Smaller Traders Have an Edge
Many don't think about this simple fact
I get questions from time to time that go something like: “Why should I think I can compete with the money managers on Wall Street that have staffs of research people, all the computers they could ever want, and spend full time managing their portfolios. Well, I once managed $600 million back in 1999 dollars which were worth a lot more than our current Fed/government diluted dollar. I had 10 people and 40 computers and a decent track record. That was hard work and I was paid well for the effort, so no complaints here.
But, I’ve now had the pleasure to enjoy retirement for about 21 years now and I can tell you without hesitation that I love being a “small investor/trader" again. Today traders in the stock market seem to be waiting on Nvidia tomorrow, so not any huge moves in stocks today. Imagine my surprise when I looked at my my top 5 most profitable positions in the portfolio and they were:
Cocoa
Orange Juice
Cotton
Live Hogs
Lumber
In addition, these five were about 82% of my profits in the portfolio today.
Back in my Trendstat days, I didn’t even trade some of these markets. If you have to go get 200 contracts of some of these markets and there’s only a couple of thousands of contracts traded all day long, you are going to have a problem picking up a meaningful amount of a position to make a difference in your returns good or bad.
The small trader has a distinct advantage here. To many smaller traders, including me these days, I only need a few contracts of any one market, compared to what I needed to buy or sell back at Trendstat. I can slip in and out and the market simply doesn’t care. It doesn’t hurt that with all those computers performing arbs on the larger contracts and the smaller mini and micro contracts that smaller trader can use these days, there’s liquidity at that smaller level of position sizes.
True Diversification:
Diversification in just stocks is getting harder and harder to achieve. Computers and the internet make the world a small place. New York, Japan, Australia, Europe and Britain stock markets are correlating more than they have in the past. Many traders would say to me, “stocks aren’t doing anything today.” To which I might say, have you looked at orange juice and I get a quizzical look on the face like, “You’ve got to be kidding me!” Cocoa? Lumber? You must be crazy!
I look at portfolio selection this way: What does Orange Juice have to do with stocks? Does the stock market care about what is happening in Cotton? Does Lumber care what is going on over in the Cocoa market? That is true diversification. One market could be doing nothing or going against you and I do have some going against my positions as well today, but when some like those mentioned above go my way, it can make a large difference in the way the day shapes up and helps keep the portfolio chugging along in the right direction.
Take a look at your true diversification, look at adding some “strange items” to your portfolio and enjoy the ride!
Being a small trader have a lot of edges. One can simply sell the position easily. It is not that easy for fund managers to opt out of positions.
But what we see at the very beginning being a small trader is that if we would have the same amount of money as fund managers, then we would have surely been profitable & successful traders. Nobody wants to deep dive into why the heck are they not able to make money & rather lose money. What are the pitfalls? What kind of tweaks can be made in the system?
Rather we want to keep telling our selves self fulfilling stories just to keep our egos in sanity that we have skills but we don't have the adequate amount of money in the bank. But it is mostly opposite of this, almost there is bleeding fault in every one's system which they are not able to see.
Every beginner trader needs to deep dive and have both a naked eye & a thirty thousand feet view how they are trading.