Stock market: The myth of genius stock traders

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I have heard countless stories about various folks being “genius stock traders”. In almost every of those stories, these are folks who haven’t really been trading that long, or at least, their success hasn’t really materialized until the last few trades.

This concerns me a lot, because the first thing you learn in quantitative finance (i.e., quant trading), is that you need to be able to separate skill from luck. Unable to distinguish those two, or even worse lying to yourself, rarely ends well.

I believe that it is possible for individuals to do well in the market, and consistently. But it’s hard enough that for the most part, most people shouldn’t try.

I have been trading for years and the following is some of my understanding from both self-study as well as my working experience in finance.

It’s good to be great, it’s better to be lucky

Most people don’t realize that it is extremely easy to be lucky.

In my 10+ years of trading experience, my best trade was 50x return in about 4 days. It was my first ever FX trade, and I had no clue what I was doing, but I turned 20,000 JPY to 1,000,000 JPY before I knew what was happening.

Right after that time, I was also lucky enough to make several correct calls on several stocks, cryptocurrency (including BTC). None close to the FX trade, but still they were successful. 

Be advised, none of those means I’m smart, successful or even had any clue what I was doing. It was just because I was lucky.

It wasn’t until a few years later when I realized that all those wins mean nothing. Looking back, all those trades happened during April to June of 2006. That’s when what was so called a “everything rally” happened. I read several articles suggesting a specific security / asset would go up, and I simply brainlessly followed the suggestions. Moreover, I later learnt that the articles I followed, their authors were “professional advocates”, meaning they keep on suggesting the same asset go up no matter what.

Yet, I made quite a profit regardless. I’m not a genius, simply lucky.

Win consistently vs. win big

Another thing that people don’t think very much about is consistency vs magnitude.

Personally, when measuring “how good” I’m, I think the “big wins” I made from those few trades mean almost nothing. Instead, this “how good” should be measured by how consistent I’m able to do good. And this is impossible without first knowing what I’m doing.

Given that market cycles take around 8~12 years, if you want to prove that you are “good,” you’ll need to at least be outperforming the market by around a decade or more. This shows that you can outperform in any stage of a cycle, and not just be good at buying levered products (e.g., BitCoin) during a bull market.

In order to be a genius trader, one should at least be beating the market for a decade. So next time you make a big win, remember:

  • Congrats! I’m jealous 🙂
  • You are not yet a qualified genius trader yet. Keep winning for a decade.