Hedge Fund Market Wizards


★★ While their responses differed in the details, all of them could be boiled down to the same essential formula: solid methodology + proper mental attitude = trading success.


Colm O’Shea

You identify a macro problem (bubble or something that diverges from fundamentals). How do you play it? You don't, not because the timing is so uncertain but because no one cares. As long as no one cards, there is no trend. You can't be short just because you think fundamentally something is overpriced. What can you do? You wait until people start to care. Even though something might be a good idea, you need to wait for and recognize the right time. You just have to make money going the other way. You just need to make decent returns and wait until the market turns. Then you can make great returns. You can participate in the bubble but do it in positions that are highly liquid so you can exit the market quickly if you need to.


When a company posts smooth earnings every single quarter, they are manipulating the numbers. You know nothing beyond that.


Once you realize something is happening, you can trade accordingly. Trades don't have to start based on fundamentals. If you wait until you can find out the reason for the price move, it can be too late. A great Soros quote is "Invest first; investigate later." You don't want to get fixated on always needing a nice story for the trade. The unfolding reality trumps everything.


Being short equities is a hard trade because they might still keep going up for a long time. After a bull market that goes on for years, who is managing most of the money? The bears are all unemployed; they're not managing any money at all. You have a few very flexible smart people, but they run relatively small amounts of money; so they don't matter, either. The managers who are relentlessly bullish and who buy more every time the market goes down will be the ones who end up managing most of the money. So, you shouldn't expect a big bull market to end in any rational fashion.


What prompted you to get out of bearish positions? Two things changed: The economy stopped getting worse, and markets started going up. The underlying problems had not gone away, but that isn’t the market driver. The fact that the economy was improving, even though it was still in bad shape, meant that the optimists could come back. Never underestimate the ability of people to be optimistic and believe that everything is going to be okay. Historically, what is important to the market is not whether growth is good or bad, but whether it is getting better or worse. Growth started getting less negative, and less negative is good news.


★★ Implementation and flexibility. You need to implement a trade in a way that limits your losses when you are wrong, and you also need to be able to recognize when a trade is wrong. There should be no emotional attachment to an idea. When a trade is wrong, just cut it, move on, and do something else. Don't let your structural views on how you believe the market will play out get in the way of your trading.


I was really pessimistic. I thought the world was in terrible condition. But the market was telling me that I was wrong. So I thought, "Okay, I’m completely wrong. What is a different hypothesis of what is going on? Ah, here is a different hypothesis. I see what’s going on. Let’s do that instead." Then there is an explanatory story that comes out afterwards. But actually, the story came after my previous hypothesis had been proven wrong. It wasn’t that I was smart and caught the turning point. I didn’t. I just noticed that what I was doing was wrong and that I needed to do something else.


You have to embrace uncertainty and risk. The market is not going to let you make any money unless you're willing to take risk. You have to embrace the logical consequences of your ideas, and that means that you have to have a stop loss that is wide enough. You also have to understand the time horizon for the trade to match your hypothesis.


★★★★ All traders have a method that is personal and fits them. You need to develop your own methodology that fits your personality. Learn from everyone around you, but you have to do what makes sense for you, even if it’s the opposite of what makes sense for other people.


When you get out of a long trade, you should be thinking: "Hmm, that shouldn't have happened. Prices are inconsistent with my hypothesis. I'm wrong. I need to get out and rethink the situation."


In a bubble, if no one else cares, and as long as no one cares, there is no crisis. The point is that beliefs that are completely invulnerable to evidence and passionately defended can be quite durable. If it trades like a bull market, it's a bull market. If you have the feeling that you want to buy but you're waiting for a pull back, it's a bull market.


Exponential price rise is characteristic of the late stages of a bubble. The natural way to trade a market that is in a bubble is from the long side, not the short side. Trading the short side is treacherous.


Having a positive skew in your trades is very important meaning that they have an asymmetric quality— the maximum loss is limited, but the profit potential is open-ended.


★★★ Trading can't be taught but it can be learned. My natural trade time horizon is one to three months, but that doesn’t mean it would be right for you. Since I don’t know you, I can’t tell you what your trading style should be. But if you are willing to put in the effort, you can learn what that style should be. If I try to teach you what I do, you will fail because you are not me. If you hang around me, you will observe what I do, and you may pick up some good habits. But there are a lot of things you will want to do differently. You are not the same as me. You need to learn not to become me. You need to become something else. You need to become you.


To be a successful trader, you need to have perseverance and the emotional resilience to keep coming back because as a trader you get beaten up horribly. If you don't love it, there are much better things to do with your life. You can’t trade because you think it is a way to make a lot of money. That won’t cut it. No one who trades for the money is going to be any good. Traders who are successful over the long run adapt. If they do use rules, and you meet them 10 years later, they will have broken those rules. Why? Because the world changed. Rules are only applicable to a market at a specific time. Traders who fail may have great rules that work, but then stop working. They stick to the rules because the rules used to work, and they are quite annoyed that they are losing even though they are still doing what they used to do. They don’t realize that the world has moved on without them.


