One of the great things about being successful is that you can then help others. However, when people ask (as they do all the time) for stock tips and specific guidance on trades, I have to tell them that this is not how it works. My trading system cannot be shared piecemeal. My trading philosophy, on the other hand, most certainly can be applied to the benefit of the novice investor, the small investor, and the large investor, too. Since leaving Mint, I have found it very satisfying to talk to students and mentor young people on how to build wealth (don’t worry, it’s for you, too, if you are 50!).

For those interested in the basic mechanics of my trend following, I’ve shared it at the end of this chapter.

First things first.

Where Does The Money Begin?

As I mentioned in the previous chapter, I did an early deal in California and made $100,000, and these funds underwrote my family and business expenses for the period I was beginning Mint. Perhaps young investors might read this and feel that getting $100,000 together is beyond them – or that putting together even $10,000 is too difficult. I have two words for you: want and count.

1. Want

When it comes to getting your first investment money together, want is your most powerful word. Or if you prefer, need – because need converts to want. Remember, I had a wife and a baby on the way and no money. My need propelled me to that deal in California, and it had me knocking on doors in London. It is the power of your want that will drive you. There is not much more to say about this, except that you better look within yourself, or average is what you will get.

2. Count

You don’t need to know advanced mathematics to make money. You simply need to count. You can build your first pile of money through counting.

You know I started with zero. But I saved up an initial $10,000 and then gathered investments from family and friends to build a pool of $100,000 I could trade with. I charged my investors 20 percent fee for performance; this meant that if my fund earned 20 percent, for example, I would make 56 percent on my original investment of only 10 percent. In fact, I did much better. This is counting.

But where did you get the initial $10,000, you ask? Count what you are making. Live on 90 percent of that and invest the other 10 percent. Seems obvious. You hear financial advisors say it all the time. Yet few people do it. Here’s an example: Some of my friends counted on their annual bonuses as part of their salary. They used it to pay for things like a $30,000 bar mitzvah. But if you look up the word bonus, it is not part of a salary – it’s extra. And if you are living on your bonus, then chances are you are living on 110 percent of your salary. Not very good counting.

Another way to get started: Get a second job. Save $10,000 and bet $5,000. (Always be sure you have an emergency fund first before investing. An emergency fund can be three to six months’ living expenses.)

The first time I realized this, I was a child at the beach with my cousin. We were going to sell ice cream, but I was too tired and lazy, so I quit and wandered about, waiting for my cousin’s shift to be over. I found a poker game with other kids. I could barely see, but I counted 10 of them, and each put in a dollar. I thought to myself, I have a dollar, and if I watch the cards and count them, I have a chance at winning 10.

It’s had to believe you can make money just counting, but you can. Many businesses do exactly this: insurance, banks, and even advertising because they put out ads and use numeric profiles to track and test them. They count to see what works. Counting is what our computers did for us at Mint. I always wanted the computers running at night while we slept. As Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die.”

I made a lot of money counting interest rates. In fact, so much of my success has been built on the smart use of debt and counting the difference between how much I am paying for money versus how much I am making from it. When I was in that college class and first heard my professor scoff at people who would put up 5 percent of the total trade in cash, everyone else was laughing. But I was counting, and that’s how I figured out that with a mere $500 I could trade – and earn on – $10,000 in commodities.

Always count how much you have, how much you can lose, and how much you can make. Take the next bet, properly financed, when your counting tells you it makes sense. Remember this: Counting is a tool of thinking. Napoleon Hill said it, “You can think and grow rich.”

What’s the Difference Between a Good Gambler and  a Poor One?

A good gambler keeps cutting his bets as he’s losing.

A poor gambler keeps increasing, trying to catch up.

 Risk Control Is Everything

The market is not my friend. I do not know what it will do. I can control, however, how much I bet and when I bet. Cardinal rule number one, the name of this book: How much are you willing to lose? Do no pass Go, or make a single trade, or bet anything at all until you answer this question. Only you can know yourself, your resources and your temperament for loss. But no matter what, never bet your lifestyle. Here are some of the additional risk-management techniques we used a Mint. They apply to any investor, large and small.

