Imagine you were a professional poker player with roughly $2.5 Million in "available" bankroll, and had to decide each day how much of those funds to allocate to the game to earn your daily keep. Essentially you have three choices: (1) Bring all of it and put it all in play and at risk (assuming the house rules would allow you to); (2) Bring all of it, yet only place a portion on the table and keep the rest in reserve; or (3) Bring and play with only a part of it.
Then let's assume you varied your allocation over the course of a year, depending on a combination of varying table regulations, perceived table conditions, and simple personal preference.
Then assume you earned $1.0M over the course of a year, and then someone asks you what rate of return you earned as the result of your poker playing. What is the correct answer?
D. Possibly any of the above.
Some might quickly respond "A" ($1.0M / $2.5M). My answer on the other hand -- without hesitation -- would be D, which helps explain why I think Rate of Return is often completely irrelevant and abused when it comes to analyzing performance, and is why many poker and independent trading pros don't track it. The plot thickens for tournament situations where a player buying into a satellite tourney for $100 ends up winning $2.0 Million. What was his ROR?
And while I realize that such a benchmark can help compare fund and manager performance in the public sector, and even used it as a "fun" personal benchmark during the 2008 race just to see what I could do, it remains largely off my radar in terms of personal goals and performance because of the complexities noted above.
Essentially, I'd define allocation of my trading capital as similar to #2 and #3 above. And while I used the conservative industry definition of #1 above (net profit divided by total account capital) in benchmarking against CTA funds last year, some could argue the figure was actually understated since I usually employed strategy #3 throughout the year, trading only a modest portion of the of the accumulated capital as I never really increased betting size during the time.
Such is why like many independent "trade for ourselves" traders, I'm really only interested in one number: Net Income. It's simple and clear. Or said another way, I view trading income as a salary. Raw dollars.
2009 Goal - OK, it's set. And it remains similar to last year, with one twist in that instead of looking solely at Jan-Dec 2009, I'm going to also continually track my most recent 12-month performance. And both goals will be set at $1.2 Million, which reflects a slight increase over the initial $1.0 Million 2008 goal, while also allowing for downtime as the result of non-market and personal priorities and obligations. It also results in a nice round number of $100K/month, which so long as I hover around there, will tell me I'm on track without having to focus on distracting analyses.
Like anything, it's subject to revision up or down (the beauty of trading for ourselves ... we get to make up all the rules), but that's where my head is currently at.
Sure, I could be Archie Karas or Stu Ungar and put it all at risk (Option 1 above). But I'm not going there. I'll be 48 in a little over a month and want to balance pushing and motivating myself with enjoying the prime years of my life.
And if I miss the goal and "only" earn $750K? You certainly won't find me jumping off any bridges.
Personal Requests - I've received a few comments recently asking me if I'd be willing to enter into a coaching/mentoring or money management arrangement, which I purposely haven't posted (some have asked the comments to remain private).
My general response remains that I don't have any current plans to go back into formal coaching, and I'll likely never trade anything except my own capital as I'm most comfortable having manager and client in the same body since "both" know each others style and tolerance for risk very well.
Blog Evolution - Having said that, I haven't given up on further enhancing this continuing blog effort in a big way. Those that know me know I'm always looking to do something that's never been done before (call me a maverick) and challenging the status quo and industry hype. Chatrooms and advisory services are all but dead, and there's something out there that remains untapped.
And while I still haven't put my fingers the next evolutionary step, I firmly believe we can grow this network in a way that will knock each other's socks off and continue to serve the collective good. And this is where I could use your input.
One of the things I'm seriously considering is hosting a live roundtable session on a weekend in the Northeast should there be sufficient interest, as well as establishing a small ongoing trader support group in the Boston area. If there's enough interest, I'll consider it, but I'd want to keep it under the radar and non-commercial. Maybe we'd even play some poker.
Online blogs and chats are great, but like poker, there's something to be said for sitting around the fire in person talking shop. I'm also still considering resurrecting the online after hours PalTalk lounge.
As always, comments/ideas/input are welcome.
Enjoy the weekend.