THE THREE PHASES OF A TRADE
The ACTION phase involves hitting the BUY key based on the previous ANTICIPATION process. Since no one can tell the future or what the right hand side of the chart will reveal, the ACTION is based on the confidence that the trader will do what is right once a trade is put on, which is to exit gracefully at a pre-determined loss line or exit humbly at a pre-determined profit target (P2), fully accepting either/or, or an OUTCOME between one or the other, depending on current market conditions.
The REINFORCEMENT phase occurs after the trade is closed. Whether or not the trade is a win, lose, or draw, the self-talk immediately following trade closure is vitally important for the next trade, and even the next series of trades, as future trades can be negatively or positively affected by building pathways to future success. These pathways are neurologically based and can make or break a successful trading career. While it is important to ANTICIPATE right side chart OUTCOMES, what is more important is DEVELOPING right side brain reinforcement.
Twelve of The Biggest Trading Losses in History
“Two basic rules: (1) if you don’t bet, you can’t win. (2) If you lose all your chips, you can’t bet.” -Larry Hite
Here are 12 of the biggest trading losses of all time, heed the lessons of these tragedies and realize the traders on the other sides of these trades made a huge amount of money,
#12 German billionaire Adolf Merckle, one of the 100 richest people in the world, killed himself by jumping in front of a train—emotionally “broken” over a bad bet on Volkswagen in 2008.
Merckle’s business interests came out on the wrong side of 2008′s short squeeze of Volkswagen. Rival Porsche silently cornered the market on Volkswagen shares, and when they revealed the extent of their stake, the price of Volkswagen stock shot up to levels that made it briefly the world’s most valuable corporation. Many hedge funds who had bet against Volkswagen shares lost huge amounts of money, while Porsche made billions in profit.
Merckle, whose personal wealth was estimated at more than $9 billion reportedly lost a billion alone on the Volkswagen stock, which shocked his employees. The loss led to margin calls from other creditors and threatened to unravel his entire private business empire. Full Article
#11 Nelson Bunker Hunt and William Herbert Hunt, the sons of Texas oil billionaire Haroldson Lafayette Hunt, Jr., had for some time been attempting to corner the market in silver.
The Hunt brothers had invested heavily in futures contracts through several brokers, including the brokerage firm Bache Halsey Stuart Shields, later Prudential-Bache Securities and Prudential Securities. When the price of silver dropped below their minimum margin requirement, they were issued a margin call for $100 million. The Hunts were unable to meet the margin call, and, with the brothers facing a potential $1.7 billion loss, the ensuing panic was felt in the financial markets in general, as well as commodities and futures. Many government officials feared that if the Hunts were unable to meet their debts, some large Wall Street brokerage firms and banks might collapse.
To save the situation, a consortium of US banks provided a $1.1 billion line of credit to the brothers which allowed them to pay Bache which, in turn, survived the ordeal. The U.S. Securities and Exchange Commission (SEC) later launched an investigation into the Hunt brothers, who had failed to disclose that they in fact held a 6.5% stake in Bache. Full Article
#10 Under the leadership of CEO Heinz Schimmelbusch, German metals and engineering giant Metallgellschaft was on the brink of bankruptcy after losing $1.3 billion on speculative bets. The firm bet on an increase in oil prices in oil futures markets, but oil prices dropped instead. Full Article
#9 Robert Citron lost $1.7 billion for Orange County, California forcing it into Chapter 9 bankruptcy.In 1994, Citron was Treasurer-Tax Collector for Orange County, California. As treasurer, Citron used a series of highly-leveraged deals that included repurchase agreements and floating rate notes. Full Article
#8 Although much success within the financial markets arises from immediate-short term turbulence, and the ability of fund managers to identify informational asymmetries, factors giving rise to the downfall of the fund were established prior to the 1997 East Asian financial crisis. In May and June 1998 returns from the fund were -6.42% and -10.14% respectively, reducing LTCM’s capital by $461 million. This was further aggravated by the exit of Salomon Brothers from the arbitrage business in July 1998. Such losses were accentuated through the Russian financial crises in August and September 1998, when the Russian Government defaulted on their government bonds. Panicked investors sold Japanese and European bonds to buy U.S. treasury bonds. The profits that were supposed to occur as the value of these bonds converged became huge losses as the value of the bonds diverged. By the end of August, the fund had lost $1.85 billion in capital.
As a result of these losses, LTCM had to liquidate a number of its positions at a highly unfavorable moment and suffer further losses. A good illustration of the consequences of these forced liquidations is given by Lowenstein (2000). He reports that LTCM established an arbitrage position in the dual-listed company (or “DLC”) Royal Dutch Shell in the summer of 1997, when Royal Dutch traded at an 8-10% premium relative to Shell. In total $2.3 billion was invested, half of which was “long” in Shell and the other half was “short” in Royal Dutch. LTCM was essentially betting that the share prices of Royal Dutch and Shell would converge. This might have happened in the long run, but due to its losses on other positions, LTCM had to unwind its position in Royal Dutch Shell. Lowenstein reports that the premium of Royal Dutch had increased to about 22%, which implies that LTCM incurred a large loss on this arbitrage strategy. LTCM lost $286 million in equity pairs trading and more than half of this loss is accounted for by the Royal Dutch Shell trade.
