ex Goldman Sachs Trader Tells Truth about Trading - Part 2

Summary

In this insightful discussion, the speaker shares their experience in the financial markets, comparing the volatility of major indices versus currency pairs and offering tips on broker selection. They emphasize the importance of diversification across asset classes like equities, commodities, and Forex. Additionally, they shed light on the culture within investment banks like Goldman Sachs and the challenges of managing large risk portfolios. The speaker also reflects on the demanding work-life balance in the industry and how it shaped personal relationships, offering a candid look at the high-pressure world of trading and finance.

Takeaways

• 😀 Major indices are historically 1.5 to 2 times more volatile than major currency pairs over the past 50 years, making them riskier for traders.
• 😀 Diversifying your trading portfolio across multiple asset classes like equities, commodities, Forex, and cash/interest rates helps balance risk and maximize opportunities.
• 😀 A suggested asset class allocation for diversifying is 65% in equities, 20% in commodities, and 10% in Forex, with some cash or margin in reserve.
• 😀 Choosing the right broker is crucial, with an emphasis on avoiding brokers who take the other side of retail trades due to conflicts of interest.
• 😀 Low spreads and commissions don't always equate to better conditions if brokers aggressively push for more trades to increase turnover.
• 😀 Working as a broker for a couple of years can provide valuable insights into the industry's inner workings, especially understanding conflicts of interest.
• 😀 The culture at Goldman Sachs is distinct for its strong work ethic, entrepreneurial spirit, and focus on creating new products to meet client needs.
• 😀 Other investment banks like Lehman Brothers and JP Morgan had varying risk cultures, with some taking on excessive risk too quickly, leading to instability.
• 😀 As you gain experience in trading, the amount of capital you manage grows, and so does the level of risk you assume. It's crucial to understand how risk limits evolve.
• 😀 The work-life balance in investment banking, especially trading, is very demanding, often leading to long hours and personal sacrifices, as illustrated by the speaker's personal story.
• 😀 Since the subprime crisis, the caliber of professionals in investment banking has declined, and compensation has been reduced, making it harder to attract top talent.

Q & A

What is the volatility comparison between major indices and major currency pairs?

Major indices are historically 1.5 to 2 times more volatile than major currency pairs, based on over 50 years of data.

What is the suggested asset allocation for someone starting out in trading?

A recommended asset allocation for beginners is 65% in equities (as the most volatile asset class), 20% in commodities, 10% in forex, and the remaining balance in cash or margin to take advantage of short-term opportunities.

Why is it important to know whether a broker is taking the other side of your trades?

It’s crucial because many brokers may have a conflict of interest if they take the other side of your trades. They may encourage excessive trading to profit from your losses, which isn't in your best interest.

What is the role of spreads and commissions in broker selection?

Low spreads and commissions may seem attractive, but they can lead to brokers pushing more aggressive trades to increase turnover and ultimately make more money off the trader.

What should you look for in a broker to avoid conflicts of interest?

The best brokers are those who don’t take the opposite side of your trades, avoiding a direct conflict of interest, which is common in spread betting and CFD trading.

What were the working conditions like in investment banks during the speaker's career?

The work-life balance was almost non-existent, with 18-hour days, constant market monitoring, and socializing with clients. Traders would often work through weekends and stay out late for business events.

What is the significance of the speaker’s experience with account sizes in the banking industry?

The speaker managed large account sizes, ranging from $10 million to $500 million, with personal risk exposure as high as $300 million. This reflects the high stakes and the massive responsibility held by traders in investment banks.

What is the difference in culture between Goldman Sachs and other investment banks?

Goldman Sachs had a unique culture focused on work ethic, intelligence, and innovation. The employees were highly entrepreneurial, creating new products to meet market demand, setting them apart from other firms with more self-interested and politically-driven cultures.

What major changes in the brokerage industry occurred in the past decade?

The brokerage industry has seen significant downsizing due to the transition from dial-up to broadband, which opened trading to a much wider audience. This has led to increased competition but also made trading cheaper for individuals.

How did the subprime crisis affect the culture and talent in the financial industry?

After the subprime crisis, the quality of talent in the finance industry decreased, and compensation was reduced. Many less qualified individuals took on larger risks, which eventually led to issues in risk management and a shift toward self-interest.