Friday, July 17, 2009

What Is The Value Of Trading?

An interesting question that arose during the Chicago trading seminar today was: What is the value of trading beyond making money?

It's a question that arises for many traders. So many occupations derive their nobility from contributing to the welfare of others in direct ways. Where is the nobility in trading?

In my reply, echoing Ayn Rand, I challenged the notion that nobility is solely or primarily a function of assisting others.

In mastering risk and uncertainty; in learning to pursue opportunity in effortful ways; in making ourselves better as decision makers; in becoming more disciplined actors; we improve ourselves as human beings. That carries over to many areas of life, so that we can become better business partners, spouses, parents, and friends.

Indeed, this might be the most important distinction between trading well and trading poorly: When we trade well, we make ourselves stronger, better; we tap into the best within us. When we trade poorly, we succumb to our lowest common denominators.

The value of trading is the value of any competitive performance activity: in its mastery, we become just a bit closer to our ideals--and that ripples throughout our lives.

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25 comments:

naresh said...

It's a question that arises for many traders. So many occupations derive their nobility from contributing to the welfare of others in direct ways. Where is the nobility in trading?......................IF U ARE ABLE TO READ THE CHARTS WELL,and if u are disciplined leading to regular profits, u can allways serve the society in various philanthoropic ways...y not look at this angle friends...every job in this world is noble..its the way u look at it and how u use/dedicate ur life for others...if all people come out of "my wife,my kid and me" attitude, this world would have been a different place to live".....

a said...

Well Dr. Steenbarger you just injected quite a rush of oxygen into my brain reading your take on trading. The whole idea of trading for a common good crystallized in that one instant I read your article above and gave meaning to the old phrase "hardest easy money one will ever make". It supports the reasons that drove me to trading as the last vestige of free market system. The thing I cherish most was that desire to learn this thing never left me.

IDkit aka Ana said...

Brett, Good of you to go into this question as I am reminded to read what I responded to you when I first started my newsletter at:

http://traderfeed.blogspot.com/2008/05/perspectives-on-achieving-greatness-as.html

Thank you.

nemo said...

Well, we'll start with the good for society angle:

If you trade well, you pay quite a bit of taxes, which means you contribute to society in that you allow some politician to spend the money you've earned. Which is much more than can be said for a significant percentage of the population.

If you trade well, and pay quite a bit in taxes, you may also be raising a family, which means, unlike a signifcant percentage of the population, you are not dependent on government largesse, nor are your children.

Now from a personal point of view...becoming good or even excellent at anything requires dedication and sacrifice,in that you must sacrifice other uses of your time to master your craft.

By mastering your craft you master yourself. You learn to control your emotions, to execute rationally, and develop learning/adaptation skills that will serve you well in life.

The market is a jungle where only the fittest survive through skill and adaptation. There's an old book, in it's 5th Chapter it says:

"Nature is unkind, it treats the creation like sacrificial straw dogs"

W said...

If we did not have trading, we could not assign a value to a good or service. Without a value, resources would be misallocated. Trading provides not only price signals to non market participants, it provides a living to brokers, data providers, attorneys, and accountants. Overall, it is a invaluable service to society.

Red Hue said...

Dr Steen,

I am afraid I have a different view than yours. Saying trading "...we improve ourselves as human beings. That carries over to many areas of life, so that we can become better business partners, spouses, parents, and friends..." I think the same arguement could be made for playing video games, skeet shooting, playing Blackjack...none of which sound especially noble! I believe the majority of traders trade for the challenge...pure and simple...the feeling of conquering the markets...the buzz of being right when others were wrong...of forecasting the future! You can paint trading in a noble light if you like...but I dont buy that. Its a challenge...its brain candy for many traders I believe.

I'll tell you what trading did do for me...after hours of sitting in front of a computer...after countless hours/days/years spent figuring out ways to beat the market...after finally making money...I realize it wasnt worth it at all...I could have spent all that precious time with my daughter/wife or friends...now that would have been noble!

