One of the things I am regularly asked about being a stock trader is this: “But isn’t it gambling?”
And whilst I have an edge – that is, something that helps me win in the long run – essentially, trading is gambling.
Think about the casino. Many punters turn up to try their luck and gamble. But the casino is gambling too. Only the casino has an edge.
The roulette wheel. A wheel of 36 numbers, half red and the other black, with punters betting on odds and evens. When even numbers win the punters keep the cash from the odds’ wagers, and vice versa.
But there is another number on the roulette wheel – a green zero. If the roulette wheel lands on this the house wins. This means that with every spin on odd and even numbers are netted off, but in 1 of 37 chances the house wins. This 1 number gives the house a 2.7% chance of winning, and 0% of loss, and when it wins it keeps all of the money wagered. This gives the house an edge.
Being a stock trader is about managing risk. Many people think of trading as being exciting and exhilarating (and I’d be lying if I said I didn’t get excited about trading), but the first and foremost lesson for trading is to manage the downside.
This is because capital compounds. If you have £10,000, and earn 10% a year, then you’ve made £1,000. But earn 10% on £11,000 and you get £12,100 – you’ve made £1,100.
This exponential effect means making money becomes easier the more money you have. It compounds. But it also works against you. If you’re 50% down, you need to make 100% just to get back to where you are.
Compounding is one of the most misunderstood and underappreciated factors in life. Through the power of compounding, if you invest a small amount of money a month every month into a passive stock market tracker, there is a serious chance you will become an equity millionaire (for more on stock market trackers you can find information on my website, or download my book from www.shiftingshares.com).
Not just that, but everything you apply yourself to has an exponential and compounding effect. The more you practice, the better you get. At weightlifting. At coding. At trading. At anything.
Managing risk is about staying in the game, and protecting the downside. Never forget this.
Putting in the hours
Whether you’re a trader or anything else, you will get out what you put in.
My day starts at 05:00, when I get up and hit the gym to lift weights and train. This wakes me up and pumps endorphins into my body, making me feel good and firing me up for the day.
The news feed for the UK start market begins at 07:00, and so I begin analysing and assessing news for opportunities to trade, before the stock market opens at 08:00.
From then on, it’s continuous trading until 16:30, and from then on I’ll take a quick break or earlier if the market is quiet, before reviewing the trading day, the charts of stocks and other information, and I’ll write or work on my consulting business. I would say I’m probably working 12 hours a day on weekdays, and I put in extra hours on the weekend too.
Why? I love what I do, and I’m lucky to be able to do this as a job. If you want to be excel at something, then you have go beyond average. Everyone wants to be better than average, but they don’t want to work harder than average. Elon Musk, the founder of Tesla Motors, once said that if you’re doing 70 hours a week (an insane amount) then you’ve doing almost twice as much in one week than someone who is doing 40 hours a week. And guess what – this time compounds. Just like money.
And by the way, if you’re not getting up at 5am – don’t worry. I was sleeping till 10am when I was 21.
One thing that should be taught in schools across the country is personal finance. This is because if more people were taught how to manage money, then more people would have more of it and become wealthier.
That TV where you pay “only” a certain amount a month in Brighthouse? You end up paying over twice the value of the TV over a few years. It pays to do the maths on things.
The difference between rich people and poor people is that rich people pay themselves first. Poor people pay others first, and leave nothing for themselves.
Adam earns £10,000 per month, but £7,000 goes towards his mortgage, £1,500 a month on his car, and another £1,000 on socialising. He spends another £500 on buying lunch and coffee at the office, and so after everything at the end of the month he is almost out of money.
Adam has a cool life. He has a big mansion, he always has the latest new car, and he dines at fancy restaurants, drinks at expensive clubs, and generally has a good time. If you looked at his Instagram – you’d think he was rich.
Joe earns half of what Adam earns – £5,000, but he has a modest house at £1,000 per month. He got rid of his car because he didn’t use it, and public transport costs him £500. He takes his own lunch and rarely buys coffee at the office, but he does enjoy eating out once a week and so he spends £500 a month. At the end of the month, Joe is transferring £3,000 to his Stocks & Shares ISA which invests in the stock market and returns him around 8% per annum.
Joe doesn’t look rich. From the outside looking in, he dresses nicely but not extravagantly, and nobody would suspect him of being wealthy.
But after 20 years, he has £1,788,841.66 in his ISA account. And he didn’t even do anything aside from regular contributions through thick and thin.
This is the difference between a rich mindset and a poor mindset. When a poor person’s salary goes up, their lifestyle increases and the savings – if there are any – stay exactly the same.
But a rich person knows that money works for its owner, and so rather than working to earn money just to spend it a rich person earns money then lets the money work for them.
There is an increase in the FIRE community these days which I don’t entirely agree with. Making yourself miserable for 20 years to retire early seems like a bad trade. But don’t be like Adam either – who works so hard every month and stays poor his entire life.
Ultimately, the best way to acquire wealth, is to increase your salary and earnings and put the money to work. This is why I became a trader, because I wanted my money to work hard for me.
Trading is hard work, and it’s a profession that requires long hours and a passion for learning. Whilst in theory I can work from anywhere, I am a slave to the market’s opening hours and so when I’m on holiday in the Caribbean I end up getting up at 2am to check the UK stock market news.
Whatever you choose to do in life, if you don’t enjoy it and are doing it purely for the money, you will find it tough.
Most people should invest in index trackers which passively follow the stock market.
A stock market tracker that invests in the FTSE 350 is an investment spread across the top 350 companies listed in the UK. Stocks get promoted and relegated just like in football, so a FTSE 350 will stay invested in the top 350 companies without you having to do anything.
You can learn more about the UK stock market from my website at www.shiftingshares.com.