Recently, I received the following email from a RealMoney subscriber:
Currently, I am in a transitional stage in my career, moving from a smallbusiness owner into a stock trader/investor.
As a teacher, you no doubt encounter many young, enthusiastic students readyto leave their mark on Wall Street. Undoubtedly, many succeed while others (probably many more) fail.
Would you pass along a prevailing trait -- maybe to the most prevalent -- which you believe separate the successful vs. the unsuccessful investors?
This individual is not alone. They are not the first and will not be the last to decide to become a professional investor. However, taking this step requires taking far more risk than the inherent risk in buying and selling stocks. One big mistake that is currently made is extrapolating a few good trades into a plan for a full-time income stream. But before I get into planning, at a bare minimum, there are a few personal traits which are core prerequisites to jumping into investing on a full-time basis. These traits are:
The ability to take and manage risk.
The ability to control your emotions.
Solid quantitative skills.
Now, before you take the professional plunge, there are a few fundamental steps in the process that you will have to walk through in order to be ready to start an investment business.
Step 1. Get Organized, Write a Business Plan:
Before you go into
business you need a business plan -- and being a full-time investor
a business. At the very least, your business plan should include: "pro-forma" (forward-looking) financial statements, such as income statement, balance sheet and statement of cash flow that project at least three years; marketing strategy (if applicable); and technology, occupancy, licensing, registration, legal and administrative requirements.
Going through the process of developing a business plan will make you think carefully about whether becoming a full-time money manager is right for you.
I found this process to be profoundly helpful. Putting together a business plan enabled me to put in writing what I thought I wanted to do. Then I worked together with other individuals, such as consultants, friends and family to refine the plan. During this iterative process I was able to transform my original concept into a workable business model.
Business plans for investment money managers are unique in that they are essentially service models that rely on the use of cash as inventory. No other business except banking really falls into such a category.
While the current market environment may be considered poor for investing, it provides an excellent opportunity to be out of the markets while you plan your investment business. I started planning my business, LakeView Asset Management, as the technology stock bust was running its course in the early 2000s. So if you're an aspiring full-time investor, I say right now would be a good time to do your planning. Personally, I think you always want to open a business at the bottom of the market, not the top.
Step 2. Understand How You Work -- Alone and With Others:
You need to ask yourself if you can do this alone (via sole proprietorship) or if you will need to join one or more individuals (via partnership) in order to execute your business plan. There are pros and cons to either choice. Some people are able to fly solo, while others need a co-pilot or two. It is a matter of your personality and risk profile.
If you start the business on your own you will reap the full benefits of your success or suffer the consequences of your failures. In addition, you will have to bear the burden of not only trading, but also of the critical administrative aspects of running a business.
Should you chose to take on a partner you will share the risks, rewards and responsibilities of the business. However, be forewarned: Entering into a partnership is in many ways like getting married, so the relationship should not be taken lightly.
I decided to go at it alone. Starting a business was difficult enough. Adding a partner on top of a wife and five kids was injecting more complexity and unnecessary stress than I wanted at that time in my life. I always knew I could take on partners at a later date, if it made sense. So far, I have not had to do so.
Step 3. Decide on a Legal (and Money) Structure:
Once you have decided whether to go at this alone or with partners, you need to decide on how the business will be legally structured. I cannot emphasize enough how important this step in the process is, as it has critical legal and taxation ramifications.
This is a matter of personal preference that depends on your own tax situation, cost of doing business, the level of risk you are willing to bear and the amount of additional clerical and paperwork you are willing to handle. While I do not want to provide tax and legal advice, I will list for your further research some of the structural options available to you:
Unincorporated Sole Proprietorship: Under this structure, you and your business are essentially one and the same. You will be directly taxed and you will have unlimited liability.
Limited Partnership: Simply put, you act as the general partner and your clients act as limited partners. This is the most prevalent structure for hedge funds. All income and expense is passed through to the partners. The limited partners are liable only to the extent of their capital contributions. The general partner may have unlimited liabilities.
Corporation: This legal vehicle is fully taxed as an independent taxable entity. The benefit is that the corporation has liability protection for its shareholders under the law.
Limited Liability Coropration (or LLC): This is structured much like a partnership or sole proprietorship for tax purposes but has the liability protection of a corporation.
Before you make a decision, I implore you to seek the help of qualified professionals, such as attorneys and accountants. The optimal structure for me was to set-up LakeView Asset Management as an LLC.
Furthermore, money management itself takes many forms. You need to decide for whom and in what structure you will be managing money. Here are a few possibilities, each of which must be more fully explored in your business plan (see Step 1):
Trading for Your Own Account: If you do this, then you will solely be making money from generating capital gains from putting your own personal capital (via savings or other sources) totally at risk. The risk of this strategy is very high. You will "eat what you kill," but you need to be very careful. At times, you might take unnecessary risks just to "make ends meet." Alan Farley's article, "Making the Transition from Investor to Trader," provided some excellent advice for those who choose this path.
