How to Become a Full-Time Investor

Recently, I received the following email from a RealMoney subscriber:

Currently, I am in a transitional stage in my career, moving from a small business owner into a stock trader/investor.

Would you pass along a prevailing trait -- maybe to the most prevalent -- which you believe separate the successful vs. the unsuccessful investors?

This individual is not alone. They are not the first and will not be the last to decide to become a professional investor. However, taking this step requires taking far more risk than the inherent risk in buying and selling stocks. One big mistake that is currently made is extrapolating a few good trades into a plan for a full-time income stream. But before I get into planning, at a bare minimum, there are a few personal traits which are core prerequisites to jumping into investing on a full-time basis. These traits are:

• The ability to take and manage risk.
• The ability to control your emotions.
• Solid quantitative skills.

Now, before you take the professional plunge, there are a few fundamental steps in the process that you will have to walk through in order to be ready to start an investment business.

Step 1. Get Organized, Write a Business Plan:
Before you go into any business you need a business plan -- and being a full-time investor is a business. At the very least, your business plan should include: "pro-forma" (forward-looking) financial statements, such as income statement, balance sheet and statement of cash flow that project at least three years; marketing strategy (if applicable); and technology, occupancy, licensing, registration, legal and administrative requirements.

Going through the process of developing a business plan will make you think carefully about whether becoming a full-time money manager is right for you.

I found this process to be profoundly helpful. Putting together a business plan enabled me to put in writing what I thought I wanted to do. Then I worked together with other individuals, such as consultants, friends and family to refine the plan. During this iterative process I was able to transform my original concept into a workable business model.

Business plans for investment money managers are unique in that they are essentially service models that rely on the use of cash as inventory. No other business except banking really falls into such a category.

While the current market environment may be considered poor for investing, it provides an excellent opportunity to be out of the markets while you plan your investment business. I started planning my business, LakeView Asset Management, as the technology stock bust was running its course in the early 2000s. So if you're an aspiring full-time investor, I say right now would be a good time to do your planning. Personally, I think you always want to open a business at the bottom of the market, not the top.

Step 2. Understand How You Work --Alone and With Others:
You need to ask yourself if you can do this alone (via sole proprietorship) or if you will need to join one or more individuals (via partnership) in order to execute your business plan. There are pros and cons to either choice. Some people are able to fly solo, while others need a co-pilot or two. It is a matter of your personality and risk profile.

If you start the business on your own you will reap the full benefits of your success or suffer the consequences of your failures. In addition, you will have to bear the burden of not only trading, but also of the critical administrative aspects of running a business.

Should you chose to take on a partner you will share the risks, rewards and responsibilities of the business. However, be forewarned: Entering into a partnership is in many ways like getting married, so the relationship should not be taken lightly.

I decided to go at it alone. Starting a business was difficult enough. Adding a partner on top of a wife and five kids was injecting more complexity and unnecessary stress than I wanted at that time in my life. I always knew I could take on partners at a later date, if it made sense. So far, I have not had to do so.

Step 3. Decide on a Legal (and Money) Structure:
Once you have decided whether to go at this alone or with partners, you need to decide on how the business will be legally structured. I cannot emphasize enough how important this step in the process is, as it has critical legal and taxation ramifications.

This is a matter of personal preference that depends on your own tax situation, cost of doing business, the level of risk you are willing to bear and the amount of additional clerical and paperwork you are willing to handle. While I do not want to provide tax and legal advice, I will list for your further research some of the structural options available to you: