Trading Like a Lawyer

PART I. A GENTLEMAN OF HONOUR (sic)

Now that I have the emotional buffer of being several years removed, the entire ordeal of first year law school exams is completely and utterly hilarious, yet also pathetic.  All semester long, you read actual cases and memorize stupid facts like the name of the grocery store where the Plaintiff slipped and fell on her ass because there was a spilled can of Ragu pasta sauce in aisle 4.  During your entire academic life, you did well by outworking everyone else–It worked in high school and college. Lo and behold, just as you are finished digesting turkey on Thanksgiving, it hits you that your one and only exam for each course is quickly approaching,  You scramble to organize your notes (“outlines”) and you attempt to memorize every last detail of every single off hand comment that your professor made in class.  The students in your first year class start freaking out.  Girls stop caring about makeup and tight jeans. It is all sweat pants, all the time.  Guys who you thought were decent people some how, some way, have suddenly developed the knack to keep forgetting to send you the notes you asked them to, for the one Constitutional Law class you missed when you had the flu.

Before you know it, you are staring down at an exam and a bluebook answer sheet in a quiet room with your classmates, many of whom are jittery from the combination of energy drinks and pills they have been popping as a last ditch effort to cram it all in. You are competing directly against them on a grading curve. Hence, performance is all relative. You have three hours to answer about five essay questions, and that will single handedly determine your grade for the course. They are hypothetical fact patterns, where a client comes to you with a long sob story, and you get to “play lawyer,” and advise her on her legal issues and  the ways to address them.  No class participation grade, no “A” for effort, no scratch and sniff stickers, no names–all anonymous.  When it’s over, it’s over.  You will probably stand outside in the courtyard and nervously do a post-mortem on the exam with insecure douchebags that are trying to psyche each other out after the fact.  You will rinse and repeat this process for each of your first year exams, pretty much. When you finally receive your grades several weeks later, you will be so burnt out that it will barely matter anymore.  You will have done well on the exams you were sure that you failed, and you will have not aced those exams you were sure you did.

To that last point, about a week before my first exam, one of my more esteemed professors, a cocky middle aged rock star of a professor with a thick British accent, gave my class a lecture on the entire spectacle surrounding law school exams.  He taught Tort Law, which is comprised of legal issues such as negligence, intentional infliction of emotional distress, assault and battery, assumption of risk, etc. Basically it is anything that isn’t a procedural, contractual or criminal case. After reading iBankCoin for over a year now, you can imagine how hilarious I find his speech now, given all of the British accent/gentlemanly references that The Fly and Jake Gint regularly make.  With no less than a few days to go before his exam, he coolly told the nervous class, “You can study all you want and still get a ‘C’ or worse. This is not college. I will give you no points for rambling on a concept after you have already earned your allotted points.”

In other words, what he was saying was that if you blew your wad talking about a negligence issue in one of his hypothetical fact patterns on the exam at the expense of talking about another issue–let’s say an assumption of risk issue, then you will have missed out on a legal issue and thus not get full credit.  Of course, this makes sense.  Let’s say you’re a lawyer in the real world and a client comes to you with a long sob story.  He asks for your advice, and you do really, really well telling him about one issue he faces, but you completely miss another issue that is significant.  Well, you’re a shittier lawyer than the other guy who can cover each issue even if he does so only superficially.  Do you see why? Lawyer’s can’t afford to miss issues.

Anyway, the cocky British guy showed us a sample grading sheet that he used for one of his older exams.  It looked like chicken scratch, and it was typed! He wrote in fragments, with some point allotments next to each issue.  He showed us the corresponding question sheet, and it was a long fact pattern of a question that appeared like it needed a long, grand response to get an “A.”  For the purposes of this example, let’s say it was the above story of the lady Plaintiff slipping and falling on her ass on a spilled can of Ragu at a grocery store.  She sued the grocery store.  Turning back to his grading sheet, it literally looked something like this:

Negligence (5 points)

-Store have duty to Plaintiff? She was a customer–special relationship. (4 pts)

-Breach o/ reasonable care? Depends, how long was Ragu on the floor for? OUGHT to have known? (3 pts)

-Proximate Cause? Did she slip because of something else? Should she have been more careful? (2 pts)

I thought to myself, “That’s all?! THIS is all there is to getting an “A” in law school?! This little bullshit grading sheet?” You see, he didn’t even care what conclusion you arrived at, so long as you briefly mentioned the relevant issues that arose.  If you did, you got points. If you didn’t, then no matter how intelligent and godly you sounded in your eloquent response, you were wasting time. He also couldn’t care less about you dropping case names or bullshit facts from the cases you toiled over all semester long.  All he wanted to see was that you knew the relevant legal issues cold and could apply them to a hypothetical case that he had concocted.

The professor then concluded his little speech by smugly saying,

“You see, in theory, it is really not that hard at all.  You should NOT start writing your answer right after reading the fact pattern. Rather, you should take a few minutes to organize your response issue by issue. And then all you have to do is ‘dink’ each issue on its head in a focused and cogent manner. Besides, why should I give you credit for regurgitating facts or case names from the semester right back to me, when it’s an open book exam?”

In retrospect, I can probably look back on that speech with a smirk because I got an “A” on the exam, basically by following his advice, and also because I loved the subject matter.

PART II. APPLIED TO TRADING

An interesting thing about trading, or even investing, is that the market seems to be like one giant open book exam every day. The opening bell rings, and there are many issues to spot. You are basically on a large grading curve with other market participants, just like you are on a curve in law school.  If a stock drops sharply, it may be a good buying opportunity, or it may be time to sell and cut your losses if you’ve been holding it.  It really all depends on your analysis.  One thing is for sure, if you spend all of your time focusing on one particular issue for a stock at the expense of another issue, you are making a mistake just as my professor said.  For example, let’s say you are an expert in technical analysis, and you see a chart that is a true gem. I mean, when you look at the chart you think it is almost orgasmic.  Well, guess what? If you buy that stock and it turns out that they are reporting earnings the next morning, and they miss and the stock gets killed, you missed an issue!  You see, it’s the same concept.  If you miss an important issue, odds are that other market participants will not, and you will fall behind them on “the curve.” Only here in the market, as opposed to law school, missing issues means that you’re losing capital.

Beyond spotting issues, perhaps the best thing that has helped me as a trader is organizing my notes before each session.  As crazy as it sounds, I have a little grading sheet of my own for each stock that I hold, or am considering trading.  It looks something like this:

GLW (Corning)

-Cup and handle pattern–bullish

-Can it break $20.85 (key resistance level)? If so, on volume?

-Earnings soon? (Wed 04/28)

-If no breakout by Tues–consider selling? (Depends where price is)

I urge you to do the same for each of your holdings, or potential ones.  You are bound to be overwhelmed if you do not have a specific watch list of stocks for each day, or at least each week.  But, frankly, that is not enough. You should be more organized than that.  You should know each relevant “issue” for every stock you are stalking, just like a lawyer should for each of his clients.  Being organized and doing your homework are two of the most basic things that you can do as a trader to become more profitable. If you feel overwhelmed by all of the stocks that you are looking at on a daily basis, then cut down on the number of stocks that you are scanning.

Thus, with your notes front and center, all you have to do is run through your “grading sheet” and see how each stock is holding up during the session.  Will the GLW cup and handle pattern materialize before earnings next week for me? If not, maybe I will take off half of my position so I am not making a big earnings gamble.  Either way, I will see the issue and have a chance to address it.  There are enough external variables in the market, that you should have a tight leash on those ones that you can, indeed, control.

I hope you found this post helpful.

If you enjoy the content at iBankCoin, please follow us on Twitter