Discussion: Multi-millionaire Traders

d.o.g. posted on 12-10-2005 at 03:24 AM

Technically, these fellows do exist. But they don't move in the same circles as dyed-in-the-wool fundamental investors, nor in the same circles as the SGX Locals trading their own money at the trading terminals. If you want to find these rich traders, try the carpark lots of the bulge bracket investment banks. Look for the fancy sports cars - Ferraris, Porsches and suchlike. These merchant banks (Merrill Lynch, Goldman Sachs et al) often have proprietary trading desks where their own traders put spare corporate capital to good use.

Successful traders can take home hundreds of thousands a year, and the bonus can be in the millions. Are these guys expensive? You bet. Are they worth it? You bet. When a chap earns you $50 million in a good year, a bonus of $1m or $2m is well-earned. Of course, a couple of expensive bad trades, and you're out of a job. So if you've been in the business 5 or 10 years, it's probably not just luck that's kept you afloat.

Acid test: call Mercer HR Consulting and pay for data on the salary of proprietary traders. Make sure you're sitting down when you read the report. These traders are very real, and the good ones are very well paid.

Most of the time, these fellows trade bonds, as the bond market is much larger than the equity market. As profit margins are slim, typically several basis points, the sums traded can be - and often are - very large (tens or hundreds of millions of dollars). It's not difficult to buy or sell $100m of sovereign bonds. The same cannot be said of equities - prices can change significantly by the time you're done buying or selling $100m of shares.

Of course, not all successful traders are rich, just as not all successful investors are rich. It depends on your spending habits, too. If your spending exceeds your income, then no matter whether you're a trader or an investor, you're financially doomed.

So stop arguing already and debate something else. There's more than one way to earn money in the capital markets, OK? And before anyone says proprietary traders don't count because they use other people's money, remember that Warren Buffett also used (and still uses) other people's money - all his limited partners paid him performance fees when he ran the investment partnership. Without those early payments, he would not have had the money to buy Berkshire Hathaway and begin his merry acquisition spree. After all, do you think he could earn enough from just his pinball machine and paper route to buy over a textile company?

Even today, at Berkshire Hathaway, Buffett depends on the huge float generated by customers' payments to National Indemnity, GEICO and General Re to fund Berkshire's acquisitions. Without this gigantic interest-free loan, Berkshire could not have grown as rapidly as it has, and Buffett would be a few orders of magnitude less wealthy today, perhaps merely a millionaire instead of a multi-billionaire.

So where are the multi-millionaire traders, who can show us their long-term record, and teach us a thing or two about trading? Answer: not here.

It's unlikely we'll ever see a successful proprietary trader here on this forum, because:

1. His livelihood depends on his skills - and he's not likely to risk breaking his own rice bowl by telling you how to do what he does. Long Term Capital Management (LTCM) did extremely well in the beginning until other firms took note and copied them, forcing LTCM into riskier and riskier trades, and finally outside their circle of competence, and they got wiped out. No good trader wants the same fate to befall him, so if he's got any sense he'll keep his mouth shut and his methods secret - at least until he retires. Think about the scammers who want your money and promise a 1% daily return - the people who ARE getting a 1% daily return are not going to tell you anything - they'll be too busy earning their daily 1%.

2. What could he learn here? As a successful trader taking home millions, the most important thing he could learn would be capital preservation, not capital growth - his job is growing the capital quite nicely already. All he has to do is learn to save some of his millions, dump them into AAA-rated government bonds, and he's set for life. So if he's active on any forum, it would probably be one for early retirees, financial planning or some hobby (car/boat/jet) forum. An investment forum would be almost totally irrelevant to a successful proprietary trader.

I'm not here to step on anyone's toes or slap anyone in the face. But I just thought the facts (and my $0.02) deserved an airing.