Retail Trading and the Big Short

I love the puzzle of retail trading – but this post isn’t about how I make millions (because I don’t, and those posts are 99% bullshit anyway). It’s about why I enjoy researching company financials to make/lose about 8% a month.

If you don’t want a story, here’s what I did.

Note: retail trading is not an alternative revenue stream unless you are amazingly skilled, gifted, or lucky. You will probably lose money rather than make any. So only do this to learn a bit and have fun. This is absolutely not advice of any sort. I’m being totally serial.

1. Signed up for eToro – cheap fees but expensive to withdraw your money ($25) so I decided that any money I put in my account for investment I would leave in there for a year.

2. Created a ‘watchlist’ – this is a list of stocks, commodities, currencies that I wanted to keep an eye on.

3. Picked a trade when I saw an opportunity – I saw a couple recently that I wanted to invest in for their IPO (initial public offering, the first time their stock has been made available for the public to buy).

4. Deposited enough to cover 4 stock in case I needed it– the minimum for a 5x leveraged trade is $50, so I deposited $200.

5. Bought short CFD in Beyond Meat, long in Uber, long in a biotech company, and long in Oil. I set my ‘stop loss’ for all of them at 20%, and the ‘take profit’ at 40%.

6. Took a profit from Beyond, Uber, then ploughed it back in and lost it when the market corrected. Then went long on Beyond again and came out as soon as I’d made my money back.

7. Had conversations with my brother where we talked about how frustrating that a vegan burger company’s stock was so volatile.

8. Still holding my Oil and biotech CFD – they’re hovering between a few dollars up and down each day. I’m paying fees of $0.03 per day, so I’m going to hold them for a month and hopefully make a bit.

9. Waiting for an upcoming IPO that I’m going to put upwards of 70% of my capital into, but it’s been pushed till next year, so I’ll just leave my money in there. Unless I see a massive opportunity (like Beyond finally correcting down to about $50) I’m not playing again until next year. I also hold shares in another company that is going public next year, so I’m crossing my fingers that I get a good return.

10. I make about $10 a month on this stuff – and it’s not even money I can rely on. But it’s a bit of fun for me using money I can afford to lose if I need to. Plus any positive at this point is very good – 77% of people using these platforms lose money, so I want to stay in the 23% for giggles. To put this into context – I saw an undervalued fighter who was boxing at the weekend and with a £10 bet made more on that win than all my profits from trading this year.

Update: it’s March 2020 and I’m much better at this stuff now. Making around 17% overall. I’m writing a new post about active versus passive investment to update things…

How did I hear about this stuff?

About five years ago I was off work sick and watching terrible daytime TV, and there was a show about people who quit their 9to5s to become retail traders. It was both quite interesting and terribly depressing. There was a man in his late forties, Quentin I think he was called. He was an antiques dealer who decided that he wanted to be a trader, so jacked in his business and ploughed his savings into a Foreign Exchange trading account. He wasn’t very good at it, and lost £2000 in the first fortnight. He went on to compound his losses, and ended up surrounded by old antiques because he couldn’t afford the rent on his storage space any more. He spent all day staring at his computer jumping in and out of trades whenever they were losing money, buying here, shorting there, and generally winding himself up and losing lots of money. His friends pleaded with him to go back to an industry he knew well, then they got annoyed and basically starting describing him as an idiot.

Then there was another guy, lets say this one was called Trent, who was really good at it. He studied the markets, paid for access to proper trading software, and then set up his orders the day before. He set the price that he would sell at if the stock/currency value went up (the ‘take profit’ percentage) and what loss he was prepared to take if the stock/currency fell in value (the ‘stop loss’). When he was interviewed he was really calm and sipping a cup of tea in a cashmere sweater next to a potted plant in his home office. He had four computer screens behind him with various green and flashing icons pinging away on the screen, and graphs going up and down. When he was asked what he does during the day he sort of shrugged (as I remember, he might have looked up at the ceiling or played with his sweater cuff for all I know) and said that during the day he doesn’t do much, he reads industry reports, he exercises, and he takes a look at any potential new orders for the next financial quarter. He explained how he places his trades with months in mind, not minutes, and that the day to day ups and downs don’t interest him – he trades long term. The camera then cut to him outside his house washing his Ferrari.

I can imagine some people watched this and ignored the Quentin bit, then immediately signed up to a Forex trading account (Foreign Exchange) and started throwing their money away. Or maybe getting lucky and making a bit. But not me. I lay there and thought it was mildly interesting, but certain that I knew fuck all about money markets, and all I would be doing if I tried to speculate is hand money to people who were already a lot richer than me. So instead of putting my own money up I started playing around with a practice account, and immediately lost half my capital (money in my pocket). So I quit it and moved onto the next thing, at this point I think I was hardcore into rock climbing.