The company, which was providing annual returns of almost 40% up to this point, experienced a flight-to-liquidity. In the first three weeks of September, LTCM’s equity tumbled from $2.3 billion at the start of the month to just $400 million by September 25. With liabilities still over $100 billion, this translated to an effective leverage ratio of more than 250-to-1. Full Article
#7 A rogue trader lost UBS $2.3 billion on unauthorized trades in the bank’s London office leading to the resignation of the CEO. September 2011, UBS revealed an unexpected $2.3 billion loss believed to be caused by a lone rogue trader in the bank’s London office. Kweku Adoboli, 31, who worked on UBS’s Delta One desk, was identified as the alleged rogue trader. Full Article
#6 In 2008, a Brazilian pulp maker lost $2.5 billion on currency bets. At the time, Aracruz was the world’s biggest producer of bleached eucalyptus-pulp. In 2008, the firm lost big time on Forex trades when it bet that Brazil’s real would appreciate in an effort to hedge against a weaker dollar. The Brazil’s real ended up tanking. Full Article
#5 In 1996, Sumitomo’s chief trader attempted to corner the copper market and lost $2.6 billion. He went to prison. Yasuo Hamakana, who was once nick-named “Mr. Five Percent” and ”Mr. Copper” because of his aggressive trading style in the copper market, caused Sumitomo to lose $2.6 billion from his unauthorized copper trades on the London Metal Exchange. Full Article
#4 Bank officials claim that throughout 2007, Jerome Kerviel had been trading profitably in anticipation of falling market prices; however, they have accused him of exceeding his authority to engage in unauthorized trades totaling as much as €49.9 billion, a figure far higher than the bank’s total market capitalization. Bank officials claim that Kerviel tried to conceal the activity by creating losing trades intentionally so as to offset his early gains. According to the BBC, Kerviel generated €1.4 billion in hidden profits by the end of 2007. His employers say they uncovered unauthorized trading traced to Kerviel on January 19, 2008. The bank then closed out these positions over three days of trading beginning January 21, 2008, a period in which the market was experiencing a large drop in equity indices, and losses attributed are estimated at €4.9 billion. Full Article
#3 In April 2005, Brian Hunter was, reportedly, offered a $1 million bonus to join SAC Capital Partners. Nicholas Maounis, founder of Amaranth Advisors, refused to let Hunter go. Maounis named Hunter co-head of the firm’s energy desk and gave him control of his own trades. In 2006 his analysis led him to believe that 2006–07 winter’s gas prices will rise relative to the summer and fall – accordingly Hunter went long on the winter delivery contracts, simultaneously shorting the near (summer/fall) contracts. When the market took a sharp turn against this view, the fund was hard pressed for margin money to maintain the positions. Once the margin requirements crossed USD 3 billion, around September 2006, the fund offloaded some of these positions, ultimately selling them entirely to JP Morgan and Citadel for USD 2.5 billion.The fund ultimately took a $6.6-billion loss and had to be dissolved entirely. Full Article
#2 Bruno Michel Iksil, nicknamed the London Whale (for his risky trades) and Voldemort (for his supposed power on Wall Street)is a trader who worked for the London office of JPMorgan Chase who is held responsible for losses up to $9 billion. Reportedly he began working for JPMorgan in 2005 and lives in Paris, commuting to London. It is thought that Iksil, of whom it is said guards his privacy, is married with four children. Full Article
#1 In 2007, Morgan Stanley lost $9 billion on disastrous subprime mortgage bets, and heads were rolling. Hubler, now a former mortgage trader at Morgan Stanley featured in Michael Lewis’ “The Big Short,” lost the bank $9 billion on bets in the subprime housing market. Full Article
3 Invaluable Quotes from Reminiscences of a Stock Operator
“The recognition of our own mistakes should not benefit us any more than the study of our successes. But there is a natural tendency in all men to avoid punishment. When you associate certain mistakes with a licking, you do not hanker for a second dose, and, of course, all stock-market mistakes wound you in two tender spots – your pocketbook and your vanity.”
…“One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.”
