Transcription
I want to start off with just talking about my guiding rules that I actually have a sign up on my wall in my office and it says no forced trades, no big losses. And I've had that sign up there for for a long time. I also have a sign next to it that says losers average losers. And basically, those are the big three rules that I always follow. And I know they may sound maybe obvious or or simplistic, but believe me, there's uh these are the things that most traders deviate from the most.
And what I mean about forced trades, let's talk about that for just a second. And I'm sure everybody that's a stock trader for any period of time can relate to taking trades that maybe you shouldn't have, or feeling antsy and itchy to do something, so you end up taking the trade. Then later on, you look back at it and you notice, you know, why did I do that? What the heck was I thinking? That's that that pressure to to, you know, have action in the market.
Data, I'm curious. You know, you've been doing this for a long, long time. And I'm sure back when you started, this was probably a problem, just like it was for me and for everybody else. You know, how do you deal with that? The other feel the urge to, you know, actually, you know, put on trades that maybe you shouldn't, or or do you get this kind of a pressure on you ever?
Yeah, I mean, it's it that's very natural. I mean, for anybody in the markets, you have these emotions weighing on you back and forth. Should I be buying? Should I be selling? And the way you overcome this, and the way you overcome forcing trades, is you you develop a system or a method that that works in good markets and bad markets. And so it really comes down to discipline. Do you have rules that you filter every idea through? That's how you get over forcing trades, because forcing trades all comes because you're emotionally in the wrong place and and you're not following some kind of systematic system to eliminate the emotion.
Yeah, and you know, of course, you have to have a system first. But you know, having a system and and having a set of rules is the very first step. And some people, you know, you may not even have that yet, and you're you're looking for those rules and that that system that you could follow. But then you have to have the discipline to actually follow it. And something that I always try to point out to new traders, especially, is that you have to define, you know, what it is you're doing. I mean, if you're, you know, if you're a certain type of trader, you got to stay in that in that area of competence. And that means sacrificing, you know, some of the other areas.
Main thing is, you know, I'm always looking to trade only setups that I am familiar with, that I know what to expect. I'm always trying to keep my losses as small as possible, back into the lowest risk trades possible. And I never ever add money to losing trades. If I'm down on a trade, I'm not gonna add to it. That's the, you know, probably the ultimate amateur mistake. I'm never ever adding to a losing trade. And averaging down, worst possible advice you could get. That's the kind of advice you're getting. Fire whoever's giving you that advice.
Real quick, let's just talk about, you know, professional trading goals and what that means to me. Professional trading for me means taking minimal risk and and then capturing relatively large gains relative to that risk. Now, that word relative is really important because if you are a day trader, well, a 5% gain is probably going to be a pretty big gain. But if you're a long-term investor, that that wouldn't be, of course. So it's relative to your risk. And then you want to maximize compounding by rolling that over as many times as you can. And again, if you're a shorter term trader, you're going to have more, you can have more turnover, you're going to be rolling that over more often. If you're a longer term investor, it's going to be less often. So it's relative.
Now, one of the things that surprises a lot of people is that when I tell them that I want to be in the market as little as possible. As a matter of fact, more, if we if we circle back to when I won the US Investing Championship, that entire year, I was up 155% that year. And if you looked at the whole year and like averaged out my exposure in the market, I was only in the market about 50% of the time. So if you take, you know, 12 months on average, six of those months, I was out of the market. So I I achieved that return. And many of my my big return years have been achieved with being out of the market. And that's because when you're in the market, you're at risk. So I'm trying to be in the market at specific particular times. And that leads me to the first key to big performance, and that's timing.
Dave, you know, a lot of people say you can't time the market. You know, I mean, I always say anybody who says now, you can't do something, it's because they can't do it and they don't believe somebody else can do it because they can't see themselves doing it. But you know, you and I have been timing stocks for, you know, decades now. You know, what do you say to that? And then what, any, you know, advice for getting over, you know, having that limitation and your in your thinking?
Well, the timing is is coming down to looking at how a stock is acting. And there's certain patterns that repeat themselves over and over again, in especially in successful stocks. Stocks that are in uptrends, they they act a certain way. So once you identify a base or how a stock breaks out or starts a move, or even in the middle of the move, or when it's topping out, if you can identify that by looking at charts and studying them, then you can get down to the point where you're buying just as the move is starting. And I've just, you know, I've looked at probably millions of charts now and and have studied them and and looked at these moves. And they're defined patterns that show up over and over again. So to say that you can't time the market, I would just say, well, I'll show you so many charts, so many different situations where the timing it worked, and it continues to work. It's the same thing.
