I am enjoying the interviews contained in The New Market Wizards and particularly like some of the comments by Victor Sperandeo. According to the author, Sperandeo had eighteen consecutive winning years before registering his first loss in 1990. Over this period, his average annual gain was 72 percent.
Here are some of Sperandeo’s comment’s:
I analyze risk by extent and duration of price swings.
Many market commentators will use volatility as a measure of risk and I certainly don’t agree with that approach. I prefer to use the Ulcer Index developed by Peter Martin as a measure of risk. The Ulcer Index serves as a measure of the depth and extent of a drawdown from a previous high.
I discovered that you can’t train people how to trade by just imparting knowledge. The key to trading success is emotional discipline. Making money has nothing to do with intelligence.
Even though Sperandeo has experience with hiring people with no trading experience and training them, I can’t say that I believe at least some level of intelligence is required. Sperandeo refers to his experience with a guy who had an IQ of 188 and never made a dime in five years of trading. This reminds me that most Nobel prize winners in the sciences have IQ’s between 140 and 150. One may expect higher levels of intelligence to be related with a higher probability of winning a Nobel prize in science but that isn’t that case. However, there is obviously a minimum level of intelligence required.
The emotional discipline referred to is absolutely paramount in my opinion. I have always had rules for determing which stocks/ETF’s to buy and when to sell. The models that I now use help me keep my emotions in check since I do not take an action until directed to do so by my rules. That’s not to say I don’t feel a level of stress when the markets are in rapid decline and I am long. My stress is minimized by knowing that I have rules in place that will direct my actions. I suspect for many investors, stress is a result of not knowing what action to take.
To be a successful trader, you have to be able to admit your mistakes.
In trading you can’t hide your failures. Your equity provides a daily reflection of your performance. The trader who tries to blame his losses on external events will never learn from his mistakes.
These comments are why I have so little faith in talking heads on television – they don’t have to provide a track record. Every so often, they will point out that one of the recommendations they made last month provided a great return. What about the rest of their recommendations?
This blog keeps me humble. Putting all my model equity curves on this site for all to see prevents me from discussing only my best model results over the past X months for example.
In my opinion, the greatest misconception is the idea that if you buy and hold stocks for long periods of time, you’ll always make money.
My thoughts exactly.
One of the mistakes that people make is that they don’t approach trading as a business. I’ve always viewed trading as a business.
Agreed.
You shouldn’t make trading your whole life. You have to take time off. You need to spend time with loved ones. You need to balance your life.
This point is often missed by those of us who spend a tremendous amount of time investing.
FJP
