Wednesday, October 11, 2006

Watch lists, ads, and vendors

Jimmy, over at Trend Following with CANSLIM wrote a piece on trader watch lists that reflects my own opinion about bloggers posting stock watch lists. He says, "I sometimes find watch lists funny... Most people who post up lists will point out all the great stocks they posted up. 'If you bought X stock when I posted it, you would have a XXX% gain!' They don't mention the losses, 'If you bought X stock when I posted it, you would have had a margin call!'" Interestingly, a few people with ads on their sites are getting pretty defensive in the comments section of Jimmy's post.

There's nothing wrong with having ads, but realize that as soon as you put them on your site, you're more than just a trader, you're also vendor. Ads can make a site look more authentic, but they can also be a red flag. I know enough to filter out the good content from the bad, but there are a lot of impressionable people who visit our blogs and websites that don't.

I wonder if traders look at the ads on their own sites? Most of the ads I've seen on trading and finance related sites link to pyramid schemes or aggressive vendors that could be a mismatch for the reader, or worse, outright fraud. I would never dream of posting a link in the body of one of my blog posts to just about any ad destination I've ever seen based on the merit of its content. I don't believe in protecting people from themselves, but when they come to me to learn in good faith, I'm not going to point them in the wrong direction.

There's a relevant discussion going on over at Trader Mike's blog. Michelle says:
  • Other criticism directed at trading blogs is they do not say anything these critics do not already know, that you can get valuable information only if you are willing to pay, and if these bloggers were good at what they do, they wouldn’t be blogging. Apparently these critics have not considered perhaps the reason why a trading blogger writes is because he has something to write that has merit to someone, and he has a generous spirit, but nothing to sell — he is already making a good living.
I would disagree with the statement that blogs with ads aren't selling anything. Regardless of whether or not there are ads on a blog, I do feel that most highly read blogs add value because inevitably there will be readers who are being introduced to the content for the first time.

In the comments over at Jimmy's blog, No Doodahs points out a trader's cost of not being some kind of vendor:
  • If a "good trader" could make 40% annual and needs to take 10% off the top to pay for living expenses, or that same trader could make 40% annually and defray those expenses by having adverts and/or selling merchandise, which is smarter? Which will get that "good trader" retired faster? By the way, 10 years of 40% gives you equity that is twice as much as 10 years at 30%.
I guess my counterpoint is that if our hypothetical trader cares about the difference between having $7mil and $14mil at some fixed point in the far-away future, he would be better off managing accounts and collecting the fees and performance incentives over that time period.

About a year ago an old friend of mine had heard that I was knowledgable about trading. He called me up and started asking me very basic questions about options. I knew he was beating around the bush, and sure enough I found out what this was about. He asked if I would go with him to an Optionetics seminar, mentioning that he had 2 tickets. I told him not to even bother with it, that it was crap. He argued that he had went to the same seminar a few days ago and was interested. He wanted me to tag along and look for anything suspicious and share my general opinion about it. I agreed since it was only an hour long and I didn't have anything else planned that evening.

A few days later I arrived at the seminar. The hotel conference room was full of probably 30 people, with at least half looking like they had been invited in off the street to fill up seats. My friend warned me that the guy giving the seminar was a slick salesman, and as soon as I got a look at him I almost laughed at how slick he looked. As he pointed at slides and moved around on the stage, he kept rousing the audience and asking us rhetorical questions to invoke a peer pressure crowd response. It was obvious that many people in the crowd had practice with this sort of thing on Sunday mornings, and that slick guy worked it. He stopped looking at me when he would rally his audience because I wasn't joining the hype, and my friend was probably too embarassed to get into it like he probably would have if I wasn't there.

The worst part that sticks out in my mind was when this slick guy told everybody that people who bought stock were suckers. He claimed they had a 1 in 3 chance to make money because stocks could, A) go up, B) go down, or C) stay flat. These uninformed masses were just giving away their money because they only profited when stocks went up. If you took the optionetics course he was selling, you would learn how to make money no matter what stocks did.

This premise is completely false. I've won free lunches and all kinds of change from people by playing a similar game. It works like this: after buying in for a 3:1 jackpot payout, the buyer flips a coin and I flip a coin. The jackpot pays out if both coins land heads-up. There are 3 possible outcomes to this game, let's look at them for a $1 buyin:
  • Two heads land. I keep the buyin and give the $3 jackpot, so -$2 for me.
  • One lands heads and one lands tails. I keep the buyin, so +$1 for me.
  • Two tails land. I keep the buyin, so +$1 for me.
When negotiating the game, it should be pitched this way so as to represent a game of pure chance with 3:1 payout on 3 possible outcomes. However, the probability of the outcome with one coin landing heads and the other one tails is actually twice high as the probability of the other two outcomes, giving me an edge. People who buy US stocks usually have a similar edge: the market's natural upward drift. Unless, of course, they trade too frequently thus reducing portfolio correlation to market direction and large transaction costs to crowd out the edge, or fail to diversify enough for the edge to materialize.

