Profitable Trading Isn’t Selling or Buying — You Have to Be Fearless
I started on Wall Street, trading on the floor.
I had virtually nothing when I started.
I had to scrounge around and borrow money from family members, so I could pony up the $12,500 it cost to rent a seat and open an account on the New York Futures Exchange.
Floor trading gave me an education in financial markets that you can’t get anywhere else.
One of the great things about being a floor trader is that you get to meet a lot of interesting characters.
There was one trader who was on a 20-day winning streak.
He didn’t want to jinx himself, so he wore the same exact clothes (underwear and all) every single day he was on his streak.
The guy smelled horrible after a few days, but no one said a word to him.
At the end of the trading day, he bought beers at the local watering hole for anyone who had to stand around him in the trading pit.
Another trader, while on a winning streak, took the same exact route from his home to the floor every single day — regardless of New York City traffic.
I Have a System, and It’s Not Superstition
I never believed in any of the superstitious crap.
If I made or lost money, it wasn’t because of the underwear I wore the day before.
It wasn’t because I took the subway rather than the bus.
I made money because I analyzed the market based on what I knew and took a position.
The key in the system I’ve designed takes emotion out of trading…
The Secret Trading Places Taught Me
Right around the time I first started trading on the floor in 1983, a movie starring Dan Aykroyd and Eddie Murphy, called Trading Places, hit the theaters.
For those of you who haven’t seen it, the plot revolves around a snobby investor and a con man. They find their positions reversed as part of a bet by two millionaires.
The final scene of the movie plays out on the trading floor, where the millionaires get taken to the cleaners.
The accurate depiction of the trading floor made an impact on traders and regulators alike!
In 2010, the head of the Commodity Futures Trading Commission proposed to Congress a rule called the “Eddie Murphy” rule based on Trading Places.
When the two characters are about to walk on the trading floor, the snobby investor gives the con man a pep talk on what to expect:
Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That’s the other guy’s problem. Nothing you have ever experienced will prepare you for the absolute carnage you are about to witness. Super Bowl, World Series — they don’t know what pressure is. In this building, it’s either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you’re up half a million in soybeans and the next, boom, your kids don’t go to college, and they’ve repossessed your Bentley.
His description of the trading pit is just as valid today as it was when the movie came out 35 years ago.
Here’s a little secret…
Good trading advice isn’t about what to buy or sell, or even how to analyze markets.
Instead, it focuses on keeping your emotions in check.
If you lack confidence, are unable to handle the pressure and take it personally — you have a slim chance of making money in the markets.
The 3 Questions I Ask Myself Before Buying a Stock
Divorcing emotions from your investing will save you money and help you sleep at night.
And the key to keeping emotions from tangling up your investment decisions is to have a strong, simple system for picking your investments.
Before even buying one share of stock, I ask myself three questions:
- Is the business run by a great management team?
- Is the business in an industry that is in the tens of billions of dollars?
- Is the stock trading at a bargain price?
Yes, it really can be that simple!
Wall Street loves to needlessly complicate investing, but I’m here to show you what you need to pay attention to and what is just noise.
When it comes to investing, I want a business that I can understand, has a solid balance sheet and that generates free cash flow.
What good is a business that is growing by leaps and bounds yet can’t pay its rent or finance its business?
I also want to make sure that my risk of permanent capital loss (the business going bankrupt) is close to zero.
Sometimes the stock price doesn’t account for a great management team. Many times, investors throw a business into the unloved pile because the industry is out of favor.
Those are the times when I back the truck up and buy the stock.
After I’ve invested in the stock and the market is on a wild roller-coaster ride, it doesn’t bother me in the least.
As long as the business is still financially sound and I bought it a bargain price … I sleep well at night.
It’s that simple — emotions are the greatest thief of profits.
Fear? That’s the other guy’s problem.
All my best,
Senior Analyst, Banyan Hill Publishing