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Can you get rich from trading?

Thursday, September 27, 2018

Here are a couple of exchanges between three of the richest men in the world.

Warren Buffett is generally regarded as the greatest ever investor.

Bill Gates is the founder of Microsoft and was, at one time, the richest person in the world.

Jeff Bezos is the founder of Amazon, one of only two companies in the US worth over US$1 trillion. The other company is, of course, Apple.

At a student Q&A session Warren Buffett was asked: what surprises him the most?

He replied pointing to Bill Gates who was standing next to him:

“People look at Bill Gates and think they can’t do what he did. They look at me and think they can do what I did”.

The lesson here is that people often view innovation and entrepreneurship as something that is beyond them. So they will basically refuse to attempt because they think they will never be able to succeed. However most people intuitively think they will be good at investing or some form of investment related activity. The best investor in the world, someone who has walked the road knows that investing is not as easy as it looks.

In the other situation Jeff Bezos is speaking to Warren Buffett. He says to Buffett, “your investment thesis is so simple. You’re the second richest guy in the world and it’s so simple. Why doesn’t everyone just copy you?”

To which Buffett answered: “because nobody wants to get rich slow.”

In this second unrelated conversation Buffett adds to what he meant in the first conversation between himself and Bill Gates. The idea that no one wants to get rich slow but we all think that investing is a pathway to getting rich quickly. The truth is that persons with this mindset often fail to get rich at all.

To be an entrepreneur, to be a star athlete, to be a successful business person, to be the best at investing or any other field of activity requires discipline. In order to have discipline you have to manage your emotions.

When we talk about managing emotions it is really about exercising judgment and the ability to stay the course. Generally speaking, our brains are wired in such a way that our emotional impulses act against what is required for success.

Of course, some are able to get lucky and that luck is often highlighted as the pathway. This is how a mindset associated with getting rich quickly and or not having to work takes root. You may get rich through luck but you need more than luck to stay rich.

Everywhere you look there are stories about hacks, money and wealth. A hack is a trick or shortcut that allows you to achieve an intended objective in a shorter than normal period of time. So on your social media feeds you will see lots of advertisements and sponsored posts by persons who suggest that they have a short cut to wealth and riches and they are willing to teach you how to do the same and achieve the same successes that they have achieved.

The allure of financial hacks is that it appeals to the short cut, the way to get rich quick, a way to get the “bling” without the hard work associated with it. In a world of instant gratification this thinking has a generational appeal. Even if you can, no one really wants to get rich slow. That approach lacks the adrenaline and excitement. We want it and we want it now.

If we step back we will appreciate that all we have done is taken gambling and transposed it to various areas of our financial lives. In the past you were not really in direct control of the steps involved in generating financial wealth. To trade in shares, options, currencies and any other financial instrument you had to go through a broker and satisfy a number of conditions. Today all you need is access to a platform.

Jeff Bezos recently became the richest man in the world.

As at the beginning of September the wealthiest 499 billionaires added a combined US$8.3 billion to their fortune for the eight months in 2018. Jeff Bezos saw his wealth grow by $67 billion over that same period. That represents an increase in wealth of $8 million an hour in 2018.

We all look at this and we want to be like Jeff Bezos. We may also want to be like Warren Buffett. What we don’t realise is that Amazon was founded in 1994 and that the octogenarian Buffett bought his first stock at age 11 and generated most of his wealth after the age of 50.

Amazon started out like many other “dot com” companies. Most of those went out of business around 1999 to 2001 after the market crash at that time. It required hard work and lots of luck to achieve what Buffett, Gates, Bezos and many others including some of our local entrepreneurs have achieved.

The combination of the desire for fast cash and the accessibility of trading platforms have seen many operations that have been set up to lead people down a path where they can earn a living from trading in instruments like options and currencies and do away with traditional work.

The key point to recognise with this set up is that trading; unlike investing is largely a zero sum game. Using the example of currency trading, your gains are someone else’s losses.

The more people that are enticed into retail forex (currency) trading the greater that zero sum effect. It is like playing online poker, it’s just on a different platform.

In fact it can very well be a negative sum game for most people who opt to participant in these schemes as the sum of their total gains and losses over time when added to the cost of training, access to the platform and other brokerage and commission costs would be negative.

Essentially this is gambling disguised as training. If there is no real information advantage between traders because everyone has the same access on their respective platforms then the difference comes from your different levels of capital and the time you put in to ensure that you don’t end up with an informational disadvantage.

Those with larger amounts of capital (institutional investors) will be able to stay in the game much longer than a retail investor and so while there may be temporary “wins”, on a long enough timeline the trend is towards substantial losses.

There are many people in T&T who are faced with more challenging economic circumstances and may be seduced by the allure of being trained to trade. Some, on account of job losses, may even be acquiring lump sums and may choose to direct those funds in these endeavours. You should know that despite all that is presented to you in the form of a sales pitch the odds are against you succeeding.

In the end you will likely be told that it was your lack of effort or understanding that brought about the negative results and that would be an even worse position to be in emotionally after much of your hard earned funds have been effectively gambled away.

Just google the term “forex fraud” and see what comes up. Match the similarities to what is written to what is being presented to you. Then decide for yourselves. The greatest investor ever and the most successful businesses have gone the route of getting rich slow. If you think you can defy those odds then good luck. If anyone offering any type of financial advice speaks from the perspective of getting rich quickly, easily or through some type of hack then my financial advice to you is to be very cautious about your next steps—maybe even seek out a different financial adviser.


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