Quotes that apply to golf AND Trading
- “Golf is not a wrestle with bogey; it is not a struggle with your mortal foe; it is a physiological, psychological, and moral fight with your self; it is a test of mastery over self; and the ultimate and irreducible element of the game is to determine, which of the players is the more worthy combatant.” –Arnold Haultain
- “Golf is the loneliest sport. You’re completely alone with every conceivable opportunity to defeat yourself. Golf brings out your assets and liabilities as a person. The longer you play, the more certain you are that a man’s performance is the outward manifestation of who, in his heart, he really thinks he is.” –Hale Irwin
- “If you wish to hide your character, do not play golf.” – Percey Boomer
- “I never learned anything from a match that I won.” -Bobby Jones
- “Concentration in golf comes out of a combination of confidence and hunger.” –Arnold Palmer
- “Golf is deceptively simple and endlessly complicated.” –Arnold Palmer
- “Golf is about how well you accept, respond to, and score with your misses much more so than it is a game of your perfect shots.” –Dr. Bob Rotella
- “Golf is the closest game to the game we call life. You get bad breaks from good shots; you get good breaks from bad shots—but you have to play the ball where it lies.” –Bobby Jones
- “No one will ever have golf under his thumb. No round ever will be so good it could not have been better. Perhaps this is why golf is the greatest of games.” –Bobby Jones
- “Golf is a compromise between what your ego wants you to do, what experience tells you to do, and what your nerves let you do.” –Bruce Crampton
- “Golf is not, and never has been, a fair game.” –Jack Nicklaus
- “Man blames fate for other accidents, but feels personally responsible for a hole in one.” -Martha Beckman
- “The worst club in my bag is my brain.” -Chris Perry
- “Of all the hazards in golf, fear is the worst.” –Sam Snead
- “Golf is not a game of great shots. It’s a game of most accurate misses. The people who win make the smallest mistakes.” –Gene Littler
- “Golf is a difficult game, but it’s a little easier if you trust your instincts. It’s too hard a game to try to play like someone else.” –Nancy Lopez
- “One reason golf is such an exasperating game is that a thing we learned is so easily forgotten, and we find ourselves struggling year after year with faults we had discovered and corrected time and again.” –Bobby Jones
- “It’s a funny thing, the more I practice golf, the luckier I get.” –Arnold Palmer
- “A lot of guys who have never choked in golf, have never been in the position to do so.” –Tom Watson
- “Golf is a game, which brings out the peculiarities and idiosyncrasies of human nature. It permits no compromises, recognizes no weaknesses, and punishes the foolhardy. Yet the apparent simplicity in hitting a small white ball from A to B lures all potential golfers/traders into a false sense of security. Every instinct in the human psyche says the game looks easy, therefore it must be. That, for many of us, is where the trouble starts.” –A.J. Dalconen
Visualise and Be Motivated
First, visualise the bad habits that you had. How do you feel? Terrible? Fuel with regrets? Uncomfortable? Now, make a note of the negative emotions and remind yourself how badly you want to get away from it.
Next, visualise the new but good habits that you intent to acquire. Again, how do you feel about it? Excited? Energised? Happy? If so, make a note of the positive emotions and compare it with the negative ones.
With that, do you feel motivated to change? I hope the answer is yes. And make sure to apply the same technique frequently to remind yourself that you really want to change.
RISKING
Trading is all about risk control !The following excerpt is from one of my favorite audiotapes ,’Risking ‘by David Viscount.
I keep this on my desk to remind me each day to keep “risking. “Only a person who risks is truly free.
DAVID TEPPER: If You Invested $1 Million
In My Hedge Fund In 1993
You Would Have $149 Million Today
David Tepper, who has been running distressed debt hedge fund Appaloosa Management for the past twenty years, is crushing it this year.
Meanwhile, the S&P is up about 19.7% this year.
Tepper was up 5.5% in July net of fees.
He’s still bullish on stocks.
He told Wapner that he finds them “reasonable” and that he’s still long.
Earlier this year, he was super bullish, though. He told Bloomberg TV’s Stephanie Ruhle back in January that the U.S. was on ”the verge of an explosion of greatness.”
Also, Tepper, who has one of the best long-term track records, pointed out in his July investor letter, which was first reported by Institutional Investor, that if you invested $1 million with him in 1993 and didn’t pull out you would have around $149 million.
By the way, Tepper told Ruhle during lunch today that he’d be staying out of the whole Herbalife debacle. Leave that for the other titans.
Five Quotes From Market Wizard Steve Lescarbeau
“I think that a physical science degree is as good if not better than a financial degree because it trains you to be analytical. If there is anything I am really good at, it’s being a researcher. I’m not a particularly good trader.” – Steve Lescarbeau
I
found it ironic that Lescarbeau doesn’t consider himself a good trader,
despite the fact that Schwager later notes that Lescarbeau has the most
impressive returns of anyone Schwager had interviewed.
I
like Lescarbeau’s point that having a physical science degree taught
him to be analytical. I have a similar background and can absolutely see
the relation. Also, similar to Lescarbeau, I am finding that I prefer
doing the research to actually trading. Trading makes me very nervous,
but research is relaxing for me. This is a big part of the reason I have
shifted my focus to system trading.
“The same qualities that make you a successful person in whatever you’re doing are going to make you successful in trading. You have to be very decisive, extremely disciplined, relatively smart, and above all, totally independent.” – Steve Lescarbeau
I
like to think that I have all of those qualities, yet I never think of
myself as very successful. I probably just haven’t gotten there yet.
“I may take partial profits on a position, or not go fully long on a buy signal, but I will never hold after a sell signal.” – Steve Lescarbeau
I’ve
often seen quotes about following your rules without fail, but also
knowing when to break them. That was always confusing to me, but I
really like the way Lescarbeau presents it. He is only willing to break
his rules on the conservative side, thus protecting his capital. He
never breaks his rules to take on more risk. This is a brand new concept
for me, and I really like the idea.
“Ninety percent of my success is due to not doing things that are stupid. I don’t sell winners; I don’t hold losers; I don’t get emotionally involved. I do things where the odds are in my favor.” – Steve Lescarbeau
I
have a similar quote I say all the time at work. Nothing I do there is
very complicated, I just show up every single day to do the work.
Lescarbeau seems to look at trading in a similar manner. If you simply
avoid the mistakes that most people make, you’re already ahead of the
game.