Determine where you are wrong -> stop level -> how much you are willing to lose -> position size


One problem with buying equity puts is that equity volatility tends to be very expensive. Who is the natural seller of equity puts? No one. Who is the natural buyer of equity puts? Everyone. The world is long equities, and people like owning insurance, so there is an excess of natural buyers for equity puts. That is why equity option prices are structurally expensive.


How a trade is implemented is more important than the trade idea itself. Aim to implement a trade in the way that provides the best return-to-risk and limits losses in the event the trade is wrong.


There does not always need to be a reason for the trade as price action itself can reveal that something important is going on, even if the fundamental reason is not apparent.


Ray Dalio

"I learned that there is an incredible beauty to mistakes because embedded in each mistake is a puzzle and a gem that I could get if I solved it, i.e., a principle that I could use to reduce my mistakes in the future. I learned that each mistake was probably a reflection of something that I was (or others were) doing wrong, so if I could figure out what that was, I could learn how to be more effective. While most others seem to believe that mistakes are bad things, I believe mistakes are good things because I believe that most learning comes via making mistakes and reflecting on them."


Recognize that you will certainly make mistakes and have weaknesses; so will those around you and those who work for you. What matters is how you deal with them. If you treat mistakes as learning opportunities that can yield rapid improvement if handled well, you will be excited by them. If you don’t mind being wrong on the way to being right, you will learn a lot.


That rally occurred because the Fed eased massively. I learned not to fight the Fed unless I had very good reasons to believe that their moves wouldn’t work. The Fed and other central banks have tremendous power. I learned that a crisis development that leads to central banks easing and coming to the rescue can swamp the impact of the crisis itself.


In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money.


I believe that anyone who has made money in trading has had to experience horrendous pain at some point.


Mistakes provide the path to improvement and ultimate success. Each mistake offers an opportunity to learn from the error and to modify one's approach based on this new information.


Larry Benedict

It’s not about making a lot of money. Of course, it's important to have return, but it’s more important not to lose money. If you can manage the risk, you will make money.


You can't push your account harder to reach some goal than justified by the trading opportunities.


If you have a broad global macro view but your trading style is very short term, don’t let it affect your trades. Let the market dictate how you should be trading; not your macro views of what you think the market will do.


You can't be emotional in this business. It’s a business and nothing else.


Don't average down losing trades. Be smaller than you need to be. Take profits.


85% of the time, they mark up the market on the morning of option expiration day.


So many other traders fail because the one trait they all share is that they have a gambler's mentality. When they are losing, they are always looking for that one trade that will make it all back. I learned early on that you can't do that.


You are not a trader; you are a risk manager. Never stay in a losing trade because you think it will come back. Minimize the loss. Accept the loss and walk away from it. The worst thing any trader can do is freeze. You need to know how you will respond in any situation. How are you going to not lose money while making money? How are you going to get out of your losers? How are you going to keep your winners from turning into losers?


Trades should be motivated by opportunity. Traders should caution against trading out of a desire to make money.


Scott Ramsey

Always buy the strongest and sell the weakest. Buying a laggard as a proxy for a leader is a bad idea.


The evolution of a trader is when you start letting your money work for you and increasing your size.


Trading gets so ingrained in your psyche that it becomes second nature like driving a car. Sometimes you look at a chart and just know what to do without thinking about it.


To me, the most important thing is to control the downside. Rigorous risk control is not only important in keeping losses small, but it also impacts profit potential. You have to put yourself in the position to be able to take advantage of opportunities. The only way you can do that is to have a clear mind. If you have trades that are not working, and your mental energy is going toward damage control, you can’t think clearly about opportunities in the market.


If there is one principle that you cannot violate, it is: know what you can lose.


Misplaced hope and the desire to still be right can cause your losses to be greater than they need to be. Hope is the worse four-letter word for a trader.


One of the biggest mistakes people make is that they look to outside sources for guidance in their positions. You really have to formulate your own opinion and not rely on so-called experts.


The beauty of selling the weak link is that this market has already shown its reluctance to make new highs. Therefore, the risk is the lowest, and sometimes the reward is also the highest. Never sell the strongest markets until they fail.


Technically oriented traders can greatly benefit by incorporating a fundamental perspective.


It’s not about being right; it’s about making money. Taking a loss is part of the process. You will have some percentage of losses; you just need to make sure that your losses are smaller than your wins. The market doesn’t care if you lost money on a trade. It doesn’t matter. Think about your next trade. You have to get past the idea that just because you lost money on a trade, it means you failed. Every trading decision you make is subject to some randomness. It doesn’t matter whether you win or lose on any individual trade, as long as you get the process correct.


Jaffray Woodriff

"My broker recommended a trade to me, in typical broker fashion. It lost money and I never followed another broker's recommendation in my entire life. Boom. Done. One trade; I will never do it again."


As soon as I learned about the efficient market hypothesis I was on a mission to prove it wrong.


The third way: neither trying to project a continuation of the trend or a reversal of the trend, instead try to predict the probable market direction over the next 24 hours.


