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I'm a Loser... Here's How I'll Change in 2012By
Tuesday, January 10, 2012
The most shocking lesson I learned when I started really studying successful traders was this:
The best traders and investors are actually losers... They're only "right" about 40% of the time.
I was stunned when I first read this.
It made me realize that we weren't taught anything at all in school about what makes successful investors successful... Instead, we were just taught the "theories" of making money through investing, which mostly weren't related to the truth about making money.
Each year, I'm wrong in many investment ideas. But that's alright with me... I know the very best investors are, too.
The thing is, it's how you handle those losers that matters. That's exactly what separates the very best investors from the very worst.
I do two things each year to get better...
Let's look at each of these closely...
For No. 1, when I look back at my 2011 loser, I see I made the same basic mistake over and over again... I was trying to "force" a bull market when it simply wasn't there. My investing mantra is to buy what's "cheap, hated, and in the start of an uptrend." But the legitimate uptrends were hard to come by in 2011. I would buy in – and then I'd get stopped out.
The lesson for me is, be more patient!
It might make headlines to "call the bottom" in something and get it right. But it's safer and smarter to be patient, let your thesis start to unfold first, and then put your money down. I need to do more of that in 2012.
When it comes to No. 2, I want to keep the losers small and let the winners ride.
In 2011, I did a great job letting my winners ride. I don't have trouble with this at this point in my career. But I can improve on my losers... I was too confident. I set my worst-case exit point too wide – as wide as 50% in some cases. So I ended up getting "stopped out" of a few positions with losses close to 40%.
My reasoning was sound... I want to have three times the upside potential as the downside risk I'm taking. So if I'm taking 50% of downside risk, I expect to earn at least 150% on the upside. But the "beatings" I took were simply unacceptable.
One way to "fix" that problem is to start using a tighter stop loss when I first buy a stock, in addition to using a trailing stop as shares move higher.
In college, nobody ever talked about things like how to successfully exit a position, winning percentages (which are below 50% even for great investors), and how to manage winners versus losers. But this is incredibly important stuff.
I urge you to do what I do...
It is not just the fundamentals of the trade that matter. It is how you trade it. A winning trade is made up of a good buy AND a good sell.
Are you evaluating your buys and sells each year and thinking about how you can do better? If not, how do you expect to improve?
I've been doing this for two decades. It takes constant refinement. You've got to do it. Get to it...
Good investing,
Steve
Further Reading:
By following the trailing stop strategy, Steve's True Wealth subscribers have booked triple-digit gains safely. Learn more about this simple exit strategy here: Avoiding the Biggest Mistake Investors Make.
Editor in Chief Brian Hunt recently sat down with our sister site, The Daily Crux, to teach subscribers another important lesson of investing. This is one of the most important ideas any investor or trader can learn. "If you don't know the basics of this concept, it's unlikely you'll ever succeed in the market," Brian says. "Fortunately, it's an easy concept to grasp."
Market NotesA TROPHY TRADE The resource "trophies" of the world are starting 2012 in a much different position than they did 2011...
Longtime DailyWealth readers are familiar with our concept of resource "trophies"... giant, world-class deposits of resources like crude oil, iron ore, uranium, copper, gold, and fertilizer. These trophies are owned by the world's elite resource firms, including Freeport-McMoRan (copper), Cameco (uranium), and Goldcorp (gold). Our general rule of thumb is, when "trophies" go on a fire sale, you want to load up on shares.
In late 2010, most trophy stocks enjoyed a huge rally. They climbed 50%-100% in response to the Federal Reserve's massive "E-Z-Credit" goosing of the economy. This boom left them plenty "overbought" at the start of 2011. As is typical with the volatile resource sector, these stocks busted when folks fled riskier assets. This brings us to an interesting start to 2012...
The chart below displays the past two years of trading in iron ore trophy Vale. Vale is the world's biggest and best collection of iron ore assets. As you can see, Vale enjoyed the big late-2010 boom… and lost more than 33% of its value during the bust. (Many other trophy stocks sport similar charts.) A trader can buy a handful of these trophies, set tight protective stop losses near their 52-week lows, and bet on a potential resource rally in the coming months.
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