Winners and Losers: Part 1

What separates the Winners and Losers in the market? Well, Stanley Kroll in his book Dragons and Bulls has a nice exposition. Will post a few insights.

Someone once said, 'The best way to make a small fortune in financial
speculation is to start with a large fortune.' It is unfortunate, but this
cynical quote is very true, because the vast majority of active specula-
tors, whether in stocks, currency, futures, options or derivatives end
up losing money. Let us examine why this is so, and what we can do
to position ourselves within the small, but winning minority.
In his memoirs, written in 1829, Bourriene recounts an incident in
which Napoleon was asked which troops he considered the best. 'Those
which are victorious, madame,' replied the emperor. I was reminded of
this incident while perusing some notes on the subject of winners and
losers in the investment arena. Tb: Wall Street jam-nal of 10 January
1983, printed a survey of 20 senior commodity specialists and their
best investment bets for the first half of 1983. Three points were given
to a first choice, two points to a second choice and one point was given
to a third choice. The ratings were totalled up and the results were
extremely enlightening.
0 Buy copper 18 points
0 Buy gold 16 points
0 Buy foreign currencies 1 5 points
0 Buy stock indexes 14.5 points
0 Buy cattle ~ 1 1 points
0 Buy silver 7.5 points
Some observations bear further consideration. First and most
obvious, all recommendations were on the buy side. Not suprisingly,
this proved a mistake since, of the top six selections, only two of them,
stock indexes and copper, advanced during the six-month period. Of
the remaining four selections, gold and foreign currencies were down,
and cattle and silver just managed a sideways move. And, while all

selections were biased to the long side, the few serious bull markets
for that year, com, soybeans, cocoa, cotton and sugar, were totally
overlooked by the experts. It is noteworthy that copper appears so
consistently on the list. Buy copper was also the second top selection in
the previous survey (second half of 1982) and was the first selection in
the first half of 1982 survey. The actual price action of copper, as well
as the composite decision was mediocre at best during this
year-and-a-half period. The copper market barely managed a broad
sideways move for the entire period: down during most of 1982 and up
during the first half of 1983.
The point of this exercise is to demonstrate how difficult it is, even
for experienced experts, to predict the course of futures prices a mere six
months ahead. The dismal record of these professionals should encour-
age serious speculators to note that the experts are frequently wrong
and that a good technical approach to investment and timing, coupled
with sound money management and a focus on trend following rather
than trend predicting, are really the recommended ways to operate for
optimum success.
There is a similar experience in the stock market between predic-
tions of experts and a random selection of stocks. Tb: Wall Street
journal conducts an ongoing competition, every six months, between
two groups of 'analysts': firstly a panel of expert analysts and brokers
and secondly the 'Dart Throwers,' a group of T/Je Wall Street journal
staffers who randomly throw darts at the journal price page, and 'select'
whichever stocks are hit. One would think that the 'professional
experts' would consistently beat the 'dart throwers,' and by a very wide
margin. But, that just hasn't been the case. Over a period of several
years, the 'experts' have been ahead of the 'dart throwers'; but only by
a narrow margin, at best.

Accordingly, a thoughtful student of financial markets should ask
the question: why are the experts so often wrong and why do so many
traders lose money at speculation? The answers may be circuitous and
are often difficult to pin down. However, it may be constructive to
reflect on what I call, the 'speculators' laments.'
With the exception of my 1975 to 1980 sabbatical, I have spent
most of the past 34 years in a quiet, secluded office, either in Wall
Street, upstate New York or aboard a large motor yacht, with trading
monitor, phones, technical studies and other accoutrements. Consis-
tently, my principal focus has been trying to make big profits on my
favourable positions and to avoid taking big losses on my adverse ones.
I have invariably played a lone hand, and very much by choice, having
learned the benefits of operating independently early on as a Merrill
Lynch account executive in New York in the 19605. The lesson that I
learned was this: it is not constructive to share trading ideas and market opinions with others, regardless of their opinions or presumed expertise.
The uniwritten truth on Wall Street is: ‘Those that know don't tell; those
that tell- dct know.‘
Over the ensuing years, I've occasionally had the opportunity to
lecture or teach courses on speculation. My presentations have generally
focused on market strategy, tactics and money management, rather
than on specific market tips on what and where to buy or sell. Perhaps
the most memorable of these events was a series of trading seminars I
conducted in New York, Chicago, Miami, Los Angeles and Dallas on
successive weekends. Attendees ranged in age from 19 to 86, with
several husband and wife and father and son teams among the
participants. The level of experience ranged from total neophyte all the
way to experienced professional trader. In the course of the sessions, I
managed to ask a lot of questions and the responses were particularly
enlightening.
I discovered a surprising commonality of experiences among the
several hundred attendees. And what I refer to as their ‘speculators’
laments’ really weren't all that different between the novices and the
experienced professionals, although the professionals were understand-
ably reluctant to admit to them. Perhaps ‘the frustration most
common to all was: ‘I watch while the market moves in the direction
of my analysis, and finally when I enter a position, prices abruptly
reverse and move in the opposite direction.’ It should be consoling to
know that all traders feel the same frustration at one time or another.
It is, however, primarily a consequence of poor timing and tactics,
rather than a ‘plot’ by other traders to gain the upper hand in the
market.

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