  • Use the worst-case scenario as your baseline. I always want to know what I’m risking, and how much I can lose.
  • Only risk a very small percent of equity on any single trade. At Mint, we never risked more than 1 percent of our total equity on any single trade. Repeat: not more than 1 percent on any single trade.
  • Spread your bets. Diversify and diversify again. Make sure your diversified trades are not really more of the same kind. We traded in dozens of markets. Today you can go even wider.
  • Stick with the plan. Like any good trading system, ours was built on sound principles and research. But if I gave it to 20 people, most of them would fail. That’s because most people lack the discipline to follow the system. It is rather like people who start New Year’s Day with a diet and by the middle of the month have given up.

It would be easy to stick to your trading system if it made money every single day. But no system can be right all the time and make money all the time – not a trend following system or any other system. Remember, there are four types of bets: good bets, winning bets, bad bets, losing bets. If you make good bets a thousand times, you will win – over time. How much time? We can’t know. So you need to work out in advance what you will do when your system is losing money. Most people can’t handle losing money. They will try to tinker, bend, or change the rules when they have a difficult time. Often it’s the smartest people of all who do this – those who are most attached to their own high IQs. The last thing you want to do is find yourself in the situation where you have to meet with your partners and say, “We’ve been losing money for six months. What do we do?”

You will make better decisions in any kind of crisis when you are not worried about your own financial survival. The guy at the poker table is short on chips and playing with his rent money is the guy who’s going to lose. You can’t make rational decisions when you are filled with fear.

You see, investors can be tragically misled by their emotions. Back in the Man years, one of my colleagues had previously been a colonel in the British Army. He was a steel-nerved individual who had specialized in dismantling bombs, the single most stressful job in the world.

I once asked him, “How did you do it?”

“It wasn’t that difficult,” he said. “There are different styles of bombs; a bomb in Malaysia is different from a bomb in the Middle East. You go there and see what kind of bomb it is and take it apart.”

I said, “Let me ask you a question. What happens when you come across a bomb that you don’t know?” He looked me in the eye and said, “You record your first impression and hope it is not your last.”

I came into the office one day and found this same steel-nerved individual virtually on the brink of tears. I asked him what was wrong. It turned out that the Fed had made a major policy change, which dramatically reversed many major market trends. Overnight, our fund, which had gone from a starting value of $10 to nearly $15, had fallen back to under $12, just after he had opened a major Swiss bank as an account.

I told him, “Get them on the phone.”

“What?” he asked somewhat confused. I repeated speaking more slowly and emphatically, “Get – them – on – the – phone.”

When I was a broker, my boss taught me that if you don’t call your client when he is losing money, someone else will. And to be honest, when I was a broker, I did the same thing. When I called prospects and they complained about their broker, I would say, “Oh, how could he put you in that trade?”

So I get the account on the phone and explain that our simulations show that this type of event will occur once every few years and that I am confident that in nine months the fund will be back to a new high. “In fact,” I said, “I have just borrowed some money to add to my own investment in the fund.” “You really did that?”  he asked in a surprised tone. I assured him I did.

Well, the account doubled up on their investment, and the fund immediately shot straight up. That account became one of Mint’s biggest clients. How could I be so sure? I knew what our systems were about. What makes this business so fabulous is that, while you may not know what will happen tomorrow, you can have a very good idea what will happen over the long run.

The Mint trading system did not prioritize being right all of the time. We prioritized not losing a lot when we lost, but winning big when we won. But as a result we were frequently wrong. We understood and expected this and taught our client the wisdom too. If you have a good system, if you have studied your odds and decided how much you are willing to lose, then stick with your system, even if the market turns against you. In our Mint days, Michael Delman liked to say that every human decision becomes an opportunity to fail. Our main success was having conceived and set this machine up so it would not depend on our judgment day-to-day and our decision-making capabilities. We all signed a written agreement that none of us could countermand the system. It was liberating to let go.

Also, tracking your volatility is a must. Volatile markets and recessions are contagious that can fool any expert. When a market is really volatile, we would stop trading and simply get out. Remember the time horizon I wrote about earlier? A speculator’s advantage is choosing when to bet. Get out if the conditions are not right. Always put money on the winners.

