Saturday, January 09, 2016

Achieving Distinctive Trading Returns by Trading Distinctively

So let's say you wanted to start a grocery store in your community.

How are you going to succeed?

After all, the WalMarts of the world can buy in greater bulk and negotiate better prices with food companies than you could.  You're not going to beat them on price.

The Wegmans of the world can build supermarkets that are super markets, complete with food courts, coffee bars, and more.  You're not sufficiently capitalized to beat them on variety.

The 7-Elevens of the world can locate in multiple locations throughout communities and carry the products people most want to buy immediately.  You don't have the resources to beat them on convenience.

So what are you going to do?  If you open a small, generic grocery store, you will get a certain part of your anatomy handed to you.

I would argue that starting up as a trader is no different from starting up a grocery store in terms of the competitive dynamics.  

You can't compete against the large institutions that have huge asset bases and can make money by investing across multiple assets with a variety of uncorrelated strategies.

You can't compete with organizations that spend millions of dollars annually on research, developing fast market-making algorithms.

If you want to make money in financial markets, you'd have to make money the same way you'd make money in the grocery business:  by carving out a niche and being better in that niche than anyone else.  You'd have to be unique--and you'd have to be superlatively good at what makes you special.

DeCicco's is a regional grocery chain in suburban New York.  What makes its stores unique is a focus on craft beer.  They have a large, well-curated selection of craft beers and several of their locations have craft beer bars within the stores.  DeCicco's also places great emphasis on fresh foods, cheeses, and prepared foods.  It's easy to go there, have a fresh pizza or prepared entree, sit down in the craft beer area, and enjoy a meal after doing your shopping.  That experience cannot be readily duplicated by a competitor.

An independent trader similarly needs to find strategies that are unique, that exploit opportunities in the marketplace, and that cannot be readily duplicated.  Taking a generic trading approach to a crowded, competitive marketplace is a sure way to not achieve distinguished results.  

Not all unique strategies win, but all generic ones, over time, fail.  Markets are simply too efficient to give awards to me-too's.

What is your unique edge as a trader?  It's not enough to say you have great motivation, great intuition, great chart reading skills, great fundamental knowledge, etc.  If you can't explain your specific trading edge clearly--if someone learning what you do doesn't have the reaction a first time visitor to DeCicco's has--you are almost certainly too generic.

In trading, as in life, do something distinctive or do something else.  Life is too short and too precious for me-too.

Further Reading:  Finding and Focusing on Your Edge