time away from your desk and to be able to think calmly and carefully about what you are doing.
‘Successful Long term Investment is not about picking Stocks. Anyone can buy a Quality Stock. The hard bit is the Portfolio Management and Psychology. It’s about Patience, Compounding, Diversification, Cost Reduction, Reinvestment, Running Winners, limiting failures, staying calm.’
I have no doubt that many people think you just need to pick good Stocks to be a successful Investor. This is not true at all – you could have 5 people all buying exactly the same 5 Stocks at the same time but I can guarantee you would get wildly different outcomes over the coming years etc. This is down to how the Portfolio is managed with respect to stuff like ‘Running Winners’; Stoplosses or not; TopChopping; staying calm and objective; understanding valuation; reading the Charts; Snatching at Profits; Averaging Down; Averaging Up; etc. etc. If you go to my ‘M3 Manifesto’ page on WD1 then I have written loads about this sort of stuff.
‘Don’t worry, I’ll be off to the Pub soon so you won’t have to read much more off this drivel ?’
Now that’s a good idea – see you !!
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