Day Trading

The day after New Year’s Day, I walked from my apartment to my new “office” on the Upper West Side. My wife’s cousin David Goldman let me use his apartment as a base of operations to make calls, send emails, look for a job and watch the market while he was at work. I would get a lot more done in a quiet apartment than if I stayed at home with my wife and two small children. It would also help me maintain my work discipline and a daily routine.

I generally wandered across Central Park going to and returning home from my new office even in the freezing cold. Walking across the park took only a few more minutes than taking the cross-town bus: my break through the North Meadow, along the Jacqueline Kennedy Onassis Reservoir, and under the Gothic Bridge always provided the perfect, peaceful distraction from a stressful day. 

As I started searching for a job, I focused on finding a similar position to my most recent experience, as that is typically the path of least resistance and what most people do. Besides, although I had not been satisfied with the environment at Houlihan Lokey, I had liked the work very much, calculating the fair market value of businesses and investments.

However, being unemployed also gave me a chance to see if I could fulfill a long-term desire to make money for myself instead of for others. After working for other people in companies large and small for most of my life, I wanted to see if I could run my own business. For many years, I had wanted to try my hand at day-trading, while I was also convinced I had what it took to start a hedge fund and manage others people’s money.

While sending out resumes, making phone calls, networking and going on interviews, I had an opportunity to try both. I opened a day-trading account and also convince a wealthy friend to allow me to manage some money his brokerage account.

I had no upside or downside in my friend’s account and was only allowed to by Blue Chip stocks or similar and sell call options against the stocks in the portfolio. My friendly investor accepted all the risks and took all the rewards for my handling of his portfolio in order to provide me with a track record—proof of concept—for my chosen strategy.

Although I was determined to succeed, day-trading turned out to be quite a costly learning experience. The market started tanking and I was not comfortable selling short. I tried various strategies and made numerous mistakes. In the end, I lost money.

At first, I bought straddles, hoping to make money when a stock such as Apple moved up or down more than a few dollars in a single day. Then I tried making money on earnings announcements. I also tried scalping—timing the small waves that most stocks go through at least several times every day.

It all seemed so simple and easy at first, but identifying the right stocks to trade turned out to be trickier than I had thought. When I watched the market to learn and practice without actually trading, I made great picks. If only I had been trading, I convinced myself, I would have made hundreds or thousands of dollars. However, when I actually bought a stock, it almost inevitably went the wrong way and I lost more than I could afford.

On the other hand, my little hedge fund performed almost perfectly, generating an average return of one and a half percent per month for three months. I was a hedge-fund wannabe—on my way to starting a hedge fund.

The covered-call strategy I used was nothing new and was much less work-intensive and less stressful than day-trading. It was also a more prudent and disciplined strategy—and it worked.

The overall portfolio had its ups and downs, but by selling options against the stocks in the portfolio month after month, I more than made up for the fluctuations. After all, I was selling time and volatility. How could I lose?

After three months, I had made my investor a good sum of money, and I had produced for myself a successful three month track record.

Although I would have liked to continue managing my investor’s funds, I was getting very skeptical about the health of the stock market, and my investor was becoming outright nervous. The market frightened us. He wanted to quit while we were ahead, and my gut instinct told me not to argue with him. We had accomplished our mission and agreed to end the experiment.

In retrospect, it was a great decision. I would have gone on to lose a significant amount of money. I might not have lost as much as a passive sit and hold strategy, but it’s hard to imagine that I could have made money with my strategy as the market began to decline sharply, bringing down the best of the best along with the rest.

Also, as a result of pulling out while we were ahead, my investor and I remained good friends, and he will not let me touch the bill when we meet for lunch.

With a brief but successful track record, I reached out to several acquaintances and firms that seeded nascent hedge fund managers, but no one seemed to be interested in my approach. It is difficult enough to raise money for a hedge fund when the market is strong and almost impossible when the market is weak.

At least I tried to be independent and work at something about which I felt passionate. Unfortunately, I was not successful at day-trading and the time was not right for starting a hedge fund.

Comments

[Tim J.]

You get to earn money and spend more time with your family. That really sounds good. Though it isn't easy, but what's life without a great challenge. Nice Article.

[mathew]

Very nice.......I'm sure it will help many people.....

job without office

[DaveinHackensack]

"It would also help me maintain my work discipline and a daily routine."

My father took a similar tack when he was laid off during the early '80s recession. We lived in NJ, but he would put on a suit and commute into Manhattan every day to his friend's studio/office, and make calls from there. He always said to treat your job search like a job.

If you are looking to get seeded as a hedge fund manager, you might want to try applying for membership to the Value Investors Club. The application is free, and if you submit the best idea of the week (by their judgment), you can win $5k. Plus, the founder of the VIC uses it to spot new hedge fund talent. Worth giving a shot.

Also, if you want to try to make a few extra dollars in the meantime, consider becoming an affiliate of my new site ( http://thehackensack.blogspot.com/2009/10/new-site.html ).

[Catherine Perry]

A great opportunity. You had an opportunity to actually bench mark two (2) desired skills the Day Trading and Hedge Fund Manager. You now have experience in both roles and know the pros and cons of what works and what doesn't work in both roles. You can now sucessfully move forward to pursue a future position that will allow you to build off recent experiences and maybe incorporate lessons learned in your future work.
You also have great freinds.