“Don’t confuse activity with accomplishment. I think one mistake novice traders make is that they begin trading before they have any real idea what they are doing. They are active, but they are not accomplishing anything. I hardly spend any time trading. Over 99 percent of my time is spent on the computer, doing research.” – Steve Lescarbeau
This
is exactly what I have been doing for the past few month (hence so few
posts). Instead of continuing my losing streak, I decided to take a
break and bury myself in research for a while. I’ve looked into dozens
of trading systems and indicators. Before I can trade successfully, I
need to find an approach that fits my needs. It helps that I enjoy the
research.
12 Market Wisdoms from Gerald Loeb
Gerald Loeb is the author of ‘The Battle for Investment Survival’ and is one of the most quotable men on Wall Street. Here are 12 of the smartest things he has ever said about the stock market:
1. The single most important factor in shaping security markets is public psychology.
2. To make money in the stock market you either have to be ahead of the crowd or very sure they are going in the same direction for some time to come.
3. Accepting losses is the most important single investment device to insure safety of capital.
4. The difference between the investor who year in and year out procures for himself a final net profit, and the one who is usually in the red, is not entirely a question of superior selection of stocks or superior timing. Rather, it is also a case of knowing how to capitalize successes and curtail failures.
5. One useful fact to remember is that the most important indications are made in the early stages of a broad market move. Nine times out of ten the leaders of an advance are the stocks that make new highs ahead of the averages.
6. There is a saying, “A picture is worth a thousand words.” One might paraphrase this by saying a profit is worth more than endless alibis or explanations. . . prices and trends are really the best and simplest “indicators” you can find.
7. Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed.
8. Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.
9. In addition to many other contributing factors of inflation or deflation, a very great factor is the psychological. The fact that people think prices are going to advance or decline very much contributes to their movement, and the very momentum of the trend itself tends to perpetuate itself.
10. Most people, especially investors, try to get a certain percentage return, and actually secure a minus yield when properly calculated over the years. Speculators risk less and have a better chance of getting something, in my opinion.
11. The market is better at predicting the news than the news is at predicting the market. I feel all relevant factors, important and otherwise, are registered in the market’s behavior, and, in addition, the action of the market itself can be expected under most circumstances to stimulate buying or selling in a manner consistent enough to allow reasonably accurate forecasting of news in advance of its actual occurrence.
12. You don’t need analysts in a bull market, and you don’t want them in a bear market.
Gann’s 11 Rules of Success
Our Favourite is number 6
Rule #1 : Strive for Success
To be successful the most important rule is to strive for success. This means you must exert effort and put a lot of hard work into your effort. You must have both the short term and long term charts necessary for trading the markets you trade. They must be always up-to-date and you need to watch them on a daily basis so your mind gets use to their price and time movement. You will then learn the secret of trading and see how the entire price movement continually evolves.
Rule #2: No One Owes You Anything
You must succeed on your own. It is all up to you. The markets, stockbrokers, brokerage firms, news letters don’t owe you anything. Gann never took anyone’s newsletter. He did it all himself. The markets are there to provide you a service for buying and selling the markets you are trading. They really don’t care that you make money. The markets are there for the brokerage fees. The more you trade, the more money the brokerage firms and exchanges make. You must be knowledgeable of a reliable trading method that you can use to extract money from these markets. This method must be able to help you understand the price structure of the markets in regards to time and price movement.
Rule #3: Plan You’re Way to Profit
when you enter a trade you should have a figured a game plan for both the entry and exit of the trade. The plan should be definite and not subject to changes to your psychology during market hours. Gann knew exactly what he was doing all the time. You should have a stop in the market at all times, because you never know when a time cycle might turn against you. You should also have a profit objective in the market. So many traders today lose because they are using computer oscillators to trade with and they never know where they are going. They usually end up on trading with rumors and tips and use hope and fear to try to make a success of the markets.
Rule #4: Plan your Orders
You should always use price orders to enter the market. By doing this you will limit your risk and you can have a predetermined stop loss for the trade you are making. It also eliminates slippage on the entry. When you exit the market, it can be with a limit order based on the time and price objective. However, if the price has not been met by the end of your time cycle, you should then exit at the market.
Rule #5: Profit Ratio
You should set your profit ratio at 3 times your risk factor. Go back on the previous charts of the market you are trading and determine how much the market has risen or fallen and then set the loss ratio based on that. For example, if you have found that wheat usually rallies 12 cents then you should have a stop set at 4 cents.
Rule #6: Trade in Private
Never under any circumstances reveal your trading positions to anyone. Your mind must be in complete harmony with your trading positions. When you reveal your positions to someone, they will immediately start to question the trade and start to erode your confidence and concentration in the trade. You will then be a less effective trader and eventually lose.
Rule #7: Margin
Over trading on low margins is why so many people lose in the markets. You should never put a position on the risks over 10% of your capital. Every position you have in commodities should be backed with 3 times the minimum exchange margins. That means if the minimum exchange margins on wheat is $700 then when you buy a contract of wheat, it should be backed with $2100. This backing can be done in several ways. You don’t have to have the money sitting in the brokerage account. It can be in a money market account or in Tbills.
