Chris’ note: This week at the Dispatch, we’re handing the reins to former billion-dollar hedge fund manager Larry Benedict. Larry’s a legendary trader who’s managed to make millions off of short-term market moves… and now, he’s sharing his strategies with readers.
Yesterday, Larry broke down his day-to-day trading process that gives him a leg up over other investors. Today, he explains a key lesson he learned that changed his whole outlook on investing…
By Larry Benedict, editor, The Opportunistic Trader
When I started out trading, I wanted to be a master of the universe.
I wanted to trade, and beat, every single market sector. The indexes, bonds, currencies, soybeans… you name it. I just wanted to outperform everything and everyone.
I bet you can imagine how that turned out. Reality came crashing down… and I learned that it’s just not possible.
The main thing I realized was you run into a lot of problems when you have too many positions.
It’s common thinking that you should invest a small amount of money into a wide array of assets. But I’m not a buy-and-hold kind of person. I just don’t have that kind of patience.
While it would be great to see a 100% return on an investment in 50 years on, let’s say, one out of 40 stocks in your portfolio… I want to see that same overall return, over and over again, in the course of a week.
I prefer to see small gains on a frequent basis, rather than big gains I have to wait decades for. This way, I can steadily grow my cash pile and have some of that money to trade now, rather than later. And as I like to say: The bigger your account, the larger your growth opportunity.
While I’m usually not putting as much money towards each trade as someone might put towards one long-term investment, my mentality has always been about slowly grinding out profits.
It started out slow for me. In my first year, I was trading to earn maybe $100 per position, if I was lucky. But nowadays, I’m trading much bigger lots, and making $1 million here, $4 million there, and another $5 million there…
And here’s the thing… Those returns are still “small” on a percentage basis. It’s just that my capital pile is much bigger now… and so are my position sizes.
When long-term investors say they have a portfolio of 40-odd stocks, that looks dangerous to me. Because, what do you do the day all 40 are down? Which one are you going to look at salvaging first?
How could someone look at 40 stocks every day or week and have a broad range of exceptional knowledge of each and every one? The answer is they don’t. It’s impossible.
For starters, there’s a difference between how many stocks you should become an expert on and how many positions you should have.
It’s wise to become an expert on just a handful of stocks… around five to 10. And when you’re just starting out as a trader, you should have no more than two to five trades going at any given time… five being your absolute maximum.
A trader should know everything about the stock they’re trading. What it means when the stock is weak and the market is strong, or vice versa. When its earnings calls are, how it reacts to certain news stories, the risk profile, etc.
So if your stock is performing better than the market, you likely want to be long that stock. If your stock is performing worse than the market, you probably want to be short that stock.
This is something I’ve implemented my entire career.
Back in the day, when I was working at different firms, each trader always had one sector. There was an oil trader, a tech trader, a healthcare trader… everyone was an expert on their respective sector.
Even in the trading pits, no one traded more than one stock. You would stand in the pit of just one stock and trade it all day.
So, I wasn’t trading tech because “Steve” was trading tech and it seemed like a winner. I stuck to what I knew. And at the time, that was the top blue-chip stocks. I watched them every single day.
So, if I was trading Apple, I’d know every move Apple made. I wouldn’t need a chart to tell me where it was headed. I would know everything, top to bottom, about Apple.
Now, knowing those stocks like the back of my hand took some time. Even learning everything about Apple took time.
So, when you’re starting out as a trader, pick just one stock of one company, and learn everything you can about it. Get to the point where you can anticipate its next move… where it becomes part of your intuition.
Then, do it again… and again… until you have a solid repertoire of stocks that you know better than anyone. And once you do, you’ll be leagues ahead of most other traders out there.
Editor, The Opportunistic Trader
P.S. As I told you above, I built my wealth over a 35-year trading career by trading the markets for fast gains. But now, I’m taking everything I learned about how to make millions of dollars before lunchtime… and showing everyday folks how to use those same techniques.
On December 11 at 8 p.m. ET, I aim to generate $70,000 or more in less than an hour – and then, I’ll donate the proceeds to a local South Florida charity. And I’ll show you how I use that same strategy to make money every single trading day.
Plus, as a bonus, folks who tune in to my event will get a copy of the “Foolproof 50” – the exclusive list of stocks that I trade. Save your spot by going here.