Good trading everyone!

Barracuda said...

Thank you very much for the post.

hippietrader said...

In this economy in which good jobs are scarce, the "nobility" of successful trader is in not depriving another desperate job seeker of a much needed job.

I don't see any "nobility" in the many helping or service jobs in which the worker can barely provide for herself, let alone providing for her family or save for a rainy day.

The above statement is not meant to belittle these neccessary jobs or the workers. I simply like to point out that doing useful work helping others doesn't always lead a decent livelihood - assuming such a job is easily available, often it is not!

The competition for these jobs is fierce in the current economy.

Markus said...

Dr. Steenbarger,

this is a question I have carried around with me for a while. I like your answer as it is surely a very pleasing one for a trader. But in a more technical sense - are we not paid for providing liquidity and depth to markets and therefore guaranteeing their existence or actually making them exist? I think this concept is very hard to grasp for a lot of people (and I don't even know if it is essentially true), but it is the only explication I have for the reason I have been profitable in this zero sum game (which is actually a negative sum game as there are costs like commission and slippage e.a.). Nobody can predict the future accurately for a long time, therefore you can only make money in these marketes if you provide a service or have another kind of edge which can not be utilized by others very soon. And the last case may be true more for institutions like investment banks or HFs but not for a retail trader with no better information or technical advantage.
It would be very interesting to hear more about this topic. Has this been discussed some time between you and the managers and traders of the prop firms you are coaching?

Thanks for you insights!

Cheers,
Markus

Bryan said...

Hi Brett, I always find your posts on the value of trading very helpful.

I suppose there is no reason why a trader/ investor could not pursue the goal of assisting others? You are a good case in point.

There are many potential ways to assist: teaching, running endowment funds, trading for charity, even managing money for friends and family. The problem with our discipline is that it is so easy to do more harm than good even though one may have honourable intentions. The role of assisting others in trading and investing may be best left to the best.

Douglas said...

Dr Brett

I think that what you say is correct. However, I think that there is another thing that is worthwhile.

Even by following technical (and fundamental) analysis I think that traders (speculators?) help to bring the market price closer to a price that is 'fair' or to one that represents what it 'should'. This means that people who are investing will get a price that is closer to a fair price.

I realise that many will disagree with the above. However, what I think will be less disputed is that market participation by more people (and more brains) will result in greater market liquidity. This is something that is of benefit to buyers looking for competitive prices.

Also, the more that markets (as well as economics - which is not the same thing) are understood, the better for the public and investors as a whole.

As someone who follows various forms of technical analysis myself - I do feel as though I am in a better position to advise the average Joe or Joanna on his or her investments. Even if someone is a long term investor - the knowledge of how to use long term moving averages as an indicator of when to be in the market and when not - would help many investors and savers over their lifetimes.

The alternative for most people is listening to a 'financial advisor' who makes money by charging commission - not by assessing risk and reward effectively.

It is actually the conventional 'financial advisor' who sits and feeds on the fees and commissions of the innocents - rather than the 'speculator' who takes advantage of the average investor / saver.

Traders should be proud of what they do - and not just because of the reasons that you have given.

Best regards.

Trader Kevin said...

If one has a need to feel like they are "serving the greater good" while making a living, there is no shortage of low-paying jobs at non-profit organizations of all types.

I've never felt the need to justify my existence as a trader. However, if pressed in a social setting I tell people that I am a liquidity provider for the longer time-frame players. My presence reduces the cost of trading for mutual funds and pension funds by reducing bid-ask spreads and slippage.

Perhaps instead of asking the value of trading beyond making money, we should be asking what we are doing with the money we make. My church teaches the 80-10-10 rule and it works very well. Live on 80%, save 10%, and tithe (give 10% to God). My church does incredible work with the 10% they receive, including building an AIDS orphanage in Kenya and sponsoring medical missions trips to Haiti and Costa Rica.

