This Is A Hard Business

Mark Hulbert published a very interesting article today on CBS Marketwatch. As you may know, Mr. Hulbert tracks about 300 advisory newsletters and services with his monthly publication, "The Hulbert Financial Digest". I subscribed to the HFD for a while and it was very enlightening to learn that almost none of the paid subscription advisory services make money for their clients. While I have no way of proving this, I would not be surprised to find that most brokers that provide stock and market recommendations to their clients realize the same pitiful results.

Many years ago in late December, 2002 I was on the phone with my broker late at night requesting reports for my tax preparation, and we got to talking about active traders. I told him what a horrible year I had, and I was trying to decide if it was worth it to continue. I said it would be really helpful if I knew where I stood in relation to the firm's other clients. In particular, could he tell me what percentage of the firm's active traders made money that year. There was silence on the other end of the phone for a few seconds, and then he responded that they just don't give out that kind of data to the public. I pressed the issue and said that surely he had some idea. I needed to know how much effort it was going to take to become successful. He began whispering into the phone and told me he shouldn't be telling me this, but only about 3% had made money in 2002. I thanked him for the information and did not let on how elated I was. Perhaps that seems weird, but deep down I knew then that it wasn't me. Well, of course it was me, but the fact was that 3% of traders knew something that the rest of us didn't. I had done poorly because I had followed the herd. I just needed to learn what those 3% of profitable traders knew. At that moment, I committed myself fully to becoming a successful trader.

A few years later, I read in books and heard in forums various estimates on what percentage of traders were successful, and the numbers ranged anywhere from 5% to 15%. Today, Mr. Hulbert revealed that only 7% of the advisory services that he tracks have made money in both the bear market that began in October 2007 and the "bull" market that began in March, a number that validates all of the prior estimates. Now, when you consider that among active traders the turnover rate is very high, perhaps as high as 80%, then it becomes clear that over time, the actual percentage of successful traders is very much lower than the estimate of 5% to 15% because the successful traders are going to stick around. In other words, over the long term, say 10 to 20 years, probably only 1% to 3% are consistently profitable.

To become successful in this business, you must treat it like a business, be fully committed to it as a career, or as a serious second business. If you are successful, you are in an elite group of professionals. If you are one of the 7% that made money in both the bear market and the current rally, you are in an elite group. But never forget that it will take ongoing effort to keep you in that group. Don't rest on your laurels. If you are not one of the 7%, don't despair. If you are committed, you can become successful. Trade small until you have that eureka moment. Trade small until you don't react emotionally to big gains or losses. Trade small until you see consistent results, and then increase your size. If you stick with it, you will succeed.