The Minimalist Trader: HIGH OVERHEAD

• Posted by chicagosean
• on November 15th, 2010

This series of posts about becoming a Minimalist Trader is not a trading strategy. It is not a get rich quick scheme. It might not even be a get rich slowly scheme. Depending on your point of view, it might not even be about money at all.

Minimalist trading is much more about a lifestyle choice.

It is a choice to work on your terms. On your schedule. At your pace. And having the financial and emotional freedom to do so. We’re all different and have different needs. Some of us are perfectly comfortable and happy sitting at our computer monitors for eight hours a day. Most of us are not. This is about choosing what’s right for you – and putting yourself in the right situation to make it happen.

In an attempt to make it happen for you, we will tackle a number of enemies of the Minimalist Trader. Today, we will discuss what I consider to be the number one enemy: High Overhead.

Besides just flat-out poor trading and money management skills, high overhead has been the death of many aspiring market mavens. And it kills far quicker than many expect.

I once knew a guy who had a mediocre track record as a stock day trader. During the 1999-2001 internet bubble expansion and subsequent bursting, he made some respectable coin while trading in the same office as me. But as the market changed, he found it tougher to make money using his old intraday scalping techniques.

Emboldened with confidence that he could make money using a different strategy scalping S&P e-mini futures, he decided he wanted to open up a money management/hedge fund firm. With little money left from his previous successes, he decided to mortgage his house, max out his credit cards, and plow all that money into his firm. He rented nearly 1000 sq. ft of Class A office in a downtown Tampa, Florida bank skyscraper. The office had a reception area, a conference room, and a “trading room.” He was the only employee.

His plan was to scalp S&P e-mini futures. To accomplish this, he somehow rationalized that he needed a trading workstation that housed 16 COMPUTER SCREENS!! And believe it or not – in his head – he had a specific use for each screen.

Not his actual setup, but it looked very similar to this

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The most glaring problem that stood out when he embarked on this endeavor was that he had NO CLIENTS! He was essentially trading his mortgage in an attempt to build an attractive track record and to hopefully WOW potential investors with his impressive looking trading operation in a fancy downtown office space.

I asked him how he expected to stay afloat while waiting for his whales to swim ashore, his response was “… I just have to average about $500 in profits a day to cover my office rent and my mortgage payment.” When asked what happens if he can’t accomplish that, he responded with something about how in Florida, bankruptcy laws protect your house so at least he’d never be evicted from his home. Whether or not this was true, it certainly wasn’t a response I was comfortable with.

I don’t know the exact amount of money he was trading with, but I suspect it was in the neighborhood of $150,000. For him to make his monthly nut to cover his overhead of $10,000, on an annualized basis he needed to earn around 80% on his money annually – just to pay the bills!

This is no way to get a business off the ground. Trading or otherwise. Trading is hard enough. Why put yourself automatically $10K in the hole on day one of a new month?

Aside from the fiscal headaches involved with scrambling to make enough money just to cover your overhead, the mental toll this takes on a trader can be overwhelming. It affects your trading, your health, your relationships, and your decision making. You won’t sleep. You’ll constantly be edgy.

The first and most important rule in establishing yourself as a Minimalist Trader is to be almost overwhelmingly mindful of your expenses. Even if this means being stingy. Cash is your inventory. Like a 7-Eleven franchisee, without inventory you’re out of business.

Do you really need 4 computer screens? Do you really need to buy the latest Apple Desktop computer when your trusty old Windows XP computer works just fine? If you’re executing one or two swing trades per week, do you really need to pay for the most expensive internet service from Comcast? There is no right answer here. But make sure you’re spending your money for the right reasons. Be mindful of taking on financial burdens. Avoid debt at ALL COSTS! Because once you spend your money – your trading capital – it’s gone.

In my next post, we’ll tackle another enemy facing the Minimalist Trader: Over-trading.

By the way, the colleague I’ve mentioned in this post closed his shop in less than 6 months and I haven’t heard from him since (this was 2004). Sadly, I think I can guess what happened to him.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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