How Rich Traders Stay Rich
By Brian Hunt, Editor in Chief, Stansberry Research
October 5, 2009
"Never confuse brains with a bull market."
Congratulations.
You found an asset that was extremely cheap... extremely hated... and just starting an uptrend.
You took an intelligent position size that limited risk.
You did a great job of sitting tight... of being patient and letting the bull market fully express itself.
You are up 500%. Now... for God's sake... Don't confuse brains with a bull market.
This classic quote is attributed to Humphrey Neill. Neill was a stock market expert who literally wrote the book on contrarian investment thinking. It's called The Art of Contrary Thinking. Neill's advice will save you a ton of money as a trader.
You see, the natural human tendency after hitting it big in the market is to "puff up" a bit... to brag to friends and family about how you "nailed it."
Maybe you did some great analysis on the oil market and rode a big move for hundreds of thousands of dollars. Or maybe you found a promising microcap company that turned into a 1,000% winner.
The natural human tendency after doing something great is hubris. And in the stock market, hubris is more dangerous than ignorance.
In 1999, I thought of myself as a great stock trader. I was 22 years old... and I was sitting on huge gains in tech stocks like JDS Uniphase, Ariba, and Microsoft. I would buy 'em, and they'd go up hundreds of percent. I made more money trading stocks that year than I did from my job.
I figured I would be retired and living on a private island by my late 20s. That's how good I was!
Now mind you, this was during the greatest tech stock bull market in history. The benchmark Nasdaq stock index gained 86% that year. I wasn't some incredible trader. I simply happened to be buying while the market was soaring. I had confused brains with a bull market.
You can guess what happened next. When the market collapsed, so did my huge tech stock bets. I didn't use stop losses. I didn't practice smart position sizing. I lost everything I had gained and then some.
It was expensive market tuition... but it taught me a tremendously valuable lesson.
Rich traders reach a happy medium between confidence and overconfidence. The right balance means having conviction in your beliefs and the courage to act on them... but always treating the market as a dangerous place that can bankrupt you if you don't use intelligent positions sizes and stop losses.
The wrong balance is being overconfident, taking a huge leveraged position, and refusing to say "uncle" if the market doesn't move in your direction.
If you've made a bundle on a big market move, go ahead and celebrate a little. Brag to your buddies. Go on a nice vacation.
But take Humphrey Neill's advice... Remember the lesson of the Internet bubble. Don't believe that just because you were right before, you don't have to limit risk. Confusing brains with a bull market will result in bankruptcy.
Good trading,
Brian Hunt |
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| • |
Thailand bucks global stock selloff... Thai Capital Fund reaches new 52-week high. |
| • |
Benchmark 10-year Treasury yield reaches lowest low level since May... now at 3.22%. |
| • |
U.S. unemployment inches toward 10%... highest level since 1983. |
| • |
Regional banks falter... index drifts back down to recent lows. |
|
Last |
Change |
52-Wk |
| S&P 500 |
1062.98 |
+1.78% |
-12.37% |
| Oil (USO) |
34.51 |
+1.50% |
-59.97% |
| Gold (GLD) |
97.05 |
+0.05% |
+12.02% |
| Silver (SLV) |
15.91 |
+1.08% |
+20.99% |
| U.S. Dollar |
77.11 |
+0.26% |
-0.52% |
| Euro |
1.46 |
-0.40% |
+0.97% |
| VIX |
24.88 |
-2.85% |
-28.38% |
| HUI |
398.09 |
+0.10% |
+20.93% |
| 10-Year Yield |
3.30% |
-0.03 |
-0.46 |
|
|
| Company |
Sym |
Industry |
NET Servicos |
NETC |
cable TV |
Flagstone Re |
FSR |
insurance |
Walgreen |
WAG |
drug stores |
PepsiAmericas |
PAS |
soda distribution |
ViaSat |
VSAT |
com equipment |
Vivo Parti |
VIV |
telecom |
Nu Skin |
NUS |
personal products |
iShares TIPS |
TIP |
inflation safety |
iShares Taiwan |
EWT |
Taiwan stocks |
SuccessFactors |
SFSF |
business software |
Pepsi Bottling |
PBG |
soda distribution |
Capella Edu |
CPLA |
for-profit edu |
Check Point |
CHKP |
security software |
Salix Pharma |
SLXP |
pharma |
Och-Ziff Capital |
OZM |
asset mgmt |
Align Tech |
ALGN |
medical devices |
|
| Company |
Sym |
Industry |
First Bancorp |
FBP |
bank |
Hampton Roads |
HMPR |
regional bank |
Osiris |
OSIR |
biotech |
United Security |
UBFO |
regional bank |
Nobel Learning |
NLCI |
for-profit edu |
First Financial NW |
FFNW |
regional bank |
UCBH |
UCBH |
regional bank |
Raser Techn |
RZ |
industrial equip |
First Common |
FCF |
regional bank |
Omega Navigation |
ONAV |
shipping |
|
|
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