In this business, if you’re good, you’re right six times out of ten.

You don’t have to be right too often to outperform the markets.  In fact, the strategy introduced in our upcoming book, the one that doubled (almost tripled) a Buy and Hold approach has a win rate of only 47%!  That means it is wrong more than right.  How can that be??  How can you be wrong more than 50% of the time and double the return of the Nasdaq? 

“In this business, if you’re good, you’re right six times out of ten.  You’re never going to be right nine times out of ten.” – Peter Lynch

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Below is an excerpt from my book, Buy and Hope '... how I beat the Pro's and doubled the Nasdaq spending only 1 minute a week and you can too'.  Check it out at Amazon, here
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I list every trade in the appendix over the past 41 years, and what you will see is that when we are right (when the trade is acting well and making us money) … on average we stay in the trade for a long time.  We are in the market for over half the year on our most successful trades, and if you look at all our profitable trades, the average time in the market is 83 trading days (roughly 4 1/2 months).

But, what is most interesting is with our losing trades, while we have more of them, our average losing trade keeps us in the market only 17 trading days (less than 1 month).   Remember … In the stock market you need to leave your ego at the door,  because it doesn’t matter that you are right, just that you make money.  If you have trouble being wrong, then the stock market is not a place for you.  You need to leave your ego at the door.

It is okay to be wrong, it is not ok to stay wrong

Most full time and institutional traders consider a 50% win rate to be quite exceptional, and 60% is just unheard of.  In fact, I have some trading buddies that have less than a 30% success rate (they are wrong on their trades 70% of the time!!) yet they are wildly successful, because their rules get them in when the odds are in their favor and more importantly, protect them when they were wrong. 

How can you be right less than half the time and still make money?  If each winning trade earns more than each losing trade, you end up ahead of the game. 

Imagine if you went to Las Vegas and placed 10 bets.  Of those 10 bets, you had 9 losing bets where you bet $10.00 each time (a loss of $90.00), but on the final bet, you decided to risk everything and you put down a crisp $100.00 bill … and low and behold you won, doubling your bet of $100.00 (a profit of $100.00).  Although you only had a 10% win rate, you made $10.00 profit.

In our case, our average winning trade returned 12%, while our average losing trade only lost 2.8%.  So this means we technically can lose 4 times in a row to every one win and still make a little bit of money (2.8% x 4 = 11.4%, which is still less than 12%).  This means that technically we can have as low as a 25% win rate and still make money. 

 

This is imperative to understand and embrace … how often you are right is less important than how much damage is done when you are wrong.  Creating clear cut rules to protect your portfolio from downside risk is essential for long term success in the market.

Sometimes your best investments are the ones you don't make.

When the market is not healthy, you should not be invested, period.  For me, this was one of the hardest concepts to grasp in my early years.  In fact, as you will see with our trades in the appendix, using the strategy in this book, you will be out of the market almost 40% of the time.  Since 1973, this strategy has been in the market 62% of the time.

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Below is an excerpt from my book, Buy and Hope '... how I beat the Pro's and doubled the Nasdaq spending only 1 minute a week and you can too'.  Check it out at Amazon, here
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Huh???  How can you more than double the return of the market while not being invested in it 40% of the time?  As I'm sure you know, the market moves in waves.  It doesn’t just go up, but goes up and down over cycles of time.  In fact, Wall Street has coined the 2000’s decade as “the Lost Decade”, because it started and ended at the exact same price point … resulting in a total gain over 10 years of 0%, but if you had been invested in a Buy and Hold strategy for just 1999 (one year only), you would have returned over 80%.  Obviously there seems to be no rhyme or reason to the cycles that occur, but clearly there are opportune times to be in the market vs. not.

As you will see in the next section, our strategy will get you in the market when it is ripe for rising, and get you out of the market when it appears to be ready to decline.  I realize entering and exiting the market and more importantly staying out for extended periods of time seems like a strange concept … isn't the point of investing to profit?  And how can I profit if I'm not invested?  Very good questions, that deserve equally good answers.

When I was in college, I had a roommate that had a knack for gambling.  He played 21, and spent most of his weeknights playing cards, practicing so that on the weekend he could drive out to Las Vegas and hopefully turn the odds in his favor.  He was a card counter and although the odds are clearly against you in Las Vegas, I decided to go along for the ride a few times to watch and partake as well.

