Test……..one million……..two million…………three million…
This is how Buffett tested the microphone before his speech at the annual shareholders’ meeting of Berkshire Hathaway. He really enjoys the game of making money. Not to spend it, but to accumulate it. The early investors in BH turned $10,000 into $100 mill for 40 years. (more…)
Years back Tom Willis (a friend of Richard Dennis’) and Bob Jenkins, running a hedge fund, offered answers about “price” during an interview. An excerpt:
Bob Jenkins: “Everything known is reflected in the price. It makes inherent sense. I could never hope to compete with Cargill that has soybean agents scouring the globe knowing everything there is to know about soybeans and funneling the information up to Lake Minnetonka, their trading headquarters. Unless I have a friend at Cargill, I can only get this information one way: I can infer it technically. We have friends who have made millions trading fundamentally, but their problems are (a) they can rarely know as much as the commercials [i.e. Cargill]; and (b) they are limited to trading their [one market] specialty. They don’t know anything about bonds; they don’t know anything about the currencies. I don’t either, but I’ve made a lot of money trading them. Every picture’s worth a thousand words.”
Tom Willis: “They’re just numbers. Corn is a little different than bonds, but not different enough that I’d have to trade them differently-not different enough that I would have to have a different system.”
Bob Jenkins: “Some of these guys I read about have a different system for each [market]. That’s absurd. We’re trading mob psychology. We’re trading numbers. We’re not trading corn, soybeans or S&Ps.”
I hope everyone catches the nuance of Bob Jenkins’ last statement? Some great succinct language about what “it” takes. Taken from an interview 20 years ago…
They say that you cannot teach a man anything. You can only help him to find it within himself. “Trading In the Zone” by Mark Douglass is one of those rare books, which has played the role of an eye opener for many seasoned traders. It is a favorite read – not because it shares some hidden algorithms or tells a riveting story, not because it reveals some secret market formula or it analyzes the irrational exuberance of the crowd; but because it deals with the only hurdle that stays between a trader and his profit – his psychology.
Here are 10 of my favorite quotes from the book:
1. The four trading fears
95% of the trading errors you are likely to make will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table – the four trading fears
2. The proverbial empathy gap
You may already have some awareness of much of what you need to know to be a consistently successful trader. But being aware of something doesn’t automatically make it a functional part of who you are. Awareness is not necessarily a belief. You can’t assume that learning about something new and agreeing with it is the same as believing it at a level where you can act on it.
3. The market doesn’t generate happy or painful information
From the markets perspective, it’s all simply information. It may seem as if the market is causing you to feel the way you do at any given moment, but that’s not the case. It’s your own mental framework that determines how you perceive the information, how you feel, and, as a result, whether or not you are in the most conducive state of mind to spontaneously enter the flow and take advantage of whatever the market is offering.
4. The flaws of fundamental analysis
Fundamental analysis creates what I call a “reality gap” between “what should be” and “what is.” The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct. (more…)
I feel certain that my discipline in executing each and every trade according to my trading methodology is the secret to my success. If you want to improve your trading, what you need to do is very simple. Before you enter any trade, imagine that you will have to explain this trade to a panel of your peers, by explaining to them the reason for your entry, your money, trade, and risk management guidelines, and why you exited the trade. Imagine having to explain why you chose this particular market and this particular time frame, along with how you set objectives for the trade, and how you determined where your initial protection would be. If you can truly do this, I strongly believe that you can be successful.
Traders will typically approach a large loss in one of two ways. First is the dumb way, and that is to become a petulant whiner and throw a fit. Next is the more-constructive way, and that is to use the loss as a means of developing as a trader and to “quote” — learn from your mistakes. But there is a third way. And that is to view the loss as the cost of information.
I don’t mean the cost of doing business per se. This is not typically associated with large losses. Small losses, yes. Because to make money you have to lose some along the way, as casinos do every day. And not the cost of tuition where the market charges a fee to school us. No, I mean information.
Instead of asking yourself about where you placed your stops and getting all personal about the whole thing, ask yourself what happened. Why did the market move the way it did? If you haven’t suffered a capital depletion, you are not likely to demand an answer and more likely to throw off the question with a wave of the hand and a shrug. “Who knows, who cares. I only play odds.”
Markets are a beast and if you want to play with them, you’ll have to be careful. Wear protective goggles and gloves. If you want to tame them though, you’ll need to wrestle with them. And sometimes you lose some body parts along the way.
There is a meaningful difference between trading to win and trading to not lose. The average person feels more psychological pain over a loss than they feel pleasure over a gain–particularly once they have already “booked” that gain mentally. If I’m expecting a bonus from my employer, I’ll be happy when I receive the paycheck–but I’ll be much more upset if I find out the bonus has been rescinded. — We can never eliminate loss from life or trading; nor can we repeal the basic uncertainties of markets. What we *can* do is develop an edge in the marketplace and, over the course of many trades, let that edge accumulate in our favor. And, if you’re trading well, maybe that losing trade will offer you a fresh perspective about how the market is trading: an insight that can make you money the next time around. Then it’s not a loss. It’s information that you’ve paid for. |
Patience is important not only in waiting for the right trades, but also in staying with trades that are working. The failure to adequately profit from correct trades is a key profit-limiting factor. Quoting again from Lefevre in Reminiscences, “It never was my thinking that made big money for me. It was always my sitting. Got that? My sitting tight!” Also, recall Eckhardt’s comment on the subject: “One common adage … that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits.”
March 4 (Bloomberg) — Citigroup Inc. Chief Executive Officer Vikram Pandit plans to tell U.S. taxpayers he’s grateful for the $45 billion bailout that helped stave off a deposit run at the bank in 2008, a person close to the company said.
Pandit, scheduled to appear in Washington today before a panel overseeing the bank-bailout program, will acknowledge that the infusion stabilized Citigroup, said the person, who requested anonymity because the planned testimony isn’t public. Pandit will thank the government for providing the money, the person said
Don’t Confuse the Concepts of Winning and Losing Trades with Good and Bad Trades
A good trade can lose money, and a bad trade can make money.
Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money.
If You Are Out of Sync with the Markets, Trying Harder Won’t Help
When trading is going badly, trying harder is often likely to make matters even worse. If you are in a losing streak, the best action may be to step away from the markets. Clark advises that the best way to handle a losing streak is to liquidate everything and take a vacation. A physical break can serve to interrupt the downward spiral and loss of confidence that can develop during losing periods. Clark further advises that when trading is resumed, the size should be kept small until confidence is regained.
The Road to Success Is Paved with Mistakes
Ray Dalio, the founder of the world’s largest hedge fund, strongly believes that learning from mistakes is essential to improvement and ultimate success. Each mistake, if recognized and acted upon, provides an opportunity for improving a trading approach. Most traders would benefit by writing down each mistake, the implied lesson, and the intended change in the trading process. Such a trading log can be periodically reviewed for reinforcement. Trading mistakes cannot be avoided, but repeating the same mistakes can be, and doing so is often the difference between success and failure.
