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What Can Traders Learn from Olympians

February 16, 2010

This weekend I spent a fair portion of my time watching the  Winter Olympics. It is a real-life field experiment where a spectator can gain some insight into what it takes to be the best in any discipline. Athletes get only one chance in  four years to compete for Olympic gold, and the stakes are incredibly high. What I find the most remarkable, is the disproportionate amount of preparation and training versus the time spent competing in the event. Many of the downhill skiers, or the speed skaters are in action for all of a few minutes in total during the whole Olympics. Few can begin to appreciate the enormous amount of personal sacrifice it takes to even compete at this level and the pressure that it creates for the athletes.  To me this situation is only loosely familiar having spent several years as a competitive swimmer in high school.  I would train for weeks-spending countless hours in practice staring at the dark line at the bottom of the pool. Once the competition finally arrived, I would stand on the blocks and realize that winning would all come down to what I could do in a mere 25 seconds or less. There was no time to think anymore-no turning back, and my heart was pounding with adrenaline. Once the gun sounded, the difference between myself and the next person was very small–it came down to talent, training, and execution. The higher the level of competition, the smaller the gap in talent and the more the outcome of the race was determined by the other two factors.

 The difference between the top and bottom 10% of athletes in any sport in the Olympics is remarkably small in terms of natural ability–unless you consider a fraction of a second statistically significant. It is a lot easier to predict that a favorite for an event will win a medal versus predicting the remaining distribution of places. The athletes that place the highest on average (other things being nearly equal), are simply better prepared,  better able to execute under pressure, and gracefully adapt to changing conditions. There were a lot of medal winners who made mistakes in either the qualifying rounds, or even in the main event. Sometimes they were the victims of bad luck or poor conditions. But the difference between the medal-winners and the other athletes, was that they did not give up and managed to recover and often improve. 

While I am not a full-time discretionary trader, it is not a stretch to assert that many of the same traits required to be an Olympian are needed to succeed in trading. Like it or not, trading is in fact a competitive zero-sum game, and to be a winner you have to be willing to make a lot of sacrifices. If you think that you can read a couple books, and trade from 9:30 to 4pm and then take the rest of the night off you are horribly mistaken. Just take a look at your competition: whether its high frequency, institutional, or just veteran independent traders, they probably have a leg up on you in every single area from education to experience. They are probably smarter than you too, and unlike the Olympics, they are permitted to play by a different set of rules with better equipment.

Talent is something that you can’t change–if you don’t have any of  it, then you might as well just become a passive investor. Even if you have some talent, given that you probably have less access to resources than most of your competition only thing you can change is: 1) how hard you train and 2) how well you execute in real-time with the money on the line. Here is the real truth: whether you are a discretionary trader or a system designer/quant (such as myself), if you want to have a realistic shot of succeeding you will have to work MORE than 40hrs a week and have LESS free time than the average office worker. Do you think any Olympians (no matter how gifted) simply showed up without a lifetime of practice?  Malcolm Gladwell is famous for highlighting that you need 10,000 hours to become an expert in just about anything. If this is the case than  trading probably requires 20,000 hours because the skills/knowledge needed to succeed are always changing. That means that if you really want to have a shot, you are going to have to sacrifice many things that everyday workers take for granted. You are not getting a paycheque to be average and follow the rules, a trader gets paid only for being better than average. These silly dreams people have of sitting on the beach and pressing a few buttons on their laptop are what make vendors rich–not their customers. NO ONE I know or have read about who is a SUCCESSFUL professional trader ever spent their early years on easy street. Invariably, all of their stories revolve around repeated failure and learning some very costly lessons the hard way.

Its not even about just working hard, its about working smart–and learning as much as possible while re-inventing the wheel only if neccessary. Find a coach, read plenty of books, take detailed notes, ask lots of good questions from good teachers.  You also have to specialize–athletes generally focus on one sport in the Olympics, and spend all their time mastering the most minute nuances.  It doesn’t matter what your style is as a trader, so much as it matters how well you know your own style. Ultimately if you do not know your own style inside out, you will lose confidence the first time you have a drawdown and completely collapse. This is where training intersects with execution. Would you want to do a backflip on a mogul run at highway speeds after having practiced a handful of times? Well that is what many traders expect to do, and even though they may have the capability of doing backflips they aren’t ready for the big time. The whole mental aspect of both sports and tradings is a huge topic that can’t be adequately summarized. But one thing you have to realize is that no matter how good you are, no matter how much you practiced, you are only as good as what you actually do during the trading day. Whether playing poker professionally, or in competitive swimming, I always noticed that there were a lot of people who didn’t make it simply because they couldn’t make this transition. To bridge this gap, you have to be confident, and you have to constantly monitor yourself to make sure you are doing what you are supposed to do–which is incredibly hard to do when things go badly. There is no one best way to tackle this problem, any more than there is a best style to trade. The key is you have to know yourself inside and out, while finding a method that works for you.

7 Comments leave one →
  1. Nick Danger permalink
    February 16, 2010 7:36 pm

    Research shows that 93% of active-trading individual investors underperform the broad indexes. Every year, Standard & Poor’s publishes their SPIVA scorecard and it shows, again and again, that the majority of the actively-managed accounts run by the pros underperform their indexes as well. Barras, Scalliet and Wermers have a paper on SSRN that shows that 1% — ONE PERCENT — of mutual fund managers have discernible, market-beating talent. (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=869748). Ken French’s research shows that investors pay as much as $100 billion more per year to the active management industry than they receive in benefits (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1105775). GET OVER IT. In the aggregate, active traders lose to passive investors. So it has always been, and so it will ever be.

    • david varadi permalink*
      February 16, 2010 10:20 pm

      hi nick, im well aware of these stats and to a point i agree with you, but that is only if enough players compete to make the market efficient. if everyone invested in index funds, the market would be a lot easier to beat than if everyone invested in hedge funds and mutual funds. Similary, if no one competed in sports, the average person would stand a much better chance of making the olympics. good comments, and important qualifiers to reiterate.

      best
      dv

  2. Ramon permalink
    February 17, 2010 8:46 am

    Nick, I think this needs some qualification – actively *managed* investments lose to passively *managed* investments, in aggregate, and by definition due to trading costs, as postulated by William Sharpe here http://www.stanford.edu/~wfsharpe/art/active/active.htm. If you think this is reason enough for me, as an individual *trader* (without the constraints of a fund mandate, or huge FUM that ‘moves’ the markets) to not participate in trading, then I think your are missing the point – trading for yourself is very very different to having a third party manage your assets.

  3. Henry permalink*
    February 17, 2010 5:11 pm

    Good to know you’ve been watching the Olympics david =)

    The studies pointed out by Nick is well known but are really missing the point of this post. Studying the entire mutual fund industry and comparing their after-fee performance that to a benchmark will naturally lead to misleading conclusions. See Berk’s 2005 paper, “Five myths of active portfolio management” accessible here at: http://faculty.haas.berkeley.edu/berk/papers/myth.pdf

    A more suitable comparison should be to study independent traders who are unconstrained in their mandate, and does not charge a fee. Only by studying this universe of market participants, one can start to see what separate the wheat from the chaff.

  4. February 18, 2010 2:14 am

    This article is so true!

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  1. What Can Traders Learn from Olympians | Financial engineering resource center
  2. ETF FOOL

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