Maria’s Note: Maria Bonaventura here, managing editor of the Diary. Over the past few days, we’ve shared insights with you from Larry Benedict (catch up here, here, and here). Larry is a former $1 billion hedge fund manager, and a legend in the trading space. And for good reason…
Between 1990 and 2010, while he was actively running hedge funds, he did not have a single losing year. That’s 20 years.
Even in 2008, at the height of the global financial crisis (when most investors were losing their shirts) Larry’s fund made $95 million. That was his fund’s best year – despite the turmoil in the stock markets.
Today, Larry takes us back to his beginning. He reveals one of the most important lessons he learned over his 35-year career. (It’s the same insight Larry will use in his $70,000 challenge on December 11.) Read on…
I started with $10,000…
And I kept losing all of it.
This was back in 1984. I started out on the floor of the Chicago Board Options Exchange, with thousands of dollars of my own money to trade with.
But I chewed through it all probably two or three times by making silly mistakes. Things like being too impulsive, going for the home run, or holding on to losers too long…
All the basic “no-no’s” of trading.
Larry (right) on the floor of the Chicago Board Options Exchange in the mid-1980s
At the same time, I had a buddy named Andy who was making money every day. But I couldn’t figure out what he was doing different.
I called my mom and told her Andy was making so much money while I was losing all of mine.
She said, “Just do what he’s doing.”
It took me a long time to realize what Andy was doing differently. I had a couple more complete blowouts after that phone call before I really understood it.
But it was simple…
Andy was letting profits slowly trickle in – rather than going all-in on one risky trade idea.
And in doing that, he was slowly but surely building a strong base of capital.
In other words, Andy was putting a “P” (profit) on the page – no matter how small or large – and consistently growing his base of capital.
This mindset seems obvious and easy to follow, but most new traders don’t think this way…
First, it’s because they get attached to their losers. They sit on a losing position, hoping it will eventually become profitable… and it usually doesn’t.
And second, they never take a profit unless it’s a grand slam. They’ll keep pressing on a winner, even when they’re losing money overall. They think that’s the only way to be successful.
But that’s the wrong line of thinking… and it’s a major pitfall new traders tend to fall into. They don’t understand how to size their positions according to how they’re trading. They don’t earn the risk they take, by building up a large capital base with small profits first.
Understanding how to do that is the most important thing in trading.
It took me a long time to grasp this concept. But each time I chewed through all of my own capital, I learned something. I got closer to learning how to let go of losers and avoid impulsive trades.
Then, I got picked up by another firm, and it gave me some money to trade and a shot.
And over time, I began to figure out proper money management.
Earn Your Risk
Trading is a business. And like any business, you have to have a goal of what you want to make, and a plan to hit that goal.
When I was running my hedge fund, that was the only way I did business. I had clients write down a number on a piece of paper, and that’s what I made for them.
Similar to those clients, anyone who’s serious about trading should have a goal of what they want to make. A number on a piece of paper that they’re going to make in one month… two months… or whatever time frame it may be.
You should always look to put a “P” on the page. It doesn’t matter if the profit is small – if you have it, you take it.
This is the only reliable way to hit your trading goals.
Most traders want to make a specific amount of money… but also get there in the fastest way possible. They over-leverage their positions, load up on risky bets, and get blown up.
That’s a fast way to become poor, not rich.
The smart trader… the one who’s in the vast minority… the one like Andy… is taking small profits every single day.
And if you keep doing that, over and over again, you accumulate a larger base of capital and can afford higher levels of risk… which inevitably leads to bigger rewards.
Trading this way means your winners will outweigh your losers. You won’t be all-in on one high-risk idea – the harbinger of death in the trading world.
But it takes both practicing on your own and learning from others. I was lucky because I made all my mistakes early on in my career and was willing and able to bounce back.
I’m telling you all this to inspire you. Anyone can start small and become a big-time trader – especially if I could do it…
It all starts with learning how to slowly put profits on the page until you “earn” the ability to take on more risk.
Editor, The Opportunistic Trader
Maria’s Note: Want more of Larry’s trading wisdom? Good news…
Larry just recorded a limited-edition video series, and his first three videos are out already. You’ll get a firsthand look at the life Larry’s built over 35 years trading the markets… why he decided to take everything he knows and show you how to use those same techniques… and how he’s preparing for his Trade-a-Thon on December 11.
To start watching Larry’s videos, go right here. (They’re free.)
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