Rule #8: Double Tops
Double tops offer you the best method of selling a market. What is happening is that a time and price high is being challenged. In most cases, the upward timing of the market has run out and it is in a downtrend. You should use the first rally to test the top as a selling point. In many cases, it ends up being a double top. Check back on the particular market you are trading on previous double tops and see what the market needed to do to get through and break the double top. It is usually 1-2 percent of the price of the current market. You should then set your stop based on that. The distance between double tops is
important. The longer the distance the more important it is. Double tops on yearly charts are the most important, and then monthly and then daily are important. This is why you should always be looking at long-term charts to see these tops
Rule #9: Double Bottoms
Just like double tops, a good double bottom offers an excellent trading opportunity. Most major bull markets are created from these bottoms. Always keep an eye on all charts for this development. Place the orders and use your protective stops to take advantage of these trades.
Rule #10: Inside Day
Watch the markets for inside days. This means that the previous day’s market high and low is inside of the previous day’s range. You will find that after a long-term price. Brokers are constantly bombard with conflicting news which distorts the current view move that this signal gives you an early warning that the market is about to reverse in the
opposite direction.
Rule #11: Reversal Signals
Understand and look for reversal signals. This will tell you the trend of the market short term. When the market runs up for more than five days and then gaps up, fills that gap,and closes lower for the day, it indicates low prices. You should expect the trend has changed. This is the strongest reversal signal. Another reversal is a market that runs up for 5 days or more and opens steady goes higher and then closes lower and under the previous days close. In many cases, the market will move at least 3 days in the opposite direction after one of these reverse signals.
12 Points about About Investing from Howard Marks
2. “Rule No. 1: Most things will prove to be cyclical. – Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.” Nothing good or bad goes on forever. And yet people extrapolate sometimes as if a phenomenon will go on indefinitely. “If something cannot go on forever it will eventually stop” famously said Herbert Stein. Situations in which mean reversion does not happen are rare enough as to make a mean reversion assumption a consistent friend to the investor.
3. “We don’t know what lies ahead in terms of the macro future. Few people if any know more than the consensus about what’s going to happen to the economy, interest rates and market aggregates. Thus, the investor’s time is better spent trying to gain a knowledge advantage regarding ‘the knowable’: industries, companies and securities. The more micro your focus, the great the likelihood you can learn things others don’t.” Focusing on the simplest possible system (an individual company) is the greatest opportunity for an investor since a company is understandable in a way which may reveal a mispriced bet. Howard Marks puts it simply: “We don’t make macro bets.”
4. “We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future.” This video has excellent material from Marks on why trying to make macroeconomic predictions is bound to fail: https://www.youtube.com/watch?v=2It1fzcBoJU If great investors like Marks, Buffett, Munger, Lynch etc. can’t make macro forecasts, do you think economists can? If you do believe they can, “Where are the economists’ yachts?” Howard Marks notes that anyone can be right “once in a row” especially when the range of possible outcomes is small.
5. “There are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third; you have to be right.” Being a contrarian for its own sake is suicidal. Not being a contrarian at all means by definition you can’t outperform the market. Being genuinely contrarian means you are going to be uncomfortable sometimes. Howard Marks adds: “To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them – ideally all three.”
6. “It is our job as contrarians to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone else is selling – and if our view turns out to be right – that’s the route to the greatest rewards earned with the least risk.” By focusing in the mathematics associated with value investing you are in a better position to shut out psychological dysfunction. Value investing is like mediation and the intrinsic value calculation is the mantra.
7. “The future does not exist. It’s only a range of possibilities. We have to understand that most outcomes will be determined by luck.” *Every* great investor in this “Dozen Things” series of blog posts thinks in terms of expected value. There are no exceptions. Howard Marks: “The expected value from any activity is the product of the gains available from doing it right multiplied by the probability of doing it right, minus the potential cost of failing in the attempt multiplied by the probability of failing.”
8. “Leverage magnifies outcomes, but doesn’t add value.” Leverage magnifies results whether good or bad. “Volatility + leverage = dynamite.” It is wise to always have a Margin of Safety.
9. “You can’t predict. You can prepare.” Some aspects of life have an unknown probability distribution and some potential future states are unknown. One can deal with this by being anti-fragile and having a margins of safety. Will doubling your money make you twice as happy? Would you really like to take the change that you might need to “return to go” and start over?
10. “In both economic forecasting and investment management, it’s worth noting that there’s usually someone who gets it exactly right… but it’s rarely the same person twice. The most successful investors get things ‘about right’ most of the time, and that’s much better than the rest.” The poseur in the magazine or on the deck of a big yacht is often lucky rather than good. Don’t confuse luck with skill and work as if you need to be skillful rather than lucky. In reviewing Mauboussin’s book ”The Success Equation Marks wrote: ”in fields where luck plays a big part, like investing, outcomes are of limited relevance in assessing performance.”
11. “The great investors are the people who have made a lot of investments over a long period of time and made a lot of money, and their results show that it wasn’t a fluke — that they did it consistently.” Persistent success is strong evidence of skill rather than luck generating a given set of results.
12. “I keep going back to what Charlie Munger said to me, which is none of this is easy, and anybody who thinks it is easy is stupid. It is just not easy. There are many layers to this, and you just have to think well.” If you are not willing to do the work or feel like you have the wrong emotional temperament, buy low fee index funds. Dumb money becomes smart once it accepts its limitations.