Oh, yeah. The other thing, you can look back at charts going back into the 1930s and 20s, and even I've seen charts of even below 1900, where the same patterns repeat themselves over and over again. So timing is is is done by looking at charts, and it continues to to help in finding the best stocks to buy.
Yeah, and charts are just showing the price. I mean, it's not, there's nothing magic about them. It's not like it's a precursor to anything. It's actually the end result. So it's just showing the price. But even Warren Buffett is timing his trades. You know, maybe they're based on a different factor, maybe he's not even looking at a chart. You know, he's looking at fundamentals. But when those fundamentals deteriorate, he's out. When when he sees the right valuation, the fundamentals, he's in. There's still a timing mechanism. You have to make a decision to buy, a decision to sell. So that timing factor.
You know, and I think the big point that people have to realize is that you're not gonna make big returns in the market. When I say big returns, I'm talking about 40% a year or greater is what I always shot for as my minimum level. And what I really wanted was a triple digit a year. That's what I always shot for, was that triple digit year. I had a lot of years that I was able to do that, about 75, 80% of my years, I had triple digit years for over a decade. But then, you know, on the years that weren't so good, I wanted to return 35, 40%. And then if there was a real big bear market, and you know, if I broke even or just had single digit losses, I was happy. But regardless, you're still gonna have to have some sort of timing. And people think that you could just put a stock away and and hold it. It doesn't work that way. I mean, even if you do get on to a long-term winner and you put it away, when it really all comes down to it, in the long in a long run, you're not gonna get that consistent, those consistent returns where you're you're making a career out of this, and you're making a living off of it. That that requires some trading and some timing.
I want to point out something that that I call the 50/80 rule. And and as much as I've pointed this out and I've talked about it in my books and so forth, a lot of people don't realize that the big market leaders of one cycle, when they finally top, when you get a big secular move and it tops, and it was a key leader, the chances of it going down 50% are about 80%. And the chances of it going down 80% are about 50%. And the average, the average leader, when it tops, goes down about 70, 75%. Now, that's a huge decline. We have a portfolio of these big high-octane names that are doing great in a bull market, and when they finally top, you could be sitting at a huge loss, lose everything you've made, and even more.
This is an example of Lumber Liquidators, which was, you know, a market leader coming out of the 2012 market and had a big move, and then of course, you can see gave up everything. And this isn't something that's new. This happens cycle after cycle. You know, David pointed out, you can look at charts going all the way back. You know, we've looked all way back to the 1800s, and it's exactly the same. It happens the same way every time. You'll see the same, the same patterns develop. You'll see the same type of emotions taking hold of people, you know, holding on to the the big high-flying names that have been going up for a long period of time. And then when everybody wants to own them, like back in the 90s, you had, you had Qualcomm, JDS, you to, you know, Phase, you had even Amazon back then was it was a big leader, Yahoo, EMC. And when these stocks finally topped and became household names, many of them were down 80, 90%. Some of them went completely out of business. And then dead money for 16 years.
Dave, we've seen this. How many cycles have you seen this? The same story. 87 top, you know, the 90s. Now, you know, going into this market with the Fang stocks, Apollo's will probably be will be talking about 10 or 20 years from now.
Let's talk about, you know, about get roll back a little bit on timing. Okay? So for those of you who have read my book, they probably know about the volatility contraction pattern or that vernacular. And how this is nothing, you know, new as far as, you know, Dave's been doing this and O'Neil has been doing this for a long time. I just came up with a sort of an overlay, a way to look at say, like a cup with handle or some of these patterns, and have just a little bit better way of determining when one was actually setting up constructively. Because I found over the years, so a lot of people would come to me and say, hey, you know, is this a cup of handle? And it just wasn't a very good setup. So I came up with this volatility contraction idea, and it's really helped people quite a bit.
And and this is something again that we're not, we can't cover everything here today. If you want to spend in a few days with us and we go over this stuff with 400 pages of workbook material, you can attend the Master Trader Program. And maybe in the future, we'll be able to do like a technical analysis webinar. But we're going to touch upon some things here and stick to the bigger concepts. But you should, you know, definitely, of course, O'Neil's book is is is probably one of the greatest books ever written on the stock market. I think my books are right up there too. And I think they all work very, very good together. So you can learn a lot about that by just reading those books. I think if you just read O'Neil's book and my two books, you don't really need anything else, and you'll learn a lot about this.