The Las Vegas experience is very surreal for a young person.  I was only 19 when I made my first trip with my roommate, and learned so much from him.  As you know with card counting, the goal is to count the high cards and low cards so that you know when there is a greater probability that a specific card will be turned over next.  The goal is to ultimately bet at opportune times, when you have an increased chance of winning.  Las Vegas games are skewed so that the odds are against you.  Obviously if they were skewed in your favor, the casinos would quickly go out of business.  Most people that go to Las Vegas don’t want to look at these games as mathematical equations and probability based, but they clearly are, and you can increase your odds by betting at the right moments.  Obviously the goal in card counting is to watch the cards and if you need a high numbered card and you know that a lot of low numbers have recently been played, you can increase your bet … knowing that the odds are more in your favor.

When we got to Las Vegas, we immediately went to the floor of one of the casinos and my roommate picked a table and just sat and watched the table for about 15 minutes.  I finally asked if we were going to play, and he pretty much ignored my question, but eventually he hopped in and played a number of winning hands.  Then suddenly, he said he was done for awhile.  Over that weekend, the pattern continued, we actually spent more time watching than playing.  Eventually I asked him what he was doing, and he explained the obvious … there are times when the opportunity is there to make money and that’s when I play, and there are times when the odds are not in my favor, and the only safe place to be is not playing. 

“You’ve got to know when to hold them, know when to fold them, know when to walk away, know when to run”  Kenny Rogers, The Gambler

This concept was obvious to me when I sat and thought about it, but it was still really hard to sit there and not play the game. 

Investing in the market is a business, and should be treated as such.  You are up against some of the greatest financial minds (and computers) in the world, and If you are not going to play the game right, you might as well cash your entire retirement account and take it to Vegas … because the odds are clearly against you.

There are times when the market is healthy and you should be invested, and times when it is not and you shouldn't even try to play the game.  From mid 1999 until December 2001, the Resnn strategy stayed completely out of the market the entire time.  For almost 2 ½ years, we sat in cash … that’s A LONG time!  But, what was the alternative.  In 2000 the Nasdaq returned -39.3%, in 2001 the Nasdaq lost again … another 21.1%.  Buy and Hold Hope for those 2 years, resulted in a net loss of over half of your portfolio (52%). 

"Sometimes your best investments are the ones you don't make." - Donald Trump.

Much as my friend taught me about Las Vegas, the same rules apply to Wall Street.  When the market is not healthy, it is ok to NOT take part in it.  In fact, you MUST not take part, it is critical to your long term success. 

When the odds are not in your favor, don’t even try to play the game … you will lose.

Bulls make money and bears make money, but pigs get slaughtered

The following story is a great example that can applied to trading and a willingness to sell when you only have a small decline.  It is quoted from the book, The Psychology of Speculation by Fred C. Kelly.  I also use this example in my book, Buy and Hope which you can 'Look Inside' at Amazon here

A little boy was walking down the road when he came upon an old man trying to catch wild turkeys. The man had a turkey trap, a crude device consisting of a big box with the door hinged at the top. This door was kept open by a prop, to which was tied a piece of twine leading back a hundred feet or more to the operator. A thin trail of corn scattered along a path lured turkeys to the box.

Once they were inside, the turkeys found an even more plentiful supply of corn. When enough turkeys had wandered into the box, the old man would jerk away the prop and let the door fall shut. Having once shut the door, he couldn't open it again without going up to the box, and this would scare away any turkeys that were lurking outside. The time to pull away the prop was when as many turkeys as one could reasonably expect were inside. 

One day he had a dozen turkeys in his box. Then one sauntered out, leaving 11. “Gosh, I wish I had pulled the string when all 12 were there,” said the old man. “I’ll wait a minute and maybe the other one will go back.” While he waited for the twelfth turkey to return, two more walked out on him. “I should have been satisfied with 11,” the trapper said. “Just as soon as I get one more back, I’ll pull the string.” Three more walked out, and still the man waited. Having once had 12 turkeys, he disliked going home with less than 8.

He couldn’t give up the idea that some of the original turkeys would return. When finally there was only one turkey left in the trap, he said, “I’ll wait until he walks out or another goes in, and then I’ll quit.” The solitary

turkey went to join the others, and the man returned empty-handed.

The psychology of normal investors is not much different. They hope more turkeys will return to the box when they should fear that all the turkeys could walk out and they’ll be left with nothing.

The point is, you need to have a definitive answer as to when it is the right time to enter the market, and the right time to exit, but the duration will be different every time.  Bottom line is that if the trade is working out, and you are making money … then you stay invested.  As we saw in 1998-1999 and somewhat so in today’s market in 2013, regardless of the worry in the news … a market can continue higher much longer than anyone can predict. 

So you let the market tell you when its’ time to exit.  You don’t decide, the market decides for you.  As long as it is acting healthy you stay invested enjoying more and more profit, but as the market starts to change its’ character and roll over … starting to decline, you exit quickly and lock in your profits.  It doesn’t matter that the market only dropped 2% from the high and people on TV are saying its’ a bargain now … you exit.  The first sign of weakness is your sign to say goodbye.