9 Lessons from Jesse Livermore
The most storied and important trader who ever lived, Jesse Livermore, would be tuning these daily buy and sell calls out were he alive and operating today. Because while he was a trader, he was not of the mindset that there was always some kind of action to be taking.
Jesse Livermore’s legacy is a bit of a double-edged sword…
On the one hand, he was the first to codify the ancient language of supply and demand that is every bit as relevant 100 years later as it was when he first relayed it to biographer Edwin Lefèvre. Livermore himself sums it up thusly: “I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that.”
On the other hand, Livermore’s undoing came at precisely the moments in which he ignored his own advice. After repeated admonitions about tipsters, for example, Jesse allowed a tip on cotton to lead to a massive loss which grew even larger as he sat on it – violating yet another of his own cardinal rules.
And of course, other than for a few moments of temporary triumph in the trading pits and bucket shops of the era, Jesse Livermore was not a happy man. “Things haven’t gone well with me,” he informed one of his many wives by handwritten note, before putting a bullet through his own head in the cloakroom of the Sherry-Netherland Hotel.
But he did leave behind a wealth of knowledge about the art of speculation. His exploits (and cautionary tales of woe) have educated, influenced and inspired every generation of trader since Reminiscences was first published in 1923.
In my opinion, some of the most useful bits of knowledge we get from the book concern Jesse’s discussion of timeframes and patience. Many traders, particularly rookies, approach the game with the idea that they’re supposed to be constantly doing something - in and out, with a trembling finger poised to click the mouse again and again. Consequently, they get on the treadmill of booking wins and losses without ever really moving the needle. They end up with tons of brokerage commissions and taxes to show for their efforts, but not much else.
Being a trader doesn’t mean one must always be executing a trade, just as being a house painter doesn’t mean that every surface needs an endless series of coats.
Many rookies are surprised to learn that Livermore, the idol of so many great traders, advocated a lower maintenance, higher patience approach as he matured. In his early days, Livermore was dependent on the short-term funding and scalping activity of the bucket shops. Once he graduated and had his own capital, he was able to lengthen position holding times and could even afford to do nothing for extended periods.
Here are nine surprising things Jesse Livermore said regarding excessive trading:
1. “Money is made by sitting, not trading.”
2. “It takes time to make money.”
3. “It was never my thinking that made the big money for me, it always was sitting.”
4. “Nobody can catch all the fluctuations.”
5. ”The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”
6. “Buy right, sit tight.”
7. “Men who can both be right and sit tight are uncommon.”
8. “Don’t give me timing, give me time.”
and finally, the most important thing:
9. ”There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”
Jesse was a trader but he knew the value of staying with positions and sometimes not trading at all. Once he began to follow tips from others or trade when he should have abstained, all of his progress had come undone, and with it, his sanity.
We are fortunate to be able to learn from his mistakes and to sidestep the errors that eventually cost him everything.
10 Points for Traders
- Capital flows from those who fight trends to those who follow them.
- In the long term money flows to those who manage risk and are able to hold on to their profits from those who don’t manage risk.
- Traders that persevere through the learning curve stick around long enough to make money from those that just trade with no understanding of what they are doing.
- Robust systems take money from traders with no edge over the markets.
- Traders that trade price action take money from those that trade opinions.
- Traders that enter a trade based on a reversal signal make money form those that stubbornly hold on to a losing trade and hope.
- Money flows to those who let winners run from those that hold losing trades and hope.
- Capital flows from those that trade a winning methodology from those that trade on emotions.
- Those with big egos pay a price to try to prove they are right by holding a losing trade those that admit they are wrong quickly keep hard earned profits.
- Money flows from those who do not know how to trade to those who do.
4 Ways Your Brain Is Making You Lose Money
Your brain doesn’t like to lose
Loss aversion,
or the reluctance to accept a loss, can be deadly. For example, one of
your investments may be down 20% for good reason. The best decision
may be to just book the loss and move on. However, you can’t help but
think that the stock might comeback.
This
latter thinking is dangerous because it often results in you increasing
your position in the money losing investment. This behavior is similar
to the gambler who makes a series of larger bets in hopes of breaking
even.
Your brain remembers everything.
How
you trade in the future is often affected by the outcomes of your
previous trades. For example, you may have sold a stock at a 20% gain,
only to watch the stock continue to rise after your sale. And you think
to yourself, “If only I had waited.” Or perhaps one of your
investments fall in value, and you dwell on the time when you could’ve
sold it while in the money. These all lead to unpleasant feelings of
regret.
Regret minimization occurs when you avoid investing altogether or invests conservatively because you don’t want to feel that regret.
Your brain remembers everything.
How
you trade in the future is often affected by the outcomes of your
previous trades. For example, you may have sold a stock at a 20% gain,
only to watch the stock continue to rise after your sale. And you think
to yourself, “If only I had waited.” Or perhaps one of your
investments fall in value, and you dwell on the time when you could’ve
sold it while in the money. These all lead to unpleasant feelings of
regret.
Regret minimization occurs when you avoid investing altogether or invests conservatively because you don’t want to feel that regret.
Your brain is great at coming up with excuses.
Ed Yourdon/Getty
Sometimes your investments might go sour. Of course, it’s not your fault, right? Defense mechanisms in the form of excuses are related to overconfidence. Here are some common excuses:
George Soros doesn’t need an introduction. He is a living trading legend. Here are some of the smartest things he has ever said about markets. His thoughts are in brown.