But the timing, I want to be going into these stocks as they're coming out of these consolidations. And you'll notice how the stock is moving very quickly. See, this is where the this is where you're maximizing that compounding. Your timing that trade at a point where it's either moving very quickly, or it's moving maybe against me. And that's also, it may not like having a loss, but if I'm going to have a loss, I want that loss to happen pretty quickly. I like to know because then I can move on into something else. It's sort of like, you know, would you want to be in a bad marriage for 20 years? No. You know, I'd like to know right away that this isn't gonna work, and then I could find someone else that's right for me. I mean, that's the way you have to look at a stock. You want to try to know. So by timing your trade and knowing what to expect, knowing whether you're right or wrong very quickly, it saves you a lot of time and time.
And also add that you not only have to look at the chart itself, but also look at the volume. Because when a stock is contracting and it's it's getting tighter and tighter, the volume is usually drawing. And then when the stock comes out of that, starts breaking into above the base, then the volume really picks up. The demand should really pick up. If it doesn't, then you've got a problem, and it's probably gonna reverse and start breaking down. And and that looks a perfect time.
Let's talk about breaking down. Not all these patterns are gonna work. All right? And then when you're, as long as you know your criteria is sound, then you'll have a pretty good idea that the markets not right. See, if your trades aren't working, there can only be one of two things wrong. Either one, your criteria is flawed, or two, the markets just not right at that time. It could only be one of those two things. If you have solid criteria and you're buying at the right point, well, then the only thing that's gonna hold that back is it is it a negative market? Is a hostile market? But if you have poor criteria, you might be in a great market and you're not doing well. So you have to go back and check your criteria. If it's if it's sound, then you have to realize there's times where you're gonna get stopped out.
And here you go. Here is a perfect example of another. And I wanted to show during this webinar, I wanted to show some of these very high quality, quote unquote, quality companies, and how what happens to them when they top. This is going into the subprime debacle, going into O8, O9. And here's Citigroup. You know, again, another name that has never come back. Most of these names, banking names, have not come come even back to their breakeven points. But you should be selling stock as it's coming up. Just like David said, volume picks up. Prime is picking up on the downside here. Your sell rules are getting hit. Should be out of this stock, and you and you're never in this. You'll end it. And of course, this will not meet your trend template criteria once it starts rolling over like this. All that criteria goes out through out the window, and you're not even going to be thinking about owning a stock like that. And you to save yourself a lot of aggravation here.
So I'm looking the time. My trades based on the trend template and looking for those VCP patterns. But also, I'm going to admit when I'm wrong very quickly. And and like I said, I want to I want to know I'm wrong as quickly as possible. Time is money in the market. Turnover.
All right, here's another thing that you hear a lot about. Turnovers bad. You know, you gotta pay taxes. You don't want to, you know, take that profit. Well, you know, I mean, if you wait long enough, you have losses, you won't have to worry about paying taxes. I want to pay lots of taxes. I want to have lots of profits. Makes a lot, make lots of money and pay lots of taxes. That taxes are good. It means you're profiting. But again, you're gonna have to turn your portfolio over. Okay? You're gonna, the yeah, gonna have to do some work. You know, if it's not, there's just putting into a basket of names. And by the time you see a basket of names like the Fang names or something, and you see this huge outperformance, believe me, the best is behind you. And once it convinces you that you could just salt it away and everything's gonna be okay, trust me, you've got a big problem coming down the road when you least expect it. You've got to turn over your portfolio, and that means cutting losses very quickly when you when when you're wrong, and selling stocks when you have profits and nailing those profits down. Turnover is not taboo. Turnover is a good thing, as long as you have an edge.
All right, talk about opportunity cost. Now, people think that I made all these big returns, especially in the 90s, because so many stocks went up huge. I had these giant winners, and there's a lot of these names that I bought right before they made huge, huge gains. Yahoo was a perfect example. I bought Yahoo, it doubled, I sold it. I bought it back, it doubled again, I sold it. I brought it back, it went up about 40%. I sold it. Well, I brought it back again, it went up 30%. You know, when it was all said and done, I don't know what my compound that return on Yahoo was, but it was hundreds of percent. But it went up 8,000%. Okay? A lot of the trades that I've done are swing trades, shorter term in nature, compared to that, the big moves. So if you can find one stock that goes up 75%, well, you can get the same result by finding finding three stocks that go up 20%, or six stocks that go up 10%, or twelve stocks will go up 5%. If you compound that out, you have to first of all, to find what your strategy is, and decide what's going to be the easiest route. Can you, is it easier to find restocks go up 20% or six docs go up 10%? I think so. For me, it is. I'm better at finding those stocks than I am at finding a handful of stocks that go up 75%. So I'm usually in that category. This would be the more of a short-term trading category, a very short-term sort of scalping. That's not my, you know, my wheelhouse. But my wheelhouse is in that, you know, 10 to 20. When I get a big winner, might be 35, 40, 50%. And I'll I'll nail that down.
