This Week’s Battle Plan

The Right Stuff

I continuously receive e-mails asking the question “Can I make a
living at trading?” The answer is yes, but it is obviously not
that easy. There is a process. And this process can be a long process
that has no guarantees of leading to long term success. It’s no
different than any other profession. It takes a number of factors all
combined to get you there. This week and next week let’s look at these
factors together.

The Path

Here are my thoughts on how you get there:

1. Specialization: Some people think trading is an
all-encompassing profession. Today I’ll do a little day trading, throw
in a few options, wing an E-mini or two and to top it off, I’ll buy
some value stocks and sell some covered calls against them.

Now, let me take the above scenario and move it to the field of
medicine. How many good doctors wake up in the morning and say
“Well I think I’ll do a little brain surgery today, followed by
radiology, then I’ll vaccinate some kids for smallpox, followed by
delivering a few babies before I go home tonight?” A doctor may
attempt to do this but he’d likely not last too long. There is no
difference in the two examples! And I could take any profession in the
world and do the same analogy (think sports, for example). You need to
specialize! You cannot possibly master 55 different styles of trading.
Trade one way and trade deep. This means become the best and most
knowledgeable E-mini trader or day-trader or swing trader in the
world. Every moment traders spend screwing around jumping around from
one style to the next further guarantees that they will likely never
make it as a trader. You need to select the style that best fits you
(see the next section) and become a master at that style.

2. Psychological Make-up

You need to be trading a style that fits your personality. That means
don’t think you can be an intermediate-term trader if you are
incapable of holding positions for weeks and months. And, if overnight
risk drives you crazy, you sure shouldn’t be swing trading. Does
leverage scare you? Then don’t trade the E-minis. Are you easily bored
and does boredom lead you to making dumb mistakes? It does for many,
many smart people. If this is true, then trading a dividend capture
program in utility stocks will likely drive you nuts.

I can’t tell you what to trade. No one can. Only you know you
and this self-knowledge and self-understanding will lead you to the
answer. I’m most comfortable with a 1-4 day hold for my positions. This
is my sweet spot. I have research that shows overwhelmingly that
the “optimal” hold for some of my strategies is seven days.
But, I’m usually not around to see that length of time. Why? I’m not
comfortable holding positions that long. I live by the philosophy
“the longer you hold a position, the more likely something can go
wrong.” As soon as we get in a position, we are looking to lock
in gains when they exist and integrate a 1-4 day time period into this
profit taking. That’s where I live. I live there because that’s
where I’m most comfortable. It’s not right, it’s not wrong — it’s
just where I think I can make the most amount of money and remain in a
continuous comfort zone.

If you are on the path to becoming a professional trader, you will get
there much quicker, and you will be much more satisfied if you are
trading where you are most comfortable. Put Tiger Woods on a golf
course and he is the most serene person on earth. Put him on a
football field with eleven 300-pound guys looking to take his head off
and his greatness is gone. Think about this. Most great people are
great because they are singular in their pursuit of excellence.
Trading is no different.

3. Get Professional Training

Many people come into this industry with little training and expect to
get rich quickly and stay rich. I have yet to see it done. Let’s go
back to our earlier examples. A doctor will go through 10 years of
training (from undergraduate school to residency) before being allowed
to practice on his or her own. And they will likely learn from the
best along the way. Athletes take from 10-20 years before turning
professional. In this business, anyone can “turn pro.” But
making money at it without the proper instruction and without the
proper time spent doing this is highly unlikely. Experience really is
a great teacher and it needs to be combined with the proper teaching.
My oldest daughter’s friend is being recruited by some top academic
schools because she has brains, and she is also an excellent softball
player. Her grades will likely get her into a great school, but the
bills for the school will be paid because of her ability on the
softball field. How does she do it? She has three full-time coaches.
That’s right. At 15 years old, she has a hitting coach, a fielding
coach and a conditioning coach. Obsessive? I think not. She told me
most of the top players have the same coaching that she has, and that
is what it takes to succeed at the level she’s playing at.

Now, let’s compare this to trading. Most people own a few books and
some testing software and from this knowledge they expect to compete
against the best minds in the business including trading desks at
Goldman Sachs and the smartest hedge fund traders in the world. Wrong!
It can’t be done! To succeed in any endeavor, one needs to put in the
time and one needs to learn it from the best people. This can come in
many different forms and many different ways. But, it must be done.
Will this guarantee your success? No, of course not. There are a
thousand different factors that come into play on the path to success
and no one can guarantee anyone’s success. But, there are formulas
that can be used and followed and by taking these proven paths,
certainly increase your chances of long-term success. Succeeding on
Wall Street is a hell of a lot tougher than getting a college
scholarship in softball. Yet, too many traders not only don’t learn
from the right people, they don’t put the time in to be able to
succeed. This is wrong, and it ultimately leads to failure. Continuous
work is the only way to succeed no matter which path is chosen,
whether you’re 15 years old and playing softball or 45 years old and
on the path to trading full time.

Two weeks ago we looked at the performance of the “All Star”
Mutual Fund Managers as selected by USA Today. These “All
Stars” were smart enough to lose less money last year than their
brethren. None made money. They simply lost less (only on Wall Street
does this type of performance equate to excellence).

This week we’re going to meet two real “All Stars.” Not only
are these two people crushing their brethren (the average mutual fund
manager lost about 2% for the first quarter), these two are actually
making money. And, we all love discovering new talent and I’m
proud to say both these people are related to members of
Tradingmarkets.com. Now, without further adieu, let’s meet the two
leaders of the 2003
TradingMarkets Stock Picking Contest!

In second place, with an 8% return for the quarter (and placing him in
the top 5 % of all money managers in the country) is Joseph Hetzer.
Joseph came into the year liking
(
KKD |
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PowerRating),
(
HAS |
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(
SBN |
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(
NTE |
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and
(
DSWL |
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PowerRating). Four of his best five stocks have risen for the year
so we contacted Joseph’s family to see how he did it. We would have
spoken with Joseph himself but because he is in his second semester of
kindergarten, we figured he’d be asleep any evening we called. Not
only is Joseph proficient at kicking the behinds of his competitors in
the money management world, he is also a renaissance man. He is the
star male performer in his tap class, plays t-ball and hopes to be a
cowboy when he grows up. And to top all of this off, Joseph likes to
watch the same show me and my 5-year-old son like to watch: “Sponge
Bob Square Pants!” Joseph, you know I don’t believe in
buy-and-hold, but based upon your results, combined with your taste in
cartoons, you are making a believer out of me!

And in first place through the first quarter of 2003, is Natalie
Brooks! Natalie is up nearly 11% for the year having nailed Yahoo
(
YHOO |
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PowerRating),
which is up nearly 50% since she selected it three months ago. Natalie
too is in kindergarten, but she’s bored with it. Plus, her family told
us she’d rather be home doing art and singing and dancing than be at
school taking orders!

That independence must be Natalie’s edge and must be why she ranks in
the top 3% of all the money managers in the country. I know you hear
me constantly say that buy and hold money managers can only make money
in an up-market. But Natalie and Joseph are certainly proving to us
the possibilities that it really may work. Especially if your money
manager has to be in bed before 8 o’clock.

Good luck to all the contestants for the rest of the year (especially
my son Dylan who is down 7% for the year…yup, the buy-and-hold genes
have definitely been passed along to him). We’ll update the contest
again at at the end of Q2.