I love reading investment books, but frankly, most of the recent releases I see online or in the bookstore fall short of really providing you with an edge. Nothing against the authors, but most seem either too introductory or contain too many forecasts and opinions that I just don’t get anything out of them.
Because of that, I’ve actually narrowed down my reading lately; sometimes I get more out of re-reading an old classic than grinding through a new book. However, one set of books that I absolutely love are those that interview other traders-it doesn’t matter if they trade stocks, bonds, currencies or commodities, the insight that they have into how the market actually works is always helpful.
The most popular of this genre is the Market Wizards series, by Jack Schwager. There are three books, each separated by a few years; the last was published in the early 2000s. I highly recommend them all. (FYI, I just bought a book dubbed “Millionaire Traders” and plan on reading it during the next couple of weeks. I’ll let you know how it is.)
However, I actually don’t want to write about books today; my goal is to discuss the Holy Grail of trading … that mystical system or series of principles that will guide you to astronomical wealth. And for that I turn to Ed Seykota, who provided probably the most memorable interview among all of Schwager’s books. Seykota was a trend-follower with an incredible understanding of the human mind, trading systems and how the two interact with each other. He made millions, mostly in futures.
You can (and should) read that interview in the book, but I wanted to jump forward to a song Seykota wrote and performed with a few friends a couple of years ago. After numerous requests over the years for his “secret” to trading success, he and a few friends produced the “Whipsaw Song,” as it’s called. It contains all you really need to become a top-notch trader or investor. I’ve relayed some of the lyrics below:
You get a whip, I get a saw, one good trend pays for them all …
What do you do when we catch a trend? We ride that trend right to the end …
What do you do when we show a loss? We give that dag’on loss a toss …
How do you know when our risk is right? We make a lot of money and we sleep at night …
What do you do when the price breaks through? Our stops are in so there’s nothing to do …
What do you do with a hot news flash? You stash that flash right in the trash …
What do you do when the drawdown comes? What do you do when it gets real big? What do you do when it’s even bigger? You stick to the plan and pull the trigger…
At this point you’re probably thinking “Cute song Mike … but what does it have to do with anything?” Well, this song was Seykota’s way of telling investors that the real Holy Grail isn’t a black box system with complex trading rules. Instead, the real Holy Grail contains lots of the simple, tried-and-true tactics we write about regularly-letting winners run, cutting losses short, using stops, not obsessing about today’s news (the market looks six months ahead, not behind), and keeping your risk in line with your personal risk tolerance. (I would also add one more: Stick with the trend of the overall stock market.)
It really is true that just following these core principles will put you ahead of 80% or more of investors. So why don’t most investors follow them? Because they’re contrary to human nature. Human minds, for instance, yearn to maximize the percent of time they’re correct, not necessarily to maximize their gains. That leads them to hold losers and lock in winners. The desire to avoid giving up hope also leads investors to hold on to stocks (winners or losers) too long.
Thus, even if you know about these rules, following them through thick and thin is the tough part. I know many experienced and successful investors who break the rules every now and again; just this week, I received a couple of emails from subscribers who are still holding some dogs they should have sold many months ago.
Granted, following these rules won’t guarantee you’ll make millions in the markets like Seykota, but I can say with confidence that these rules will put you in a position to earn outsized profits, assuming you’re able to uncover the leading growth stocks in the market.
Real traders are taught that the Holy Grail to Investing doesn’t exist. Real people were taught that all the planet’s move about the earth, don’t go to far out into the ocean(you’ll fall off the earth), on and on……….
When one looks outside the box(inventor), goes against the group(thinks for self), said they found(developed) something that is supposed to be impossible(airplanes), they were once killed. Now these people are called bad names and delegated to be unheard, and ignored group.
I developed multiple arbitrages that enable me to trade(not invest) in the finacial markets, without risk(The Holy Grail to Investing), or arbitrage that anyone can do. Over 30% a year.
Thomas Adair
thomasadair@live.com