Margin In Trading

26 Mar

I was browsing the titles in Amazon’s Kindle marketplace for something interesting to read and ran across an interesting book by Richard Swenson, MD, titled: Margin: Restoring Emotional, Physical, Financial and Time Reserves to Overloaded Lives the other day and quickly became engrossed in this topic. We are all acutely aware that today’s modern society is moving at breakneck speeds, technology has not only made us more productive but has eliminated much of the “downtime” that we normally used to have in order to “repair” ourselves.

Seth Klarman wrote about Margin from a financial context; Margin Of Safety in dealing with investments or trading strategies, the basic premise being that you need to have a buffer or “safety zone” should your investments or trading strategies don’t go exactly as according to plan. Many people have written about this topic in the financial arena, but very few people have applied the concept of Margin into their own lives. Sean McLaughlin has a dedicated blog called The Minimalist Trader ( that has many of the underlying principles of both Klarman and Swenson’s work – Sean has taken both forms of Margin and applied them not only to his investment strategy, but his overall plan for dealing with life.

Swenson talks about the absence of margin in our lives and the spillover effects that it has had on society as a whole: while productivity and life in general has “sped up”, our margin has decreased (and in some areas vanished entirely). Swenson talks about what happens when our margins in life evaporate and the spillover that it has: our relationships become frayed, decision making is fraught with errors (due to lack of margin in sleep), etc.

I noticed a recent comment from James Altucher:

“Here’s the thing: people are really angry. I get it. The world has changed and we’re all in post-traumatic stress syndrome from not only the 2008 crisis, but 9/11, the dot-com bust and everything that happened in between. Everything we thought was safe: having a job, going to college, owning a home, even our relationships, has become more unstable than ever”

He’s correct. This is a prime example of when “progress” has moved us along at so fast of a pace that when we evaporate the historical norms of Margin in our lives and something comes along that attempts to bump us back down to having a little margin (only to see in a short time our lives running back at higher and higher levels of marginless living again) we change. Stress comes in 3 different forms according to Swenson: eustress, distress and hyperstress. Eustress is generally considered a “good” form of stress, he likens it to a “creative energy” that you see in some firms (such as Google). When we talk about “stress”, we’re generally referring to the latter two. Distress (such as what I’m experiencing) happens all of the time in life, but generally lasts for a short period of time – if you’re really good you can manage to turn some of the effects of distress into eustress. But more often than not, we let it become hyperstress which leads to a rapid burnout and violent changes; physical, emotional and mental changes. Hyperstress can warp our thought process and create an insidious negative feedback loop that causes our decision making process to become clouded. Prime example would be allowing distress in the early stages of trading losses such as what I experienced in the fourth quarter of 2010 to morph into hyperstress. Most of my margin (Klarman’s type of margin, as well as Swenson’s definition of margin) vanished in the financial/trading aspect of my life. Given the rapid change and strong interconnectedness of modern living, with exponential speed it affected just about every other thing in my life (relationships, sleeping habits, wild weight/mood swings, etc.). Instead of turning distress into eustress, many of us when faced with drawdowns tend to try to burn the candle at both ends.

Here’s an interesting snapshot from Swenson’s book:

We as a society have run out of room in many aspects of our lives: we have exceeded our limits in just about everything: financial, emotional, mental, performance. It’s hard to really define what emotional and performance limits are (as Swenson talks about in detail), but we can define our financial limits and we often know when we’ve run out of margin in those areas.

I’m still in the process of reading (and re-reading to ensure that I fully understand) Swenson’s book and I can already begin to see some of the areas in which I have run out of margin. Hindsight is always 20/20 but I think that society as a whole needs to re-examine where margin has disappeared. The rapid succession of crises in the previous decade provides us all with the perfect opportunity to stop and examine what areas in our lives are lacking margin: and begin to define where each of our limits exist and moving forward establish a buffer between our limits and where we are at. It’s sometimes OK to exceed the limit,  but like anything (redlining a car for excessive periods of time) if we burn the candle at both ends, nature has a way of bringing us back below the limit (or worst case, walking us off the trading floor of Earth) in a bag.



9 Responses to “Margin In Trading”

  1. Edmundo Braverman March 26, 2011 at 5:40 pm #

    “I was browsing the titles in Amazon’s Kindle marketplace for something interesting to read…”

    And you didn’t come across this gem:

    Don’t know what you’re missing, lol.

    The notion of personal margin is an interesting one. There is no doubt that stress is a killer.