Cutting Losses And Letting Winnings Run : The Mechanics of Finding and Following Trends

I’ve shared the basics of trend following in theory and how you can apply this system to love and life. It is one of the most important lessons of this book. Don’t stay in bad marriages, bad job, or bad businesses that are failing year after year. Leave and instead seek out rising trends, then ride them for as long as they continue. Stay with the great spouse. Invest more in the business that is on the rise. Sounds great – and quite obvious when patterns are clear. But the world is full of ups and downs. How do we measure?

It’s not difficult to identify stocks or commodities that are rising or falling in value. One of the most basic methods is to use “moving average”, which is the average of the price of a certain asset over a given period of your choice, typically ranging from 10 days to 200 days. This is how I identify stocks or commodities that are one the move.

How do you choose your time frame? Short-term moving averages of 20 or 30 days, for example, will signal trends early, but will be more bumpy. A 200 day moving average will be slower to reflect a trend, but stronger. You set the rules as to how strong the trend is to signal a buy or sell. Action. But generally, your goal is to use moving averages that signal rising or falling trends early so you don’t miss them, but long enough so the trends are real trends and not just a fleeting jolt.

I may buy stock on a rising 200-day moving average and let it run, until it starts to decline by whatever amount I’ve preset that I’m willing to lose, then I get out. I’m not going to sit around for a loss. I’m not there to lose money.

You can apply this principle to a range of investing scenarios. Say you can’t afford to lose more than 5 percent in value of a nonretirement stock portfolio; then when you reach the 5 percent loss threshold for the portfolio overall, you can sell the declining stocks. This is a rule that protects you against “the worst.”

What percentage of your wealth are you risking? It doesn’t matter how well off you are. Human beings are emotional and subject to bias when they see swings in their wealth, positive or negative. That’s where we get into trouble. Letting the winners run means you don’t need to see until your stop-loss tells you to. Enjoy the ride. But don’t be attached emotionally to a great investment that made you a lot of money if the market tells you to sell. By having stop-losses engrained into your money behavior, you won’t make panicked or rushed decisions under pressure.

When you do want to come back to the market? When the moving average tells you that it’s a good time to be there. The reverse is also true. If you’re doing well and have your stop-loss in place, be careful of walking away and leaving some winnings in the universe that belong to you. Of all that I’ve learned as a trader and investor, letting your winnings run is the most difficult for most people.

The Basics of Options and Stops

People believe that trading is very risky. But there is a simple device you can use to protect yourself. When you purchase a stock or commodity, you put a stop-loss order in place. This will automate a sell-off once an asset declines by an amount that you predetermined based on what you have decided you can lose.

I like to set a “trailing stop,” because these adjust to trailing value, and adjustment is very important. If you buy something for $100 and you have a 2 percent stop-loss – that’s $2 you’re willing to lose. Once the asset goes down to $98, you’re out of there. But what if the value first goes up to $110? With a trailing stop, you will automate your sell-off at 2 percent of $110, not $100. You stopped the loss but retained more value of what you won.

Another way of limiting your loss exposure is to buy options, something I like to do. When you buy an option (whether in commodities or the stock market), you pay a fee for the right, but not the obligation, to purchase that asset for a predetermined price during a predetermined future time period.

Why would you buy an option? Because you think you know how it’s going to move. You are essentially making a rule. For example, say you paid $20 for a three-month option to buy a certain stock for $200 a share. Then its worth increases to $300 a share and you paid $20 for the option. You would proceed to buy and win a 50 percent profit. With the option you take two kinds of risk: price and time. Stock options are a wonderful example of asymmetrical leverage. They do not cost much, but the potential upside can be very large.

A stop-loss system isn’t dramatic or exciting, but who needs drama in your money life?

Don’t Push Your Luck With Bad Bets

When you learn how to cut your losses, you won’t be tempted to do some of the dangerous and illegal things people do when they’re in trouble with their investments. Everyone had read about the crime of insider trading, which is defined by Investopedia as “the buying or selling of a security by someone who has access to material nonpublic information about the security. Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still nonpublic.” It’s dumb: (1) You don’t know if the information is good. (2) Illegal – you can go to jail.

