[This topic (“Why don’t system creators trade their own systems?”) started out in another thread, but the subject has drifted so far from the original (“What is the best subscription cost?”) that it seemed to make more sense to break it out into its own thread here before I replied]
And yes, I tend to ramble endlessly in everything I write. 
I think that the most important reason why system creators don’t trade their own systems is poverty. Consider the math. A poor trader has $5k in his brokerage account. With that little money to invest he can’t afford to do anything high risk, so he’ll split up the money among several securities, make a small number of carefully researched transactions, and hold for a long time. Let’s say he holds 5 positions at a time, each initially worth about $1k, for about 6 months. His broker charges him $10 per transaction, so a round trip costs him $20, or about 2% of his original investment. So he has to make a 2% profit on each transaction to break even. Now let’s say that his system is good enough to win at a 2:1 ratio. This means that every 2 winners has to pay for 1 loser. So in order for the whole system to break even on the brokerage fees every winner has to make 3% profit.
Now let’s switch to his endgame for a moment to get a number that we’ll need. If he wants to make a profit of just 5% per year on all of his capital, which isn’t going to give him a very good retirement, he’ll need for each 6 month round trip to make just a bit less than 2 1/2% profit on every security to meet his goal. I’ll use 2 1/2% to make the math easier. Now let’s go back to the original thread.
Let’s assume that his system is even better than we thought in that, in addition to a 2:1 ratio of winners to losers, the magnitude of each win is about twice that of each loss (and yes, I do think I get far too carried away when I write about things like this). Since the investor needs to make a 2 1/2% profit on all securities, including the losers, how much profit will each winner have to make (not including the brokerage fees) to cover the losses incurred by the loser? A bit of algebra and one headache later, we see that if each winner makes a profit of 4 3/8%, or 2 1/2% + 1 7/8%, then each winner has made its desired profit plus 1 7/8% extra profit to devote to covering for the loser. Adding the extra profits from the two winners gives us an extra profit of 3 3/4%. Not by accident, this is how much profit we need to cover for both the losing security’s 1 1/4% loss and its missing 2 1/2% profit. Sooo…
In order to satisfy his goals, and assuming that his system wins at a 2:1 ratio, and assuming that the size of the wins averages twice the size of his losses (which is a really good system), and given the trading parameters in the first paragraph, then each winner has to make an average profit of about 3% + 4 3/8%, which is equal to 7 3/8%, to cover the losers and allow him to attain a high enough average return across all of his investments to reach his goal. (Give me a moment… I ran out of breath on that one…). Finally (thank God!), we note that his goal isn’t a very lofty one. Starting with $5k and a 2.5% profit compounded every 6 months, in 40 years one’s account would only hold approximately $36,047.84 assuming that I didn’t hit a wrong button on my calculator. Normally you’d want a lot more than that. The initial parameters are made up, but I think that they’re realistic enough that the point is valid.
Putting all of this together, I suspect that in most cases it’s not worth a person’s time to trade their own systems until they’ve got enough capital to make the effort worthwhile. While achievable profit percentages can yield large returns when applied to large blocks of capital, those same percentages can yield microscopic returns when applied to small blocks of capital. When you’re poor the return for selling your system’s advice is far greater than it is for trading your own system. When you’re rich the situation is reversed. I’ll leave it for people much smarter than myself to find a way to determine when the crossover point is reached, although I suspect that in most cases intuition would do well enough.
Of course by the time you don’t need to be selling your system’s advice anymore you’ll probably be making enough money from trading it that you’ll take it off of C2. When that time comes try to remember us all kindly and leave it on.
[LINKSYSTEM_65259981]
I can not speak for othes, but I do trade my own system.
Good points about overhead. I suspect a lot of people jump into penny stocks with only $2k and paying $5 per trade. Ouch.
You can make 20% per year with long-term value investing, holding most equities at least 1 year. Also, TD Ameritrade has a small selection of no-fee ETFs, with which an ETF system probably could make 20% CAGR. So I assume we are talking here about someone who wants to do a lot better than 20% per year, which requires frequent trading fees.
This person cannot afford autotrading, which is $1,200 annually for the software. If you do not have an autotrade account, you pay $5 per trade at MBtrading. There are brokers with $1 minimums, usually requiring $10,000 minimum deposit, which you can raise by partnering with your best pal, if you don’t mind risking the loss of your friendship. Or maybe you have a relative with over $30,000 in a Merrill Edge premium account with 30 free trades monthly–who would like you to add $5,000 and also trade $5,000 of theirs. So it can be done.
Secondly, anyone who only has $5,000 but publishes a c2 system needs to be confident because this costs money. Nonetheless, the vast majority of new c2 systems will crash. So he might think he is a genius, but I would not bet on it. I personally would not gamble more than 1/3 of my last $5,000 on my own high-risk system with 50% target CAGR. I would put the other 2/3 in my medium-risk system with 30% target CAGR. (And please note, that is because these are my systems. I would not expect others to put their last $5,000 in another person’s system.)
Also note that there is a certain “bell curve” about risk-taking. If my net worth were $50,000, then I would increase the low-risk portion to 50%. My 50k life savings would tolerate much less proportional risk than my 5k life savings. Presumably, the 5k person can count on his day job salary as if it were 1/2 of his account, and otherwise has "not much to lose."
But nonetheless, I would primarily do medium-risk, not high-risk, with only 5k. So I would only expect to average 30% = $1,500 per year, and maybe not this year… That’s less than he could make moonlighting at MacDonald’s… And not every trader has a medium-risk system with reasonable churn.
So yes, it makes a lot of sense for a trader with only $5,000 not to trade his own system. But if he were somewhat cautious, chances are he would not be a trader. In fact, lack of caution is probably the main reason he is a trader and only has $5,000.
So, I agree it’s not advisable. But I suspect you will find that most c2 system vendors do trade their own systems, no matter what.
Krystof,
Your posts have been comprehensive and thoughtful, as well as thought-provoking.
I, for one, am on tenterhooks awaiting the system or systems you’ll release on C2.
Any time frame?
Best,
–Josh
Thank you very much Josh. My systems are basically done, I just need to refine the backtesting. The real problem is getting my family to stop requiring me to mow the lawn, pick blueberries, go shopping, feed the squirrels, etc. All of which I don’t do as well as most people. And I can’t stay up till 2 am anymore, it was reducing my immune system… I suppose this sounds familiar to a lot of people…
But now I will tell my family that at least one person will take a serious look at my systems if only I get them published. Then maybe they will back off and I will get this done next week… There now that I’ve said it, this puts more pressure on me and I will get this done…
@ Kevin Grant
"I think that the most important reason why system creators don’t trade their own systems is poverty. Consider the math. A poor trader has $5k in his brokerage account. With that little money to invest he can’t afford to do anything high risk…“
If a system can’t make money when developer trades it, it will not make it for a C2 subscriber either. There are poor traders at C2 too with a $5000 accounts, don’t forget that.
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