Part 1: Are Great Traders Born or Made?

    This was the running argument between Richard Dennis and William Eckhardt in 1983. Dennis believed successful trading could be taught. Eckhardt, his friend and fellow trader, believed traders were born with an inherent set of skills and natural instincts that proved profitable in the pits. 

    To settle this conundrum, they devised an experiment. Richard Dennis recruited 23 diverse individuals from various walks of life. Their careers ranged from Chicago doormen and retired Air Force pilots to corporate middle managers. After a simple, two-week training program, he turned them loose to trade his personal money. When his experiment ended five years later, his protégés had earned an aggregate profit of $175 million. 

    This group of assorted characters weren’t all Wharton grads or financial whizzes. But each person had one thing very important thing in common: they followed a simple set of rules to guide them to becoming multimillionaire traders in a very short time. Over the next four weeks, we will be conducting a similar experiment – by exploring the 4 Secrets of Wealthy Traders. Just as Richard Dennis proved 34 years ago, we believe traders aren’t born. They’re made. 

Secret of Wealthy Traders #1: They are patient with winners. 

    In today’s fast-paced world of T1 fiber optic connections and fraction-of-a-second trade executions, we’ve been brainwashed to believe that speed is everything. The markets move fast so we need to move faster. Incorrect. The best traders in history have demonstrated the exact opposite trait, proving patience and a slow hand to be a more profitable skill. 

    Pierre Andurand is not a household name, but in 2008 he pulled off one of the most successful trades of all time. After raising $300 million to start his new hedge fund, he began buying crude oil futures hand over fist. It is rumored that he held more than half of all existing oil futures at one point during the year. It was a risky move, to say the least. And more importantly… it took time. But by July, he was a god on Wall Street. Andurand rode his trade to the all-time high. Performance was 210% in 2008 and 55% in 2009, inspiring investors to pour another $2 billion into the fund.

John Paulson pulled off a similar feat around the same time, shorting home mortgages during the biggest housing boom in a generation. Neither of these men saw instant profits. And both undoubtedly experienced moments of self-doubt and unease. But their ability to remain patient in the restless environment of trading proved fruitful.

The Flip Side of this Secret

There’s another side to this coin.

Note that our first secret of wealthy traders was: They are patient with WINNERS. The same patience applied to a losing position will lead to undesirable results. The ability to abandon losers is just as important as the willingness to stick to winners.

Take Warren Buffett, for example. A value trader in the truest sense, he has been regularly quoted saying his “favorite holding period is forever.” “The money is made in investments by investing,” Buffett told CNBC, “and by owning good companies for long periods of time.”

But in 2014, he proved that even a buy-and-hold prophet like the Oracle knows how to dump a loser. After buying more than 40 million shares of Exxon Mobil in late 2013, he soon began liquidating his position. The outlook for oil had changed and so had Buffett’s faith in the trade. His response? “We thought we might have other uses for the money.”

For most of us, getting in and out of a stock over a few quarters’ time is no big deal. But considering the resources required to scoop up 40 million shares and Buffett’s adamant stance on long-term investing, this instance is quite telling.

If a trade isn’t working, or the reasoning behind an idea no longer holds true… move on. Close the position, take your lump, and live to trade another day. Hubris and pride have devoured more fortunes than any mistake a trader might make.

Next week we will examine the second secret of wealthy traders… and it might change your entire approach to trading.

Stay tuned.