What does ‘success’ mean in financial markets?
The goal of any true investment is rational self-interest, and the same applies for speculation. For a good investment, potential rewards and their odds of coming true outweigh potential risks and their odds.
Simply put, one is successful in financial markets when one is consistently net profitable over a long time frame. Extracted returns have to consistently outweigh losses incurred, as in any business. Optimal opportunities have to be seized exceptionally, while non-productive or losing propositions have to be controlled and nipped in the bud.
This has to happen year in, year out. As in the business world, there are glorious and meager years. For consistent profitability, it only matters that realized rewards gained realized risks, on whatever scale.
Success – A whole, made from many elements
A successful stock speculator combines a large set of skills, knowledge and characteristics into an integrated system of profitability. You can think of the system’s elements as the wooden planks of the hull in a large ship.
Any single one by itself floats on the water, but you can’t sail the ocean with it.
Put a few together, and you can make a raft – but once even a small storm catches you on the sea, you’re doomed.
Put almost all the planks together but miss a single one, and your ship will still sink sooner or later.
Only all the elements of the system working together will make you a consistently successful speculator in the stock market, as they all inevitably intertwine and rely on each other to function. Any single element ignored or left under-developed can become a point of failure for the whole system.
Success in the markets is a system of systems, a well-oiled clockwork with every cog indispensable.
Success means sticking to the plan
The bottom line is the following. Since success is consistent profitability, which can only be achieved through application of an integrated system, then a speculator achieves success only through unfailing ‘zero-defect’ application of that system.
Profitability and money are results of this success, and will follow by themselves. To become a successful speculator, you should not concern yourself with making money, but only with the unfailing application of your system and your plan that you arrived through detailed deliberation.
Why should this be the case? Because in financial markets nothing is a given, and all is a question of probabilities. And every time uncertainty enters the picture, the destructive power of emotions rides on its coat-tails (more on that below).
Of course, there can be a place for discretion, intuition, even art. But the privilege of overriding rules and to listen to the ‘inner voice’ is reserved for the true pros, who have honed their abilities over many years and decades.
Most people have rules, but what truly divides the successful speculator is that she is the rare market participant that follows them ritualistically.
The way of the speculator
The markets are not ‘efficient’, there is no such thing as a ‘random walk’ – otherwise there would be no speculators whose names keep reappearing in performance records and who continue to make money, year in, year out. They are few, I admit … but they exist.
What follows is a bird’s perspective overview of the 17 basic elements that I consider non-negotiable in my own system of successful stock speculation. If you’re not aware of a few yet, steal some and make them a part of your own system. I’m sure you will find value, or at least food for thought.
1. Only operate within a healthy market trend
The adage ‘don’t fight the trend’ is one of those rare ones that is based in truth. As Marty Zweig points out, would you rather follow the trend, or fight it? Fighting the trend is like stepping in front of a freight train or a tsunami, demanding from it to get out of your way. The market is an immense natural force, and opposing it is futile.
Pro speculators will only substantially be long stocks in a bull market showing healthy vital signs. They will only be shorting in a seller’s market, and avoid choppy environments at all costs.
2. Listen to stocks and the market only, nothing else
The market gets the first, the last, and the only word. To read the market, the successful speculator is skilled in reading charts of individual stocks, analyzing the daily price and volume action of the major indices, and gauging the health of the total market.
No talking heads on television, no webpages, no secret newsletters, no social media commentary, and no opinion is worth a single dime – be it that of your friend, your hairdresser, your trading idol or your own. To boot, mental flexibility is key – the best speculator is able to about-face on her thoughts in a day.
3. Think in ‘states’, environments, movements, or waves
A single day or a week is just a blip. They’re the blink of any eye for the market. No genuine move starts or ends in a single day or week in the market, and often not even in a month.
Genuine action occurs as chains of events, as larger movements, as waves, all while the market undulates back and forth between different states. The pro speculator takes a higher-altitude perspective, and is able to judge the context, corroborating information and the environment in the market.
4. Progressive risk exposure
Speculation is not an all-or-nothing venture. In fact, it is more like driving a car. In the city, you drive slow and controlled. On the highway you step on the gas, and when you exit it you slow down. Before you drive off a cliff, you break to a halt.
It’s the same with risk exposure. When stocks behave well, the speculator becomes exceptionally opportunistic. When stocks misbehave, she pares back risk. When the market tops and heads south, she gets out and stays out.
5. Risk your money in the very best opportunities, or not at all
The best speculators focus on only honing in on the one-in-a-thousand opportunities, and then piling into these genuine market leading stocks when the time is right. The virile, elite-quality massive movers, which are often but not always highly liquid. Profits come from price changes, and maximal profits come from operating in those stocks that have the potential to move the most.
6. Have explicit entry rules
Know where to get in, and when to pass. Know when to chase, and when to let something be. Know when to double down. Finding and acting on low-risk entry points to start positions is a key skill in the toolset of the successful market operator. This involves analyzing individual stocks, group behavior, and the general market.
7. Have explicit exit rules
When the advance is over, the skilled speculator knows how an exhausted stock looks, how to spot a general market top, and when to leave for greener pastures.
She makes every effort to not let complacency override her rules – she tries to stay humble, as she knows that hubris, especially after a winning streak, can bring about her downfall.
8. Take losses quickly
Speculating in stocks without capping point risk and controlling losses is walking through a minefield. It can go well for a few steps, but eventually you’ll take your last one.
When we’re wrong, we need to admit it and get out, no questions asked. The speculator keeps her ego in check – the pain of having to admit a mistake to oneself is neglectable compared to the possibly disastrous consequences of not admitting it.
