Why most traders fail

You can use the terms trader and investor interchangeably on this one...

What I like best about the Larry Benedict chapter in Jack Schwager's Hedge Fund Market Wizards  book is that it opens with a story about repeated failure. Before becoming the uber-successful founder of Banyan Capital Management, Benedict failed and failed repeatedly but kept at it, using the proper discipline to assure that failed trades wouldn't knock him out of the game and never looking for a shortcut to make up for them. 

Here he discusses why this is so important: 

Why do you think you have been successful whereas so many traders fail?

Since I started in the business, I have seen a number of traders who ended up committing suicide or being homeless. The one trait they all shared was that they had a gambler's mentality. When they were losing, they were always looking for that one trade that would make it all back. I learned early on that you can't do that. This is a business where you have to work. That's what I do. Every day I make hundreds of transactions. I grind out the returns. If you look at my daily returns, you will see there are very few big up days.

A lot of traders (or investors) approach this business with the idea that one or two "big" moves are going to change their lives. Or that after a string of small loses, one coup de grace is going to get them "back to even" or make up for the slump. And while this is certainly possible, it is not likely. Moreover, for every success story you can find in which a huge gamble paid off, you will find countless tales of woe.

Larry Benedict's above comment got me thinking about my friend Greg Harmon at Dragonfly Capital, whom I often link to.

Greg has been crushing the S&P 500 since he's launched the blog and newsletter service in 2011. But he's not done so because of a big call, he doesn't point his bat at the centerfield stands and talk about 10-baggers or grand slams. No, Greg grinds it out, exactly like Benedict discusses.

In his recently posted examination of the Dragonfly track record, Greg notes that he's done 765 trades over two years, with 484 wins and the rest losses or break-evens. He's using very specific entries and exits, working with equities and options, playing both sides of the market. This isn't a 9-to-5 gig or a pastime, he's a professional.

Trading is a business in which you have to work. Larry Benedict will tell you that, Greg Harmon will tell you that, and anyone who's made it will probably say the same. Bernard Baruch, one of history's greatest market participants, made his first rule of investing "Don't speculate unless you can make it a full-time job," and this is still pretty elemental advice decades later - in fact, in today's markets it's probably even harder for the hobbyist trader.

Hitting it big can happen randomly, and to anyone, but then what? Can you do that twice? Thrice? Probably not. So the question is whether or not "grinding it out" is really what you want to do - is really something that you are capable of doing. The statistics say that you are probably not, emotionally or physically, but no one will fault you for trying.

Just make sure it's what you really want, because if it works out, it will only be because you've earned it.