Dr. Brett, it might make for an interesting post to explore the self-sabotage that can occur if one feels guilty about making money and strategies for overcoming this challenge.

Finally, one is always "serving the greater good" when they earn a living in a legal, ethical way and become a producer rather than a taker. [Note to 85 Broad Street: market manipulation and front-running are neither ethical nor legal.]

Trader Kevin said...

Dr. Brett, terrific seminar yesterday. A big thanks to you and Trevor Harnett of MarketDelta for leading an informative, interesting, and insightful discussion.

Trader Kevin said...

Red Hue: "I think the same arguement could be made for playing video games, skeet shooting, playing Blackjack...none of which sound especially noble!"

Come on, this is crap. All of these are legitimate forms of relaxation and entertainment. (Not that they can't be abused in some way, but that applies to almost everything.) There is a certain nobility in earning your "right" to blow off steam in a way of your own choosing.

"I believe the majority of traders trade for the challenge...pure and simple...the feeling of conquering the markets...the buzz of being right when others were wrong...of forecasting the future!"

If you are correct (and you might very well be) it would go a long way towards explaining why the majority of traders are long-term losers in the markets. Trading for "the buzz" instead of focusing on achieving the highest risk-adjusted returns is a sure road to ruin.

"After countless hours/days/years spent figuring out ways to beat the market...after finally making money...I realize it wasnt worth it at all...I could have spent all that precious time with my daughter/wife or friends...now that would have been noble!"

Putting a roof over your family's heads and putting food on the table in a legal, ethical way is noble. Spending time with family and friends is also noble, but it doesn't pay the mortgage or buy groceries.

Janusz said...

Dr. Brett,

The same question can be asked by a car dealer, what is the value of selling/buying cars (or anything for that matter) beyond making money?



In my opinion making money (as oppose to stealing) is noble on its own, not to mention that as a byproduct one can not make money in a free market economy without benefiting others.



Trading financial instruments is always beneficial for both sides of the trade in one way or another. Each side of the transaction is willing to participate in it to either realize monetary profit or for emotional relieve of not having to lose any more.



Can we imagine what would have happened if there were no traders of financial instruments, cars, groceries, etc?



How would we know the price of anything?





Janusz

Trader Kevin said...

Janusz: "Trading financial instruments is always beneficial for both sides of the trade in one way or another."

I dunno, I can think of plenty of trades that were significantly less-than-beneficial for me!

OKL said...

Just scanning through some of the comments... and here's my take:

1) Providing liquidity/price discovery- not for me and I don't give a hoot, GS can do that way better than I can... doesnt make sense to me.

2) Taxes- the less the better; period.

3) Chain effect of accumulated wealth/donation/charities; what I do with the gains- never thought about that; I can just get another job for that (not that I don't do it).

4) Replacing financial advisors- never crossed my mind, folks will believe what they want to believe and advice is subjective and given the recent nonsense;

"The conmen succeed because the mark wants to believe,"

5) Noble causes- not my aspiration and too subjective.

For me;

1) Freedom; I answer only to myself- all responsibility on me... I've learnt and still learning more and more about my own character; to a certain extent, I'm trying to master myself.

2) My family; what's there to say here.

3) Knowledge/Discovery/Analysis; always interesting to uncover and, where applicable, apply the many different arts & sciences trading itself can encompass; the reading, research and analysis of the various faculties- financial, economical, investing, politics, geo-political, psychology, agriculture, geology, cultural, social, historical, legal, entrepreneurship etc... is a wonderful process; don't forget that many of the faculties mentioned above can be broken down into many different sections too!

For example- I used to have a job too, which slowly intoxicated me into somewhat despising bosses/supervisors and founders... but now that I'm doing my own business from trading, I have a great deal more appreciation of what these guys do to be successful.... but I still hate office/workplace politics.

I'm having a lot of fun and enjoyment doing this, I don't know if I'd call it passion or all those ra-ra terms, but I just like doing it.

