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Trading as a Business:
Trading as a Business
By Charlie Wright
“Trading as a Business” has always been a very good way to sum up my approach to trading. Every principle and idea in this book ultimately refers back to the notion that trading ultimately is a business and should be approached as such. In the final analysis, business is simply the effective management of cash flow. A successful business generates more cash than it consumes. This is the goal of trading as well.
For most businesses, the key to success is attracting and keeping competent people. Personnel issues can and should consume a significant amount of time and effort, because a business really is only as good as its people. Trading for the most part eliminates this task, and also relieves us of the headaches and problems associated with managing employees.
Trading is a solitary endeavor. You will be freed from dealing with employees and the problems associated with managing employees, you will not be distracted by absenteeism, withholding taxes, EEOC rules and regulations, and disgruntled employee law suits. The only relationships you must manage are between you and the markets, and between you and yourself.
Bill Williams used to say that trading is the ultimate psychotherapy. He was right. Trading will expose some of your most prominent personality quirks as you attempt to trade your strategy. The more you learn about strategy trading, and the more you learn about yourself, the better a trader you will be.
Thinking of trading as a business has helped me enormously as a trader. It puts everything into perspective and helps me deal with my own psychological difficulties with trading execution. Once I stopped viewing trading as speculation, my trading improved. Once I realized that I was not going to get rich quick, that trading was not easy money, my trading improved. Once I realized that almost no businesses are successful overnight, my trading improved. Once I realized that I had to make an investment in the business, both in terms of my own education and in equipment and working capital, my trading improved.
Barriers to Entry
One concept that is commonly taught in business schools is that of ‘barriers to entry.’ This is a very simple concept that has important ramifications as you consider trading as a business.
The basic principle is that the higher the barriers to entry in a business, the higher the investment to establish market share but ultimately the higher the margins and profits. A good example is the beer business. Controlled by several large breweries, it would be financially very difficult to start up a new brewery and acquire significant market share. When Phillip Morris bought Miller, they spent over a billion dollars to acquire the business and do the advertising and promotion necessary to obtain market share. But Miller was successful, and when they achieved the share of market they wanted, the profits were outstanding.
The reverse is also true. If an industry has low barriers to entry, and there is a relatively small up front investment, there is much competition for profits and lower margins. This is the case for many service businesses, real estate brokers, securities brokers, cleaning services, etc. Restaurants are also a relatively low investment business. All you need is some decent space for tables and some cooking equipment and you are in business. However, the competition for customers is intense and thus the margins are low.
There is no good or bad when analyzing barriers to entry for a particular industry. If the investment is low, the stress comes from being smarter and superior than everyone else at making money. If the barriers are high, the stress comes from taking the large financial risk and the uncertainty of obtaining the target market share. Either way, the business is always difficult.
Trading is a low barrier business. You basically need a computer, a broker, and a modest amount of capital and you are in business. But because of the low barriers to entry, the competition for profits is very high. There is no such thing as gaining market share.
Many people wrongly conclude that low barrier businesses are easy to start and trading is no exception. Many new traders think that trading will be easy and they will get rich quick. Experienced traders know that this will not happen. Trading is as difficult as any business I have ever been involved in.
The main point to remember is that trading is a business with low barriers to entry. This means that the competition for profits is very high and you will have to be smarter, more disciplined or more creative than the majority to make money.