Million Dollar Trader Part Two

Million Dollar Traders - Episode 2 Profit or Loss

I have been wondering again what Lex Van Dam's motives were for coming up with the Million Dollar Traders. He believes beginners can do as well on the stockmarket as professionals and he wants to prove it. One of the implications if he is correct is that success or failure is random. Put a group of 8 people in a room together and left to their own devices you would expect 4 of them to do well and 4 of them to do badly. If it turns out that success in trading is random then you could effectively do away with traders and have all your trading done by computers. And also anybody with a decent computer program could do well on the stockmarket. Or if it is all random then a set of darts would do just as well.

Be that as it may, in the second episode of Million Dollar Traders we see however that one trader, Simon, seems to consistently make wrong decisions, buying when he should be selling and selling when he should be buying. It is strange that this should be so, as it is clearly not a problem of intelligence. There are some people who seem to have the knack of doing the opposite of what is required. So much so in fact that one 'investor' in the USA was so bad that he was hired by a firm and paid to make decisions, the firm then did the exact opposite of what he said! Getting it wrong every time is also a gift.

Simon seems to be applying logic to his trades, but it is not clear that the stockmarket is logical. As he and Emile say the stockmarket is full of irrational humans who react in ways that seem strange and at times illogical.

The way to get around this problem appears to be to do two things at once - you buy one lot of stuff and sell another lot of stuff, then no matter what happens you are covered (in theory). The flaw seems to me to be that your trades may also cancel each other out.

Caroline seems to have got the hang of things more than the others and is singled out by Lex for a pat on the back ! She is in fact the only one of the 8 in profit, which is no mean feat in the stockmarket at the moment (or even back in the summer).

She appears to have achieved this by staying calm and also staying out of the financial sector.

For Simon, Cleo and Amit, however, the experience is akin to chinese water torture.

But as Lex explains, a lot of trading has to do with being able to tolerate pain.

Lex also asks Caroline if she feels any 'Schadenfreude' - the feeling of being pleased when people you know are suffering - a terrible feeling that we all get, but are loathe to own up to - Caroline says she doesn't (she's obviously far too nice).

Mike likes the intellectual thrill of the game, you are either winning or losing, so are rarely indifferent to what is happening, which most people who trade stocks will confirm, unless they get it right all the time and get blase, which never hapens. As Amit said, when you lose £25,000 in one day (which he did during the boom times) - you feel it!

Mike is one of those doing well as he has decided to concentrate on arms manufacturers, as a soldier he presumably has a certain amount of specialist knowledge, which may be a help in his decisions. There is certainly an argument for investing in what you know.

In a discussion with Sam, Mike says it's a bad world and if he doesn't make money from arms stocks then someone else will.

Sam on the other hand goes for ethical stocks - a difficult task, but not impossible, as ethical funds do exist. But making money on the stockmarket whilst maintaining an ethical stance is difficult, as Anton points out when he asks Sam (who has shorted a number of stocks) if he wants the US employment figures to be bad i.e. if he wants a lot more people to lose their jobs so he can make money - Sam says he only wants specific stock to go down, not the whole market, but if the market goes down it's a lot easier for his stocks to go down too.

Personally, for what it's worth I think shorting is immoral and should also be illegal. The best result possible for someone shorting a stock is when that stock goes bankrupt. The arguments I've heard defending shorting have not convinced me of its worth.

Oki, the economics student, says to succeed you need to do your research, work hard and hedge against any possible mishaps. But the stockmarket is a cruel place and you sometimes feel it has an evil plan to make you suffer. He bought Standard Chartered, reasoning that the Far East is immune from the turmoil, but he left his desk for 15 minutes and while he was away two banks were downgraded (that has happened to me before now too) and his stocks slumped. But instead of selling at a loss he took the decision to buy Shell instead, thus hedging his losses. Sounds like a wise move.

Emile has gone for stocks he likes, sports goods, Nike, Adidas, Blackberry and shorts stuff he doesn't like. An unusual approach but it seems to be working for him, once again probably because he has a c ertain amount of professional knowledge that the others don't have to the same degree.

Amit's motivation is to make money trading as he has had enough of shopkeeping and wants to make money for his parents who have worked hard all their lives. But he too is finding it difficult and also has the knack of doing the wrong thing.

He shorted Wolseley group when they announced profits were down - but as Mike pointed out to him - he may be shorting at the bottom. Amit was confident he wasn't but it turned out he got it wrong and had to buy back his short for a hefty loss. Anton points out that his problems are due largely to the fact that he only has one stock, whereas you need a portfolio. Amit could in fact have taken the path that Oki took, instead of closing his short, he could have hedged it by trading in something else and waiting for Wolsely to come back down.