Adjust position sizes in line with changing overall volatility. In high IV environments, decrease the number of contracts traded, keep 80% cash and 20% positions. In low volatility, 50% cash and 50% position.


Risk manage by adjusting the trading size for changes in the volatility of the markets. Adjust position sizes to overall risk to target a particular volatility.


The worst mistakes the public makes in the markets are overtrading and listening to tips.


Develop the discipline of objectively evaluating your own progress. Systems that work well across many markets are more likely to continue to work in actual trading than systems that do well in specific markets. The lesson is: Design systems that work broadly rather than market-specific systems.


Edward Thorp

"I discipline myself and paced myself. It was a lesson about managing money that stuck with me forever after. Don't bet more than you are comfortable with. Just take your time until you're ready."


"I got to thinking about games in general and thought, the biggest game in the world is Wall Street. Why don't I look at and learn about that?"


In favorable situations, you will want to bet more than in unfavorable situations.


If you bet half the Kelly amount, you get about three-quarters of the return with half the volatility. So it is much more comfortable to trade. It is much more comfortable to trade and psychologically much better. There is always the possibility that there is some unknown factor. If the precise probabilities of winning are unknown, the bet size should be significantly smaller.


Stocks that are the most up tend to underperform the market in the next period, while the stocks that were the most down tend to over perform the market.


Stocks that paid no dividends seemed to have above-normal returns. Stocks that paid low dividends had below-normal returns, but as the dividend payout went up, the total return tended to increase as well. Earnings surprises also seemed to have an impact for a considerable period of time—weeks and even months—suggesting the market was slow to assimilate this type of information.


A lookback period of about 60 days (3 months) is best for the standard trend-following approach.


Reducing your exposure on drawdowns depends on how confident you are about your edge. If you have a really strong conviction about your edge, then the best thing to do is sit there and take your lumps. If, however, you believe there is a reasonable chance that you might not have an edge, then you better have a safety mechanism that constrains your losses on drawdowns.


Do what you love and the money will follow.


The claim of market efficiency, which implies that no market edge is possible, is a hollow statement because you can’t prove a negative. But you can disprove market efficiency if there are people who have a demonstrable edge. There is a market inefficiency if there is a participant who can generate excess risk-adjusted returns that can be logically explained in a way that is difficult to rebut.


★★ Gambling and investing are both probability based games for which the problem of finding an edge can be solved analytically. Varying the position size can be as important as the entry methodology: trade larger on high-confidence trades and smaller, or not at all, on low-confidence trades. When the edge is uncertain or the probabilities cannot be accurately assessed, reduce exposure on drawdowns as part of the methodology. Emotions are deadly for trading, and the surest way to guarantee that emotions will impact trading decisions is by trading beyond one’s comfort level. There is no single solution to the markets, and any solutions that do exist are continually changing. Successful traders adapt to changing conditions. Even when they find patterns or methods that provide a market edge, they will change their approach as dictated by the market. Finding success in the markets is a dynamic rather than static process.


Jamie Mai

As a general observation, markets tend to overdiscount the uncertainty related to identified risks. Conversely, markets tend to underdiscount risks that have not yet been expressly identified. Whenever the market is pointing at something and saying this is a risk to be concerned about, in my experience, most of the time, the risk ends up being not as bad as the market anticipated.


The single best predictor of future increases of volatility is low historical volatility. The market certainty and complacency reflected by low volatility often implies an above-average probability of increased future volatility.


★★ Take advantage of the fact that markets always price securities on the implicit assumption that changes from prevailing levels are equally likely in either direction, where in reality, idiosyncratic fundamental factors can make a move in one direction much more likely. The market always assumes symmetry, and you look for potential asymmetry. Ideal trades share the characteristic of being priced cheaply relative to the perceived probability and magnitude of a win.


Beta is measured based on daily relative price changes, which can be a very poor indicator of long-term relative price changes.


Volatility is a terrible proxy for measuring potential price change over longer intervals of time. Option prices will tend to be priced too low in smoothly trending markets. The broader principle is that the explicit and implicit assumptions that go into option pricing models often diverge from the underlying reality. Markets sometimes trend and that volatility will dramatically understate the potential price move of markets that trend.


  1. Find mispricings in a theoretically priced world. Identify trade opportunities that arise because prices, particularly for derivatives, are based on one of a number of standard pricing assumptions that may be entirely inappropriate based on the specific circumstances applicable to the given market.
  2. Select trades in which the probabilities appear to be significantly skewed to a positive outcome. Ensure the estimated gain if the trade succeeds is at least twice as large if the trade fails.
  3. Implement trades asymmetrically. Structure trades so that the downside is severely limited, while the upside is open-ended.
  4. Wait for high conviction trades. Be content to stay on the sidelines and do absolutely nothing until there is a trade opportunity with high expected value.
  5. Use cash to target portfolio risk. Hold a large cash component in the portfolio (50-80%), by increasing or decreasing the cash component, you can target desired portfolio risk level.


