Martin Kronicle

Hi Michael,

I have a question. I am a 50 year old blue collar type of joe. I work in the food industry as a kitchen manager. I have always had an intense interest in the markets and have been educating myself over the years as far as how the markets work and who the players are.

You and Michael Covel are by far the best educators that I’ve come across. I have never actually traded before; I want to get more knowledge before I start. I will have between 40 & 50k in trading capital when I start. Trading to me represents independence and a chance to do things that I have not been able to do with my life. To me, it’s a challenge.

My question is, do you think that I am expecting too much from the markets? I have read that it’s not a good thing to expect the markets to do things for you. How do you balance this? I will be trading my own account; I’m not looking to manage other peoples money. Thanks for your time. I love your website and your intro to commodities course.

Bob D.

Expectations have built-in disappointments. I think you’d do well to think that the market will try to kill you and take all your money. Focus on keeping your losses small and start by trading 1 or 2 contracts to see how it feels. And by that, I mean “how does it feel?” – not “how do you think your trading is going so far?” If you feel scared, you should hold off.

If you do trade, grow your account and don’t take any money out. In other words, don’t trade and try to live off of the growth. You’ll always be trading with scared money.

It’s better to peel off  a chunk and leave it somewhere and trade the rest. IMHO, it’s better to be a blue collar joe b/c you’ll have an appreciation for the money and you’ll probably err to keeping losses small. You know how hard it is to accumulate that much in the first place.

Second, you probably have some ambition about you with this sort of background b/c things have not been provided for you, so my guess is your intention is rock solid. But you’ll only know for sure once you start managing risk.

With rates at historic lows, real estate markets soaring, stock market soaring, there were lots of estate planning seminars 2 years ago, helping wealthy baby boomers with the greatest transfer of wealth the world will ever know.

My guess is with the severe erosion of wealth that’s taken place, you’ll soon see advertisements on how to gift life insurance.

On first blush, Sean David Martin (no relation) might not seem too different from anyone else who claims to have made accurate market calls in the past.

However, this fellow committed fraud according to the SEC.

From the NYT:

By his own reckoning, Mr. Morton is a modern-day Nostradamus. According to his Web site, delphiassociates.org, the Dalai Lama sent him to a monastery in Nepal, where a fusion of Eastern spirituality and Western psychic techniques helped him develop the “spiritual remote viewing” system.

A spiritual remote viewing system…? That’s a whole other type of Martin Kronicle…

I wonder how long it takes for all these movie stars to get their photos taken down…

A trend following commodity trader advisor (CTA) who runs a separately managed account for a client is more of a fiduciary than a financial advisor under the current rules, as delineated in the NYT yesterday.

Here’s why:

-They run one transparent strategy

-They minimize losses

-They make much more money through Incentive Fees

-They are Long/Short, not Long-Only, so they can make money in all types of markets

A commodity trader’s Disclosure Document is easier to read than a Mutual Fund prospectus and there are not 12b-1 fees either!

In a stark contrast, trend following CTAs add to winners and sell losers – they don’t always come back. Conversely, Financial Advisors & Consultants do the opposite with their quarterly rebalancing act, effectively Robin-Hooding the winners to give to the losers. Counter-intuitive and counter-emotional to a trend follower. Diversification is a good start, but it’s just a start…

You can trend follow with mutual funds and sector funds a la Market Wizard Gil Blake.

The NYT ran article in the paper yesterday called Trusted Adviser or Stock Pusher? Finance Bill May Not Settle It about the brokerage industry.

I’m bearish on the industry, not for any other reason of how Wall St. branch managers dumb-down the advisors to the level of the client. That does not serve the client in any way. The internet is partly to blame as well: as the investors read and had more access to financial information, commissions dropped by 95%, thereby killing the stock trading business for the wirehouses.

Everything became, and still is, a fee-based wrap account – the ultimate neutering of Wall St.

Can you name one person in your life who has made a fortune investing in mutual funds?

Ultimately, I concur with those quoted in the NYT article: trading and risk management advice was never discussed. After passing the Series 7, we were trained how to sell and market the firm’s goods and services. At no time were we taught how to make money.

As if Johnny Cochran himself gave them the mantra a la “if it doesn’t fit, you must acquit,” it was ingrained in us that:

-you have to buy and hold (long only)

-you have to diversify

-you can’t time the market

Worst of all, they can’t really go to cash. It’s not ethical to garner management fees for managing cash. How defensive can they possibly be?

Nowadays you have the advisors repeating this nonsense and they have no understanding of what they’re saying. Training them this way robs them of making a difference and it robs the clients of having a real money manager. It’s not their fault though, it’s on the shoulders of the Wall St. firms that have trained them and their branch managers.

This model breeds complacency. It breeds “sign ‘em up. Wrap ‘em up, and move on”…the mantra for handling a new account.

-have them sign the new account documents

-wrap them in a fee-based asset management account in a long-only mutual fund or separate account platform

-go after new assets, referrals, or new accounts – move on

By repeating this mantra, you don’t have them focus on making clients money, but on marketing.

By ingraining “diversify, buy and hold, and you can’t time the market,” in their heads, the Wall St. firms have gotten perfectly capable people to surrender their intelligence at the door before they have a single dollar in AUM.

A few ideas towards a solution:

-Pay advisors more money and increase their payout to a minimum of 50%

-Make them work from home to save rent for commercial real estate, but allow them access to a conference room for meetings

-Incent them with bonuses for the most stable account balances – happy clients are sticky

-Cut head count – there are too many advisors at the wirehouses, which are not distinguishable

-Do away with the FINRA Series 7 exam

-Eliminate options trading – 90% of the complaints generate 4% of the revenue – are you crazy?

-Train advisors properly in trading and risk management in fundamental & technical analysis – an abbreviated CMT / CFA combo

-Use mutual funds, if at all, only in retirement accounts with less than $100k in them

I was talking to an old friend yesterday about what the environment is like these days for anyone who wants to become a CTA or prop trader. He works in NYC for one of the largest FCMs in the world, and he gets solicited by all shapes and sizes, so he would know. He’s got 30 years experience on the FCM side.

According to him, the reality today is that an emerging CTA needs almost $50MM in assets to get an allocation from a big fund or family office in this environment, as well as a great track record. At least for the time being, gone are the days of a 2-year track record and $20MM in Assets Under Management (AUM) to be considered an emerging CTA.

The catch-22 here, to me, is that if you have $50MM in AUM, you are – at least cash-flow-wise – an established CTA: even at 0.50% Management Fee, you’re cash flow is $250,000 before Incentive Fees.

Another difficulty, in the short term, is that many of the seeders got hammered and/or went bust as a result of the subprime morass. These allocators allocated money to many different types of managers, not just commodity traders and CTAs. Many lost over $10B in corpus, and thus, don’t have it anymore to allocate so they are being exceptionally picky.

I’ve written about How to become a successful Prop Trader or CTA recently including how to use social media, so this is a bit of a corollary.

The great thing is that this situation is not locked limit down. Markets and environments change, so you must persist and be determined.

If you are on the fence about what to do, you might consider becoming a prop trader at a reputable prop trading firm – where they will seed you and train you – instead of launching at CTA in such a tough environment.