This Week’s Battle Plan
Tell Us What
You Really Think, Kevin
“The media now has the US on the verge of nuclear war with
North Korea, and now Iran. In spite of the media war blitz, I see that
the (OIH)s were down 2.1% yesterday, the XAU, which is the gold index,
was -3.7% and is now down 10.3% in six days, and then I see that the
Baghdad Stock Exchange is up 50% in seven months, as per Fox News. I
guess that’s because they are in a delta neutral position as the
construction and engineering companies are going to rebuild regardless
of who blows it up.”
(from his March 11 column)
The All Stars
A few weeks ago, USA Today did a full three-page spread listing
their “USA Today All Star Mutual Fund Team.”
According to them, it appears that to be selected for this team, you
simply have to lose less money than your peers. No reason to make
money. Just lose less, and you are the crème de la
crème. All you have to do is what the two well coiffed, dignified
gentlemen pictured on top of their list did. Invest
“Conservatively” and lose 8.7% for the year and you are the
winner. You are the Tiger Woods of managing people’s money! The Wayne
Gretzky of your industry. And, if you invest “Moderately,”
all you have to do is lose 13% for the year and you too will get your
picture taken (just wear a tie. That’s a must, otherwise people will
think you don’t know what the hell you are doing). And, if you are
“Aggressive,” you will get to wear your suit for the
newspaper, but only if you achieve the Herculean task of losing 14.5%
for the year (some of the other “All Stars” only lost 25.8%
for the year and 28.2% for the year. Man, these guys are good!).
So, the game is not to make money for investors. It’s not to grow the
assets and retirement money of hard working individuals who save in
order to have money later in their life. It’s simply to beat the other
dummies you compete against. It simply to be the one-eyed man in the
land of the blind. And, after three years of this type of wealth
destruction these guys have caused, have they done anything about
this? Hell no! Over 90% of them have lost money for people again this
year! These guys have probably single handedly lost more money and
destroyed more wealth in the past three years than any other group
over the past 50 years. Yet, they do nothing to make things
better. They raise their fees (Congress is now attacking them on this
front) and the majority still parade on TV and recommend stocks that
subsequently drop 40% and then reappear on TV later on to say “we
were a bit early on this one.”
So, who are the real winners at this game? Who are the
“real” All Stars? And, how do you properly measure your own
performance to reach real greatness in the markets? I’m going to let
Monroe Trout answer this for us. Who is Monroe Trout? Monroe is a
retired hedge fund manager. He retired near his 40th birthday. He
retired with a net worth supposedly well north of 100 million dollars.
And he did it by putting together over a decade of huge results. Huge
results are good, but they usually come with great risk. Not Monroe’s
fund. It was always ranked amongst the top for taking the minimal
amount of risk on a monthly basis. He did it with technical analysis.
His expertise was pattern recognition backed by statistical analysis.
His approach was structured, focused and disciplined.
Unlike the mutual fund “All Stars,” he made money in both
rising markets and declining markets. He made thousands upon thousands
of very small “trades” that had statistical edges. And, by using
exit strategies that were optimized to lock in these edges, he
made himself, and more importantly his investors, very wealthy.
Two Essential
Factors To Creating Wealth
Monroe was featured in the book New
Market Wizards, published in the ’90s. He was quoted as saying
“I sincerely believe that the person who has the best daily
Sharpe ratio at the end of the year is the best trader.” What is
a Sharpe ratio? It’s a statistical measurement that combines
performance with risk. The higher the ratio the better. And trust me,
last year’s “All Stars’ ” Sharpe ratio was (be nice
now) not very good. Trout’s ratio was amongst the best year after
year. Why? As he further states, the two top reasons for this is
“we do good research so we have an edge, and we have a
rational approach to money management.” Not rocket science
here. But trading methods that have a statistical edge, combined with superior,
disciplined, structured exit strategies/proper risk control, made
this man amongst the wealthiest in the country and has created wealth
for him and his family that will likely last for generations to come.
Look at what this man has accomplished
using “statistically proven” entry patterns combined with
great exit strategies. And now compare this to the “All
Stars” who are in the newspapers sticking out their chests
because they only lost 8-25% last year. The real winners in this game
are the ones who put in the performance year after year and do it
while minimizing risk. Just like Monroe Trout did.
Getting There
Look at your own trading and compare it to Monroe’s. You must be
trading multiple strategies (or multiple variations of one or two
strategies) that have a statistical edge. And then, you must be
locking in that edge. And finally, you must have the ability to put
together a proper portfolio that minimizes both intra-day risk along
with overnight risk. Monroe Trout was able to do it. He supposedly
lived and breathed the markets for over a decade and the reward was
his success. Not success that let him wear a suit in USA Today
after losing people’s money. Real success that allowed him to grow his
money and his investors money year after year. He did it by not only
focusing on returns, he did it by focusing on “daily risk.” By
controlling the risk, he controlled the returns. A lesson we can
and should all learn from.
If you need any help on this, or would like to share your thoughts
with me on this, feel free to email me at lconnors@tradingmarkets.com
My Seminar
As you may know, I’m conducting a 5-week, online, interactive seminar
from April 5-May 7. The seminar was announced on Wednesday night and
it’s already more than 50% sold out. If you’d like to join me at this
event, you can find details here.
Finale
We all know that “buy and hope” is not conducive to creating
and growing wealth when markets decline. You must be trading both
sides of the markets and you must be using strategies that have a
built-in edge. But, you must go further. You must know how and when
to lock in these edges. And you must know how to put together a
daily portfolio that properly adjusts to the risks the markets bring.
The risk we will see in the market this week will be much different
than the risk we will see when the markets are no longer susceptible
to war. Having the knowledge, structure and discipline to adjust to
these risks is part art, and it’s also part science. And this is a
science that can be learned. Obviously, Monroe Trout learned it and
it’s the reason he was able to retire a very wealthy man at the age
of 40. The path he took to the markets is the correct path. He
had edges and he locked them in year after year, while assuming
minimal risk. He, and others like him, are the real All Stars
in this game, and their path is the proper path for all of us to take
and emulate.
Have a great week trading (and I hope I never see you wearing a suit
in the business section of USA Today)!