Anyway. This post is entitled how I learned to love money markets, so I’m going to skip on a bit.

Maybe a year later I was sat in my office waiting to start the day (around 6.45am) and got a notification of an update to the trading software I had been using. So I updated the software and logged in. I took a look at currency rates, had a look at the graphs and stuff, and then signed out. Then when I read the news I saw that there was some kerfuffle between a large US tech firm and the British Government about tax or something. So (shrugging my shoulders because it happened to be payday) I deposited $80 into my account and bought a shorted CFD (contract for difference) in the tech company with 5x leverage, and shorted the US dollar against the pound. In case this is gibberish to you, I basically bet that the price of the tech company would go down, and the price of the dollar would go down against the pound, and used a thing called ‘leverage’ that meant that for my $50 investment in the stock, the system would imagine I invested $250. This is risky though because it means that although my profits could be larger, so could my losses.

I put my phone away and went to my meeting, and when I came out about an hour later I’d made about $15 on the currency. I was chuffed, and closed my trade. That afternoon when I’d finished my day, at about 5pm I remembered about the stock, and saw that I’d made $25. So I closed that trade too, forty dollars up for the day. I was happy with that. All because I checked the news I thought, if I could make $10 per day on this then that would make a real difference to me! But about a week later I lost $40 on three trades and sacked it off. I was totally risk averse.

Since then I have taken a careful approach to my speculation (I don’t think I can really call it investment at this point) I am much happier with it – and the tiny amount of money that I make or lose is worth it to play the game a little. (see above for a rundown of what I did recently).

But my real passion for this subject started with a book about the global financial crisis of 2008.

The Big Short by Michael Lewis
(I also recommend reading all his other books too, also (if you can stomach it) ‘Security Analysis’ by Graham & Dodd and ‘Financial Mathematics’ by Camacho.)

This book/film is the real life story of various investors who noticed that the US housing bond market was propped up on low quality mortgages where the people were likely to default. They created a bet against these mortgages using an insurance contract, so that when the housing market (and the global economy) tanked, they made millions. It’s a bittersweet story of clever people noticing an upcoming problem and betting it would happen, versus the horrible human cost of a severe economic recession.

But for me the interesting bit was the financial instrument right at the heart of the plot – the Collateralized Debt Obligation. This financial instrument was created to pool together lots of other financial instruments into one easy to trade thing. The ones that the book really concerns itself with is the MBS (mortgage backed security) which are bonds made up of thousands of mortgages. The safer the mortgages in the bond, the lower the coupon payments that an investor receives (because they are ‘safer’), but the more risky the mortgages (people with low credit ratings, previous defaults etc) the more risky the bond, and the higher the coupon payment (to make the risk worthwhile).

Image result for big short cdo jenga tower

If you imagine that you make a bet that a person will pay their mortgage, your risk could be pretty high. After all, you’ve got all your eggs in one basket. But if you put thousands of them together, then if one, or two, or ten default, then you can still make money because the risk is still low. It makes sense until it becomes clear what banks and securities firms actually did. They packed their CDOs with good mortgages until they ran out, and then bought riskier mortgages to put into them. But people don’t want to buy CDOs made up of bonds packed with mortgages that are crappy, so they wouldn’t sell. And this is where the spectre of ‘diversification’ reared it’s ugly head. Once lots of crappy bonds were put together they were considered a ‘diversified portfolio’ and so were less risky than they ever would be individually. This makes sense right? But the problem was that the ratings agencies rated them all AAA which meant that to an outside buyer they looked as safe as government debt, i.e they would not default. But they did, on a massive scale that shook the worldwide economies and led to recessions around the world.

So how did this horrible financial trickery lead to my fascination with financial markets?

The sheer audacity of it. The intensely clever way that debt was used to finance the economy opened my eyes to a world beyond the one I’d seen. I now see companies, governments, international institutions, and the man in the pub with his pension as completely interconnected. I loved learning about how money management can help societies to function, and also about how what must have been an intellectual exercise was used (and is still used) to make a small number of people disgustingly rich.

This interest has naturally led me to learn as much as I can, driving a couple of my brothers (who work in investment banks and fintech companies) mad with questions. I love diving into companies I’m interested in, looking to see if they are under or over valued, and then place a trade based on my analysis. Its fun to try and work out the puzzle. If this can help me make a little on the side in the future I’d be delighted. But for the time being I’m happy to be learning something that has a value in itself because I’m sure it’s a niche skill amongst people like me who studied theology…

Bless bless,


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