I recently responded to an email that asked my opinion about their situation; eighteen years old, not enthused about college, with a small starting stake (low five figures), and a desire to day trade their way to financial freedom. Since there are probably others in a similar situation, I have shamelessly reworked that response into this post, removing any identifying information, changing and tweaking a few things here and there, etc. Remember that my posts, as always, represent my opinion, and not advice or any type of recommendation (read my disclaimer).

The short answer is: get a job and trade on the side.

The long answer is, well, longer.

There were three main points addressed in the email, relating to the type of trading desired, the amount of starting stake, and the lack of enthusiasm about college. I’ve dealt with all three before on this blog.

Trading Types

Trading is trading, regardless of style, issue traded, or timeframe. Unless someone is buying for income, as in an annuity, a bond held to duration, etc., then that person is buying in order to later sell for profit, and that’s T-R-A-D-I-N-G. Value “investors,” get over yourselves.

People shouldn’t get emotionally entranced by any particular style of trading, whether it’s the excitement of day trading, or the intellectual superiority that many of the value folks feel as they re-read “Security Analysis” for the ninety-ninth time. What they SHOULD do (again, my opinion only) is investigate ALL types of trading, maybe try several on for size, and settle for the one(s) that best match their logistics and temperament. For example, action junkies should take up skydiving and not day-trade futures, and busy people with families and work commitments should think about mechanical trading on EOD (end of day) data, doing Forex trades at night, or “value investing.”

I tried to single out a couple of good day-trading blogs in my email, but there are several excellent ones out there that I know of, and probably dozens that I don’t know about, so any mention of just a few blogs will leave lots of deserving candidates out. Additionally, it’s worth exploring more than just day-trading. Let’s face it, just because someone’s infatuated with day trading at age eighteen doesn’t necessarily mean it’s a right fit for them. Check out my links page, it’s one of the best around, and browse through the variety of trading styles available. When someone finds a site on a style that seems interesting, they should read the site’s archives! ALL of them.

Starting Stake

Low five-digit capital isn’t enough juice to live off of via trading. The best of the best traders would be lucky to average 40-50% returns annually over a stretch of several years, and that’s the best of the best, with lots of luck, besides! Even a good, consistent methodology is going to find it hard to pull 25%-30% annually over the long haul (a stretch of years), and there are always going to be lean times, negative months or years, and drawdowns where equity just falls, and falls faster as one pulls money out in order to pay bills. I mentioned this phenomenon in Why Mechanical Systems Will Always Work.

People shouldn’t delude themselves with masturbatory fantasies about being “Super Trader” who turns $5K into $5M. They should settle for becoming GOOD at what they do, and have a process of continuous self-improvement so that they keep getting incrementally BETTER at what they do. Leave striving for being the “BEST EVAH” to those who didn’t get enough of Daddy’s love and consequently have “esteem issues.” This ain’t “Trading Places” and this ain’t “Market Wizards,” I’m talking about real people, building for the future, over the long term.

Here’s a quick and dirty calculation about capital needs. Say that I think I’m good enough to pull 20% annually on my stake; I want to compound it so that I can eventually go on auto-pilot, so 5% stays in. I want to compound faster than my cost of living goes up, so I better make that another 5% stays in, for 10% total. Now I have only 10% gains on my stake, in order to meet my annual budget. So to live like I have a $30,000 annual salary, I probably need to have at least a $300,000 stake. That’s before taxes. And, that only really gives me a 50/50 shot at survival, because if my system averages 20% but makes 0% some years and 40% in others, if I get a couple of bad years at the start of trading for a living, I might be saying “welcome to Wal-Mart” before too long.

I don’t trade for a living yet. I’ll be several more years of building the account, adding my savings to it, etc., before I take that step. Even after taking that step, I’ll be looking for non-trading supplemental income.

College

The benefit of college is solely that businesses use the degree as a screening process for (1) the capacity to perform boring, repetitive, entry-level work, (2) intelligence, and (3) breeding and pedigree, at least where prestigious colleges are concerned. Note that items (2) and (3) are things which businesses can’t legally screen for directly! Also note that as time passes, the functionality of item (2) has been diluted, hence the ever-growing focus on higher-level degrees! The fact remains that there are tons of jobs available to those without a traditional degree, and there are lots of resources for finding them.

More and more, having a few college credits under the belt is becoming table stakes for some of the better non-degreed jobs. If one is suffering from wet dreams about a job shaping U.S. foreign policy, or determining Goldman’s strategic direction, there’s really not much choice but to get a prestigious degree from a top school. If, on the other hand, one just wants to be gainfully employed in a good job, while working on financial independence for the long term through trading, there are lots of non-degreed jobs out there, and for the ones that need college credit and/or a degree, there’s always Junior College.

That all adds up to … get a job and trade on the side.