(This can be applied to any other art and/or science as well, so long as the view from the passion one is pursuing fits with one's character and allows one to view the world and its workings in a much more wholistic and comprehensive manner)

4) Competition- brings out the best and worst in people; essentially evolution accelerated.

Because I have that sports background, I love that winning feeling (Yeeeeeeha!!!) and hate the losing feeling (Pffft...)


4 words to sum it up for me; Freedom & Family (Motivation), Curiosity (Thinking), Competition (Execution).


As mentioned before, everyday is a new day (it can be quite tiring though LOL) and as such, still learning!

Janusz said...

Trader Kevin said...

“Perhaps instead of asking the value of trading beyond making money, we should be asking what we are doing with the money we make….”

Hopefully investing in something we can profit, not necessary in monetary value.

But why should we even ask those questions?
In a free market economy good trader already has proven to be good, for himself and obviously for people who voluntarily paid him money for his services.

Same goes with any other trade or profession. Successful lawyer, banker, builder, psychologist or manufacturer has already contributed to the wealth of others, besides themselves.

After all nobody would voluntarily pay any of those professionals $1 while receiving something worth less than $1 in exchange. They always receive more, not necessary directly or in monetary value.

That is the beauty of free trade.

Janusz

Janusz said...

Trader Kevin said...

"I dunno, I can think of plenty of trades that were significantly less-than-beneficial for me!..."

How so? If you voluntarily traded than you should benefit, one way or another.
Those benefits depends on your (our) rational evaluation.
When we have emotional problems and pay $1000 for psychological help we don’t call that expense a loss, as long as we use the advise and put an efford in changing something in us.

Same is with trading. Market is charging us fee for its clear advise. And a good teacher is never very cheap!

But we shouldn’t call that ‘advice’ less-then-beneficial for us.

So, again, in a free market (and trading is almost 100% free market) both sides of a trade are always receiving their just benefits.

Janusz

Trader Kevin said...

I normally blog about college football, but here is my review of the seminar. Enjoy.

JimRI said...

The value to society from trading (or in my case the almost subconscious judgement that it is wrong to do) has had an impact on my trading. This is one of the increasing collection of psychological factors I have worked on to be a trader.

In the final analysis, there are many rationalizations for justifying the particiaptation in an activity that has little value add and is essentially a means to transfer wealth from one to another. Often from the less wealthy to the already wealthy. In the end, it is can be a means to survive and fairness is not a criteria to that end. Life is not fair.

hippietrader said...

Trader Kevin said

" If one has a need to feel like they are "serving the greater good" while making a living, there is no shortage of low-paying jobs at non-profit organizations of all types......"

Trader Kevin too optimistic! There are no enough low-paying jobs at non-profit or anywhere to go around. These days, non-profits want volunteers, not paid staff.

Even for profit business are using desperate job seekers as volunteers!
http://www.reuters.com/article/domesticNews/idUSTRE56C0T120090713

Janusz said...

JimRI said:

"In the final analysis, there are many rationalizations for justifying the particiaptation in an activity that has little value add and is essentially a means to transfer wealth from one to another...."

Think about banker. Where is his value to society?

He is making living off lending NOT his own money.

At least traders avail their own money each time they’re in a market.

hippietrader said...

The sad thing is in this age of automation and off-shoring, there is not enough useful paid work to go around for all those who need or want one.

It is often in jobs that does not produce any real social good (e.g. bankers who designed CDS and sub-prime mortgages) where fortunes are made. These CDS/sub-prime brokers actually did a lot of harm.

My ideal is *Do No Harm*. I wish I can do some good in my work but a livelihood has to come first. I am not a saint, can't work for nothing when I have bills to pay!

Mike said...

OKL,
YOU summed it up this beautifully...

"I've learnt and still learning more and more about my own character; to a certain extent, I'm trying to master myself"...

"know thyself" as Vadic says

and "before you do something,you FIRST must be something"...and this is worth thinking about...