Advice on being a trader

[The following is taken from p.43-44 of Inside the House of Money (2006) by Steven Drobny. (Interview with Jim Leitner).]

What advice would you give to a young trader who would like to be in your shoes in 20 years’ time?

They should be open to the entire spectrum of market experiences. I never locked myself down to investing in one style or in one country because the greatest trade in the world could be happening somewhere else. My advice would be to make sure that you do not become too much of an expert in one area. Even if you see an area that is inefficient today, it’s likely that it won’t be inefficient tomorrow. Expertise is overrated.

There’s a book called The Wisdom of Crowds (by James Suroweicki) that contains a lot of examples where the average results of a group were much better estimators than expert opinions. We wrongly tend to look at other people as experts. If you ask currency experts where an exchange rate is going, they are just as likely to be wrong as some average guy on the street.

One also needs to learn to fight certain human biases such as buying into stories. The thing that gets fundamental discretionary traders involved in trades is stories because we can grasp onto them. But, in general, it’s good to step away from the story and take it back to the numbers. Trading off a story is too amorphous. We need to quantify things and understand why things are cheap or expensive means. Then there has to be a combination of story and value. A story is still required because a story will appeal to other people and appeal is what drives markets. If there’s no story and something’s cheap, it might just stay cheap forever. But if there’s a story involved, make sure that you first look at the numbers before you get involved to be sure there is some quantitative back to the idea.

Where do you source your stories?

I read a tremendous amount of books and papers, I subscribe to research services, and I read The Economist, read it every week, and think about what you learned this week that you didn’t know the week before.

If you read about an oil discovery, start thinking about how to develop it into a trade. The idea is to do as much research as you can just reading and thinking about anything in the world before reaching out to your network. Developing a network by going out and metting groups of intelligent people is also very important.

Another thing that’s important is not to be afraid to be ignorant or ask questions. Learn to love to listen to people and when you hear something interesting, follow up on it. Don’t just think, “Well, that’s an interesting idea,” only to find out a year later that the company you could have bought shares in is now up five hundred-fold. You never want to say coulda, woulda, shoulda. When I find a really compelling idea that I don’t know about, I put a tiny amount money into it and treat it like a cheap option.