You can always find fresh stories of people being busted on insider trading charges. To me, insider trading is one of the worst bets around and therefore has never tempted me. It’s a terrible risk. First of all, you usually can’t validate the sources or the information. So that’s number one. Second, forget about being moral; your risk/reward has just changed dramatically because now you’re going to have to go to jail. That’s pure recklessness.

How to Let Those Winnings Run

When we first moved to Summit, New Jersey, we started in a modest house, but moved up and eventually wound up in an 11,000-square-foot house, where my wife Sybil and I raised our two daughters. It was a beautiful house. It was my dream. Remember, we didn’t have a house when I grew up, and I grew up looking at a wall out of the window from Ocean Avenue and Avenue V. For much of my childhood I didn’t even have a bedroom. This house had a heated in-ground pool, big lawns, and many rooms. My favorite was my study, which looked a lot like Don Corleone’s office from The Godfather.

I had bought my parents an apartment in Hollywood, Florida, as I was raised to do. They had relatives there and the place was in a complex next to my rich uncle. My father wanted something simple, but I said no. All my mother’s friends from Brooklyn had moved to that area, and it was good for her to be near them and be in line with their standards. Mothers have more fear than fathers, and mine lived through the Great Depression, which made her fear more acute.

After my father died, my mother came for regular visits north and stayed with us. On one of these visits, she stopped by my study after supper.

“Look, Larry, you’ve done well, but this is commodity trading,” she said. “It’s dangerous. Everyone knows that. You have enough money that you can quit.”

First of all, things are not as dangerous as you think if you know what you’re doing. But also, a lot of people can’t deal with it if things are too good I’ve noticed that this is a myth of poor people.

I looked at my mother and considered her question. “Ma,” I said, “who is the richest person in our extended family?”

“Well, you, Larry.”

“Do you want to keep it that way?”

“Yes, of course,” she said.

“Well, what am I going to do? Go into the dress business with the other people in the family? Can you see me in that business? Mom,” I continued, “I know this business. I have studied it for years and have a half dozen PhDs working for me. Wouldn’t it be kind of dumb for me to get out of that business I know very well where I am an acknowledged expert, and go into the dress business because I’ve gotten too good at it?”

If something is too good to be true, my mother would say it probably is. I don’t see it that way. I say, get smart and just enjoy it. Here’s a kid who was dyslexic, blind, a poor athlete, a poor student, and now a man living in an 11,000-square-foot house. The world could turn out to be a lot better than you think.

You could say all this happened because I was a lucky sonovabitch. Perhaps. But I’d say it be because I had the courage to bet. And the intelligence to make smart bets. I had a goal and a plan. I had  great imagination and the idea to build a trading model that told me when to get into the markets, when to get out of the markets, and when to add more money. But mostly, I enjoy making money in the markets. There are a set of criteria of facts, and I get a kick out of figuring it out or finding someone who can execute my ideas. The money is confirmation that I’m right.

I respected my mother’s question, of course, and thought about it from time to time myself.

Strangely, a few weeks after this, my youngest daughter, 15 at the time and very smart, came into the Don Corleone room and said to me, “Dad, I know you’re very successful and I’m very proud of you, but don’t you think enough is enough?” Obviously, she, too, had this fear. My wife and I both were only children. I brought my daughters up to be spoiled and protected, never to encounter abuse from anyone.

We talked awhile then, and I explained what I told her grandmother. I wasn’t going to be good at anything else, I said, but more than that, simply because I am good at something doesn’t mean I should stop. You let your winnings run, and that’s what I was doing.

I realized I had become agnostic about wealth. The pile of money I’ve built is a result of a system that works in generating wealth. Its relative size isn’t very important. I say that if you earned your pile through integrity and intelligence, let your winning run. If you are generous and take care of your family, let your winnings run. If you pay your taxes, and share what you’ve made with the less fortunate, let your winnings run.

There’s a bad thing about Jewish or Catholic, I’ve noticed: Being raised in these faiths tends to give you a sense of guilt. When things are going too well, you don’t believe you are entitled. In my early years, I was not prepared to be successful. I couldn’t handle it, but as time went on, I came to see that, yes, life can be better than you expect. I wish the same for you, your family, and your friends, too.