Trading: There Is No Safe Business

Many traders – and I have been for a long time – are looking for a safe trade on the stock exchange.

We hope to find a strategy that allows us to make guaranteed profits, as we know it from other areas, such as the economy, where forecasts and studies often have a higher significance than on the stock exchange.

If one knew, for example, that a company was particularly well positioned for a new trend, e.g. for electromobility or digitalisation, then an investment in the shares of this company would most certainly generate high and secure profits.

Or if one knew that this orchard on the outskirts of the village would be converted into building land in the next few years, then an investment in the field would certainly lead to a high profit.

Or if one knew that company X would be taken over by billionaire Y next week at a premium of Z percent.

Such guaranteed profits are the dream of every trader.

In principle, “trading” works in a similar way in business life.

Here is a little anecdote. When I founded my first “trading company”, which also used the term “trading” in its name, a lady from the trade office called me and asked me what goods I wanted to trade. She assumed that I wanted to open an import-export business. When I explained to her that these were stock exchange transactions, she advised me to change the name.

Buying and selling a commodity in business can only work with “secure profits”. Had the traders of the Silk Road not known two thousand years ago that spices from China would be remunerated with guaranteed higher prices in Europe, it would not have been worth the risk and strain of this risky and exhausting journey.

It is similar in the retail trade today, otherwise the risk of opening a shop and employing staff would not be an incentive. If, as a retailer, I know that I can sell, for example, sports shoes from a brand label at a recommended retail price set by the manufacturer and buy them with a “safe” profit margin of 30 or 50 percent, then that is a safe deal. Therefore this market is very limited and “gatekeepers”, like wholesalers with whom the producers trade exclusively, protect this lucrative business model.

At some point I had to realize that there is no such thing in trading, the betting on price movements.

The problem is that the supposedly secure profits are preceded by an information advantage that we can hardly find on the stock exchange.

There used to be something like this in the form of arbitrage transactions, when a trader bought a share on the Paris stock exchange and resold it on the New York stock exchange at a safe profit. The advantage was his information advantage, because the prices were perhaps telegraphed to him beforehand.

A few years ago – I don’t know if this business model still works – there were plenty of smart algo traders in Frankfurt who checked certificates for “mispricings” against their underlyings and then bought the certificate and sold the share on which the certificate was based and booked the profit. All they had to do was wait for the issuer to correct the price of the certificate.

But when we work with charts or patterns in fundamental or technical time series, this thinking does not work.

I have already explained in many other articles why this is the case:

For example in:

The unlocked bicycle


The dangerous game with the past

The main reasons are:

  • a past time series lacks future information, and this must (!) lead to an error if the projection is long enough
  • human behaviour is impulsive and often irrational, especially in stressful situations
  • Natural disasters or human error are not 100% predictable

If a trader relies too much on the expressiveness of a past simulation, this leads to the well-known “turkey phenomenon”, where, despite careful feeding, the poor turkey is presented not with the food but with the knife on the evening before Thanksgiving.

So how to deal with this insight?

For me, there are three ways:

1.) I accept that trading is a game of probability and that only those who manage to trade cleanly and disciplined (whether they win or lose) will win.
2.) I focus on strategies that offer maximum security, e.g. quality stocks that survive any crash or long-term investing with ETF strategies, as I trade you in the Index Manager.
3.) I immediately stop looking for the 100% strategy and burn money on the stock exchange (and make friends with step 1 and 2 or leave the stock exchange and spend the money on summer holidays instead).

“Even when I took losses, I went home happy because I acted the way I wanted.” – Mark Spitznagel

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