So anyway, after the seminar, I spoke with my friend about all kinds of reasons I thought it was crap. But he still wanted to do it. Even after what I told him, he asked me to reduce the cost of the course by signing up with him and getting a two person discount! Unbelievable. I said, no way, and to watch me go verify these suspicions with the slick guy who gave the seminar.

I waited my turn to speak with him, and the first thing he asked me was, "So are you going to sign up today?" He was kind of smiling. As soon as I asked my first question, he stopped smiling. I asked him about the hedge fund he mentioned that was run by Optionetics founder, George Fontanillis. I pointed out that the hedge fund could potentially be on the other side of a lot of the trades recommended in the course, and how could I be sure that wasn't going to happen. You know what he told me? "I'm not even supposed to mention the hedge fund. That's all I'm saying." He was threatened, and my friend could see it by the way this slick guy was frowning at me. I wasn't going to let him off that easily though. I kept grilling him until he just stopped responding to my questions.

There's more to the story, but we'll leave it at that. The point of that story was to show that there are harmful vendors out there who are selling it as hard as they can to whoever they can. There are also curious and well-intentioned people like my friend, who didn't know enough to see that what was being sold at the seminar was just hopes and dreams. That kind of mistake can cost an aspiring trader years to make up for.

17 Comments:

At 6:37 AM, Blogger Michael said...

For the record, that post was written by Michelle, not me (Trader Mike)

 
At 9:33 AM, Blogger jontait said...

I corrected the mistake. Thanks Mike.

 
At 11:42 AM, Blogger NO DooDahs said...

"I guess my counterpoint is that if our hypothetical trader cares about the difference between having $7mil and $14mil at some fixed point in the far-away future, he would be better off managing accounts and collecting the fees and performance incentives over that time period."

Some of don't want the big red "P" for "professional" tatooed on our foreheads. Lot less litigation risk in Google Adsense or Amazon affiliate marketing than in money management, and no government registration.

I do appreciate the sarcasm in $7 mil versus $14 mil, but think about this: 700K versus 1.4 mil. Realistically, living expenses from other programs could make that difference a reality, and I don't know about YOU, but with 1.4 mil I could find some nice quiet places to retire and live off the income alone.

Also, many of the bloggers with ads use programs that select the ads automaticaly, so there is little control over content.

 
At 1:15 PM, Blogger jontait said...

That wasn't sarcasm.

30% per year:
500000
650000
845000
1098500
1428050
1856465
2413404.5
3137425.85
4078653.605
5302249.687
6892924.592


40% per year:
500000
700000
980000
1372000
1920800
2689120
3764768
5270675.2
7378945.28
10330523.39
14462732.75


That is a $500k account, which I don't think is unreasonable for a trader who has been "pro" for a few years. 10% the first year is $50k to live on. We could take it lower, maybe down to, say $300k account, which would leave $30k for living expenses the first year, so after 10 years we're talking about $4mil and $8.5mil using your math. Not far off from $7mil and $14mil.

In order to get the result you're talking about, you've got to plug in $50k starting capital. That means $5k living expenses? Maybe for someone living with their parents. On top of that, $50k is just plain undercapitalized.

I didn't want to make the assumption that our hypothetical trader was undercapitalized because it makes the argument too easy: if he cares about money, he's quit his job too soon.

"Also, many of the bloggers with ads use programs that select the ads automaticaly, so there is little control over content." These bloggers choose whether or not the ad programs are there or not in the first place, so don't try to take the responsibility out of their hands. Not to imply that it is irresponsible to have ads, what I mean is that a personal blog author is responsible for ALL of the content on their blog because they have the power to change it.

 
At 5:00 PM, Blogger NO DooDahs said...

I've edited this comment for length and content. Boiling it down, so to speak. More to say, not enough time and not worth more than this …

Here's a hint – when you want to do a critical post titled "watch lists, ads, and vendors" – don't have two posts titled "watch list for _" in your recent post box and don't open quoting approvingly from a blogger that has watch lists AND ads, including one for "exact buy and sell signals" at the moment.

If you take that $500K account gaining 40%, and each year take $50K out of the profits, adjusting that $50K for inflation of 4% annually, what happens? That $14,462,732.75 becomes "only" $10,650,896.47! And just what is $50K annually, adjusted at 4% inflation, for 10 years? It's $674,317.60. So how does $674,317.60 in income "magically" defray $3,811,836.28 in equity growth? Through COMPOUNDING. Being a "vendor" is a business decision.

 
At 7:58 AM, Anonymous Yee Sian said...

"Here's a hint – when you want to do a critical post titled "watch lists, ads, and vendors" – don't have two posts titled "watch list for _" in your recent post box and don't open quoting approvingly from a blogger that has watch lists AND ads, including one for "exact buy and sell signals" at the moment."

