Tuesday, February 10, 2009

Richard Dennis: Market Wizard

I read the Richard Dennis interview from Market Wizards during the tumult of last week. I can say surely, that had I listened to one particular message from the interview that I could have saved myself $5,000. Schwager asks what to do when things aren't going well. Dennis cautions that, "a certain amount of loss will affect your judgement, so you have to put some time between that loss and the next trade." Indeed.

Since my troubles from last week are still rather close-at-hand, I can say undoubtedly that my judgement was clearly affected by my losses.

For example, at one point last week, I was going to war with GS. Just shorting it over and over again because I thought the move up was overdone and that the stock should be going down. When I looked back on my trades in GS, I was surprised to see that it was perhaps the strongest stock on the exchange the day I was shorting. Was I expecting it to go from the strongest to the weakest or something? Hoping to get lucky?

That wouldn't have worked... according to Dennis, luck accounts for "absolutely zero" when it comes to trading success. Instead, it was like I entered into a little bubble of hate and GS was the only stock on the exchange to trade.

Furthermore, when I was involved with these "unlucky" trades, I couldn't imagine it going higher when it was trading $89. Then at $90 I thought, "it's just gonna pop above and scum back down to trap longs."

At $94, I don't remember what I was thinking, but I'm sure it was dark.

This illustrates another important point made by Dennis: "You should expect the unexpected in this business; expect the extreme. Don't think in terms of boundaries that limit what the market might do. If there is any lesson I have learned in the nearly twenty years that I've been in this business, it is that the unexpected and the impossible happen every now and then."

Had I been able to take a couple steps back, clear my head and have some perspective on the trade, I could have saved myself thousands of dollars. If you get into this situation, take Dennis's advice. I'm not sure how much time needs to pass, but do something to clear your head, trade another stock and do something different than what you are doing.

It doesn't come as a surprise to hear that Dennis (like Marcus and Kovner) lost money initially. But despite his early setbacks, he had "a need to try to succeed." People ask what a trader needs to do well. Some people think you need a "good head for numbers" or "an ability to analyze data." That stuff won't hurt you. But first, a potential trader must have that desire to try to succeed on his own.

Dennis reserves a certain amount of vitriol for the stock market. He says stocks are "random" and that they didn't offer enough fundamental information to create a real trend to trade. Or, as he succinctly puts it, "There is not enough information, not enough fundamentals. Just nothing going on." 

Damn commodity traders!

But despite his adoration for commodity trading, he bemoaned the growth of computerized trend trading and all the resulting false breakouts he believed were due to too many people watching for the same patterns. He then made a rather dark prediction, "There will come a day when easily discovered and lightly conceived trend-following systems no longer work."

Man, I thought... everything I do is lightly conceived! But I also thought of Trader X, and his new patterns and this made a lot of sense. The patterns are constantly changing and it's our job as traders to find them.

His critique of Keynesianisam is interesting and oddly enough, timely given the current environment. "Keynesian economics was a solution to the problem of over-saving and under-consumption, which was a fair enough attempt to pull us out of the Great Depression. The problem now is the exact opposite: under-saving and over-consumption."

Market Wizards was published in 1989... can you imagine how much worse the problem of under-saving and over-consumption has grown in the last 20 years? The best you can say is the the near future should prove to be a very interesting time to live, though not necessarily comfortable.

Finally, Dennis throws at least one specific trading rule our way, and while I'm not a swing trader, it makes sense. He explains, "it is important not to have a short position with a loss on Friday if the market closes at a high, or a long position if it closes at a low."

Okay, with that I leave you to go and make a million bucks.


John C. Lee said...

I will recommend this post to my students in the morning.

Highly educational on the continued struggles that we face on a daily basis.

Dinosaur Trader said...

Thanks, John. I liked this interview a lot.

Great work on Richie's blog, BTW...


Anonymous said...
This comment has been removed by a blog administrator.
Dinosaur Trader said...

As an anonymous blogger, I'd like to respect the anonymity of the one known as "the Fly."


John C. Lee said...

I didn't hack his blog, but I wish I did. Someone just got to it faster than I did lol.

Google must think he's a complete dumbass.

Dinosaur Trader said...

And here I was giving you iBCers all the credit...

Was funny as hell, and made his blog worth reading for a day or two!


John C. Lee said...

There sure were a lot of iBC vocab words though.

I think he's at brunch with his father balling his eyes out.

Anonymous said...

good post. i fight overdone moves as well trading off daily but the intraday is still going against me- so easy to just wait for a rollover in theory but in the trenches i lose my mind fighting it.

p.s. i imagined for an ivy leaguer your reading speed would be a little faster than 1 chapter a week.

Dinosaur Trader said...

It's the writing speed, that's slowing me down Pete...


HPT said...

Good post DT.

hayfro said...


Been there, done that many of times. Instead of letting time pass I scale back my position size or focus on a different sector.

It's an awful feeling as a trader to be losing money when everyone else is making money ie. short when the markets are going up and getting squeezed.