  1. Prices are normally distributed. Options are priced based on the assumption of a normal distribution, which effectively implies that future prices near the current level are most probable and that probabilities drop steeply for prices further removed from current levels. Another implication of the normal distribution assumption is that it is always equally likely for prices to go up X percent as down X percent. Although this assumption may often be a reasonable approximation, there are times when it is far more likely for a market to go up by a given percentage than down by the same amount or vice versa
  2. Option pricing models incorrectly assume that volatility scales with the square root of time. This assumption may provide reasonable approximation for shorter time periods (1 year or under), but if you have a very low standard deviation, and you extend it for a long time, it doesn't scale properly. For longer time periods, the volatility assumption may understate potential volatility because the longer the time period, the more likely volatility will revert to the mean from current low levels.
  3. Trend is ignored in the volatility calculation. Option pricing models gage the probability of price moves of a given magnitude based on volatility and time. Trend is not part of the calculation. The implicit assumption is that the direction of daily price changes is random but trends tend to result in larger price moves than implied by the volatility assumption.


Good traders get out of a position when they realize they have made a mistake. Great traders are capable of taking the opposite position when they realize their original concept was dead wrong.


Michael Platt

"I have always regarded financial markets as the ultimate puzzle because everyone is trying to solve it, and infinite wealth lies at the end of solving it."


The market is always right. You are wrong if you are losing money for any reason at all.


Don't be too invested in your positions and let ego get in the way. Losing money is what kills you. It is not the actual loss that hurts you. Losing trades mentally impede the trader and often result in missed winning trade opportunities. It’s the fact that it messes up your psychology. In this game, you want to be there when the great trade comes along. In trading 80% of your profits come from 20% of your ideas.


★★★ If I enter a trade, and the minute I put it on, I feel uncomfortable, I will just turn around and get right out. Also, I look at each trade in my book every day and ask myself the question, "Would I enter this trade today at this price?" If the answer is "no," then the trade is gone. Most of the trades that I do stop myself out of, I stop out because of time rather than because of a loss. If I really love the trade and get strongly positioned, and then a month later, it still hasn’t moved, alarm bells start ringing in my head. I think to myself, That is a really great idea you have, but the market is just not playing ball.


Bull markets ignore any bad news, any good news is a reason for a further rally.


I like to know what the consensus view is because you really do make the most money when the consensus shifts.


★★ When I am wrong, the only instinct I have is to get out. If I was thinking one way, and now I can see that it was a real mistake, then I am probably not the only person in shock, so I better be the first one to sell. I don’t care what the price is. In this game, you have an option to keep 20 percent of your P&L this year, but you also want to own the serial option of being able to do that every year. You can’t be blowing up.


Steve Clark

The price is where anyone is prepared to deal, and it can be anything.


What made you so profitable? I was very proactive in orientating the book. If I was in something that was wrong, I would cut it. I wouldn’t defend it. I wouldn’t average down. I would just cut it, cut it, cut it.


Calculate the risk, determine its position size, and do the trade.


How to determine if you are a buyer or seller after a news item? When you are trading over a short to medium term, your own views on the fundamentals of a story are totally irrelevant. What you have to do is gauge what the market thinks of the story. I would sample opinions, and if there were enough people saying that we were going to see buying on the back of the news item, I would go long. If I didn’t see momentum develop, I would cut it, and if I did see upward momentum, I might increase the position size. I am a big believer in buying on the way up.


★★★ Time and time again, I give traders who work for me one piece of advice: Do more of what works and less of what doesn’t. Young traders come to me and say, "Well, I have been running this book, and these things have been going really well, but I keep losing money on this." I tell them to just stop doing the things that are not working. Dissect your P&L and see what works for you and what doesn’t. It is a very interesting process to analyze where your profits come from, and traders often don’t know. Once you understand you have a method, you can tweak that method. Just stop doing the things that are not working.


★★ Price is irrelevant; it is size that kills you. If you are too big in an illiquid position, there is no way out.


★★★ As a trader, you have to be honest with yourself. I have met many traders who have laid out a strategy on how they will be scale-down buyers. "I’ll buy some at eight, and if it goes down, I will add at seven, six, and five." But if you are the type of person who will be puking his guts out if it goes to seven, let alone to six or lower, you shouldn’t be buying at all at eight, or if you do, it should be 25 percent of the size. You have to train yourself to trade at a smaller size so that you trade within your emotional capacity. If you are really, really excited about a trade and swing the bat in a big way, and 10 minutes later the market moves against you, but you are the type of person who doesn’t handle that type of volatility well, you will end up cutting your position and losing money, even if the trade was ultimately a big winner. We see this behavior in traders all the time. It is the size of the position you put on rather than the price at which you put it on that determines your ability to keep the position.


Although traders focus almost entirely on where to enter a trade, in reality, the entry size is more important than the entry price because if the size is right, you are much more likely to stay with a winning trade. The price is irrelevant; it is all about controlling the size of your position.


