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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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I hired other traders, taught them what I did, and gave them my capital to trade==== Any other trades that stand out as being particularly dramatic? ==== On one of the expiration days in the S&P in 1985 or 1986-1 forget the exact date-the spread action between the S&P and OEX convinced me that a major buy program was going to hit the market. The Major Market Index [MMI] was trading at about 349. I bought four thousand of the 355 options at 1/8 and five hundred of the 350s at 1 3/4. The market moved higher, and at 3:30-one half-hour before the close-the 355& were trading at 2 and the 350s were trading at 5 1/2.1 sold the five hundred 350 options, giving me a free ride on the rest of the position. At that point, one of the major Wall Street firms hit the market with an extremely large sell program, and prices collapsed. With less than a half-hour remaining until expiration and the options out of the money, there was no way to get out of anything. The market finished down sharply for the day. After the close, I remember going to Michaels One and telling the bartender, I need a drink. I just made $100,000 today-the only problem is that an hour ago I was ahead $800,000. ==== Your track record shows that you made substantial withdrawals from your account during the 1980s. You dont seem to be the type of person whos an extravagant spender. Therefore, I assume that this money was reinvested in some form. What alternative investments did you choose? Why didnt you simply let the money compound in your account, since you were doing so well? ==== One of my major investments was starting a trading company. I hired other traders, taught them what I did, and gave them my capital to trade. ==== Why did you do that? ==== Because I wanted to be the McDonalds of trading rather than an egotistical, solitary trader. This venture, of course, didnt work out as well as McDonalds [he laughs loudly]. ==== What was the outcome? ==== Over a five-year period, I trained thirty-eight people. Each of these people spent several months by my side while I taught them virtually everything I knew about the market. Out of these thirty-eight people, five made money. ==== How did you choose the people you selected for training? ==== 1 wasnt very scientific about it. Basically, I went with my instincts and whims about who might be a good trader. The people I selected were a very diverse group. ==== Was there any correlation between intelligence and success at trading? ==== Absolutely, but not in the way you think. For example, one of the people I picked was a high school dropout, who Im sure didnt even know the alphabet. He was one of the five who made me a great deal of money. ==== Why did you pick him? ==== He was my phone clerk on the American Stock Exchange, and he was very aggressive and alert. Also, he had been in Vietnam and had a hand grenade explode near him, leaving shrapnel in his pancreas. As a result of this experience, he was always afraid of everything. When it came to trading, he was more worried about losing than winning. He took losses very quickly. On the other extreme of the intelligence spectrum, one of the people I trained was a genius. He had a 188 IQ, and he was on Jeopardy once and answered every question correctly. That same person never made a dime in trading during five years. I discovered that you cant train people how to trade by just imparting knowledge. The key to trading success is emotional discipline. Making money has nothing to do with intelligence. Think of all the bright people that choose careers on Wall Street. If intelligence were the key, there would be a lot more people making money trading. ==== You almost seem to be implying that intelligence is an impediment to successful trading. How would you explain that? ==== Assume that youre a brilliant student who graduates Harvard summa cum laude. You get a job with a top investment house, and within one year, they hand you a $5 million portfolio to manage. What would you believe about yourself? Most likely, you would assume that youre very bright and do everything right. Now, assume you find yourself in a situation where the market is going against your position. What is your reaction likely to be? Im right. Why? Because everything youve done in life is right. Youll tend to place your IQ above the market action. To be a successful trader, you have to be able to admit mistakes. People who are very bright dont make very many mistakes. In a sense, they generally are correct. In trading, however, me person who can easily admit to being wrong is the one who walks away a winner. Besides trading, there is probably no other profession where you have to admit when youre wrong. Think about it. For example, consider a lawyer who, right before a big case, goes out with his girlfriend and stays up half the night. The next day, hes drowsy and inadequately prepared. He ends up losing the case. Do you think hes going to tell the client, Im sorry, I went out last night and stayed up too long. If I were sharper, I would have won the case. Heres your money back. It will never happen. He can always find some excuse. He would probably say something like, I did the best I could, but the jury was biased. He will never have to admit he was wrong. No one will ever know the truth except him. In fact, hell probably push the truth so far into his subconscious that hell never admit to himself that his own