Navigating the Investing Landscape: The Active Trader's Perspective

In a world where passive investing has become the norm, one industry veteran is challenging the status quo. Tom Sosnoff, co-founder of tastytrade and co-founder and CEO of tastylive, believes that active trading can provide investors with a more rewarding and educational experience than simply "set-it-and-forget-it" passive investing.

Unlocking the Power of Active Participation in the Markets

The Risks of Passive Investing

Sosnoff argues that passive investing can breed complacency and deprive investors of a crucial education in risk management, market mechanics, and decision-making. He believes that by actively participating in the markets, investors can gain a deeper understanding of how the financial world works, ultimately equipping them with the tools to navigate volatility and capitalize on short-term inefficiencies.Sosnoff's stance is a departure from the near-constant drumbeat of pro-passive investing advice that has dominated the industry in recent years. He believes that the decision to opt for passive investing is still an active decision, with over 3 million stock indices in the world – more than 50 times the number of stocks.

The Benefits of Active Trading

For Sosnoff, the volatility that scares most investors is an opportunity. He sees it as "the only true math equation in finance," where price is not mean-reverting, but volatility is. By learning to navigate this volatility, investors can develop the skills to take advantage of short-term inefficiencies, particularly through strategies like selling options.Sosnoff emphasizes that active trading is about learning how to make decisions, take risks, assess probabilities, and invest strategically. This education, he argues, can provide long-term benefits, even if an investor ultimately decides to return to passive investing.

Redefining Risk in Finance

Sosnoff takes a unique view on risk, seeing it as something that can be controlled through position size and diversification. He believes that the only thing an investor can control in finance is what they do, not the unpredictable events that may occur, such as another car hitting them on the road.By keeping position sizes small and spreading investments across multiple assets, Sosnoff argues that investors can effectively define and limit their risk. This approach, he believes, is accessible to anyone, regardless of their investing experience.

The Importance of Education and Experience

Sosnoff's core message is that active trading provides an education in real-world finance that can be invaluable, even for those who ultimately choose to invest passively. He believes that losses in active trading are akin to "tuition" for this education, equipping investors with the knowledge and skills to navigate the markets more effectively.The irony of Sosnoff's position is that it seems to contradict the near-constant advice to embrace passive investing. However, his argument is that the decision to opt for passive investing should be an informed one, made with a deeper understanding of the markets and the tools available to investors.In a world where passive investing has become the dominant investment strategy, Sosnoff's perspective offers a refreshing and thought-provoking alternative. By embracing active trading, he believes investors can gain a more comprehensive education in finance, ultimately empowering them to make more informed and strategic decisions in the markets.