★★ I found it was critical to find things to involve yourself in. It is a very good thing to be busy when you are a trader because you don’t want to have too much time to stare at the screen, particularly if your style of trading is to have only a limited number of positions on at one time. Once you have your positions on and are waiting for the market to do what it needs to do, what are you going to do in the interim? Coming back again to the investment bank world, they have meetings and all sorts of stuff going on that suck up time. Traders would all complain about the waste of time, but what it actually meant was that it limited the amount of time they were in front of their screens staring at their positions. You don’t want to be sitting in front of your screen and staring at market prices for 12 hours a day. Staring at the price is not going to tell you very much. You will start to over process and overtrade. The more time staring at the screen, the less patience you will have.


One of the common denominators among successful traders is patience, particularly in regard to staying with good trades long enough — and that is true regardless of the time frame.


★★ When you're in a negative loop mindset, when you are in that mode, don't do anything. Discipline yourself not to trade for two weeks or whatever time period you choose. Take a holiday. Don’t have any positions on when you go. You need to get out of everything. Then go away and forget about it. Now that takes time because what you will do for the first few days is torture yourself. I could have done this. I could have done that. But for me, after a few days, I can let it go. Once you let go, you can unwind. Then, when you come back, you have to set rules. You need to be able to say that you won’t trade for, say, two weeks. You’ll see trades that you are itching to do, but you need to have the discipline not to do them because, clearly, you are not in sync with the markets. Otherwise you wouldn’t be where you are. When you feel you are ready to begin trading and see a trade that you really like, trade a fraction of the size you would normally trade.


★★ Nearly all the successful traders I have known are one-trick ponies. They do one thing, and they do it very well. When they stray from that single focus, it often ends in disaster. Really good traders are also capable of changing their mind in an instant. They can be dogmatic in their opinion and then immediately change it. This market is going higher. It’s absolutely going up. No, it’s definitely going down. If you can’t do that, you will get caught in a position and be wiped out.


I have learned to trust my judgment. Gut feel is important, and you can trade off of it, but you need to have a set of rules that control your size and stop loss points.


If you wake up thinking about a position, it’s too big.


★★ When everything lines up, you need to swing for it because in those situations, even if you are wrong, you probably won’t be wrong by that much. But if the position starts behaving in a way you don’t understand, you need to cut it because then you clearly don’t know what is going on. The market is telling you that you don’t know.


★★ Your job as a trader is to make the line go from bottom left to top right. That’s it. If the line goes down too much or too long, you were wrong. You can’t argue that the market is wrong because it is your job to predict every move in the market. Once you understand that is your job as a trader, you have to start protecting the direction of the line.


Do more of what works and less of what doesn’t. You need to figure out exactly what you are best in and then focus on doing those trades.


Its okay to be a OTP. Be cautious against diversifying against your expertise. Some traders succeed because they are good at doing one type of trade.


Traders focus almost entirely on where to enter a trade. In reality, the entry size is often more important than the entry price because if the size is too large, a trader will be more likely to exit a good trade on a meaningless adverse price move. The larger the position, the greater the danger that trading decisions will be driven by fear rather than by judgment and experience. Your position is too large if you wake up thinking about it.


You need to be sure that your methodology is consistent with your risk tolerance. For example, if your trade implementation strategy allows for building a three-unit position, but your natural risk tolerance is only one unit, you can easily end up panicking out of good positions because you are trading larger than your comfort level. Trading size needs to be kept small enough so that fear does not become the prevailing instinct guiding your judgment. Trade within your emotional capacity.


Traders also need to adjust position size in response to the changing market environment. If the market volatility increases dramatically, traders need to reduce their normal exposure levels correspondingly, or else their risk will dramatically increase.


Flexibility is an essential quality to successful trading. It is important not to get attached to an idea and to always be willing to get out of a trade. Really good traders are capable of changing their mind in an instant if the price action is inconsistent with their trade hypothesis. They can be absolutely convinced the market is going higher one moment, and then be just as sure the market is going down in the next.


Martin Taylor

When markets are trending up strongly, and there is bad news, the bad news counts for nothing. But if there is a break that reminds people what it is like to lose money in equities, then suddenly the buying is not mindless anymore.


★★ Buying low-beta stocks is a common mistake investors make. Why would you ever want to own boring stocks? If the market goes down 40 percent for macro reasons, they’ll go down 20 percent. Wouldn’t you just rather own cash? And if the market goes up 50 percent, the boring stocks will go up only 10 percent. You have negatively asymmetric returns. It is what I call a pigeon-and-elephant trade — you eat like a pigeon and shit like an elephant. If you have a portfolio of boring stocks and want to make it produce equity-like returns, you have to leverage it up. If the portfolio then goes wrong, the loss is going to be massively asymmetric because of the leverage. Boring companies never have the opportunity for earnings growth.


There are three things I like to see when I buy a stock: a favorable macro situation, a secular trend, and good company management.


★★ When the market is so bad that you think it is obvious that you should be net short, that’s typically the time when it is all in the price and you should be buying.


