Since we’ve just talked about volatility, I thought I’d share with you a little joke about how volatility can affect people.
A minister passes away and he finds himself at the pearly gates.
He walks up to St. Peter and he introduces himself. “My name is Reverend Charles Smith,” he says, expecting to be let into paradise
For tips on diagnosing your risk tolerance, click www.traderslibrary.com/TLEcorner.
immediately. So St. Peter looks him up in the book, and says to him, “Nice to meet you, Reverend. Why don’t you have a seat over there on that bench and we’ll get to you as soon as we can.” A little taken back, the minister walks over to this little wooden bench and sits down as he was told.
After sitting there a few hours, he sees another man come up to St. Peter, and St. Peter says, “Name?” and the gentleman replies,
“My name is Robert Wilkerson.” St. Peter looks it up in the book,
“Wilkerson…Wilkerson…ah yes here you are. Robert Wilkerson, you’re the New York heart surgeon. We’ve been expecting you.
Come right in.” And in he goes.
A few hours pass by and the minister is still sitting on the bench when another man walks up to St. Peter. “Name?” and the gentle-man replies, “My name is Michael Murphy.” St. Peter looks it up in the book, “Murphy…Murphy…ah yes here you are. Michael Mur-phy, the farmer from Iowa. We’ve been expecting you. Come right in.” And in he goes.
Now the minister is beginning to get a bit miffed by this whole thing. But he decides to sit it out a little longer. A few more hours go by, and finally another man walks up to St. Peter, and St. Pe-ter says, “Name?” and the man replies, “David Stevens.” St. PePe-ter looks in his book and says “David Stevens…the famous hedge-fund manager? Well, come right in, we’re very excited to have you here.” The gates open and the hedge fund manager strolls right in, past the minister sitting on the bench.
Well, now the minister has come to the end of his patience, and he marches right up to St. Peter and says, “St. Peter…okay, okay.
The doctor, I got that. He saves lives, so of course he goes in. I can understand that. Makes all the sense in the world. And the farmer, all right…an honorable profession, hard worker, helps feed people.
I can understand that. He goes in. But the hedge fund manager?
How come he waltzes in while I sit on this hard bench?” St. Peter says, “You know, I was trying to be tactful here. Up here we go by results. I didn’t want to say it, but the truth is when you gave your sermons, your congregation slept. When that guy traded…his in-vestors prayed.”
I hope you liked this story, and appreciate its message. Don’t ac-cept any more volatility than you can handle if you want to sleep at night.
Chapter 4 Review
• Know your “uncle point,” or how much loss you can take.
• Know when you’re going to get out of a trade before you get in.
• In money management, simpler is usually better.
• Know what to do in advance, and be prepared for a pos-sible down-turn.
• Know your risk tolerance, and how much volatility you’re willing to take before you get into a trade.
Self-test questions
1. Good money management skills include:
a. Knowing when to get out.
b. Keeping your strategy simple.
c. Discipline to carry out your plan.
d. All of the above.
2. It is important for a trader to know their threshold for pain;
also called ones’:
a. “Father timeout.”
b. “Mother rule.”
c. “Uncle point.”
d. “Aunt spot.”
3. When considering how risk-averse you are, you should consider:
a. Risk and price.
b. Risk and volatility.
c. Volatility and price.
d. Price and time.
For answers, go to www.traderslibrary.com/TLEcorner.
Chapter 5
Independence
Independence is one of the most consistent and over-arching principles I have found among all the traders I have spoken with over the years. All of the Market Wizards have shown themselves to be incredibly independent. Some would call them mavericks, some strong individualists, but it all comes down to being inde-pendent—and backing up that sense of independence with ac-tion. They keep their own counsel, and do not rely on anybody else’s opinions about what is right, what is risky, or what is wrong.
They know their systems and they work them, regardless of outside opinions or influence.
Trader Michael Marcus put it very well when he said, “Every trad-er has to follow his own light. You can take two of the world’s best traders, and put them in a room together, and what you’ll get will be the worst of both of those traders.” And Michael should know.
He indeed is one of the world’s best traders, and for a short time he worked with Bruce Kovner, who is also one of the best. What he discovered is that no matter how good the traders are individually, if you try to combine different methodologies, different personali-ties, and different opinions, what you are most likely to end up with is a rather fetid stew of the worst parts of both these traders. Of course, the idea that two giants could combine forces and create a sort of “Super-Trader” is very attractive, and still seems to hold a certain amount of appeal and make a certain amount of sense.
But as Michael had said, the exact opposite is more than likely to happen.