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Tuesday, 3 June 2008

Full-time investing

Like to share one article Googled. POSTED BY DANIELXX (Thanks to him)

The buoyant stock market may have got some investors/traders who have made good money to consider quitting their jobs and doing investment/trading full-time. This is evident from the enthusiastic response to a thread with the same title in one of the share forums ( I believe). Judging from the comments of one or two of my contacts who have gone down this path, I would think there are pitfalls that one has to be aware of to avoid being sorely disappointed and suffering heavy opportunity costs.

Firstly, one's risk appetite changes tremendously when going from part-time to full-time. Any entrepreneur would tell you this: that when they start their own business, every cost component becomes magnified to them because it all flows toward their bottom line. So it is for one trading/investing for a living. In general, return is directly correlated to risk, which means the eventual returns may not be what was projected at the onset of turning full-time. For traders and investors alike, the level of volatility which previously worked fine for them might now seem too risky; the change in risk outlook is subtle but palpable. It is a psychological barrier that is difficult to overcome.

Secondly, mental discipline is compromised. An investor previously too busy to track stock prices suddenly finds all the time in the world for his own allocation; the temptation is too great for him to follow the path of least resistance and monitor stock prices since his fortunes are tied to them. Routine office work, whether one likes it or not, gives a definite structure to one's mental framework and hones useful skills. Social interaction and the exchange of ideas with other people (colleagues, clients) also augment this. All such activities are lost when one turns inward to one's own investment portfolio.

Thirdly, one's investment horizon is shortened as there is a definite pressure to "bring bread home every day" or at least every month. While buy-and-hold is hardly the way to go (except for people like Warren Buffett), one should also not be primed to sell every time a portfolio stock rises by 10-20%; as Peter Lynch advises, let the profits run. Worse, one might buy a stock for the wrong reasons as a result of the shortened investment horizon; where previously he used to buy an illiquid stock for its long-term prospects and wait for it to be recognised, he might now start buying highly valued, highly traded momentum stocks to reap quick gains in a highly risky musical chairs game (or the "greater fool" game). Patience is a virtue highly relevant to investing; that virtue is often attenuated when one depends on and consequently focuses excessively on one's stock portfolio.

Fourthly, one has to reconcile within oneself the role of a trader/investor in contributing to society. This social pressure cannot be underestimated, especially from the older generation. This view is understandable, and indeed, one will have to assess his motive for turning to full-time investing/trading. Is it mainly due to push factors (job dissatisfaction)? If so, it is time for a rethink. As for contribution to society, there is none: all that talk about bringing liquidity to the market and helping to ensure efficient resource allocation and prices is just plain bollocks; traders or investors bring nothing to society, unless they reach a certain scale of operations akin to that of venture capitalists. One has to be comfortable with that.

All things being said, there are people who trade or invest successfully on their own, in various areas such as equities, commodities, futures. I would think to overcome the psychological barriers described above, one has to have at least one million bucks to consider this avenue as a complete full-time option, or at least half a million with another additional source of passive income to be comfortable with this chosen path for the long-term. Assuming an annual dividend yield of 3% (typical for the Singapore market), one can collect $30K in dividends on a million-dollar portfolio which is adequate for covering the household expenditure ie. capital gains will be the main instrument for growing the portfolio and the full-timer will have to be confident of making this happen. Additionally, the drive to constantly enhance one's knowledge in this field should be there; there are so many ways to improve one's reading of stocks, from enhancing one's knowledge of the various industries through reading, to locating sources of information to enable monitoring of the environment in which one's stocks operate, to streamlining the stock selection process, to understanding the global or regional markets with a view to assessing global supply and demand dynamics. It would be fair to say that the level of discipline involved is similar to that in operating one's own business.

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