Investors will often make decisions based on reasons that you and I would not consider rational, such as rumors and conspiracy theories. When you are dealing with that kind of mind-set, you can get very badly burned investing just on fundamentals.


RSI doesn’t work as an overbought indicator because stocks can remain overbought for a very long time. But a stock being extremely oversold is usually an acute phenomenon that lasts for only a few weeks.


You have to be an expert in what you invest in. You need to understand why you are invested. If you don’t understand why you are in a trade, you won’t understand when it is the right time to sell, which means you will only sell when the price action scares you. Most of the time when price action scares you, it is a buying opportunity, not a sell indicator.


Investors often miss the best stocks because they can’t bring themselves to buy a stock that has already gone up a lot. What matters is not how much a stock has gone up, but rather how well a stock is priced relative to its future prospects.


You have to know your net exposure comfort zone, it is important that your net exposure match your comfort level.


The best opportunities are those where you can identify a potential trend that the market does not appreciate because it is extrapolating history instead of looking forward.


Tom Claugus

Just because you made money doesn’t mean you were right, and just because you lost money doesn’t mean you were wrong. It is all a matter of probabilities. If you take a bet that has an 80 percent probability of winning, and you lose, it doesn’t mean it was a wrong choice. A big mistake investors make is that they judge whether a decision was right based solely on the outcome. There is a lot of randomness in the outcome. The same set of conditions can lead to different outcomes.


Look for future revenue generation that can be reasonably anticipated but that is not reflected by the current market price. You pay a fair value for the stock based on the prevailing statistic only, but get the upside of the anticipated favorable development (e.g., new source of production) for free. Fundamental screens will fail to identify these stocks because the source of the bullish potential is not at all reflected in current statistics.


Very exposure based on opportunity.


There is no way of knowing a prior which individual trade is likely to be a winner. Traders need to accept that a certain percentage of good trades will lose money. As long as a profitable strategy is implemented according to plan, a trade loss does not imply a trading mistake. On the flip side, a winning trade can still be a poor trading decision. Trading is a matter of probabilities. Any trading strategy, no matter how effective, will be wrong a certain percentage of the time. Traders often confuse the concepts of winning and losing traders with good and bad trades. A good trade can lose money, and a bad trade can make money. A good trade follows a process that will be profitable (at an acceptable risk) if repeated multiple times, although it can lose money on any individual trade. A bad trade follows a process that will lose money if repeated multiple times, but may make money on any individual trade.


Joe Vidich

It is always better to do your own work and get your own information because then you will have more confidence. If you listen to someone else to get into a trade and things go bad, then you have to listen to that person again to get you out.


When people see their money disappear and start redeeming their investments, mutual/hedge fund managers have no choice but to liquidate, regardless of the price.


There are times where fear dominates. Those are the times you have to be a buyer. Those are the time s of great opportunity.


Don’t sell expensive stocks just because they are overpriced and buy value stocks just because they are underpriced.


In a bull market prices open up lower and then go up for the rest of the day. In a bear market, they open up higher and go down for the rest of the day. When you get to the end of a bull market, prices start opening up higher. There is a tendency to open counter to the prevailing trend because when the market closes near the high of the move, there will be some traders who want to sell near the high, and they will be sellers on the next day's opening.


If there is bearish news before the opening and the market does not trade down much during the first hour, it indicates that the smart money is not selling and that the dip is a buying opportunity.


If everyone is bearish because that’s what CNBC says, that is public sentiment, but if the stock gaps higher after a conference call, that’s the market sentiment. What matters is the market sentiment, not public sentiment.


Stop orders are an outrageously poor way to manage risk. If you have a stop order in the market, it means that one price will dictate the outcome. That is a bad concept. You can, however, use mental stops, which are essentially evaluation points. If the stock is down, say, 15 percent, you should evaluate why it is down 15 percent, but you shouldn’t automatically sell it there. Stop orders may be okay for some public investors, but not for professionals.


The right way to manage risk is to monitor your positions and to have a mental point at which you reevaluate the position. The amount of room you would allow till that point would be different for different stocks. Every stock has its own risk profile.


Scale in and also scale out. The idea is don't try to be 100% right.


If you can't take the loss, take a little bit of a loss. Sometimes, though, it is best to just liquidate the entire position. It’s a good idea to harvest your losses because it forces you to revisit the trade. If you are in the trade, you are always defending it. Liquidating forces, you to reevaluate the trade relative to other opportunities. You sold the position. Do you really want to buy it back? Or would you rather put the money in this other idea, which looks a lot better right now?


Have the willingness and ability to gradually take losses. The emotional benefits of taking losses incrementally can give you an insight into managing portfolio exposure.


★★ It is really important to manage your emotional attachment to losses and gains. You want to limit your size in any position so that fear does not become the prevailing instinct guiding your judgment. Everyone will have a different level. It also depends on what kind of stock it is. A 10 percent position might be perfectly okay for a large-cap stock, while a 3 percent position in a highflying mid-cap stock, which has frequent 30 percent swings, might be far too risky. Don't let greed influence position sizing beyond comfort label.