And the same is true for when it is time to get back in.  The rules we have setup will tell you when to enter the market, to maximize your potential.  You need to follow the rule and not second guess it.  Usually when things look most grim we are at the moment in time when the greatest profit is possible, this is why Warren Buffett has don’t so well in his investing career … he buys beat down companies when every one else is running for the hills, and holds them until everyone else is euphoric about them.  Using rules keeps you from second guessing your entry (or exit) … regardless of what you are seeing on the news or hearing from your friends.

“Bulls make money and bears make money, but pigs get slaughtered” - Unknown

Don’t be a Pig, don’t hesitate an entry or an exit.  Remember you will be wrong sometimes, but all that matters is that in the end you make money.  An exit at a wrong time means you miss out on some profit, but an exit at the right time means you will miss out on a large decline … which would you rather?

Death by Shark Bite - An excerpt from my upcoming book ...

Not much can stop the imagination of a little boy, particularly when his older brother is as adept at scaring the lights out of his bro as my brother was. I remember one particularly ‘effective’ moment when my brother contributed to my now balding scalp by scaring the day lights out of me.

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Below is an excerpt from the upcoming book, Trust, buy Verify 'how I beat the Pro's and doubled the Nasdaq spending only 1 minute a week and you can too'.  Check out the free excerpt of my current book at Amazon here
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JAWS; Can you hear the music?  Dun, dun, … dun, dun … dun, dun … It’s funny to watch the movie Jaws today as the shark is pretty fake looking, but many years ago it was a terrifying movie that left the world afraid to enter the water.  And the music composed by John Williams is just brilliant!  In my previous business I spent a lot of time on the Universal Studios backlot, and remember driving by the Jaws ‘pond’ late at night and having a chuckle over the story I am about to tell you. 

The story is absolutely real, and no, the names have NOT been changed … there were no innocent people in this story.  I was 9 years old and my family was visiting relatives at Martha’s Vineyard off the coast of Massachusetts.  Martha’s Vineyard is a sleepy touristy / fishing / beach island.  Ironically (for me) … the movie Jaws was filmed there a few years before our visit.

It was a sleepy afternoon and my brother had the brilliant idea that we watch the movie Jaws on TV.  I remember asking him what Jaws was about and he said it was about “An overprotective clownfish that must leave the safety of his reef and brave the open ocean to rescue his missing son, who is captive in a dentist’s aquarium” … ok, ok … I realize in 1979 the movie, Finding Nemo had not existed but trust me, my brother did his best work at painting a fun loving friendly fish ‘romp’ in the ocean.  I envisioned a fantastic story, not unlike Flipper and was gung ho on spending the afternoon watching it with him.

It didn’t take long before I realized that my brother had upped the ante and quite honestly, he should be proud of his accomplishment with this one.  If there was an Academy Award presented to the “best scare by a big brother”, he definitely would have won that year. 

I remember as the credits were rolling, he dropped the bomb … “Hey Randy, did you know that Jaws was filmed right here in Martha’s Vineyard?”  He always had a way of carefully waiting for just the right moment to ‘educate’ me with his incredible knowledge, and it was ALWAYS appreciated (I hope you are detecting my use of sarcasm here!!).

It was decided by unanimous decision that Randall would not be going in the ocean again on this trip or ever for that matter.  In fact, I had no intention to get in a bathtub ever again after today.  I'm not sure how a shark could ‘get me’ in a bathtub, but again, I remind you … the imagination of a 9 year old is a very powerful thing ~ besides .. Jaws was no ordinary shark!!

You can imagine how I felt later that same day over dinner when my dad announced the ‘fantastic’ news that we (my dad, my brother and myself) were going “on a little adventure tomorrow.  We are going to rent a catamaran and go out in the ocean on it.“

To this day I still wonder if my brother had advance knowledge of our plans the next day, he claims it was all coincidence and if it was … man, he must’ve had the time of his life that evening, but I wonder …

I sat up late that night trying to come up with any excuse to avoid the impending death by shark bite that I was to experience tomorrow.  I mean honestly, death by shark bite … could there be a worse way to go??? 

I'm fairly certain that day I went through all five stages of grief: denial, anger, bargaining, depression and finally acceptance.  I remember getting in trouble ‘dragging my feet’ while getting ready.  I was grasping at straws thinking maybe if I got in trouble they would leave me back at the house “grounded”, while they went to their most certain death.