There is a distinction between the watchlists Jon posts, and those that he is referring to. I have yet to see Jon post up the performance of his watchlists, nor attempt to claim credit if it is successful.

Just because he is of the same opinion as the person he quoted from on a certain issue, does not imply that he has to take responsibility for the other person's actions. I do not see any advertisments nor banners on Jon's blog to date.

 
At 8:16 AM, Blogger Tyro said...

Just a comment on the 40% vs 50% thing...

I think you are a bit out of touch with reality if you think that a lot of the people who have blogs with ads are trading accounts where a 10% would account for $14 Million dollars. I think you're even more out of touch if you think that any of these trading blogs, even the good ones, can rake in $14 Million dollars in ads.

A far more likely scenario would be a trader with a $100k account who is contemplating the difference between earing $50k/yr with ads and $40k/yr without ads. That extra $10k/yr may be enough to kick back to the principal and compound it.

There are some traders, like Ugly who are both very popular, but also not very profitable. The extra cash that they generate from revenue can make a big difference to them.


You have to remember that these people are entertainers. Sure, they're also traders, but they're providing a service and there's no reason why they shouldn't get an income based on this, especially if they're successful at it (entertaining, that is).

It's just a shame that their entertainment income is at odds with their trading income.

 
At 8:24 AM, Blogger Pradeep Bonde said...

How is writing about previous calls or market analysis and illustrating the thinking behind trading, which you criticise different from your example about your friend not listening to you about not following your advise about options. Only if he had listened to you, he would have not got conned by slick guru.
How is that different from me saying look why I made a long call on housing stock in August and why it worked and you would have made money following it.

 
At 9:52 AM, Blogger jontait said...

"Just a comment on the 40% vs 50% thing..."

It was 30% versus 40% in the example No DooDahs and I were discussing.

"I think you are a bit out of touch with reality if you think that a lot of the people who have blogs with ads are trading accounts where a 10% would account for $14 Million dollars. I think you're even more out of touch if you think that any of these trading blogs, even the good ones, can rake in $14 Million dollars in ads."

The $14 million was the total stake of the trader who compounded a $500k account at 40% annually for 10 years.

"A far more likely scenario would be a trader with a $100k account who is contemplating the difference between earing $50k/yr with ads and $40k/yr without ads. That extra $10k/yr may be enough to kick back to the principal and compound it."

In my view, guys who try to go pro with this small of a stake are dramatically increasing their probability of washing out. Why not line your ducks up all in a row? I guess for some people it is better to go from one grind to another and leave trading stake critical mass to chance. Can't say I appreciate it.

 
At 12:06 PM, Blogger jontait said...

"How is writing about previous calls or market analysis and illustrating the thinking behind trading, which you criticise different from your example about your friend not listening to you about not following your advise about options. Only if he had listened to you, he would have not got conned by slick guru.
How is that different from me saying look why I made a long call on housing stock in August and why it worked and you would have made money following it."


Because following calls IS A BAD IDEA. I could write a whole post about this, and maybe I will when I feel like making the time. When people "make calls" to provoke envy and drum up sales/hits, they are playing a game that has nothing to do with trading.

 
At 5:12 PM, Blogger Ron Sen, MD said...

I don't have ads on my site (at least as of today, because I think I have more cred without ads (less money, too).

I wish I could say that I can make a living by trading, but I can't, because frankly my analysis is better than my trading (I'm working on it).

Similarly, I know a lot about playing 'wing' in basketball, and could probably 'coach up' a talented athlete without enough background in the game. But as for playing in the NBA, I'm a balding 51 year-old guy. So sometimes you can provide good information, but not necessarily be at the top of your game.

 
At 11:42 AM, Blogger Allan said...

I tried to police ads on my site, but Google didn't like it and threw me out of their ad program.

 
At 8:02 AM, Anonymous Yee Sian said...

"Similarly, I know a lot about playing 'wing' in basketball, and could probably 'coach up' a talented athlete without enough background in the game. But as for playing in the NBA, I'm a balding 51 year-old guy. So sometimes you can provide good information, but not necessarily be at the top of your game."

I suppose the point in contention is not about the quality of your posts, but the quality of your advertisements. While you may be providing good information, the ads on your blog may be directing your readers to stuff that are not.

In that case, you should charge your readers for the information, and not charge other sites to put their advertisements on your site. While both means will help make a person money, the former ensures that you are in charge of the information you provide, while the other does not.

 
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At 2:30 PM, Blogger contrary canary said...

I think you can have a legitimate blog with ads that happens to be the journal of a good trader. If a trader is making good fundamentally sound trades, I don't see the harm in sharing them with others with similar interests.

By the way, you seem to have good response and readership on your blog, and I like your forthright and honest writing style.

 
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