Flexibility is a key characteristic of traders. To be successful in the markets, you have to be willing to change your opinion. Most people are not willing to change their opinion. You have to be humble about your ideas. You have to be willing to take losses and understand why you may not be right.


I would rather sell on the way down then on the way up because I might be giving up much more on the upside than the difference in selling at a little bit lower.


One of the best patterns is when a stock goes sideways for a long time in a narrow range and then has a sudden, sharp up move on large volume. That type of price action is a wake-up call that something is probably going on, and you need to look at it. Also, sometimes whatever is going on with that stock will also have implications for other stocks in the same sector. It can be an important clue.


Critical risk controls are being diversified and cutting your exposure when you don’t understand what the markets are doing and why you are wrong.


★★ You have to be willing to take the hit. Even when you are wrong in taking your hit, it cleans the slate, and cleaning the slate can be very therapeutic. If you don’t clean your slate, you will end up keeping your losers. Some stocks with losses will come back, and you will sell those, but the ones that don’t come back, you will end up keeping. Getting out sometimes right before a stock turns is the price you pay to keep your losses under control.


Don't make trading decisions based on where you bought or sold a stock. The market doesn't care where you entered your position.


A common mistake made by traders is that they let their greed influence position sizing beyond their comfort level. Why put on a 5 percent position when you can put on a 10 percent position and double the profits? The problem is that the larger the position, the greater the danger that trading decisions will be driven by fear rather than by judgment and experience. Limit your size in any position so that fear does not become the prevailing instinct guiding your judgment.


★★ To control your losses, there will be times when you will get out just before the market turns around. Get used to it. This frustrating experience is an unavoidable consequence of effective risk management. "Harvest your losses".


Kevin Daly

You have to stay focused on the value of a business and see past exogenous crises events. Stocks get cheaper than fair value. It may be painful to buy into a panic over the short run, but over the long run, it can pay off if you are buying stocks well below their value.


The best value opportunities arise in the most extreme bear markets.


If I invest in a business that can be purchased at a discount to its intrinsic value, and that value is growing, then all I have to do is wait and be patient. "Time is the enemy of the poor business and the friend of the great business."


I'd rather miss an opportunity than lose money. Go cash when the environment is uncertain.


If you buy a stock at a good valuation, and the price goes down, unless something has changed with the business or business outlook, you should stay the course, or possibly even buy more. Conversely, don’t get carried away if the stock goes up. You should use the same valuation discipline to decide where you're going to sell.


The times one is out of the market — can be critical to successful investing. It is important not to be involved in the market during negative environments when the opportunities are not there. You need patience to stay on the sidelines when the environment is adverse to your approach or when opportunities are lacking/suboptimal.


Having a small trading size allows you to move in and out of positions, even less liquid equities, with virtually no market impact. The larger the assets, the more difficult it is to enter and liquidate positions without incurring significant slippage costs.


Jimmy Balodimas

Learn to have the same emotional response whether you are up or down for the day.


Always take money off the table when it’s in your favor. Always, always, always.


"Oh, something has changed. I don’t know what it is, but something has changed." I really trusted that feeling.


I don’t let myself panic. Even if I don’t know what’s going on, I’m not going to sell. I might lose 5 percent more trying to find out what is going on, but I’m not going to make a decision because other people are choosing to make a decision out of emotion.


The more the market went up, the more right my short was going to be. The more it went up, the more money smart people would take off the table. Smart guys always sell when the market is going up. That’s how they make money.


"For me, mastery would be knowing that I don’t have to be early, and all I have to do is wait for when I see it because I almost always see it."


Sometimes I just want to be involved, and I get in instead of waiting until I see, "Oh, there it is." It’s a lack of discipline that I have been contending with my whole career. I don’t allow myself to get bigger if I am wrong early. Even though I think I am right, I won’t necessarily short more because it is higher. When I was younger, I would get bigger just because the market was going up. Now, I’ll wait till I get that sense that the market is ready to move before I get bigger.


Buy companies when they are out of favor and sell companies when everybody loves them.


I wanted to be a trader. Even though I didn’t know exactly what it was, I knew it was what I wanted to do. I knew I wanted it more than anybody else. There was no way I was not going to make it. I always had that competitive drive.


Regardless of my belief that the market will fall apart, even when the market gives me just a 1 percent or 2 percent move, I’m still taking chips off the table. That way of trading explains a lot more of why I have made money in my career. It was not so much about my being right on the direction of the market as it was that when they were giving me money, I was always taking it, on a daily basis.


★★ I don’t mind if I miss a move down because the market will always have a move that I can re-enter if I really feel like it. I am never afraid of missing anything. The market is always providing opportunities.


"I never need to make money in a stock where I lost it."


There is something wrong when I start feeling that uncomfortable. Whereas before Iwould dig in my heels, I’m not willing to go there anymore. Now, when a trade feels painful, I start reducing my exposure. I am much more sensitive and conscious about how I am feeling. If a position doesn’t feel right, I will make the shift. I can’t sit with that feeling very long anymore.