At the end of week 3 Caroline, Oki and Mike are doing well and Emile is showing real promise.

Simon is fully invested and feels confident at last, unfortunately for him the stockmarket does not agree with his decisions.

( .......................................... Indecision !)

Cleo is being way too cautious for Lex Van Dam's liking,but she does have a point (that Mr Van Dam seems unwilling to acknowledge) i.e. what's the point of investing if you are not sure what to do? If you just buy something for the sake of being busy, then that is not investing it is just gambling. But on the other hand you should know what to do, or at least make an intelligent guess, at the moment Cleo seems to be paralyzed by the fear of making the wrong decision. But, as Lex tells her, you gotta pull your finger out Cleo. She does try a hedge, but only for 10 minutes, and Anton lets her know that that is not the way to hedge!

Caroline has the right idea. But as they are in it as a team why don't they get the good ones to help out the ones that are struggling?

Simon concludes that forecasting the future is impossible - Caroline on the other hand says you need to be resilient and just get on with it.

Jobs data comes out and is not as bad as expected so share prices go up and short positions start to lose money. Caroline, who is making money on her longs - which are hedging her shorts - says there is no point getting really excited as there will another event in a few days. As it turns out she was right, but it didn't take a few days, only a few minutes.

News from Israel about Iran reverses the markets and so the ups go down and the downs go down as well. But is it the news that drives the markets, or is it that the market really wanted to go down anyway (a lot of professionals were probably already short) so the marlet went down on the first piece of 'bad'news, on another day the markets would have ignored the bad news and gone up. (An interesting theory for when data is better than expected, the market will go up briefly, but then on the first bit of 'bad' news will slump again, as that is what people wanted it to do anyway).

Emile's shorts are now in profit and he points out that the stockmarket brings out the bastard in you, which is an interesting observation given that the UK economy depends on such a large extent to the City and the City is full of bastards. His particular example was the oil price going up which was good for his portfolio, but bad for petrol prices and probably bad for the economy too.

There are people in fact who say that the whole of this current economic crisis was started when oil prices shot up to from $60 to $145 a barrel.

Simon feels like many who trade do, that 'THEY' are out to get you, no matter what you do, the market has just been waiting for you to make a decision and then do the exact opposite. Unlikely but it certainly feels like that at times.

In week 5 Cleo, Amit and Simon are struggling. Caroline is the only one in profit, although Mike's arms companies and Emile's branded name are also showing a profit.

The team overall is making a loss, mainly due to Simon and Cleo, although if Cleo is not invested in much I don't see how she can be making much of a loss.

Simon seems confused and says he doesnt really know what he's doing, but Anton doesn't seem to be much help.

At this point Vladimir Putin very inconsiderately decides to invade Georgia.

The team sets about looking for who will profit and who will lose from a war in Georgia. There's no place for sentiment (which let's face it wouldn't do much good anyway).

Simon wants a rule book, Emile points out that he should rip the rule book up, you live and die by your decisions. Simon would like to know why all his decisions prove so disastrous.

Lex finally takes action - he tells Cleo she needs to get invested. Cleo thinks she really is making progress and sees no point investing if you are going to lose money, but Lex seems to think it's better to take a punt rather than sit around biting your finger nails all day. Cleo really does look like she is going through the emotional wringer, but maybe that's just the BBC showing the edited highlights. It seems to me that there is not much help and advice offered to the team, who are after all beginners, but I guess that's Lex's plan, to find out if beginners can do the job as well as professionals.

Lex has a word with Simon and they agree it is time for Simon to walk the plank. So Simon packs his bag and Anton aks him to leave quick, not hang around, as he could have a negative influence on the group. Simon leaves with a round of applause from the others at Anton's instigation. That is the way it is in the city, clear your desk and out you go.

So with two weeks left, the team is still making a loss. The BBC seems to be playing up the ethical dilemma side of the city, but I can't believe that many city traders worry about such niceties, if they did then they wouldn't be working there.

From a trading point of view I am curious to see if beginners can do as well as professionals or as well as a guy with a set of darts and a copy of the Financial Times.

A recent study has shown that male traders do significantly better than their colleagues if they have a long ring finger (something to do with being exposed to male hormones in the womb) - see - Size Matters . Such people take more risks and make better decisions, and the difference is statistically significant. So I've been trying to see who has the longest fingers, but haven't managed yet.

Third and final episode next week.

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