Money Management: This will require raising investment capital from other people. This is no easy feat. Clients will require performance track records, documentation and an infrastructure to manage their funds. This is a difficult hurdle to surmount for those of you who are not coming from a trading or investing career. As a result, you may have to resort to disseminating personal trading records or back-tested models. Finally, be aware that you will need to service your clients and provide periodic performance reports. Also, you need to decide whether you will manage money in separate accounts or in a fund structure, such as a mutual fund or hedge fund. Lastly, managing other people's money will require some sort of licensing, such as an RIA (Registered Investment Advisor) or other regulatory filing. This may require registering with a state securities bureau or the Securities and Exchange Commission (SEC). Furthermore, you might have to file a prospectus or other regulatory documentation with one of those regulatory agencies. The good news is that when you take the money management route, you will earn fees instead of relying on your own capital to feed your family. These fees are typically based on two variables:An Asset-Based Fee: This is a percentage of the assets under management. This percentage is negotiated and varies based on the asset class and complexity of the management strategy. Typically, asset-based fees run from as low as 0.25% for fixed income accounts to 3% for some aggressive equity strategies. A Performance Fee: This is a percentage of the profits generated by you (the manager or advisor) in your client accounts. In most instances, the performance fee is between 10 to 20%. Beware that there are securities regulations that affect the rules for charging performance fees.As it turned out, money management was the direction that I took. LakeView Asset Management, LLC became a registered investment advisor, specializing in the management of separate accounts for high net worth individuals.
Quick Recap -- So Far
Deciding to strike out on your own in the investment business is not as simple as opening a trading account at
and then going to work. Before making the final decision to switch from your current career to working as a full-time money manager, you need to carefully plan your transition and consider the implications of your new life.
I suggest that you begin by preparing a business plan and discussing the plan with family, friends and consultants. Conslutants may include career consultants, business consultants, peers in the business, lawyers and accountants.
I began to plan LakeView Asset Management a few weeks after the events of September 11, 2001 and launched the business in the spring of 2002. I spent those months developing my business plan, speaking to others who had started similar businesses, working with consultants and managing my wife and family through the process.
Step 4. Raise Capital:
When starting (and running) an investment business, capital commitment is critical. Raising capital is no easy task. That said, with your business plan as a starting point (see Step 1), here are three ways in which to source the needed capital:
Use your own investments or those of your family.
Raise money from third parties on your own. This requires marketing skills that you may or may not possess.
Use a third party to raise money on your behalf. This may be costly, but could be quite effective.
I used the first two methods to raise capital for LakeView.
Every market environment is different. In the current volatile environment, many investors are reluctant to part with their investment capital. On the other hand, some investors are dissatisfied with their current investment advisor and may be seeking a new perspective. However, this type of environment tends to disadvantage a start-up venture and favor an established manager.
Step 5. Manage Your Mindset:
Making the transition from your current career to being a full-time investor, or money manager is not trivial. Unlike changing jobs from, say one company to another, changing your profession -- how you earn your livelihood -- has important ramifications for both you and your family.
To succeed, you have to be willing and able to devote the necessary time and again, capital. Highly motivated and hard working individuals are more likely to succeed than those who see this as only a 9:30 a.m. to 4:00 p.m. (typical trading hours) job.
For every success story like
James "Rev Shark" DePorre, there are many trading entrepreneurs who fail. Here are three things to keep in mind:
Can you go from the certainty of a regular paycheck and income stream to the uncertainty of trading or investing for a living? It is highly likely that you will have to rely on savings for a year or more just to make ends meet and maintain the standard of living to which you are accustomed. Remember that you are about to confront the double-edged sword of needing your savings for investment capital, and needing that very same capital to sustain your living expenses. Also, you must explore other personal financial considerations, such as medical insurance and retirement planning.
You will need the support of your family to make this work. This may be the hardest part of your journey. Your family will be directly affected by your change of job and income stream. Consider both the emotional and the financial aspects of your new career, as this can impact the lives of many people for many years. As I stated before, getting my spouse and family involved in the business planning of LakeView was most helpful. Initially, my wife was skeptical, but as the process evolved she learned more about the business and became more comfortable with my decision.
Are you willing to devote the time necessary to operate a full time business? While the markets may be opened from 9:30 a.m. to 4:00 p.m. (plus or minus time for premarket and after-hours activity), you will need to devote many more hours to become successful. Also, expect to expand your work week from five to as many as seven days. Running your own business requires performing a multitude of tasks (described earlier). All of these responsibilities cannot be performed during standard trading hours or even during a five-day work week.
In your transition to becoming a full-time investor, be prepared to devote a considerable amount of time and capital to the effort, knowing full well that you might be foregoing a steady paycheck and benefits for a period of time. The volatility of this business can take its toll on your wallet and your psyche.
Suggested reading: If you genuinely want to be full-time investor, Jim Cramer's account of getting started in the business in
is a must-read book.
At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J. The firm offers customized individually managed separate accounts, including proprietary long/short strategies to its high-net worth clientele.
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at
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