tradingmarkets 6 Common Traits of Successful Traders and Investors
By Jack Ablin
Jack Ablin, Chief Investment Officer of Harris Private Bank, is responsible for managing over $50 billion in private client assets, and for developing strategies for some of America's wealthiest individuals and families. He is a trusted source to some of America's most respected journalists; a frequent commentator on CNBC and Bloomberg; and a frequent contributor to Barron's.
For the last 27 years, I've been an institutional investor. I have spent more than a decade on trading desks and have overseen the management of billions on behalf of individuals and institutions alike. One trend that has been very clear during my 27 years, and that is the balance of information has clearly changed.
Early in my career, the balance of information was clearly skewed in favor of the big boys. All of that has now changed with the democratization of investment data. The Internet has brought real-time quotes to avid investors' desktops and CNBC leveled the playing field when it comes to news. In fact within a year of its launch, CNBC forced virtually every investment professional to get a TV set in their office just to spare the embarrassment of having one of their clients clue them in on an investment scoop.
Like many other segments of business, just because individuals have equal access to many of the same tools, doesn't mean that they will employ them as effectively as the professionals. WebMD is a great tool for understanding our health and bodies, but I would still leave medical diagnoses to trained physicians. Desktop publishing is another area where we now all have the tools to layout a newsletter, but that doesn't make us graphic designers. When it comes to investing, the little guy is clearly empowered, but there are a few points, however, that individual investors must keep in mind before charting their own course in the rough seas of investing.
Pay Less Attention
Individual investors tend to get caught in the minutia of the moment and often lose sight of broader trends. Focus instead on what's important. There's so much information available nowadays, it's easy to drown in the deep end of the data pool.
From 1982 to 1990, I was a mortgage-backed securities trader. My job was to scour the markets for the best deals in Freddie Mac, Fannie Mae and Ginnie Mae securities looking for the best opportunities. Day in and day out I would concentrate on my trading screens and watch the prices of as many as 60 securities ebb and flow with the movement of the marketplace. I was set to pounce on any instrument that got as little as one-sixteenth of a point out of whack. Talk about granularity. Had I simply appreciated that the yield of a 10-year Treasury was nearly 14 percent and it was the single-minded aim of Treasury Secretary Volker to drive the yield lower, I could have simply put one big trade in place at the beginning of my career and kept in place throughout my entire tenure, and made significantly more money for my clients and would have had a much easier time of it. Certainly, "buy in 1982 and go away," is unrealistic, but appreciating the enormous tailwind behind the bond market would have made my life a heck of a lot easier at the time.
Leverage Your Strengths
Each of us bring a unique set of skill and expertise. Make sure you're employing your best skills in investing. At the same time, insulate yourself against your weaknesses. Understand that individuals, for example, have far fewer resources when it comes to stock selection than large institutions. Last time I checked, Fidelity spent about $150 million annually on stock research, so going toe-to-toe with the big boys when it comes to selecting stocks puts individuals at a big disadvantage. Notwithstanding their advantage is selecting securities, big institutions are handicapped when it comes to market selection.
Most big institutions are "mandate managers," meaning that they are constrained by a set of specific investment styles and markets. A small-cap value manager, for example, must maintain small-cap value exposure through thick and thin, regardless of their opinion of the market for small cap value stocks. The fund manager would be chastised for leaving their "style box" if they decided that international large cap equities were a better deal. Since the big guys are often constrained to their pre-determined style boxes, individuals have an opportunity to play between the giants; by evaluating and trading markets, not securities.
You're Your Own Worst Enemy
Human nature often gets in the way of sound investment decision making; even among institutional investors. Do you consider yourself to be "better than average" drivers? Most people do. The Lake Wobegon Effect, as it's affectionately called, was inspired by the radio series, A Prairie Home Companion by Garrison Keillor, where "all the children are above average." Seriously though, overconfidence has the potential to make bad investments worse, by pushing obstreperous investors to hang onto losing positions; even when evidence to the contrary is overwhelming. New car buyers love reading favorable reviews about the bright and shiny automobile they just purchased, at the same time they would be highly critical reviews that criticize their decision. As investors, we sift through a myriad of information as we assemble a mosaic. How valuable would our conclusions be if we latched onto data that only supported our views and ignored information that refuted it?
