Interview with “Broken Arrow,” A Real Life Day Trader

By Derek On November 22, 2011 Under Post

In the financial industry discretion is a key attribute to success. This is one reason hedge funds are loath to publish their stock holdings. Sometimes this borders on secrecy as it doesn’t pay to let your competitors know what you are trading; they will just trade against you.

In keeping with a high level of discretion, the trader below did not want to go on record with a full blown interview posted on iTunes. (By the way, we are up to 1,000 iTunes downloads!). He also declined to have his real name in print. He goes by the nom de guerre, “Broken Arrow.” I have been acquainted with this individual for many years and know what he writes to be factually correct, based on his point of view and many years experience trading the Taiwan market.

“Broken Arrow” is extremely “plugged-in” and speaks fluent Mandarin, French and Russian. He is the ultimate cynic and has made, and lost (as he tells us below) a fortune in the stock market several times over. He is still trading actively. If you ever wanted to know what the life of a successful day trader in an emerging market is like, read on. This is real and gripping stuff.

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What do you do?

I trade stocks in Taiwan. I used to say that I invested in companies in Taiwan, but I have abandoned that illusion.

 

How long have you been in Asia/Taiwan?

I have been in Asia since 1987 and in Taiwan since 1997.

 

What is your average day like?

I typically get up an hour or more before market open to prepare. I am sometimes hung-over and invariably exhausted. I make some coffee and walk down to my computer. I squirm in front of the monitor from 9-1:30 (Taiwan market hours). I used to only look at the market periodically through the trading session, but since the global meltdown of 2008, the volatility has risen greatly and it is hard to “trust” the markets anymore. I would not bend over for a bar of soap in front of Mr. Market these days.

I like to go the gym to work out the stress in the afternoon, and spend much of my free time researching micro and macro issues related to the stock market. In other words, [I spend] countless hours on the internet or talking to friends. If you cannot stand working in an isolated environment, don’t become an independent trader.

 

What do you like/dislike about your “job?”

I like the fact that I have no boss and that I eat what I kill, so to speak. I like the fact that I can take my computer anywhere and get my job done. I like the challenge of making money by defying consensus views. But my list of dislikes has outstripped my list of likes recently.  I hate the stress. I hate the fact that it is completely unproductive as a profession. I hate that there is so much intervention in the markets, as desperate acts from desperate men dominate the fundamentals. I dislike the fact that nothing offers the potential to make as much money in the short term. In other words, I would like to do something else, but [have to] evaluate any other business opportunities relative to the “easy money” I have made in the markets.

 

What do you like/dislike about finance overall?

The stock market is a giant casino and has little to do with finance these days. Recently, the big winners are the wealthy algo traders who use money and trading platforms to game the system. “Financial Hackers,” as Mark Cuban calls them. The markets have been getting worse and worse as more people (real investors?) give up on them. Most of the finance industry is just a institutionalized mechanism to leach money out of global business activity. And yes, based on my experience working in the corporate world, many investment bankers are overpaid, cocky, insecure bastards. And despite the protestations of Mr. Blankfein, Goldman Sachs is stone-cold evil.

 

What advice would you give to someone who is interested in following in your shoes?

1. Expect considerable pain, since the agony of defeat usually outweighs the joy of victory

2. Don’t believe any of the standard financial industry bullshit about “investing for the long term,” “diversifying your portfolio”, “averaging down”. It is all propaganda to feed the machine and finance the sports cars, and mansions in the Hamptons.

3. Read “Reminiscences of a Stock Operator,” [by Edwin Lefevre] and realize that even the best traders of all time lost all their money many times, and in the case of Livermore, ended their lives completely broke. Read every book about investing that you can, and take it all with a grain of salt. There are no magic bullets.

4. Have some kind of exit strategy for your positions, even though your plans will probably fail.

5. Realize that stock analysts, probably don’t know much more than you. And that a little knowledge is often more dangerous than no knowledge at all. In my experience, analyst reports are much more reliable as contrarian indicators than anything.

6. Do not think that just because people make a fortune in the financial industry (usually selling risk to others) that they are particularly intelligent, or have any profound insights. It is an industry where people “go along to get along.”

7. You are often the most “right”, when everyone around you is telling you that you are wrong.

8. You can be completely right and lose big bucks. Never underestimate the enthusiasm of idiots, or the ability of certain speculators to manipulate a stock completely independent of its fundamentals.

9. Don’t quit your day job, until you have a big enough investment egg to make good money. If you are trading with 10,000 dollars or even 100,000 dollars, you will not have much of a living. If you have 500k or several million, it becomes a much more possible full time career, until you blow up.

