When I was eighteen one of my high school buddies and I went hang gliding with his brother. Mark was one of the leaders of the Cowboy Gliding Club, which was just a sophisticated name for around twenty crazy college guys from the University of Wyoming who had three hang gliders, way too much time on their hands and alcohol in their bellies.
My first flight was a tandem ride with Mark at the controls. I’ll never forget hauling the glider halfway up Elk Mountain, Wyoming, strapping in, waiting and waiting for just the right wind, our running takeoff just over a small cliff, and then soaring a couple hundred feet above the tree line. The sites were spectacular, the rush incredibly exhilarating.
It was the landing part that did me in. You see, to land a hang glider properly, you have to come in fast, both vertically and horizontally, which goes against every natural instinct, especially those of us who get nervous above the second rung of a ladder. I panicked and Mark and I hit the ground- hard.
Thankfully that would be my first and last hang gliding excursion. Within five years two of the original members of the Cowboy Gliding Club were dead, and Mark suffered a spinal injury that forced him to drop out of his junior year of college. I believe a great majority of investors are hang gliders.
There are way too many hard working, successful people struggling so hard just to get off the ground of Wall Street, at times soaring with the latest, greatest investment idea, signal, or strategy, but buying time only to eventually crash on the rocks.
I’ll admit in my first decade of trading, I was a hang glider.
My aha moment came in 2002, when tired of being tossed around by every gust of wind, I suddenly realized I was going about trading all wrong.
It finally registered that the trick of the trade to making money first begins with the unwavering determination to not lose money.
Before you can soar above the tree line you have to first figure out how to never, never, ever crash into the side of the mountain.
Religiously, obsessively control risk, and growth has a chance to follow.
In the past fifteen years around 8 out of 10 trades I put on make money. The number is high because of my stock selection. Rather than picking stocks like most people do, I eliminate stocks. I black ball stocks until I come to just a few gems I have no reason to not trade.
I start with a universe of 300 stocks. Yep, out of the 4,000 publicly held companies on the NYSE and Nasdaq, I trade just 300 of them. So right off the bat, I eliminate over 90% of the stock market.
Every week I go through the 300 names, eliminating the ones that have less than 5 to 1 odds of trending my direction on a long term time frame. That typically black balls at least two-thirds of my universe. Then I eliminate the ones that have less than 5 to 1 odds of success on an intermediate time frame. There goes another two-thirds. That leaves just a letter size page of stocks at the most. Then I narrow those down once more, kicking out the ones with less than an 80% chance of success on a short term time frame. I’m left with a handful of candidates- my boys- that may number anywhere from 0 to a dozen. For instance, as I write this, we currently have four stocks on long, one short, and seven more we are stalking for possible entry sometime this week. That’s it. After doing it for years and years, it takes me around 45 minutes start to finish.
So when it comes down to it I’m really not a stock picker. I’m a stock eliminator. It gives me an edge on locating winning trades and provides an opportunity for success.
But here’s where you need to lean in because this is the most important part.
You see folks, it’s not the 80% winning trade percentage, or whatever percentage, that’s most important to being a successful investor.
It’s what you do with the other 20%.
It’s what you do with the losers that make all the difference, that separate you from the hang gliders.
I know traders could consistently beat my 80% winning trade percentage and still lost all their money.
The other 20% cleaned their clock and parted them from their money.
Since my aha moment I’ve never had a losing year, including 2008. Now you can easily find other traders who have had better returns, I can point you to several. But you will be hard pressed to locate anyone who has experienced less drawdowns (a peak to trough decline in a portfolio). It’s because I set extremely tight stop-losses, never allowing small losses to turn into devastating losses that can destroy accounts. It’s because I’ve determined above all else, to never crash into the rocks.
So if you’re having trouble getting off the ground with your investments, if you feel like you’re getting tossed around with every wind gust Wall Street throws your way, or you have suffered through a painful crash, my encouragement to you is to begin looking at investments through a different lens. Before you focus on making money, make it your first priority to stop losing money. Resolve once and for all to never, ever hang glide with your investments.