Editor’s note: Regular Dispatch readers know when it comes to investing, following the crowd is a recipe for disaster. But with most investors piling into stocks right now, it’s tough to be a contrarian.
That’s why today, we want you to hear from former hedge fund manager and legendary trader Larry Benedict. Larry built his fortune by going against the grain and focusing more on his risk than his return. And it’s a strategy that can work for you.
Below, he explains the biggest mistakes that new traders make… and how his approach is different from Wall Street’s…
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.
Small Positions Build Toward Big Gains
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, but in the course of a week.
You see, I prefer to see small gains frequently, rather than big gains that 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.
As I like to say: the bigger your account, the larger your growth opportunity. Using this strategy, your profits – and profit potential – grow exponentially.
While I’m usually not putting as much money towards each trade as someone else might put towards one long-term investment, my mentality has always been about grinding out a large number of smaller 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 over 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.
Don’t Try to Be a Master of the Universe
When long-term investors say they have a portfolio of 40-odd stocks, that looks dangerous to me.
What do you do the day all 40 are down? Which ones 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 put on.
It’s wise to become an expert on just a handful of stocks… around five to 10. And when you’re just starting out, 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 on Wall Street, 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 with 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 20-50 blue-chip stocks. I watched them every single day.
So, if I were trading Apple, I’d know every move Apple has made. I wouldn’t need a chart to tell me where it’s headed. I would know everything, top to bottom, about Apple.
Now, knowing those 20-50 stocks like the back of my hand took some time. Even learning everything about Apple took time.
So, when you’re starting out, 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 said above, with the right strategy, trading offers exponential profit potential – but only if you know how to find the right trades.
And right now, there’s a rare profit window on a little-known trade that could deliver returns as high as 816%… in just 24 hours. But it won’t stay open for long. For all the details on this opportunity, click here.