Traders Should Think Of Themselves As Entrepreneurs

October 4, 2011 | By: Robert A. Green, CPA

Postscript September 2014: While we no longer operate Green’s Entrepreneur Network, we are focusing on the tax needs of small businesses. Many traders and spouse operate another home-based business. 

Traders may not realize it, but they are entrepreneurs. It’s wise for traders to learn and follow entrepreneur business axioms. What counts most are bottom-line net profits and after-tax cash flow from your trading business over a period of time; not just successful trading strategies. 

Risk taker or avoider?
Many people will say entrepreneurs are risk takers. It’s actually the opposite, — entrepreneurs are “risk avoiders.” Malcolm Gladwell, in his 2010 New Yorker article “The Sure Thing,” made this point in his excellent story on a few very successful entrepreneurs. Ted Turner, founder of CNN and John Paulson, the famous hedge funder who did the Big Short with Goldman Sachs each made billions on what they viewed as a “sure thing.” They mostly used other people’s money rather than their own. 

But, there is no sure thing when it comes to trading. Successful active traders use a plethora of tools, charting services and hedging strategies to limit risk. Traders shouldn’t bet the family farm on a new trading business either and they need the discipline of reversing course after a period of consistent trading losses. 

Once an entrepreneur, always an entrepreneur 
There’s good news during this high unemployment era: It’s not just a choice between trading for yourself or getting a job again. Traders are well suited for seeking other entrepreneurial activities, perhaps related to trading or their prior career skill sets. You don’t have to give up trading for good; you can try out other entrepreneurial endeavors while you restructure your trading business. 

How to balance trading with other activities 
Some active traders keep their full-time jobs and fit trading around their job schedules. Others leave their jobs to pursue trading fulltime. Some traders like to diversify their entrepreneurial activity by trading during market hours and operating another entrepreneurial activity after trading hours. 

Some traders are enamored with the trading industry and they want to launch a trading services business involving trader education, coaching, mentoring, IT, administrative services or blogging. Other traders want to start a brokerage firm, proprietary trading firm or investment management business. 

The common thread through all of this is being an entrepreneur and having financial and business independence. 

Diversification is wise 
Just like an investor should not hold their entire portfolio in one stock, some traders may want to own and operate more than one business activity. Diversification of business activities is a good idea since only a low percentage of traders are able to make a sufficient living from trading over the long-term. Many traders may be successful during certain market conditions, but they may lose their way when market conditions change – which happens fairly often these days. 

Entrepreneurs keep tax breaks 
If a trader falls short of “trader tax status” (business tax treatment), they can retain business tax treatment in another side business. The IRS is not as strict with other business activities as they are with trader tax status. 

Traders want to be able to deduct general business expenses, home-office expenses and AGI deductions including retirement plans and health insurance premiums. Dedicated trading expenses are treated as investment expenses (Section 212) when a trader falls short of trader tax status. Section 212 does not allow home-office expenses. Employees get very few tax breaks and expenses. 

Entrepreneurs need to be virtual and global 
Modern-day entrepreneurs need to take advantage of online tools, services and ecommerce and create a fully equipped home office. With the reach and power of the Internet and online business, entrepreneurs should seek global cooperation and business as well. For example, you can design a great product in America or Europe, manufacture it with a manufacturer in an emerging market and sell it globally, including in high-growth emerging markets too. All of this can be done from a home office over the Internet without employees. 

Entrepreneurs can weave joint venture and contractor relationships over the Internet to create a partner-in-profit relationship rather than an employer-employee relationship. 

Traders are experimental, and most entrepreneurs should be too. 
Most traders experiment with trading by using online broker “demo” or “sim”(ulate) trading systems, before committing precious capital to risky live trading. Other traders “back test” trading strategies and ideas beforehand too. But, the real proof is in the pudding when you go live. Trading in a live account triggers sweat and more emotions, and that risk is very different from the cocky feeling one gets while sim trading. Risk avoidance is important, but undue fear of risk can sink otherwise good traders. 

Successful entrepreneurs conceive of great ideas that suit their skills and passions and they execute them well. Trial and error is a huge part of an entrepreneur’s success. Entrepreneurs should also test new products and services out on friends, family and close business associates. 

A California executive becomes a business trader and sets up a BOO business. 
Sanjay is a high-salaried engineer at a California software company. At age 55, Sanjay and his wife Vainavi are now empty nesters. Sanjay is approaching the end of his career and he feels insecure in his job considering that his company is facing technological obsolescence and management is increasingly offshoring jobs to foreign markets. Vainavi gave up her administrative job a few years ago and she is anxious to work again. Like her name means in English, she is a gold mine of talent.

Sanjay has been trading for several years. He became interested in trading after receiving employer stock options, exercising and holding some and trading options around his core stock positions. As a software engineer, Sanjay got swept up in online trading. It was a natural fit for his engineering skills, mindset and passions. Vainavi helps Sanjay organize and operate his trading activities. 

This year, Sanjay has taken trading to a higher level. He’s been very profitable, making even more money than at his day job. Rather than wait another year to face an impending company restructuring, Sanjay has decided to become a full-time trader and entrepreneur. Instead of trying to fit trading into his busy job schedule, Sanjay wishes to make trading his top priority and engage in other entrepreneurial activities as well. Vainavi wants to be Sanjay’s business partner in all these endeavors too. They have saved sufficient money over the years and feel the time is ripe to become entrepreneurs. They want business activities they can pursue until their late 70s. 

Sanjay now day and swing trades securities and options in a new husband-and-wife general partnership account. Vainavi helps with research, administration, accounting and more.

Sanjay’s employer was sorry to see him leave. His ex-boss figured Sanjay could manage some of the company’s offshored jobs sent to India. Sanjay turned down part-time employment but agreed to be a new supplier to his ex-employer instead. Sanjay set up his own Business Operations Office (BOO) based in India, along with local Indian colleagues. Sanjay offered to house his ex-employer’s Indian contractors in his BOO to improve management and security – exactly what his ex-boss wanted in the first place. But in this scenario, the software company encounters less risk. Sanjay leaves much of the Indian-based operations to his Indian-based partner while he focuses on trading and sales of his BOO services – which doesn’t take much time. Vainavi helps out with the BOO business, as she was a career administrator before and this is right up her alley. 

The end result is great. Sanjay and Vainavi beef up trading and make even more money. Sanjay left a negative job scene and replaced it with a new exciting BOO business in India, with his ex-boss and company as his first client. Sanjay and Vainavi plan to get several other good clients for their BOO business too. Having an anchor client with an excellent reputation is a great start. Vainavi is happy to be working more again. 

Sanjay and Vainavi set up two home offices in their children’s former bedrooms. They expense 20 percent of their home for business purposes and deduct much of their travel expenses to India. 

This entire entrepreneurial endeavor is fairly easy and natural for Sanjay and Vainavi, as they were both Internet and computer savvy. They got the additional support they needed on business, tax and legal matters from experts in trading, virtual business and global entrepreneurs — including Green & Company. 

To conceive and expand their trading and BOO businesses, Sanjay and Vainavi benefited from having joined Green’s Entrepreneurs Network, led by Robert A. Green.

Green’s Entrepreneurs Network suggested that Sanjay and Vainavi set up their own proprietary trading firm. They can recruit prop traders in India, managed by and housed in their BOO operation, to trade their own capital or capital raised from other members of Green’s Entrepreneurs Network or other contacts of Sanjay and Vainavi.

Bottom line. 
While trading is an exciting and profitable business for some, it’s unprofitable for others. While most traders hope to hit a home run, that’s simply not feasible for most. Traders often retool, restructure or take some time off from trading. Why not consider other entrepreneurial endeavors during those times? If you love trading because it meets your urge for financial and business independence, you will satisfy that same urge with other types of entrepreneurial activities too. Jobs may be scarce, but entrepreneurial opportunities are not and the world is your oyster. 

Robert Green invites you to join Green’s Entrepreneurs Network. Membership to this entrepreneurial endeavor is free. It’s a win-win: You will learn new ideas, meet new people and gain invaluable experience. This is not a support group for sorrow, but a springboard group for launching and improving successful businesses that are rewarding in terms of profit and passion for our members.