Category: Market Insights

The right trading mindset

I was absolutely unemotional about numbers. Losses did not have an effect on me because I viewed them as purely probability-driven, which meant sometimes you came up with a loss. Bad days, bad weeks, bad months never impacted the way I approached markets the next day. To this day, my wife never knows if I’ve had a bad day or a good day in the markets.

Learning never stops

I am really humble about my ignorance. I truly feel that I am ignorant despite having made enormous amounts of money. I calculated the other day that I have taken over $2 billion out of the market for my investors and employees so far. That seems like a lot of money and yes, I am relatively wealthy and happy to be independent, but there’s never a day when I feel a lot smarter than everybody else.

An advice to aspiring traders

Aspiring traders should be open to the entire spectrum of market experiences. I never locked myself down to investing in one style or in one country because the greatest trade in the world could be happening somewhere else. My advice would be to make sure that you do not become too much of an expert in one area. Even if you see an area that is inefficient today, it’s likely that it won’t be inefficient tomorrow. Expertise is overrated.

On the benefits of using options

Options take away the whole aspect of having to worry about precise risk management. It’s like paying for someone else to be your risk manager. Meanwhile, I know I am long XYZ for the next six months. Even if the option goes down a lot in the beginning to the point that it is worth nothing, I will still own it and you never know what can happen.

I once owned a one-year option on the euro swap rate that became worthless soon after I bought it. Then, with two weeks to go to expiry, the swap rate came back my way and blew through my strike. After being worthless for 11 months, I ended up selling it for five times what I paid for it.

Short-dated volatility is too high because of an insurance premium component in short-dated options. Longer-dated options are priced expensively versus future daily volatility, but cheaply versus the drift in the future spot price.

Every Friday, we go out and buy one-year straddles. We admit that we’re ignorant but we expect that sometimes, over a year, there will be enough trend that we will make money. So, yes, we overpay for options but that doesn’t mean that we don’t make money. If the option maturity is long enough, trends can take us far enough away from the strike that it’s okay to overpay.

Hedge fund money is not the smart money

The big thing that distinguishes the real money world from the hedge fund world is redemptions. Universities don’t have redemptions, nor do family offices. Both are going to be around for years so they invest for the long-term. Meanwhile, the hedge fund world industry invests for the one to three-month time horizon, which subjects managers to taking inefficiency risk and missing out on opportunities that are longer term in nature.

Source: Inside the house of money, Steven Drobny

First, do not be invested in the market all the time. There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move….Second, it is the change in the major trend that hurts most speculators.

Always remember; you can win a horse race, but you can’t beat the races. You can win on a stock, but you cannot beat Wall Street all the time. Nobody can.

There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily– or sufficient knowledge to make his play an intelligent play.

Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes.

Peter Lynch has given the investment world a lot of market wisdom. Here is one of his most insightful thoughts:

The point is, there’s no arbitrary limit to how high a stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock. Shame on all those experts who advise clients to sell automatically after they double their money. You’ll never get a ten-bagger doing that.

Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up fivefold. I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised. The success of a company isn’t the surprise, but what the shares bring often is.

I am not a long-term investor like Peter Lynch. I am a swing and position trader and yet I agree with his statement. This is why I have never been a fan of hard price targets. I believe in having a time stop for swing trades – giving a stock a certain number of days to prove that it deserves to be held. I believe in having exit strategies in both, my swing and position trades. Those exit strategies are never based on a hard price level. They are based on price cycles and invalidation of trends on different time frames. My reasoning is simple:

1. I don’t know which particular trade will end up being a winner. I know that I’ll be right at least 50% of the time and my average winner is bigger than my average loser.
2. I don’t know what profit will a particular winner deliver. It could be 5% or 50%. I know the average size of my winners, but never what the individual return will be in advance.

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