Be Willing to Be Wrong
Those investors who recognize mistakes sooner are better investors than those who don't. One way to maintain objectivity is to articulate your strategy and expectations before establishing a position. This means write out your investment premise and establish "rules" for exiting the position, whether it's time horizon, return or price targets, or simply a technical factor like breaking below a moving average. Not all investment decisions work out as planned. Recognizing when to get out and move on is paramount. Darwinian survivors aren't necessarily the smartest, but they are the most flexible.
Be a Hawk, Not a Worm
Always be aware of the big picture. Investment market movements are a function of the global economic and political environment as well as the collection of moods and attitudes of investors. While investors are mercurial, the political and economic landscape tends to move in a more deliberate fashion. Peter Stamos, Chairman and CEO of Sterling Stamos Capital Management, relayed the story about the headmaster on campus who walked his dog every evening. Every evening after dinner the headmaster would stroll along the quad, walking his dog who hurriedly scampered from lawn to lawn, bush to bush, occasionally stopping to greet a passer by. Each evening the headmaster walked an identical path in a slow and predictable fashion, yet predicting the path of his dog was impossible. That depended upon an incalculable number of decisions taking place in his trusted pet's brain. Ultimately, the dog followed the headmaster. After all, he was on a leash. Peter's point was that the economy is the headmaster and the market is the dog. Over shorter periods, predicting the markets' pathways is like reading the collective minds of investors, yet over longer periods, the market must follow the economy. Focus on the landscape and understand the economic headwinds and tailwinds as your guide to managing your asset allocation.
Lessons Learned
Study after study have found that asset allocation, the decision whether or not to be in a particular market or asset class, is by far the most influential on your investment outcome than virtually any other investment decision you will make. Yet, sadly, very few individual investors spend nearly enough time thinking about the overall market. The explosion of exchange-traded funds, or ETFs, enables individuals to effectively maintain a broadly-diversified global portfolio. Think of it as a CliffsNotes Guide to effective investing. The basics are there for the taking, but some extra effort will always pay off. The tools available today are so much better than they were when I started in this business 27 years ago. That means that everyone has the opportunity to be successful, even during a very challenging market.
Jack Ablin, Chief Investment Officer of Harris Private Bank, is responsible for managing over $50 billion in private client assets, and for developing strategies for some of America's wealthiest individuals and families. He is a trusted source to some of America's most respected journalists; a frequent commentator on CNBC and Bloomberg; and a frequent contributor to Barron's.
For the last 27 years, I've been an institutional investor. I have spent more than a decade on trading desks and have overseen the management of billions on behalf of individuals and institutions alike. One trend that has been very clear during my 27 years, and that is the balance of information has clearly changed.
Early in my career, the balance of information was clearly skewed in favor of the big boys. All of that has now changed with the democratization of investment data. The Internet has brought real-time quotes to avid investors' desktops and CNBC leveled the playing field when it comes to news. In fact within a year of its launch, CNBC forced virtually every investment professional to get a TV set in their office just to spare the embarrassment of having one of their clients clue them in on an investment scoop.
Like many other segments of business, just because individuals have equal access to many of the same tools, doesn't mean that they will employ them as effectively as the professionals. WebMD is a great tool for understanding our health and bodies, but I would still leave medical diagnoses to trained physicians. Desktop publishing is another area where we now all have the tools to layout a newsletter, but that doesn't make us graphic designers. When it comes to investing, the little guy is clearly empowered, but there are a few points, however, that individual investors must keep in mind before charting their own course in the rough seas of investing.
Pay Less Attention
Individual investors tend to get caught in the minutia of the moment and often lose sight of broader trends. Focus instead on what's important. There's so much information available nowadays, it's easy to drown in the deep end of the data pool.
From 1982 to 1990, I was a mortgage-backed securities trader. My job was to scour the markets for the best deals in Freddie Mac, Fannie Mae and Ginnie Mae securities looking for the best opportunities. Day in and day out I would concentrate on my trading screens and watch the prices of as many as 60 securities ebb and flow with the movement of the marketplace. I was set to pounce on any instrument that got as little as one-sixteenth of a point out of whack. Talk about granularity. Had I simply appreciated that the yield of a 10-year Treasury was nearly 14 percent and it was the single-minded aim of Treasury Secretary Volker to drive the yield lower, I could have simply put one big trade in place at the beginning of my career and kept in place throughout my entire tenure, and made significantly more money for my clients and would have had a much easier time of it. Certainly, "buy in 1982 and go away," is unrealistic, but appreciating the enormous tailwind behind the bond market would have made my life a heck of a lot easier at the time.
Leverage Your Strengths
Each of us bring a unique set of skill and expertise. Make sure you're employing your best skills in investing. At the same time, insulate yourself against your weaknesses. Understand that individuals, for example, have far fewer resources when it comes to stock selection than large institutions. Last time I checked, Fidelity spent about $150 million annually on stock research, so going toe-to-toe with the big boys when it comes to selecting stocks puts individuals at a big disadvantage. Notwithstanding their advantage is selecting securities, big institutions are handicapped when it comes to market selection.
Most big institutions are "mandate managers," meaning that they are constrained by a set of specific investment styles and markets. A small-cap value manager, for example, must maintain small-cap value exposure through thick and thin, regardless of their opinion of the market for small cap value stocks. The fund manager would be chastised for leaving their "style box" if they decided that international large cap equities were a better deal. Since the big guys are often constrained to their pre-determined style boxes, individuals have an opportunity to play between the giants; by evaluating and trading markets, not securities.
You're Your Own Worst Enemy
Human nature often gets in the way of sound investment decision making; even among institutional investors. Do you consider yourself to be "better than average" drivers? Most people do. The Lake Wobegon Effect, as it's affectionately called, was inspired by the radio series, A Prairie Home Companion by Garrison Keillor, where "all the children are above average." Seriously though, overconfidence has the potential to make bad investments worse, by pushing obstreperous investors to hang onto losing positions; even when evidence to the contrary is overwhelming. New car buyers love reading favorable reviews about the bright and shiny automobile they just purchased, at the same time they would be highly critical reviews that criticize their decision. As investors, we sift through a myriad of information as we assemble a mosaic. How valuable would our conclusions be if we latched onto data that only supported our views and ignored information that refuted it?
Be Willing to Be Wrong
Those investors who recognize mistakes sooner are better investors than those who don't. One way to maintain objectivity is to articulate your strategy and expectations before establishing a position. This means write out your investment premise and establish "rules" for exiting the position, whether it's time horizon, return or price targets, or simply a technical factor like breaking below a moving average. Not all investment decisions work out as planned. Recognizing when to get out and move on is paramount. Darwinian survivors aren't necessarily the smartest, but they are the most flexible.
Be a Hawk, Not a Worm
Always be aware of the big picture. Investment market movements are a function of the global economic and political environment as well as the collection of moods and attitudes of investors. While investors are mercurial, the political and economic landscape tends to move in a more deliberate fashion. Peter Stamos, Chairman and CEO of Sterling Stamos Capital Management, relayed the story about the headmaster on campus who walked his dog every evening. Every evening after dinner the headmaster would stroll along the quad, walking his dog who hurriedly scampered from lawn to lawn, bush to bush, occasionally stopping to greet a passer by. Each evening the headmaster walked an identical path in a slow and predictable fashion, yet predicting the path of his dog was impossible. That depended upon an incalculable number of decisions taking place in his trusted pet's brain. Ultimately, the dog followed the headmaster. After all, he was on a leash. Peter's point was that the economy is the headmaster and the market is the dog. Over shorter periods, predicting the markets' pathways is like reading the collective minds of investors, yet over longer periods, the market must follow the economy. Focus on the landscape and understand the economic headwinds and tailwinds as your guide to managing your asset allocation.
Lessons Learned
Study after study have found that asset allocation, the decision whether or not to be in a particular market or asset class, is by far the most influential on your investment outcome than virtually any other investment decision you will make. Yet, sadly, very few individual investors spend nearly enough time thinking about the overall market. The explosion of exchange-traded funds, or ETFs, enables individuals to effectively maintain a broadly-diversified global portfolio. Think of it as a CliffsNotes Guide to effective investing. The basics are there for the taking, but some extra effort will always pay off. The tools available today are so much better than they were when I started in this business 27 years ago. That means that everyone has the opportunity to be successful, even during a very challenging market.
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