9. Patience
The Cheetah is the fastest land animal on the planet. It is able to sprint up to 80 mph (130km/h). It could catch any gazelle alive, but if it goes for a kill at all, it will make sure it has all the odds on its side. The Cheetah prefers to wait for the high-probability opportunities, as Stan Weinstein remarks – the young gazelle, small and inexperienced, or old and weak. It will lie low for days or weeks on end, waiting for the right opportunity, the high-probability kill.
The same applies for the pro speculator. She will pass on many sub-par trades, let many marginal opportunities slide … until the big fish show up. Most successful market operators owe the lion share of their fortunes to just a few but vital opportunities they seized over their career … those have be awaited patiently, but they are worth waiting for.
10. Let profits ride
The speculator sometimes has to be patient for long amounts of time. But once an exceptional opportunity with a strong reward/risk profile forms, he will capitalize on it exceptionally. This is what the great Jesse Livermore exhorted over and over again.
Since a speculator waits for the best opportunities for some time, he won’t just take profits at at 10 or 15% – he wants to gain more, much more. Triple-digit percentage gains are not rare in the true virile market moving stocks. And the only way of getting there is letting his profits ride and sitting in his position until the trend reverses reliably.
11. Trade with the pros
An individual market operator usually cannot afford to spend millions of disposable cash to employ a whole building filled with the smartest people in the field to dig out the most promising companies. But she doesn’t have to – the speculator just follows the footprints of those that can afford to do so.
Another corollary of this the following: If the speculator wants to see what big players are doing, she pays attention to the time windows when institutional money managers tend to place orders – usually late in the day and the week.
12. Concentrate, and keep redeploying capital into winners
A speculator knows better than to put all her money into a single idea. This is too much of a risk. But she also knows that over-diversification dilutes performance. The more stocks she selects, the more her selection will be made up of stocks that out- and under-perform each other relatively.
The best market operators thus seek to focus on the best 4-8 stocks in the market, and will concentrate their capital in them. If a commitment does not meet their expectations, they will swiftly redeploy the money from the weak to the poor performers, keeping their funds liquid.
13. Average up, not down
Speculators are only involved with stocks if they behave as expected. That means that speculators only buy or add to a position when they’re receiving confirmation that they’re right, i.e. that the stock is moving up and makes them a profit right away.
This is counterintuitive to the common fallacy of averaging down (buying or adding when the price has declined). As the eminent Dixon Watts wrote, averaging down may go well 4/5 times when you are in a strong market, but 1/5 times you will keep buying more and more in a permanently declining market, usually without controlling risk. This will result in heavy losses, demoralization and even ruin.
Bottom line, buy strength, not weakness.
14. Skill is only the tip of the ice berg – psychology is the true challenge
Over the course of her career, the successful speculator sooner or later realizes that emotional discipline & consistency in sticking to the plan is more than 90% of the equation. There’s the bloody amateur that has no rules at all, who is victim to his impulses. But there’s another character type, and most traders and speculators actually fall into this category: They have some or other rule, but break them consistently
“What if I miss something?” they think, pleading with themselves. Impulses take over, dollar signs in their eyes. A question that I find to be much more useful is “If I do this a thousand times, will I make or lose money on average?”
You’d be smart to monitor your own reactions, thoughts, emotions, impulses, decision-making, and learn how to deal with each effectively. Learn the tenets of Zen. Learn how you think, how others think, why we break rules, how rules in the market are based on probability, and how to use that for you benefit.
15. Learn from mistakes
This should probably rule #1. The successful speculator admits and learns from her own mistakes. She writes down the reasons for the decisions she makes, and compares them to the outcome. She annotates charts with her thoughts. She logs trades, and daily and weekly journals the market, stocks and her reasons for or against acting in a certain way.
16. Make a plan before the battle, not during it
Whenever they make a decision, successful speculators lay out a plan before the market opens, or at least the principles and rules they need to follow for when the action starts. With minimal exceptions, they don’t second-guess their previously set boundaries and rules of engagement just because they observe something that stirs up impulsive actions.
Their plan includes actionable steps for any conceivable event – whether the stock goes up, down, sideways, explodes or implodes. They plan for their brokerage software to go down, for an electricity blackout, for black-swan events in the economy, and for anything that the imagination allows. Preparation is half the game.
17. Know your place
Even the best speculator must keep in touch with what she really does. We are not curing cancer, we are not averting wars, or helping a suffering child in an Indian village to avoid starvation. We are making money off numbers on a screen. Yes, we help provide liquidity. Yes, our share buying as a group might bring wealth to a select few individuals who own the shares.
But as Gordon Gekko, the caricature of a cut-throat financier in the 1987 movie Wall Street poignantly remarks, we don’t really create anything materially other than riding on the coat-tails of something else. A very rare few of us genuinely ‘invest’ in companies. We rather convince ourselves that we do so, while simultaneously trading in shares of those companies with complete strangers in the calculation of a speculative profit .
Remain a lifelong student of the markets
Any of these points requires a dedicated learning process, experience and commitment in application. The path to success, as in any other endeavor in life, is filled with obstacles, setbacks, and mistakes. But you’d be well off to see them in a different light, namely as stepping stones on your way to becoming a better version of yourself, personally and professionally.
I will teach every single element and much more supporting knowledge and skills in my educational course package. Deeply understanding all the above points, integrating them into your intellectual framework, and becoming a consistently profitable trader or speculator takes a long time. Consider purchasing this course, as it will dramatically shorten your learning curve to the road to success.
