Why there are very few billionaire traders !

If you have asked to name some billionaire trader name come to your mind is probably Paul Tudor Jones. But if asked name some billionaire traders large list will click in your mind like Warren Buffett, George Soros, Howard Marks, Jim Chanos, Charlie Munger and list goes on .

Then where are those people who claim to have made 20%- 30 % in a day why they are not on Forbes list. Why there are only old folks who said stick to stock for large number of years made to that list.

Answer simple it is not that people are less intelligent or less competent but there are inherent structural deficiencies in trading which does not allow traders to become billionaire .

Timing the market

One of the most difficult things in entire universe is timing in market even world’s richest and one of the smartest  person in entire universe Warren Buffett agrees with this.

What market will price today depends not on intelligence of person or expertise in field but it simply based on demand and supply in market .If say one year old accidentally make a 100 million dollar trade then also market will take his opinion into consideration and adjust itself according to trade made by that child.

In order to time market you will need to know few things . What each and every trader and investor in the world is thinking about market and which stock trade he is thinking of making . For how long he will retain his views .Not only that you will also have to give weights to each opinions and that too based on  willingness and ability  to make monetary transactions in market .

If you could know this then probably you could time market. But CAN anyone read minds of whole world not  possible .

Large number of factors affecting short term prices

Let consider you know everything about Amazon stock you have ability to predict its prices in short term. If that happen then  you will earn whatever move stock makes in a day.

Initially you will make something like 1 million per day. Now this gain will daily add to your initial capital and thus you initial capital will increase day by day.

At some point of time you portfolio size will so large that you will find hard to sell and buy stock in large quantity.  This will cause liquidity problem and your trade will start affecting price of stocks.

At  extreme when you buy stock will increase and when you place sell order price will automatically fall to previous levels .

Someone will say we have universe of 14000 stocks .

But do anyone’s  brain have capacity to track all variable and analyze such vast amount of data of many companies moreover you have to tract geopolitical factors, economic factors and thousands of other things.

In short though we may have capital but due to limitations of market and mind we cannot use large sum of capital every day to do trade and earn big.

Transaction cost

If you see transactions costs in broader way, we have to pay certain percentage to broker then exchange fees, securities transaction, taxes, goods and service tax, cess depository fees and many more expenses that have to paid  at both time of buying and selling  this  adds to one to two percent of capital per trade.

This amounts significant expense if you are making transactions every day.

Take example:

A is trader makes 2 trades a day of 100 dollars .He is professional trader and  60 percent of trades become successful..

When trade goes right he earn return of 12 percent but he have a good habit of putting stop loss 4-5 percent below investment value.

Here total profit to investor is80 $-24 $ and total transaction cost is 28 dollars so expense to profit percentage is staggering  50 percent and that too in favorable scenario.

Many time target goes favorable but misses target by significant amount sometimes there is no profit and no loss cases and percentage of trades in profit is generally near to 50 percent .

But if we see in investors point of view then he buy once and hold for 2-3 years until it makes 70-80% to 2-3 times initial amount.

Social Psychology and Rationality

I think this is very often ignored point but is major reason for failure of traders

If an investor for long term then what the only thing he have to worry about is business fundamentals. Because no matter how irrational market is or how ignorant public and institutions are toward stocks the fundamental reality of company will eventually governing factor for prices and sooner or later price of company will catch up its intrinsic value. So investors do not have to worry about other noises. Then also many investor get driven away by emotions.

But in shorter tern there is no guarantee that market will remain irrational. If a trader is trading in any stocks or derivatives then he have to pay attention toward factors related to company like results news and their comparison with market anticipations.

Not only that there are other very broad range of factors also which influence short term prices

The list is long.

• Geo politics.
• Government policy decisions.
• Economic variables.
• Fear and greed emotions to present happenings.
• Interest rate.
• Elections results.
• News related to industry.
• Flow of money from institutions both FII and DII

And list goes on. Human Brain is not that capable of processing all such information and changes in it and it is impossible to know how market will factor particular news . There may be overreaction or under reactions or no reactions at all.

Taking about emotions when trader is in front of trading terminal there it becomes very difficult to control emotions and take rational decisions because every changing number create panic or greed.

Discipline

This is what most people lacks. Fear and greed are two emotions which prevent trader from taking rational decisions .

We have fear of losing what we have that’s why we tend to sell our loosing trade very quickly, On the other hand we are not ready for to accept losses that why we hold loosing trader which cost us more loss.

Taking about emotions when trader is in front of trading terminal there it becomes very difficult to control emotions and take rational decisions because every changing number create panic or greed.

This emotions are very active when we are in front of trading screen and prices are changing constantly each tick changes out emotion . All happens subconsciously without ever noticing by us .

Subduing our emotions require great experience and  discipline .

Bottomline

We don’t know why but some things look to exciting on paper but are far different (in negative way)in real life and trading is one of them. I think this is  one type of natural selection where long term investment is preferred over trading by nature.