actions caused the loss of me case. In trading, you cant hide your failures. Your equity provides a daily reflection of your performance. The trader who tries to blame his losses on external events will never learn from his mistakes. For a trader, rationalization is a guaranteed road to ultimate failure. ==== Typically, how much money did you give these trainees to trade, and what was their cutout point? ==== In most cases, I started people out with $25,000 to $50,000. In a few cases, I started trainees out with accounts as large as $250,000. Their cutout point was when they lost it all [he laughs]. I never had to fire anyone, they just self-destructed. ==== On balance, did you lose money on this trainee trading program? ==== No, because the five of the thirty-eight trainees who were successful made more money than all the others combined lost. The only unfortunate thing was that these five people made so much money that they quit. That was one outcome I didnt consider at the onset. ==== In the end, though, you still ended up with net profits on the deal. ==== Yes, but not very much considering the effort that went into this venture. I certainly wouldnt do it again. ==== Why do you think the majority of people you trained lost money? ==== They lacked what I call emotional discipline-the ability to keep their emotions removed from trading decisions. Dieting provides an apt analogy for trading. Most people have the necessary knowledge to lose weight-that is, they know that in order to lose weight you have to exercise and cut your intake of fats. However, despite this widespread knowledge, the vast majority of people who attempt to lose weight are unsuccessful. Why? Because they lack the emotional discipline. ==== If you were going to repeat this experiment again-which obviously you are not-do you think that youd be able to pick a higher percentage of winning traders? ==== Yes, because this time around I would pick people on the basis of psychological traits. ==== Specifically, what traits would you look for? ==== Essentially, I would look for people with the ability to admit mistakes and take losses quickly. Most people view losing as a hit against their self-esteem. As a result, they postpone losing. They think of all sorts of reasons for not taking losses. They select a mental stop point and then fail to execute it. They abandon their game plan. ==== What do you think are the greatest misconceptions people have about the market? ==== In my opinion, the greatest misconception is the idea that if you buy and hold stocks for long periods of time, youll always make money. Let me give you some specific examples. Anyone who bought the stock market at any time between the 1896 low and the 1932 low would have lost money. In other words, theres a thirty-six-year period in which a buy-and-hold strategy would have lost money-and that doesnt even include the opportunity loss on the funds. As a more modem example, anyone who bought the market at any time between the 1962 low and the 1974 low would have lost money. If something happens once, I think logic tells you that it can happen again. Actually, I believe that anything can happen, but certainly if it has happened before, it can happen again. From 1929 to 1932, the market dropped an average of 94 percent. In fact, it has even happened in more modem times-during 197374, the nifty fifty stocks lost over 75 percent of their value. ==== Is your point that we could get a bear market that would be far worse than most people could imagine? ==== Exactly, and people who have the notion that buying and holding for the long term is the way to go can easily go bankrupt. ==== Wouldnt your own duration and magnitude rules lead you astray if we get a market that goes down 80 or 90 percent? ==== Not at all. Remember that I use these statistical studies as only one among many tools. ==== How do you handle losing streaks? ==== We all go through periods when were out of sync with the market. When Im doing things correctly, I tend to expand my rate of involvement in the market. Conversely, when I start losing, I cut back my position size. The idea is to lose as little as possible while youre in a losing streak. Once you take a big hit, youre always on the defensive. In all the months I lost money, I always ended up trading small-sometimes trading as little as 1 percent of the account. When I get into a losing streak, I like to read a nonfiction book to learn something new. That action accomplishes two things. First, it takes my mind off of trading; second, by enhancing my knowledge, I help improve my self-esteem. The key is to do something positive. ==== Do you sometimes pull yourself away from the markets totally? ==== Yes. ==== For how long? ==== Sometimes for as long as a month or two. ==== Do you think that taking such extended withdrawals from the market is a good practice? ==== Without a doubt. You dont want to keep losing if youre in a mt, because that will only destroy your selfconfidence even more. ==== How do you get back into trading? ==== Ty Cobb once was asked why he never had slumps. He said that whenever he felt himself getting into a slump, he wouldnt try to get a hit, but he would simply try to make contact with the ball. To relate that concept to trading, when youre in a slump, try to be patient and wait for a trade that you feel very confident about and keep the bet size small. Your goal should not be to make lots of money but rather to get your confidence back by making correct decisions. |
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