Why successful trading of commodities futures, foreign currencies and options depends on the exploitation of novice traders.
In this episode you’ll learn:
- How trading schools convince students to pay up to $50,000 to learn how to trade.
- Common mistakes investors make in managing their assets.
- Why trading is a zero sum game in that winners win at the expense of losers.
- What it takes to be a successful trader.
Show Notes
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Episode Summary
Host, David Stein, and his wife recently visited a furniture store where they met a salesperson who was attending a trading school. He had not taken advantage of his work’s 401(k) plan and was excited about trading becoming a source of assets for his retirement. David was surprised to discover that this salesperson had paid $23,000 to attend a trading school. Why would a gentleman in his mid-sixties with limited financial buffers lay down such a large amount to learn how to trade — something that by no means guaranteed success?
How much is trading school?
David did some investigating into the trade school his acquaintance was attending too understand it better. Beginning with a free, four-hour class, attendees of the school can choose to go on to a three-day course for $300 and then on to paying $23,000 for lifetime learning.
In the four-hour class, the instructor laid out three goals:
- To help students understand why they weren’t reaching their income and retirement goals.
- To train students to think and execute their money management like Wall Street professional traders, as that is the only claimed way to succeed in trading.
- To guide students through a personal financial blueprint.
Where you are making money management mistakes – according to trading school
David listened as the trading school instructor laid out all the ways people make mistakes in managing their money — which turned out to be pretty much any way other than trading. The main theme of the discussion was that, “traditional financial assets in vehicles are just insufficient.” Taking the normal route of investing and taking part in 401(k) plans was deeply discouraged. The instructor warned against the following:
- “Making individual stock decisions based on fundamental information.” Trusting the data and leaning on your own understanding will lead to losses, especially considering the scandals that have occurred such as AIG, WorldCom, Enron, and Lehman Brothers.
- Trusting brokers. Since brokers don’t have a fiduciary standard, they don’t have to work to your personal advantage. They simply have to be fair.
- Not understanding retirement plans. 401(k) plans, for instance, will be taxed later on with regular income tax, damaging the effectiveness of the plan.
- Investing in mutual funds because of their inconsistency and tax inefficiency.
- Failing to understand that there is a recession every ten years.
Is a patented trading process the answer?
The most appealing part of the trading school was the fact that their process was patented. But is trading really the only way to manage risk and be successful? While David did agree with some of the points made, he found several red flags in the process.
The instructor claimed that, “Markets are as safe as a bank if you know what you’re doing.” Using leveraged asset classes was given as the solution to all of the money managing “mistakes.” The instructor failed to give all the options and statistics, however. David rebuts many of the claims in the rest of the episode, so be sure to listen all the way through.
The patented trading procedures used by the school are built upon the assumption that many traders — especially beginning traders — trade based upon gut feeling. Being able to succeed more than 50% all of the time (the necessary percentage to sustain personal profit) rests upon exploiting the poor understanding of naive traders. The procedure also mentioned being able to overcome automated trading software, since such tools work off of predicated price trends. Traders can take advantage of novice traders and institutions that use such tools by following the trends and “footprints” of their movements and determine when the best time to make a trade is.
Is exploiting others, however, the best way to a secure financial future?
Trading is essentially poker
David explains that trading is a zero-sum game, just like poker. The winner(s) win at the expense of the losers. While playing such a strategy can certainly become profitable — as it is with Wall Street — it requires significant practice. Continuous practice in pursuit of future success isn’t always practical. And there are certainly other options and strategies other than trading and exploiting novice players. A zero-sum game isn’t the only solution. David shares that he would rather not have to worry about being better than 50% all the time. He says that he would rather, “Look at where we are today and try to make the best risk-reward trade-off with the opportunities that are there today.”
Be sure to listen to the entire episode for more in-depth details, numbers, and statistics concerning the trading school position.
Episode Chronology
- [0:20] Learning how to trade.
- [4:52] David takes a look at a trading school for himself.
- [9:15] Red flags in the trade school learning process.
- [10:32] Common mistakes in managing wealth according to the trade school.
- [16:29] Is the solution found in only trading and shunning the stock market?
- [19:48] The patented approach to trading success is based upon taking advantage of inexperienced traders.
- [25:09] Trading is a zero-sum game.
