Four Markets Quotes That Contain Eternal Wisdom

Anyone who has been around the markets for a few years has heard them. Call them what you want: quotes, aphorisms, sayings, truisms.

“Time in the market, not timing the market”

“Sell in May and go away”

“No one went broke taking a profit”.

They are literally a dime-a-dozen, with everyone offering up some market wisdom all wrapped up up in a nice bow.

Some market sayings have stood the test of time and deserve to be repeated over and over. Why? Because they hold some pearls of eternal wisdom that we can apply in our investing activities. Below, I’ve compiled ten of my favorite quotes, along with some commentary to tease out the meaning and implications for traders.

1.       Win or lose, everyone gets what they want out of the markets—Ed Seykota. Market Wizards

On this surface,  this is cryptic and sounds like something a guru would say. I think that most people have trouble accepting the implications of this quote—that they if lost money in the markets, it’s because they wanted to. How crazy is that, right? However, if we dig a bit further down, there is a lot of merit to this argument. Ultimately, we are driven by a complex set of desires and goals, most of which are not consciously accessible to us. Those can determine our behavior in such a way that we end up with results different from what we had intended or thought we wanted.

We can already think of other instances of some subconscious desire getting in the way of our stated goals, no matter how fervently we declare them. Has anyone heard of New Year’s resolutions? We all know somebody, perhaps even ourselves, who declares confidently that “This is the year that I finally get in shape”, and they start eating right and going to the gym. This lasts for about four days. And then, the excuses start and they just don’t seem as enthusiastic as before…and by the end of January, the resolution is all a distant memory.

Let’s be blunt—despite the declared goal, do you think that, deeeeeep down inside, this person really wanted to get into shape? Of course not, otherwise they would have been able to make it happen. Rather, there was some deeper desire that sabotaged the conscious intention. Maybe they didn’t want to make the effort. Maybe they prefer eating whatever they want to getting in shape. Maybe they want to get

The same kind of self-sabotage can happen in our trading, if we stop doing the necessary preparation or begin hoping that positions will turn around.  With the markets, make sure that you know why you’re in the markets—and that you’re crystal clear on what you really, genuinely, truly want out of them. If you have some psychological “stuff” that’s rearing its ugly head, learn ways to get a handle on it. If the markets are truly aligned with what you want to do, then you will be successful and will enjoy a blissful existence.

Otherwise, you will lose. Because that’s what you really wanted.

Scary? Yes. Wise? Even more so.

2.       Undertrade, undertrade, undertrade – Bruce Kovner. Market Wizards

The lesson here is straightforward. Trade less frequently and trade smaller than you think you should.

Of these two, trading smaller size is easier to grasp and much more intuitive. If you are risking less, then your P&L won’t swing as wildly, allowing you to stay more level-headed and to make better decisions without getting scared or euphoric. You also are unlikely to lose as much during a bad run, allowing you to sidestep potential catastrophic losses and to stay in the game, both financial and psychologically. Ultimately, it’s steep drawdowns that end careers. If you can avoid big declines In your equity and be in the right place psychologically to bounce back, then you will have a long and successful career.

But trading less frequently is equally important. By making it a priority to trade less frequently, you are making sure that you think harder and deliberate before entering and exiting a position. This allows you to focus on executing your methodology, rather just impulsively leaping into and out of positions. That should boost the quality of each trade and in turn, your overall success.

You are also making sure that you are picking your spots, thereby boosting the percentage of your trades that are winners. Even a small increase in your win rate, e.g. from 40% to 43%, would mean a measurable improvement in profitability. Having more winners, and having those extra winners generate bigger gains on average than the losers, can mean the difference between a so-so year and a great year.

There’s a reason Bruce Kovner was an original Market Wizard and one of the best macro fund managers of all time. Undertrade, undertrade, undertrade.

3.       It was never my thinking that made me money, you hear me? It was my sitting. – Jesse Livermore. Reminiscences of A Stock Operator

This is another counterintuitive one, along the lines of Ed Seykota’s comment. After all, how can thinking not be a good thing?! But the message here is similar to Bruce Kovner’s—activity, especially senseless and impulsive activity, is often a poor choice.

If you are watching the markets and your open positions and putting a lot of work into evaluating potential trades, then you are on the lookout for potential trades. Once your methodology suggests a trade, then you should execute it.

After that, just sit.

If you have a position on and it’s working and you don’t have to exit it, then sit on it. Let it make you money.

Quite often, we get anxious and our heads fill with idle, distracting chatter—“What if the ECB says something on Tuesday” or “What if this one-day decline is actually the start of a big selloff” or “How will this perform if China goes to hell?”. This kind of thinking is not helpful. You have a position on and you know what will cause you to exit it. Stick to that plan. If that means closing a position, then close it. If it means sitting in it and making money, then sit. Any other idle chatter is usually counter-productive, because it distracts you from making sound trading decisions.

Learn to put on a position that’s well-considered and sit in it. Have the courage to make money, rather than talking yourself out of your plan.

4.       Cut your losses and let your winners ride—Numerous people

This quote is the perfect corollary to Livermore’s. Just as he preached “sitting”, letting your winners ride is the same idea. If you have on a position and it’s working, let it make you money. Don’t cut it prematurely for the sake of booking a small profit. Don’t get scared and exit on the first reaction, when all of your trading rules dictate staying in. If it’s a winner, and it’s working, then let it ride. Winners are good—embrace them.

The important flip side is how to treat losing trades. The first lesson is that losers have to be cut at some point.  Otherwise, a losing trade can keep eating away at your P&L, undoing the profits from any winning positions. If you cut losses at a pre-defined level, then they stop—and presumably your wins can be larger than your losses.

The math behind this is compelling. If you assume that your average winner make 1.6x what your average loser loses, then you only need to be right 40% of the time in order to make money consistently. By keeping the leash short on your losses, then you can let the math of statistical expectation work in your favor. Cut losses and let your winners ride.

There is another aspect to this. A loser isn’t just a trade where you get stopped out at a pre-defined loss limit. Imagine a trade that isn’t making money and has just been languishing on your books—this is also a loser. Cut it, free up financial and mental capital  and move on.

Conclusion:

These markets quotes contain pearls of wisdom, more so than much of the idle chit-chat that you find disguised as advice. As the saying goes, “Advice is worth what you pay for it”. These ones, however, are worth a great deal to your bank account .

As with any field, we can learn a great deal by striving to emulate the greats. When they summarize what they’ve learned on their long, arduous and ultimately successful journey, we should pay attention. When they condense much of their experience into a few key phrases, then we should sit up and take notice. In our trading, if we want to be great, then we should learn from them.

And above all, remember that wonderful formulation:  “Undertrade, undertrade, undertrade”.

 

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