As we walked up to the rental place, I remember trying desperately one last time to talk my dad out of it … “it looks crowded, maybe we should come back tomorrow”, “I think its’ too windy”, “boy this is expensive, Dad … we don’t have to do this”, “I don’t know if there’s room enough for all three of us, I’ll wait on the dock”, but ultimately my fate was sealed and we departed on our 3-hour tour …

I learned after we had departed from the dock as my dad was struggling with the sails that he had never actually piloted a sailboat, let alone a catamaran.  As we drifted out to sea, this certainly was setting up for a Perfect Storm.  Eventually he got the hang of it and we started moving with great speed through the water.  I will say that if I hadn’t had the pleasure of watching Steven Spielberg’s epic shark movie the day before, I probably would have been digging the moment but given the circumstance, I was terrified.

I remember constantly looking back, expecting to see a shark fin raise out of the water behind us, and every bump of the water on the canvas of the Catamaran … I thought for sure was a shark reaching with his jaws to devour me. 

Ironically I finally started to calm down, convincing myself that as long as I didn’t hear the music, the shark would never come J … I know it sounds crazy, but again … as I said earlier, the imagination of a little boy can be very compelling. 

As I sat and waited for the music to start, the catamaran started tipping up, up, up … and unfortunately I didn’t know that this was supposed to happen and started to feel very panicky.  Unfortunately, the boat continued to tip and ultimately completely tipped over.  I remember the moment so vividly as I slipped across the canvas bottom into the depths of the ocean.  Coming up for air, I looked for the boat as saw it about 50 yards away moving very quickly in the opposite direction.  Even tipped on its’ side, the wind and current was still pushing it along the water at a fast clip.  My brother had fallen into the water as well and my dad was hurriedly trying to flip the capsized boat right side up.

I was terrified!  If the shark hadn’t gotten me while above water, I was now easy prey for his awaiting jaws.  I knew that my minutes were numbered …

I remember seeing my dad look at me, seeing the panic in his eyes, trying to control a situation that was out of control.  Now as a father, I can only imagine the horror he must have been feeling.  Being in the ocean, watching his youngest son drifting further and further away, his oldest son drifting in an opposite direction and a boat that was sinking.

Initially I was desperately trying to get back to the boat but I quickly realized that it was a futile effort.  The current was just too strong and I needed to take a different approach.  As I saw my father get further and further away, I learned a valuable lesson that day. 

My dad, my rock … was not able to get to me.  The man that I always relied on for safety couldn’t reach me, I had to step up and take care of myself in that moment.  In hindsight, I'm actually quite impressed at how that little 9 year old boy took charge of the situation and ‘manned up’ to keep himself safe.

Ultimately my father ditched the boat … dove in the water and started swimming toward me.  He got to my brother and called out to me to swim toward a deserted island that was reasonably close, which I did.  We swam and swam and swam for what seemed like hours and eventually made it to the island and were reunited.  The catamaran was gone but we were alive and amazingly Jaws, who was apparently asleep at the wheel missed his prime opportunity to have some tender morsels for lunch.

Having my father so close, but at the same time completely out of reach created an eerie moment, the irony of his close proximity yet he might as well had been over a thousand miles away showed me how ultimately it is you and only you that can protect yourself.  Relying on others, even if in this case it was my superhero dad, proved to be a futile effort, and I learned at that moment that ONLY YOU CAN PROTECT YOURSELF.

This lesson has carried forward through my years where I know ultimately at the end of the day that I am not only in charge of my destiny but that I am the only one that can keep myself out of a real mess in life.  In investing, no one will ever feel the pain of your financial loss as much as you will.  An advisor that doesn’t protect you properly and steers your investments incorrectly and ultimately causes a loss in your portfolio simply wont be affected by the loss as you will.  I’m sure they wont like the situation, but I'm also certain they will sleep fine that night even though they did not protect you from a 30 – 60% loss in portfolio. 

In fact, statements like “Past performance does not guarantee future performance” are boiler plate comments that your advisor will tell you or have in the agreement that you sign to try and help soften the blow when and if the above happens. 

Ultimately he may have the best intentions, but it is YOU that needs to make certain that all is kosher in his suggested investment mix.  If you are going to feel the pain when things go wrong, then you need to verify the decisions he is making on your behalf are prudent.  No longer can we assume that this person has your best interest at stake.  You need to “Trust, but Verify”, because ultimately when things go terribly wrong it is you that will be alone, all by yourself, treading water deep in the ocean with nothing but a life preserver to keep you alive.

Surrounding yourself with financial advisors and experts in all forms of your professional life makes sense but taking a few precautionary measures along the way, verifying, confirming for yourself that this person is putting you in the proper environments is necessary.

Would love you to share your own 'scary' stories below ... that taught you a similar lesson ...