    I once delivered a 41′ sailboat from New Orleans to Isla Mujeres through a tropical storm. What would have normally been a four-day delivery took just over a week, and it was battle stations the whole way. I felt fine when I got to Mexico, even partied the first night to celebrate. But a couple days later, back in New Orleans, the entire left side of my body was wracked in pain and I couldn’t get out of bed.

    My wife rushed me to the emergency room with what I was certain was a heart attack. Turn out it was just exhaustion. Before you die laughing, keep in mind that I:

    1) Am retard strong
    2) Have a threshold for pain that would induce nausea in most people (thanks to my years in the Marines)

    It was a major wake up call for me. I was running a yacht services company roughly 80 hours a week and doing high risk deliveries on the side, and it just caught up with me. I’ve laid way back since.

    • The Analyst March 26, 2011 at 5:55 pm #

      Why I’ve been having second thoughts about what I want to do with the rest of my career in Finance. While Investment Banking certainly isn’t nearly the same as delivering a 41′ sail boat through a tropical storm, I think there’s still a bit of an analogue. Some people are ok with it, some thrive off it, but I’m not so certain I want to spend 18 hours/day, 6-7 days/week at the office/on the road for the next 25+ years of my life.

      Of course, we all have our price, so we’ll see, but your point is important; everyone has a unique stress tolerance, and over time, while we keep plugging away trying to ignore/repress reality, we can’t out-run it. Eventually, it’s going to catch up with us, or, we can take a step back and be proactive, most likely to our benefit.

    • bond wimp March 26, 2011 at 6:18 pm #

      I got my fill of TARP related readings hahaha (Reading R. Glenn Hubbard’s skewering of Derr Presidente)!

      Thanks for the comment; there’s something I forgot to elaborate on from the topic and that’s mankind’s progression of innovation has (to borrow Swenson’s analogy) gone from a linear progression to an exponential one. In the “previous era” innovations were almost linear in nature and as humans, we were able to adapt while still maintaining margin in our lives. Now, with everything moving at an exponential rate (just look at the iPad delivery schedule, twitter/facebook or the ever dreaded Crackberry Syndrome); margin in our lives has vanished. Some people actually prefer no margin and they thrive off of it.. Others aren’t quite so fortunate and that’s when they begin to stumble.

      There’s a lot of material I didn’t get to cover (didn’t want to write a novel for the novel) which I’ll break up into smaller blog-sized pieces. It’s an interesting topic that I until recently largely ignored until as you say “it just caught up with me”.


  2. Edmundo Braverman March 26, 2011 at 6:14 pm #

    Working in finance was such a grind, but the money was so good. When I was making the most money of my life (as a commodities trader), I literally woke up every morning and said, “F***, I hate my job.”

    That said, it enabled me to do the things I wanted to do in life, including starting a crazy yacht services company that did its dead-level best to keep me in the eye of the storm (both literally and figuratively).

    The advice I give most guys on the Street is to use the Street like an ATM machine. Make your money and GTFO. Go do what you REALLY want to do in life once you hit your walkaway number.

    When I was working at my first firm at 23-years old, a 34-year old guy in my group had a heart attack at his desk. He survived, but that really stuck with me. It’s okay to do hateful shit for the money for awhile, but nobody lives forever.

  3. dunkelblau March 27, 2011 at 3:38 pm #

    I think you get into these margin problems when you play the game in “always on” mode. Predictable narrowly defined assembly-line tasks are efficiently handled this way and they are paid by the hour, but most creative professionals operate in entirely different terrain.

    I work in tech in Silicon Valley and we don’t do regular hours. Instead it’s kind of like an emergency room– bursts of hyperactivity in response to crisis followed by long periods of waiting for the next call. Anyone who doesn’t understand this and runs in “always on” mode is sure to burn out. Yes margin goes negative during the crisis, but you draw down your reserves, and replenish them during the waiting periods.

    I’ve never worked in finance but I imagine you would have to play this way if you want to perform at your peak. This means preparing for a certain setup scenario and simply waiting for it to manifest– then hitting with everything you have when it appears, and switching back off when it’s over. If you go in with the idea of a quota of X number of deals per month regardless of the environment, then you should be selling cars.

    The difference is compensation schedule. Here in Silicon Valley the company absorbs the ups and downs and most of our wages come at a fixed rate. I suppose on Wall Street it’s the reverse, so you finance guys need to keep a much larger cash cushion (“financial margin”). What causes grief is when you don’t understand that most of your paycheck is for cushion, not for day-to-day spending.

  4. Taos Hum March 27, 2011 at 8:16 pm #

    Why do you think “they” call it “trading on margin”?


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