A Trick to Successful Trading?
Every Successful Investor Does It. Every Failed Investor Overlooks It.
Last year, I spent about two months in Miami, living and working within spitting distance of one of the most famous coastlines in the world — populated by the wealthiest and most ostentatious group of foreign ex-pats found anywhere.
My neighborhood was Sunny Isles, an enclave on the northern end of Dade County characterized by futuristic high-rise condos, pristine beaches, and an endless procession of exotic cars running up and down the coastal strip of Collins Avenue like a mobile auto show.
The two major demographics in Sunny Isles are Russian and Brazilian, with native-born Americans coming in third at about 13%.
Regardless of nationality, however, the one unifying factor among most everyone who lived on that section of beach was, of course, wealth.
Aside from the overt, sometimes over-the-top ritziness, places that concentrate wealth also tend to concentrate unusual personalities.
Over the seven years that I've been visiting that somewhat strange, somewhat surreal part of the world, I've made a lot of friends, but there's one in particular whose wisdom I keep going back to in my mind.
When I first met him last fall, I didn't really make much of him.
He's Russian-born, just like me, but he didn't arrive in the U.S. until the '90s, when he was already in his 20s.
My cousin, who lived in downtown Miami at the time, brought me to a pier at the famous Marina Del Mar at around 2 p.m.
He'd been trying to get me to meet this mysterious "Grisha" (Russian diminutive for Gregory) for weeks and grew more excited the closer we got to the slip.
And I admit, when I saw the gleaming, 88-foot twin-masted sailboat he brought me to, I had to stop and take it in for a moment.
Two summers ago, I spent a week sailing a 45-foot catamaran around the Aeolian Islands off of Sicily. Our boat was nice, but this thing was in a whole different class.
Walking onboard this beast, I thought it was deserted until I noticed a single, shirtless body laying face-up in the shade on a padded bench just off to the side of the wheel.
He was about 5'6" and tanned like he'd just spent a year marooned on a treeless island. As we approached him, he was immediately jarred awake and sat up.
Judging by the empty tumbler beside his sleeping arrangement, he'd been into the vodka sodas, and judging by the ashtray beside that tumbler, he wasn't afraid of some full-strength Marlboro Reds, either.
So I figured he was another rich nitwit with more money than brains and not an idea in the world of what to do with himself.
Don't Judge a Book By its Shirtless Cover
That couldn't have been further from the truth.
Inside this day drinker was the soul of a real entrepreneur.
You see, Grisha had started off as a self-taught investor right around the time online trading came around.
In fact, one of his very first trades was in E-Trade itself in the first half of 1998.
Shares of E-Trade got to reap the benefits of both the rapid acceptance of online brokerage accounts and the dot-com bubble — which was going into exponential expansion.
Grisha sold his shares less than a year later for a 1,000% gain — and just in time, too.
Within a few months, the bubble had popped, sending everything back down to Earth.
He rolled those earnings into several more development-stage companies, and by the time the Dow was hitting its pre-recession peaks in 2007, Grisha had a liquid net worth well into the eight-figure range.
As he told me over multiple Ketel One and sodas that afternoon, he's been lucky twice in his trading career...
The moment he entered the market, right as Internet revolution was going manic, and the moment he exited, right before the real estate bubble pulled the national economy into a death spiral.
Everything in between, however — where he made a vast majority of his money — came from good, old-fashioned diligence and persistence.
Words to Remember
The most concise piece of advice anybody's ever given me on the subject of trading came from his lips when he said, “It's not how much you make on each trade — it's how much you don't lose.”
It sounds a little counterintuitive, I know, but here's what he meant — and mind you, this is advice worth billions in the right hands:
Given enough time, a scientific, thoroughly analytical trader will always win.
His wording was a bit flipped around, but what he meant by "not losing" was being able to stay in the game long enough to win big.
It's the same principal on which casinos rake in billions each year. The house's odds of winning any individual game or contest are just a few percentage points (sometimes just fractions of a percentage point) better than the player.
In trading, that means you only need two variables in place to wind up on top: a slight statistical advantage and a long enough timeline.
There is no trick to it at all... And anyone who tells you they have a trick or a system or an algorithm that guarantees victory is full of it.
The only way you can succeed as a trader, whether it's a full-time job or just something you do for fun and maybe some extra pocket change, is to consistently make trades with more than half a chance of succeeding.
Math, Not Magic
The diligence part comes in finding that edge — because in the world of investing, macro variables like recessions, poor political climate, and market bubbles can lower the chance of even a seemingly safe blue-chip investment below that 50% mark.
To isolate the highest-probability winners, you need to filter out the dead and the dying prospects and go only for those with great return and growth potential.
Some will fail, but over a sufficient period, the gains will stack up, compound, and put a trader on a path similar to Grisha's.
Ironically, when Grisha moved out of the stock market, he moved into private equity — or venture capitalism, which, statistically, is far more risky than your average public microcap stock.
He applied the same principles to that, and the result... well, the result was spending a Saturday working off an early afternoon hangover with follow-up drinks onboard a $4 million toy.
That day bled into the evening, and at night, as more people joined us and meaningful conversation on wealth creation decayed into the usual mixture of small talk and overly boisterous laughter, things got a bit blurry.
Grisha and I became fast friends, and in the months that followed, he told me lots of other stories, but it was that first, elegant reflection that sticks out:
“It's not how much you make — it's how much you don't lose.”Trade long enough, and if you're good, you'll win.
It's a principal that's as universal to successful investors as the quest for torque is to drag racers, and it doesn't take a strange eccentric like Grisha to typify it.
A Common Thread Among the Elites
Just about every successful investor I know follows the same philosophy.
Even the most famous of them all, Warren Buffett, has followed the exact same pattern of consistently seeking out that seemingly narrow edge through his years of trades.
Now, the concept is simple. But getting that edge... well, that's where it gets complicated.
Again, there is no system, no trick. The only method that works is to brush away the useless, dead, and dying and go with the best of what's left.
Every trader has his own specific method for vetting the winners from the average and sub-average outfits, but some of the essential variables are universal.
Two Pieces of the Puzzle
When it comes to microcap stocks — the fastest-moving variety there is outside of private equity — you can remove a majority of the field just by filtering based on two requirements:
Profit margin and dividends.
A weak or nonexistent profit margin means the business model is either unestablished or questionable.
A dividend for a microcap is nothing but a poor allocation of earnings. Small companies need to reinvest in growth, not trickle profits away to their shareholders.
And the shareholders should thank them for it.
Eliminate based on those two metrics alone, and your battle in finding companies with a better-than-average chance of succeeding is already more than halfway done.
But to really make it, you need to take it further.
Again, there is no trick or system to guarantee success, but there is a way for you to minimize the risk down to almost complete insignificance.
Apply this to a breed of stocks that produces triple-digit returns on a routine basis, and success on a level you've probably not allowed yourself to imagine can be within reach.
It's been a long-time goal of mine to distill this method into a few simple rules.
Just last month, I believe I finally hit the nail on the head, as I broke it down into just five basic steps every microcap investor needs to accept to gain that essential edge.
I've already hinted at two of those rules when I mentioned profit margins and dividends... But to get the full picture, you'll need some details.
I've put together a report that not only explains everything but also provides some great examples of what happens when this methodology is put to use.
You'll be amazed at what people with little or no previous trading experience have accomplished.