1. Perceptions affect prices and prices affect perceptions
I believe that market prices are always wrong in the sense that they present a biased view of the future. But distortion works in both directions: not only do market participants operate with a bias, but their bias can also influence the course of events.
For instance, the stock market is generally believed to anticipate recessions, it would be more correct to say that it can help to precipitate them. Thus I replace the assertion that markets are always right with two others: I) Markets are always biased in one direction or another; II) Markets can influence the events that they anticipate.
As long as the bias is self-reinforcing, expectations rise even faster than stock prices.
Nowhere is the role of expectations more clearly visible than in financial markets. Buy and sell decisions are based on expectations about future prices, and future prices, in turn are contingent on present buy and sell decisions.
2. On Reflexivity
Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values. One provides a static picture, the other a dynamic one.
Sometimes prices change before fundamentals change. Sometimes fundamentals change before prices change. Price is what pays and until expectations change, prices don’t change. What causes expectations to change? – it could be change in fundamentals or change in prices. So what I am saying is that sometimes prices could be manipulated to change expectations, which will fuel further price momentum in a self-reinforcing way.
3. “Once a trend is established it tends to persist and to run its full course.” – Sentiment changes slowly in trending markets (up or down) and extremely fast in choppy, range-bound markets.
4. “When a long-term trend loses it’s momentum, short-term volatility tends to rise. It is easy to see why that should be so: the trend-following crowd is disoriented.”
A surprising countertrend pop or drop reminds investors of the risks involved and all of a sudden the fear of losing (giving back gains) becomes bigger than the fear of missing out. This is the beginning of the end of an established trend. It doesn’t end here, but it is a damn good spot to consider closing positions and moving to something else. The distribution/accumulation stage is in full force.
5. Markets are not always right. The capital market is a good discounting mechanism most of the time, but not always. There are times when animal spirits run supreme and emotions overshadow reason. Markets constantly discount events that haven’t happened yet. As a result they will often discount events that will never happen or over-discount identified risks.
How good are markets in predicting real-world developments? Reading the record, it is striking how many calamities that I anticipated did not in fact materialize.
Financial markets constantly anticipate events, both on the positive and on the negative side, which fail to materialize exactly because they have been anticipated.
It is an old joke that the stock market has predicted seven of the last two recessions. Markets are often wrong.
Often? How often? Do you have the balls and more importantly the pockets to fade them. Market could remain irrational longer than most people could remain solvent.
6. It doesn’t hurt you what you don’t know, but what you think you know, when it ain’t so
Participants act not on the basis of their best interests but on their perception of their best interests, and the two are not identical.
7. On Bubbles
“Boom-bust processes are asymmetric in shape: a long, gradually accelerating boom is followed by a short and sharp bust. Consequently, most of the credit contraction can be expected to occur in the near term.”
Currency movements tend to overshoot because of trend-following speculation, and we can observe similar trend-following behavior in stock, commodity and real estate markets, of which Dutch Tulip Mania was the prototype.
8. On Manipulation
I want to buy $300 million of bonds, so start by selling $50 million. I want to see what the market feels like first.
9. On how to be selectively active
The trouble with you, Byron [Byron Wein – Morgan Stanley], is that you go to work every day [and think] you should do something. I don’t, I only go to work on the days that make sense to go to work. And I really do something on that day. But you go to work and you do something every day and you don’t realize when it’s a special day.
- ‘if-only’: If only that one thing hadn’t happened, then I would’ve been right. Unfortunately, you can’t prove the counter-factual.
- ‘almost right’: But sometimes, being close isn’t good enough.
- ‘it hasn’t happened yet’: Unfortunately, “markets can remain irrational longer than you and I can remain solvent.”
- ‘single predictor’: Just because you were wrong about one thing doesn’t mean you’re going to be wrong about everything else, right?
9 Wisdom Quotes from George Soros
1. Perceptions affect prices and prices affect perceptions
I believe that market prices are always wrong in the sense that they present a biased view of the future. But distortion works in both directions: not only do market participants operate with a bias, but their bias can also influence the course of events.
For instance, the stock market is generally believed to anticipate recessions, it would be more correct to say that it can help to precipitate them. Thus I replace the assertion that markets are always right with two others: I) Markets are always biased in one direction or another; II) Markets can influence the events that they anticipate.
As long as the bias is self-reinforcing, expectations rise even faster than stock prices.
Nowhere is the role of expectations more clearly visible than in financial markets. Buy and sell decisions are based on expectations about future prices, and future prices, in turn are contingent on present buy and sell decisions.
2. On Reflexivity
Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values. One provides a static picture, the other a dynamic one.
Sometimes prices change before fundamentals change. Sometimes fundamentals change before prices change. Price is what pays and until expectations change, prices don’t change. What causes expectations to change? – it could be change in fundamentals or change in prices. So what I am saying is that sometimes prices could be manipulated to change expectations, which will fuel further price momentum in a self-reinforcing way.
3. “Once a trend is established it tends to persist and to run its full course.” – Sentiment changes slowly in trending markets (up or down) and extremely fast in choppy, range-bound markets.