★★★★ There is no single true path to trading success. Aspiring traders need to understand that the quest is not a matter of finding that one approach that unlocks the secrets of market success, but rather finding an approach that fits their personality. You cannot succeed in the markets by copying someone else’s approach because the odds are remote that their method will fit your personality. The answer lies not in copying someone else’s method, but in finding your own.


Joel Greenblatt

People don’t fully appreciate the importance of not losing money. Negative compounding is very difficult to overcome. If you lose 50 percent of your money, you have to make 100 percent to recover the loss. If you have more volatile returns, that volatility can result in larger losses that are more difficult to make up. If, however, you have a more diversified long/short portfolio, you have a smoother ride and the opportunity to compound your money very well.


Stuff happens. Don't fall in love with any position.


Experience is what you got when you didn't get what you wanted.


★★★ I explain that therefore it can’t be intelligence that is the defining reason why someone is successful in the markets. I think the difference between those who succeed and those that fail is how they think about the market. Everyone is bombarded every day with price movements, explanations for those price movements, macro events, and lots of other information. You need a methodology to cut through all that information and see things as they are.


Over the short term, prices fluctuate due to emotion, but over the long term, they come back to value. Value investing is figuring out what a business is worth and paying a lot less.


There are no called strikes on Wall Street. You can watch as many pitches as you want, and only swing when everything sets up your way.


Capital allocators should be looking at the process—how does the manager go about picking stocks and managing the portfolio—not returns, which have no predictive value.


★★ To beat the market, you have to do something different from the market. And if you are going to do something different, sometimes you will underperform significantly.


★★ You are setting yourself up for failure if you invest differently than you want to in order to please investors. Manage your own account if you can. There is nothing like actually doing it and learning what it is like when you lose money and finding out what your emotions are when you are doing well and not doing well.


Investing in good businesses that are priced cheap will outperform the market over the longer term. This value edge does not go away because the periods of underperformance using a value approach can be long enough (a few years) and severe enough to discourage investors from sticking with the approach.


The efficient market hypothesis provides an inaccurate model of how the market really works. The market will eventually trade at fair value, a price that would be consistent with the efficient market hypothesis, in the interim, which can sometimes be as long as years, stocks can deviate substantially from their fair value. A more appropriate model is that prices trade around fair value, but broad deviations occur because of wide swings in investor emotions.


You don't have to trade. Wait for the right opportunity and the right time.


40 Market Wizard Lessons

  1. There is no holy grail in trading
  2. Find a trading method that fits your personality
  3. Trade within your comfort zone
  4. Flexibility is an essential quality for trading success
  5. The need to adapt
  6. Don't confuse the concepts of winning and losing trades with good and bad trades
  7. Do more of what works and less of what doesn't
  8. If you are out of sync with the markets, trying harder won't help
  9. The road to success is paved with mistakes
  10. Wait for high conviction trades
  11. Trade because of perceived opportunity, not out of the desire to make money
  12. The importance of doing nothing
  13. How a trade is implemented can be more important than the entry price
  14. Determining the trade size
  15. Vary market exposure based on opportunities
  16. Seek an asymmetric risk/reward profile
  17. Beware of trades borne of euphoria
  18. If you are on the right side of euphoric or panic, lighten up
  19. Staring at the screen all day can be expensive
  20. Risk control is critical
  21. Don't try to be 100% right
  22. Protective stops need to be consistent with the trade analysis
  23. Constraining monthly losses is only a good idea if it is consistent with the trading strategy
  24. The power of diversification
  25. Correlation can be misleading
  26. Price action in related markets can provide important trading clues
  27. Markets behave differently in different environments
  28. Pay attention to how the market responds to news
  29. Major fundamental events may often be followed by counter intuitive price movements
  30. Situations characterized by the potential for a widely divergent binary outcome can be well priced even if it has already gone up a lot
  31. Don't make trading decisions based on where you bought or sold a stock
  32. Potential new revenue sources more than a year out may not be reflected in the current stock price
  33. Value investing works
  34. The efficient market hypothesis provides an inaccurate model of how the market really works
  35. It is a mistake for a manager to alter investment decisions or the investment process to better fit investor demands.
  36. Volatility and risk are not synonymous
  37. It is a mistake to select managers based solely on past performance


  1. Trading is not reserved for the world’s most elite. There is no correlation between trading success and school or prior occupation. The commonality of the traders was traced to hard work and determination, and their desire to unlock the puzzle of the market. They all shared an aspiration to avoid the psychological impediments that prevented most people from winning in the markets.
  2. Trading is not just a science, but also an art. Even those traders who use a purely systematic approach to tackling the markets are still engaged in creative thinking. None of the traders stepped into an already working formula; nobody was handed a blueprint. Their success was built on the backbone of their ability to discover what others overlooked.
  3. There is no single right way to make money. Those who succeed do so because they find what works for them. Trying to replicate someone else’s method almost always results in failure. All successful traders have their own methodology, an approach that makes sense to them and that they are comfortable with.