Why The 90% Trader Failure Rate Is Good News

Tyler here.

It seems intimidating to tackle an endeavor where 90% of participants fail. The little voice whispers:

 Wow, nine out of ten people fail at this? What makes me so special then?

And yet, consider:

  • Nine out of ten small businesses fail.
  • Nine out of ten Americans can’t stay on a diet.
  • Nine out of ten Americans can’t get in the gym on a regular basis.
  • The vast majority of Americans don’t have the discipline to work from a home office.
  • That same majority lacks the basic business skills to run a corner grocery store…

Then too, consider the following in weeding out “the ninety percent:”

  • Those who trade for entertainment.
  • Those who trade because they like to gamble.
  • Those who trade because they hate their jobs.
  • Those who indulge in trading fantasies.
  • Those who trade without willingness to learn.
  • Those who refuse to admit their mistakes.
  • Those who are just plain stupid (dumb as a box of hammers).


WHY THE 90% IS GOOD NEWS

Once we move past the initial fear of the 90% barrier – the notion that “9 out of 10” is daunting – we can see that a 90% failure rate is very good news.

Why? Because of the zero-sum nature of the trading game:

  • If bad traders did not reliably lose money…
  • Then good traders could not reliably win it.
  • If the supply of bad traders dried up…
  • Then winning traders would be in trouble.
  • But the supply of bad traders is endless…

In Breaking Down A Market Edge, we explain how the mechanics of excess returns work. There’s only a set amount of alpha out there. Which means winning traders need must feast off of the errors of their inferiors in order to generate excess returns.

If this seems confusing, try thinking about it from the perspective of “who can make the fewest mistakes.” There is a collective pool of capital. The proper actions you take generate a positive expectation, which causes capital from that pool to flow towards your trading account. Meanwhile the mistakes you make generate a negative expectation, which causes capital to flow out of your trading account, back into the pool, and ultimately toward someone else. The picture is still one of a minus sum game, in which all participants compete and the house takes a vigorish — but you win by focusing deeply on the quality, clarity and consistency of your own actions. Your profits come from the 90%, but your focus is not on them… it is internal.

Good traders make money from bad traders (and bad investors)… and the supply of bad traders is endless. Human nature makes it so. For the past 100 years, the game has not fundamentally changed. The suckers will always hand over their money to the sharps.

 Livermore has been saying this since his day (via Reminiscences)

At first, when I listened to the accounts of old-time deals and devices I used to think that people were more gullible in the 1860’s and 70’s than in the 1900’s. But I was sure to read in the newspapers that very day or the next something about the latest Ponzi or the bust-up of some bucketing broker and about the millions of sucker money gone to join the silent majority of vanished savings…


It will not change for the next 100 either…

As a winning trader, your profits do NOT depend on:

  • a booming economy
  • a hot new technology
  • inside information
  • super powerful computing software
  • a secret “holy grail” trading recipe
  • a magical “genius” level talent
  • or anything of the above nature

Instead, your profits depend on the continuing presence of bad traders (the 90%) making mistakes that allow you, the 10% minority, to profit over time… and that supply will NEVER END.

So rejoice the 90% failure rate! That’s where the pile of money comes from for the sharps to harvest. As long as you don’t become part of the 90% trading will prove fruitful.

Going forward, how do you ensure that you stay in the 10% and don’t fall into the 90%?

  • Test your process! Before committing hard earned dollars to a trading program make sure properly vet your strategy. Does it make logical sense? Has it made money in the past? Do you have reason to believe it will continue making money in the future? Can you identify the sucker or group of suckers that will provide you with excess returns?
  • Continuously improve. The ‘vetting” process in trading never ends. Record your trading results, track the performance, and adjust fire.
  • Maintain emotional control. Play to win not to feel good. Emotions are a traders worst enemy, do whatever possible to control them and separate them from the trading process.
  • Never assume what you read in on a blog, textbook, of white paper is true! The trading advice might actually be helpful, but the 10%’ers will verify the claims through their own research. The 90% shortcut the process and immediately implement what they read on Fintwit or a random financial blog.
  • Join a community of like minded 10%’ers who will help you grow. Putting yourself in the company of an elite crew, will help keep your edge sharp.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.