Niederhoffer on making errors

As a squash player, I was gifted. I had all the right things going for me. I practiced. I was very good with the racket, and I had tremendous anticipation. But I tended to play an errorless game by hitting a slice on my backhand, which took a lot of power off the ball. That wasn’t a disaster, but it was definitely a weakness in my game. My opponents always used to say that on a good day they could beat me, because they could hit more spectacular shots than me. But they never did. I went for about 10 years without losing a game, except to [the great Pakistani squash player] Sharif Kahn. He made about six, seven errors a game—but he also made eight or nine winners. I would make about zero errors per game but only one or two winners. He had the edge on me about 10-4, and I regret that I was never willing to accept the risky shots and confrontations, never willing to play a more error-full game.

In my market career, I took too many risks. In my squash career, I didn’t take enough.

I wish I had applied my squash methods to my speculating. I’d be a very wealthy man if I had.


After hours action


maldives-1After the market close, I like to spend about an hour filling my trading journal, take a last look at my screens to see if I need to add new stocks to my watch list. I try to analyze some basic questions:

How did I spend my day? (how can I be more productive and happier)

What did I trade and why? (the method behind the entry and the reason behind the exit)

What did I learn today? (for the market and for me as a trader and human being)

What will I do to improve my perceived strengths and eliminate perceived weaknesses? (create a specific plan how to do it and start implementing it the very next day)

A typical strength could be precise risk management due to which your portfolio has never experienced a significant drawdown. Think about how to become even better at it? Is it worth it to use different trading horizon or apply tighter stops?  Is that going to make you more profitable, without having to take on an excessive risk beyond your “sleep level”.

A typical weakness could be bad timing. You enter long position blindly on weakness, because you want to make 30-40 cents more, without realizing that by doing that, you are depreciating your odds of success. You buy when  a stock is entering in consolidation, effectively locking capital in an underperforming position. How could you overcome that weakness? You have two options:

– turn to someone who knows and is willing to share his/her knowledge;

– find the cure yourself by experimenting.

The first approach makes much more sense for me. You will be learning from other people’s mistakes in an attempt to shorten your learning curve. Unfortunately in trading you often have to experience it first hand in order to appreciate what your friends were trying to teach you.

There are 3 major trading (investing) skills that everyone should work on:

1. Equity selection methods (save time and improve the odds of success)

What is your entry criteria and is there a statistical edge behind it, based on research or experience); time horizon (find out your niche – is it intra-day trading, swing trading, value approach, momentum approach. There are thousands different ways to make money in the market, but you have to find yours)

2. Risk management (tight stops or wider stops, position sizing, how to exit)

3. Timing (know when to be long, when to be short, and when to stay on the sidelines; enter your position at the right time and the right spot, so if wrong, the damage is minimal)

Work on one core skill at a time.

Scott Bessent on what matters in investing

Recently, I was at a money manager round table dinner where everyone was talking about  “my stocks this” and “my stocks that”. Their attitude was that  it doesn’t matter what is going to happen in the world because their favorite stock is generating free cash flow, buying back shares, paying a dividend and doing XYZ. People always forget that 50% of a stock’s move is the overall market, 30% is the industry group, and then maybe 20% is the extra alpha from stock picking. And stock picking is full of macro bets. When an equity guy is playing airlines, he’s making an embedded macro call on oil.

Cutting losses


There is one big difference between traders, who make money and traders who don’t. It is called risk management. Even if you blindly pick your stocks, in the long-term you will make money as long as you cut your losses short. Add to risk management a proper equity selection model and then you are in top 5% in the world. The 5% that actually make money, consistently. This is the biggest secret of successful traders – cutting losses short. It saves capital and it saves your piece of mind.

If you browse on the internet, you will find thousands of articles that preach that losses should be cut short. It is well known fact and yet you’ll be surprised how few people actually utilize it, even those who write about it. Words are free. You can say whatever you want. Many people don’t practice what they preach and this is why the biggest edge someone could have is called discipline.

There are two types of traders: the ones that cut losses short and the ones that lose everything and go out of business. If you can’t define your risk in advance and most importantly if you can’t accept it, you should not be trading at all. Reading about cutting losses short will never be enough. It is human to believe that you are different and that you know better and that it will never happen to you. You have to experience it to realize it. It is part of the learning curve. I knew about this rule long before I committed serious money to trading and yet I didn’t practice it until I had my portion of outsized losses. Today, the thought of how and where I’ll exit a trade, is the most important.

I know that there are many people who preach that they don’t use stop losses and yet they are successful. Well, if they are successful doing that, then they are not really traders. They are investors and they limit their risk by hedging, which is a whole new chapter.


I will spend the next week and half in South Beach, Miami. Hopefully the weather will be nice and the girls …