This week I read a story about Canadian businessman who bought some low volatility ETF products backed by nothing but margin.

“Harvey Hajiyan, a 35-year-old financial adviser who lives in Toronto and has been investing for more than a decade, assumed stocks would continue to grind higher this year, similar to the gains the Dow and the S&P 500 had posted for much of the past two years without a pullback.

“All of the strategists agreed the market would go up,” said Mr. Hajiya.

At the end of January, he placed an ill-timed bet and used only margin to fund a large position in the ProShares Short VIX Short-Term Futures exchange-traded fund (SVXY), which rises as long as stock prices remain stable. When the S&P 500 fell into correction territory to erase one of its best starts in years, Mr. Hajiyan’s investment in the ProShares fund tracking expected market swings was nearly wiped out, forcing him to liquidate hundreds of thousands of dollars of securities to answer the margin call.

“I was in denial,” said Mr. Hajiyan after he realized he lost about 600,000 Canadian dollars (US$472,260) worth of his C$1.1 million investment portfolio.”
Mr. Hajiyan’s story isn’t unique. Financial media was full of tales about people funding their Bitcoin wallets with credit card debt at the peak of the mania in December.

All of this made me realize that success in trading depends on two completely independent factors -- good habits and good systems. The irony of trading is that of those two factors good habits are the only thing that we can control, yet most traders pay only lip service to good habits and spend 99% of their time searching for good trading systems.

But systems always fail -- it’s the nature of the market. In the end, the one thing that separates the long-term winners from everyone else is good habits. George Soros has been trading for more than 50 years. Perhaps no trader has as good a record over such a long time span as Soros, yet if you deconstruct his success it’s only partially due to his system of reflexivity. Soros has been able to survive for so long because he only takes risks with “house’s money”. In other words, when he bet big it was always with accrued profits for that year. For example, his massive One Billion trade against the Bank of England was done with the fund’s year to date profits. If he lost he would have just had the same capital he started with. But if he won -- which he did -- he was able to double his yearly return in just a few weeks. Betting with house’s money is just one of many good trading habits that we can all learn and apply.

In the end, good habits never die, but good systems always do.