Editor’s note: Our offices are closed today for the Independence Day holiday. But we’d like to share an insight from Market Wizard and colleague Larry Benedict.
It’s a tip he learned in the early days of his career trading on the floor of the Chicago Board Options Exchange in the 1980s.
He calls it putting a “P” on the page… And it’s helped make him one of the world’s most prolific moneymakers today.
Want to know the secret to successful trading?
It’s not about being a hot shot and taking high-risk bets.
I’ve seen enough traders blow themselves up to know that’s a losing strategy.
I’ve known traders with that mindset who ended up losing their homes… or even worse.
They had a gambler’s mentality. And it caught up with them in the end.
The secret to making money over time is to treat it not like an outing to a casino but as a business.
Apply this insight to your trading, and you stand to really move the needle on your wealth. Fail to apply it, and you’ll likely end up losing money.
I can’t stress enough how important it is to internalize. It’s what allowed me to thrive as a trader for the past four decades.
All the “No-Nos”
My career as a trader began in 1984.
I started out on the floor of the Chicago Board Options Exchange (CBOE) with $10,000 of my own money.
That’s me on the right.
Larry (right) on the floor of the CBOE
But I really learned the ropes as a trader at a firm called Spear, Leeds & Kellogg.
At the time, it was the largest specialist trading firm in the world – meaning it traded its own money. It traded almost every stock on the New York Stock Exchange.
Then from 2000 until 2013, I ran my own hedge fund.
It wasn’t all smooth sailing. Far from it…
Early in my career, I bet too much on risky trades and got wiped out.
I chewed through all my money two or three times by making silly mistakes.
I was too impulsive. I was going for home runs. I was holding onto my losers for too long. All the “no-nos” of trading.
Then something changed.
I’d lost so much money, I thought my trading career was over. At the same time, I had a buddy, Andy, who was making money every day.
I couldn’t figure out why…
I called my mom and complained to her that Andy was making so much money and I was losing all of mine. I was desperate for an answer.
She said, “Just do what he’s doing.”
It was a light-bulb moment.
What Andy was doing was simple.
Instead of going all in on a risky trade idea like me, he was taking smaller wins on lower-risk trades.
That way, he was slowly but surely building a strong base of capital.
Put a “P” on the Page
That’s what businesses do all the time.
Coca-Cola, Nike, Hershey’s… These blue-chip companies haven’t been around for decades because they take wild bets all the time.
They’re in business for decades because they’re booking smaller profits day in, day out.
It took me a long time to grasp this concept. But when I did, it transformed my trading.
From 1990 to 2010, I didn’t have a single losing year as a trader.
This winning streak got me featured in Hedge Fund Market Wizards. It’s the 2012 book about the world’s greatest hedge fund managers. (I was featured in the chapter after Ray Dalio, the manager of the world’s largest hedge fund.)
It all came down to the insight I learned from Andy.
I call it putting a “P” (for profit) on the page.
You don’t take on much risk until you’ve had a string of smaller winners. You build a pile of capital you can speculate with.
If you don’t have a big enough base of capital, you shouldn’t take on any high-risk trades. Target 5%… 10%… or 25% returns. Grab these smaller wins when you can.
As the old-timers say, you never go broke taking a profit. Once you’ve built a strong foundation of capital, you’ve earned the ability to take on more risk.
I’m not saying there’s no room for more speculative trades. But you have to earn them.
You need to grow your capital pile with low-risk trades before you shoot for the moon. That way, you’re protected if the risky trade goes bust.
That’s what keeps you in the green.
Unfortunately, people tend to do the opposite.
You go on a losing streak… get frustrated and emotional… and lose even more, even faster, because you’re shooting for big wins to recapture those losses.
I’ve seen it happen dozens of times throughout my career. It’s one of the key factors that wipes out new traders.
Instead, you want to think like a business. You earn the ability to take on more risk only after you’ve put a “P” on the page.
That way, you can go the distance as a trader and build your wealth, slowly over time.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict