How to Trade Like the "Lone Wolf of Wall Street"

We all know a guy like this – I just hope it isn’t you… 

He chats your ear off about the perfect trade he pulled off. He tells you all about how he—against all odds—outfoxed the market and bought a tumbling stock at the perfect moment. Then miraculously he sold a few months later at the very top, booking a king’s ransom.

This guy wants you to think he’s a friggin’ genius. Except something about his story doesn’t jibe. As you listen to him yammering, it dawns on you…

This guy’s talking… junk. 

After all, you know how difficult it is to perfectly time a trade or investment. So did Bernard Baruch, legendary New York financier who amassed a fortune before he was 30…

Josh Brown recently republished a neat piece on Baruch over at his Reformed Broker blog. And it features one of my all-time favorite investing quotes from the man known as “The Lone Wolf of Wall Street.” 

“Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars.”

Why do I like this quote so much, aside from the fact it calls B.S. on that guy above?

For one, it keeps me grounded. Every trader in the world is looking for that perfect setup—and the picture-perfect trade to go along with it. But you must realize even your best trades aren’t going to follow a perfect script. The market is a viper’s pit of surprises. You can’t possibly account for them all. And the minute you start chasing the perfect trade, you’ll start second-guessing your every move.

Worse yet, you’ll bungle perfectly good opportunities because you’re trying to nail every last cent on that trade. That’s not gonna happen. Don’t shoot for perfection. 

Since were talking Baruch today, here are three more of my favorite rules from his memoirs, along with my own comments:

Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.

Sound familiar?

That’s one of our cardinal rules—we always cut our losses before they become big losses. We can’t expect to get every trade right. But we can shake a loser loose before it drags us into the quicksand. That’s why we have no problem selling when the market tells us…

Always keep a good part of your capital in a cash reserve. Never invest all your funds.

Many traders think every dollar in their account always has to be off chasing some trade. They’re wrong. Some of the best trades are the ones you don’t make. Always keep a lot of cash in reserve.

And never, ever go “all in” on any given trade. It can be tempting when you think you’ve got a no-brainer on your hands, but don’t do it. The market has a funny way of turning no-brainers into losers. You can add to a winning position later, but keep your initial position small, no matter how enticing. You gotta have discipline.

Don’t try to be a jack of all investments. Stick to the field you know best.

There’s no need to swing at every pitch that crosses the plate. If you’re a commodities hitter don’t go swinging at tech stocks you know little about. And vice versa. Know what kind of trades work best for you – and stick to your “strike zone.” Just sit tight and wait for that room-service fastball you can crush. It’ll come.

Now start trading like a wolf.


Greg Guenthner
for The Daily Reckoning

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Trading Notes

You don’t know jack about Japan…

In fairness, neither do I. But I’m doing the best I can at faking my way through the experience as I attend a gathering of the International Federation of Technical Analysts in bustling Tokyo.

But it’s useless to worry about such things. Even if you make a complete fool out of yourself trying to interact with the locals or exchange bows and business cards, no one would ever mention it for fear of turning an embarrassing situation into a full-blown etiquette crisis.

Something else I didn’t know: Agora Financial has some competition (or maybe admirers) just one block from my hotel. I snapped this pic of the building directory as I wandered out in search of coffee on my first morning in town:

I’m just glad to see Japan’s Agora Banquet Room is right next door to Y’s Party House. Who knew?

Anyway, in keeping with the spirit of blissful ignorance, here’s a list of three things about Japan you probably don’t know, either:

1. Japan has more pets than children under the age of 15

It’s no secret that Japan has an aging population and serious demographics problems. However, this startling statistic really hammers home just how desperate Japan is for growth.

There are a few experts who believe the demographics issue is such a well-known fact that it is completely baked into the price of the Japanese market. We’ll have to see about that…

2. “Lifetime Employment” creates career problems

You won’t find a lot of flexibility for workers, a prominent Japanese economist told us. If you don’t jump into a career right after college, you end up completely left out of the system. There are virtually zero opportunities for mid-career changes, and women risk getting booted from the workforce entirely if they take leave to start a family.

Of course, new government policies are aimed at creating a more flexible work environment that promotes more innovation and creativity. But it’s difficult to say how long it will take to change Japan’s rigid business culture… if that’s even possible.

3. QE can be a blissful experience

As you would expect, it’s impossible to ignore Abenomics here in Japan. Over the past few days, I’ve listed to countless investors and economists attempt to shed some insight on Abe’s three arrows. But sometimes, the message becomes lost in translation.

I was diligently scribbling notes on Friday morning as a translator buzzed in my earpiece. Quantitative easing was the topic at hand, which the translator hurriedly referred to as monetary relaxation as she tried to keep pace with the presenter.

Doesn’t that sound peaceful? We’ve beaten the topic of QE so far into the ground in the U.S. that it has busted through on the opposite side of the world… as beautiful poetry.

Stay tuned for more tomorrow…

The Daily Reckoning