10. Governments and politicians will try all sorts of tricks to gain votes by intervening in the markets. In the end, this is extremely negative for markets, but most players want to get behind the govt. trade in the short term. In other words, if the govt. starts to buy shit, Steve Cohen, Warren Buffet and George Soros will all get shit shovels.

11. Everything standard that people use to make investment decisions is illusory. Price-earning ratios, price-to-book, dividend yields. They work until they don’t. Respect the market not the fundamentals.

12. Technical analysis is like everything else. Sometimes it will make you money, but be ready to run when it goes against you. The speculators know how to “paint the tape” better than you know how to read the tape.

13. Financial crises lead to a complete failure of trust. Nothing is safe, and margin calls will bring out forced sellers. Forced selling will take down even the best investment idea. Get out or get short, never ignore this advice. If speculators are deep in a stock, they will be forced to support it to try and escape. They will probably fail, so don’t hang around to see if they pull off a miracle.

14. Understand your market. Taiwan, where I trade, and Asia in general is very different from [the] US market. Here are some points for the brave who want to try their hand in a “wild west” market:

  • Forget books on modern financial markets, read any historical book about the speculators, insider trading and stock pools that were common in the US at turn of the century. Once again, read “Reminiscences of a Stock Operator” type books to understand markets where “anything goes”.
  • Insider trading is the rule not the exception.
  • Corporate transparency is low and governance non-existent in many cases. Corporate Governance is often just a ploy to fulfill the demands of foreign investors and further obscure transparency.
  • Speculator groups run rampant and often include corporate insiders. They are the real “players” in the market.
  • The media (reporters, etc.) is also playing in the market and often available to speculator groups at a price. No company will call a business press event in Taiwan during market hours; no journalists will show up.
  • The Govt. is often in the market, and I strongly suspect that govt. officials front-run the trades, as do local fund managers tasked with deploying govt. funds.
  • Local brokers front-run their customers.
  • Local fund managers front-run their own funds.
  • TV pundits are “talking their own book” or someone’s book.
  • Small investors (mom and pop) are always left holding the bag.
  • Stocks always overshoot to the downside – often at valuations that will make you question your sanity.
  • Stocks always overshoot to the upside, your sanity will be in question again.
  • There is always someone more “inside” than you (or your tipster), so if you look around and don’t see any suckers, the sucker is you.
  • No one is a long term investor, including corporate management.
  • Anything is possible. The Chinese have an expression that pretty much sums it all up: “There are no fish in clear water.” Under the presidency of Chen Shui Bian in Taiwan, the president’s wheelchair-bound wife was heavily involved in stock market speculation.
  • There are only the fast and the dead. Being nimble is crucial.
  • Most foreigners and foreign investment house star analysts have no idea about the market. Or even the industries they cover, in some cases.
  • When the market crashes, but a particular stock rallies regardless, it probably just means that speculators are trying to fool you. It will usually sell off on strength in a following session.
  • Big speculators have more money that you can even imagine, and have decades of experience ramping stocks. They orchestrate every element of a stock ramp, to the extent of controlling news flow from company insiders and media.
  • Much of the volume in a “hot stock” is punters selling back and forth to each other to build interest in the stock.
  • Foreign investor safe haven stocks (like TSMC in Taiwan) can hold up at the beginning of a downturn, but become a giant ATM machine when the shit hits the fans and the long-only funds realize they need to raise cash.
  • There are “good” companies that have decent corporate governance and focus on their core business, but many others extract all their profits from various forms of stock market manipulation. In other words, management does matter, and some corporate executives are “evil” beyond your wildest belief.
  • A 10 dollar stock needs to drop 8 bucks to fall 80% percent, but then only needs to fall another 1 buck to fall an additional 50%. In other words, don’t try to catch falling knives, it doesn’t end well.

 

What has been the biggest surprise, good and bad?

Perhaps I was naive to start, but my biggest surprise has been just how much of a casino the whole system has become. Capital markets, originally meant to facilitate business, often cause huge damage. I have also been surprised by the huge amounts that I have made or lost in a short period of time. For a small trader like myself, I have had many days where I made or lost up to 500k US. For many people that may not seem like much, but compared to what I made as a “salary man” over the years, it is a bunch. I am constantly surprised by the ebb and flow of the tides of fortune. Since I first entered the stock game during the “internet bubble” days, there have been 3 times that I was almost completely wiped out. In the same period, there have been 2 or 3 times that I had enough money to just walk away with a big smile on my face, and shut the computer forever. I unfortunately screwed this up. But in the final analysis, I have done better than most. Knock on wood.

 

Any funny stories?

At the bottom of the 2008 financial crisis, I had lost so much money that I was unable to sleep for days on end and ended up making a visit to the hospital psychiatry ward.  Is that a funny story? Thank God for Xanax. Buy Pfizer, Xanax and Viagra… the two drugs indispensable to the financial industry!

 

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