Understanding Jack Bogle: How to trade more and make money

Mike Bellafiore
Yahoo Finance

By Mike Bellafiore, co-founder of SMB Capital and SMB|U

A trader asks the following question, “@MikeMellafiore Mr. John C. Bogle says the more you trade, the less you make. He refers to ETFs like SPY. What is your thought on that?”

1. The context of this quote is essential.

The above quote from Jack Bogle, the grandfather of passive investing, reflects his opinion on how best to invest—not how best to trade professionally for income. Investing and trading professionally for income are very different.

Let’s go to the source of this quote. In an editorial for Financial Times (*disclosure), Father of passives has doubts about ETFs, Mr. Bogle wrote, “I had come to realize that as investors trade stocks with one another, the zero-sum game (before costs) of striving to beat the market becomes a loser’s game (after costs are deducted). The only sure winners are the brokers and dealers of Wall Street.”

He went on to went to explain, “Yes, ETFs are largely vehicles for short-term trading, while traditional index funds are largely held for long-term investment.”

Let’s not conflate an investment philosophy, long-term buy-and-hold, with trading.

2. Let’s focus directly on trading: Is it true the more you trade, the less you make?

If we examine the most extreme example of active trading, we consider HFTs. The best of them do quite well trading.

I am not an expert in the success of HFTs, but some examples are worth noting:

  • JPM had zero trading day losses in 2013.

  • When Virtu (VIRT) filed its IPO prospectus, it reported that in 4 years of trading, it had just one day in which it lost money.

  • Citadel rebounded from a disastrous 2008 with impressive market making and HFT trading, which it parlayed to become one of the largest hedge funds.

HFT trading became so successful for some firms that regulators contemplated new rules to provide speed bumps for trading. Michael Lewis made it to the best seller list with his depiction of the industry’s ills in Flash Boys. IEX, an alternative routing exchange to protect market orders from being abused by HFTs, was born. There was a fervor about HFTs running our markets.

But to leave this question answered solely with a focus on HFTs would not be satisfying, I suspect, to the questioner. I doubt he was interested in becoming a high frequency trader, with the attendant expensive barriers to entry. Let’s try again, this time focusing on active discretionary trading.

Proprietary day trader at SMB Capital (Source: SMB Capital)
Proprietary day trader at SMB Capital (Source: SMB Capital)

3. Trying again. Is it true that the more you trade as an active discretionary trader, the less you make?

Yes and no.

No! You won’t make less if you take this approach:

a) Train to trade with edge. Trading is a sport that requires extensive and professional training of markets and products.
b) Trade on a demo, after learning strategies with edge.
c) Gravitate towards strategies that highlight your cognitive and psychological strengths.
d) Measure your results to ensure you have edge.
e) Trade live with small capital, if they have edge.
f) Bump your size and risk after a significant period of success.
g) Build technology to help you find more of your favorite strategies so you can trade them more often and with more size.
h) Backtest automated trading models to see if you can play more offense in your favorite strategies.

The goal is to internalize and master your best setups and then trade them more often and bigger, as an active discretionary trader. In this case, you want to trade more and not less.

Yes! You’ll make less if you overtrade. Traders that I work with tend to slump when they do not wait for their favorite setups to visit. In essence, they are not taking their trades with edge, but getting out of in front of lesser and different trades. Be concrete about the trades for which you have edge. Build a PlayBook of the setups, your trading business, that you can trade with edge. Trades taken outside your PlayBook, is you overtrading. Overtrading will cause you to make less as a trader.

4. It will be a journey to find your edge so that trading more is smart.

Often, when new and developing traders fail after training to trade on only one product on one time frame, they will conclude that trading is not for them. As I explained in One Good Trade, failing at one product and time frame does not necessarily mean you cannot find edge as a trader in markets.

For example, you may have to find the product right for you among stocks, options and futures. Also, you may have to find the right time frame for you among stocks, options and futures. Further, you may have to find the best way to express your ideas as a discretionary or automated trader.

Finally, mentoring and coaching even after you have found edge are essential for you to make the most from your edge and sustain as a trader.

5) Active discretionary traders are succeeding.

Dr. Brett Steenbarger, my business partner, Steve Spencer, and I penned an article for Forbes on traders succeeding. Many of the examples of successful traders we contemplated were active discretionary traders.

6) You will lose.

Some developing traders take a string of losses and conclude they are overtrading. There are periods of drawdown even in winning strategies. Take your losses and work to make more from your winners.

7. Are you prepared to trade live?

When I was a kid, I wanted to pitch for the NY Yankees. Though I played baseball at a high level, I was not good enough. I cannot walk onto the mound at Yankees Stadium and pitch. Well I could, but I would be arrested. Many dream of becoming a professional trader. Throw a few dollars into an online brokerage account and you can trade and gain access to markets, just like a pro trader. But access does not mean you should trade. You must have found edge that works for you so that you responsibly belong playing as a pro trader.

* No relevant positions

* The author’s second book, The PlayBook, was published by The Financial Times.

More posts by Mike Bellafiore

How to trade stocks for a living: Mike Bellafiore

8 trading lessons from a proprietary trading desk

9 reasons to trade at a proprietary trading firm

5 lessons from the prop desk

A trading strategy newly stressed on the prop desk

The #1 issue traders want to fix on our desk

What to read next