The Exchange Africa: Trader Summit, held in Sandton last Saturday, brought together a diverse group of traders and do-it-yourself investors to listen to a great line-up of speakers.
Sian Kidd, who came to fame after reportedly making more than £400,000 in 30 minutes on Black Monday in 2015, kicked off proceedings by sharing his insights on trading. He was followed by PJ Sutherland of Sutherland Research, who shared some of the knowledge he’s acquired from years of quantitative research and trading mean reversion strategies. He has done extensive work in developing and deploying quantified trading systems that have achieved significant results.
Freddie Herbst, a key member of the Brandseye team that achieved global recognition after successfully calling the outcome of both Brexit and the US election, explained the potential of sentiment analysis to create an edge in the markets.
Etienne Nel, one of the founders of ZAR X, outlined his ambitions for the new exchange and the potential benefits it offered issuers and investors. Garth McKenzie, the founder and editor of BDTV’s Traders Corner, reminded us of the need to measure success through the correct implementation of a trading plan rather than the outcome of a trade. He took the audience through his "worst trade ever" in which he made money and his "best trade" in which he lost money.
The highlight came from the world-renowned online innovator and financial teacher Tom Sosnoff, who has been trading options for 35 years and cofounded thinkorswim in 1999, tastytrade in 2011 and the newly launched tastyworks.
He continues to drive know-how to the retail investor with advice that stands in sharp contrast to Warren Buffett’s often quoted view that they are better off in an index fund as "it’s the best solution for people looking for the least amount of worry".
— WHAT YOU NEED TO KNOW ABOUT RISKIS THAT IN ORDERTO REDUCE IT, YOU HAVE TO TAKE MORE RISK
Sosnoff thinks index funds are restrictive and high-risk. Today’s markets, he says, provide the free technology, free data, access to market and product base that enable investors to challenge themselves.
"Not challenge yourself to read a balance sheet better than the next person, not to do the better homework on some fundamental research or to try to outguess some economist on what will happen over the next two years, but to create whatever winning percentage you want … to see how good you can really be in a two-sided market, where there’s virtually no ‘give-up to theoretical’."
"You can’t buy rich," he says. "You can’t go out and find a brilliant investment manager and say to him or her, ‘Here’s a hundred thousand dollars of my money, make me rich.’ It’s not possible, it doesn’t exist."
Because if you believe, as he does, that everything is random, "the manager that hit a home run last year is never likely to hit another home run.
"And that’s just industry statistics; people don’t outperform the averages — those who outperform one year, normalise after that. People ask: ‘What’s your track record?’ But the better question is: ‘What’s your methodology?’ And are you disciplined enough to stick to it?’
"Self-directed traders have the advantage that it’s their money and their intellect. So, instead of empowering money managers, empower yourself," he says, "because you can get small enough to do anything. Whereas the money manager that’s managing anything from a billion dollars to a hundred billion dollars, can’t participate in the opportunities you can.
"The key to success is in the ability to recognise opportunity and to take a chance," says Sosnoff. "Wealth is by-product of the ability to seize opportunity — you reduce risk by taking more risk. Nobody will tell you that. The industry will say that’s bulls**t. But, we’re not talking about taking more risk size-wise, we’re talking about creating more occurrences of risk [more trades].
"While 90% of investment advisers will tell you that if you’re in different stocks you’re diversified, we’ll tell you that only if you create enough occurrences, in enough noncorrelated underlyings, with enough different volatilities, with enough
liquidity and enough strategies, are you diversified. When markets go down every stock is correlated. What you need to know about risk is that in order to reduce it, you have to take more risk. We know, statistically, that you can’t manage risk. That the best you can do is stay small.
"Which brings me to the fact that there’s nothing passive about success," says Sosnoff. "It’s scary that we’ve become a complacent society of investors who believe that this is the only thing that works. Nobody would have said that in 2007 or 2008, but in 2016 and 2017 – sure, why not?
"Unfortunately, when there’s a complacency level like we’re at today, there’s no incentive to learn. And that’s a scary thing. Because, when you write that first cheque, you’re basically giving away 35% of your wealth to an investment firm.
"That’s what the numbers come down to after 30-40 years. When you tell your kids that, they look at you with that glassy look, but it’s an important message to get out there. [What’s more] passive investing has funnelled everybody into the same few stocks – 80% of ETF capital is invested in 20% of the companies that are out there and if you take out Google, Facebook, Amazon, Neflix and Apple, you aren’t left with much more."
The solution is to go your own way. The thing is, you have to commit to taking risk and that’s a hard thing to do, he says. "Losing money stinks. But losing is one of the necessary steps to winning. You have to understand that. And get used to it."
What are your chances of success if you take up the challenge? Sosnoff predicts that for 15% of people, "it’s just not gonna work"; 2.5% are going to have "a ridiculous level of success"; for the remainder it will be "a game changer – they will gain something – better decision-making, a better appetite for risk, a better understanding of the markets."
A word of caution: while Tastytrade offers some fantastic research and educational content, you don’t want to follow their trades too closely. Some who’ve tried have been burnt. Not because the Tastytrade team are bad traders, but because they are set up to react and get in and out of trades far quicker than anyone following can.
By all means, watch the shows, have a few laughs and learn a lot. But when it comes to trading, as Sosnoff says, "you need to become a master of your own destiny".
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