4. “When a long-term trend loses it’s momentum, short-term volatility tends to rise. It is easy to see why that should be so: the trend-following crowd is disoriented.”
A surprising countertrend pop or drop reminds investors of the risks involved and all of a sudden the fear of losing (giving back gains) becomes bigger than the fear of missing out. This is the beginning of the end of an established trend. It doesn’t end here, but it is a damn good spot to consider closing positions and moving to something else. The distribution/accumulation stage is in full force.
5. Markets are not always right. The capital market is a good discounting mechanism most of the time, but not always. There are times when animal spirits run supreme and emotions overshadow reason. Markets constantly discount events that haven’t happened yet. As a result they will often discount events that will never happen or over-discount identified risks.
How good are markets in predicting real-world developments? Reading the record, it is striking how many calamities that I anticipated did not in fact materialize.
Financial markets constantly anticipate events, both on the positive and on the negative side, which fail to materialize exactly because they have been anticipated.
It is an old joke that the stock market has predicted seven of the last two recessions. Markets are often wrong.
Often? How often? Do you have the balls and more importantly the pockets to fade them. Market could remain irrational longer than most people could remain solvent.
6. It doesn’t hurt you what you don’t know, but what you think you know, when it ain’t so
Participants act not on the basis of their best interests but on their perception of their best interests, and the two are not identical.
7. On Bubbles
“Boom-bust processes are asymmetric in shape: a long, gradually accelerating boom is followed by a short and sharp bust. Consequently, most of the credit contraction can be expected to occur in the near term.”
Currency movements tend to overshoot because of trend-following speculation, and we can observe similar trend-following behavior in stock, commodity and real estate markets, of which Dutch Tulip Mania was the prototype.
8. On Manipulation
I want to buy $300 million of bonds, so start by selling $50 million. I want to see what the market feels like first.
9. On how to be selectively active
The trouble with you, Byron [Byron Wein – Morgan Stanley], is that you go to work every day [and think] you should do something. I don’t, I only go to work on the days that make sense to go to work. And I really do something on that day. But you go to work and you do something every day and you don’t realize when it’s a special day.
Fear, Greed & Trading Profits
Over
the years we’ve noticed a remarkably consistent pattern. A very high
percentage of our trainees can trade brilliantly in the simulation
program; steady consistent profits, sharp entries and exits, excellent
grasp of market conditions and a clear, rational plan for exploiting
them
And then they start trading real money.
It’s
like somebody turned out the lights. Almost immediately things turn
sour; they jump in too soon, get scared out of good positions, hang on
to losers and cut their winners short … the exact opposite of what they
should be doing, and the exact opposite of what they were doing in the
simulation program.
WHAT HAPPENED?
The
only difference between real and imaginary – and between good and
horrid – is the emotional impact on new traders of having real money at
risk. They succumb to the two emotions that drive the market: greed and
fear.
Nothing
cranks up our emotional responses faster than money. And trading is
about nothing else. But successful trading requires a kind of cold,
calculating rationality, and any emotion – giddy joy as well as bitter
despair – is fatal.
So we see trainees doing things they know are dumb:
- They jump on the long side of an uptrend because “they don’t want to miss the trade,” even as the trend is ending.
- They cling tenaciously to losing positions hoping the price will come back – an attempt to avoid admitting you made a dumb trade that usually turns a small loss into a big one.
- They pull their stops so they won’t get hit. Really!
- They become so traumatized by losing that they take excessive risks hoping to get back even.
- Finally, they quit in despair, close their trading account, burn the computer, and retreat into a dark place to lick their wounds.
None of this is necessary. All of it can be avoided. Here are some things that help.
HOW TO FIX IT
- Learn to curb your enthusiasm. Nothing will kill your account faster than impatience. Entering trades too soon usually means you have to hold on through some draw-downs where the market moves against you. That puts a strain on your emotional control. You don’t have to get every dime from every move to make a profit; all you need is a piece out of the middle.
- Learn to act decisively. Trading is a bit like warfare: long periods of inactivity followed by short bursts of explosive movement. You need to learn to wait for the moment; but you also need to learn to jump when the moment is right. Which means you have to …
- Learn to read the market. The market is cyclical. Periods of expansion are followed by periods of consolidation which end in a new expansion. The patterns repeat in every time frame, and at every price level – traders call them “fractal” patterns. You need to learn to read price charts because they can help you see when one part of the cycle is ending and the other is beginning – break-outs from trendlines, for example, or reversals from patterns like double tops and bottoms. There are hundreds of these technical patterns, but you don’t need to learn them all; just the ones that work for you. We know traders who have made a good living for years trading just 2 or 3 trade set-ups. They have mastered a very small slice of the market … and that’s all they need.
- Learn from experience. You can’t learn to trade by reading about it – or by watching somebody else do it – any more than you can lose weight by reading diet books. You have to do it yourself. There is no substitute for time spent in front of the screen, studying the market and trying to see what it is likely to do next. The more frequently you see how it behaves – the more experience you acquire – the easier it is to control your emotional responses and profit from your knowledge.
- Learn yourself. You can learn to recognize the stimuli that trigger foolish trading, and identify the emotional states that sabotage your trading decisions. Develop strategies to manage them. Get up and walk away, for example, or turn your attention to something else until you calm down. When you get excited you are much more likely to do dumb things that cost you money.