Dave, I'm curious because of course, you know, when I was starting as a stock trader and reading about you winning the US Investing Championship three years in a row, that's what got me interested in entering the US Investing Championship. You know, were you making those big returns because you had some giant winner? Or and I know it's evolved over time. I know back then we we did have bigger winners, and now, you know, we're all trading a bit more. But I'm just curious if that particular time was a result of big winners, or did you also have some of these, you know, these quote-unquote shorter term trades?
Yeah, at that time, when I was winning those Championships, they were shorter term trades, but they weren't trades where I was in for two days or three days or so. I would probably usually I'd hold them for at least a couple of weeks, or if not a month or two, and get these 30, 40, 50% moves. And when I felt that those were getting tired, or that individual stock was getting tired, then I would shift and I'd move into something else. I was constantly looking for for the next breakout, the next big winning stocks that have all these characteristics. And so I'd be rotating my money from stock to stock. So yeah, there were a lot of shorter term trades, but it's not a trading, it's it's more weeks and then and then some months. And and when I really like a company, I don't want to lose a position in it and completely sell out of it. I might cut the position way down and keep a token amount until it rebuilds a base and then I come back and I buy back.
You're gonna find that the traders that are getting the big returns tell me that's the key. Consistently. I mean, you can have, you know, a big year every now and then, get a bull market, and you're in the right names. But to consistently turn out big returns year after year, you're gonna find that it comes from timing and turnover. And as you're hearing, David's talking about having turnover even back, this is in the 80s, when trading was really, we didn't do short-term trading back then much. It was really a cutting edge thing to to trade it out because commissions, there were so many things against you at that at that point. It's it right now, it's a really great time to be a trader. You have just so many benefits of very, you know, tight spreads and just incredible access where you can trade off your phone, and commissions are so low. So it opens up a lot of a lot of opportunities.
You need to define your style. Sorry. Yeah, and Mark, if I could add, I don't think I've ever thought about taxes when I've when I'm in a stock and thinking about selling it. I've never said, you know, I've got to go long term and I've got four months to go. I always base my decision on how the stock is acting and if it should be sold. It should be sold regardless of taxes. And one last thing is that, you know, so many people have IRAs and Roth IRAs. There's no tax consequences within those. And so they don't even have to worry about, you know, it's a very, you know, ignominious way of thinking when you start thinking about taxes. No type of things, you're you're really thinking very small, and you're not, you're missing the big picture. The big picture is to make big returns. And I know a lot of people don't believe they can do that. They don't. But again, you know, I mean, I can't fly a 747 either. But I'm sure if I got the training and I went through the classes and became a pilot, I'd be flying a 747 several years down the road if that's what I chose to to do as my profession. So you just need to get the proper training and then spend the time getting the experience. But you can, you can, you can beat the market every year, and you could do really well and make big returns, just like we're doing. It's not something that we're naturally gifted with.
One of the keys is to make sure that you define your style and you stick to it. In the beginning, you really want to perfect something and get good at a particular style before you start drifting off of it. You don't want to have style drift. That's the first thing you want to make sure that you don't have style drift. Now, if you're a day trader, you're gonna sacrifice bigger moves, but you're gonna have the comfort of not holding overnight. You'll have no overnight risk. But you're probably never gonna have a, you know, a 50 or a 100% move like a long-term investor would. If you're a swing trader, you're going to maybe sell some stocks that are up 20 or 30%, only to watch them go on to become 50, 100, 200% winners or more. So there's a price to pay, but you have to realize there's benefits and there's good things and there's bad things about every approach. But you're in your particular wheelhouse, you know, that's your limitation, but there's a benefit from it. So, you know, I find people are constantly thinking there's a better way. You know, you do it this way, and they know it doesn't work, they switch over to this one, and you end up being just a little bit okay at a bunch of things instead of being really great at one thing. And the reason why I've done so well, and I think David's done so well, we've stayed with a particular style for decades. We didn't just commit to it for a year to see how it does. We believed in it, we realized it's timeless, and we've stayed with it. We learned everything about it, and that's that's what I would recommend that you do too. And it doesn't matter if you're picking my style, or, you know, or some that doesn't, that's irrelevant. Well, there's lots of ways to skin the cat. My strategy is not the only way. You know, but but there's many ways, but you want to stick to one of them and really learn it and become great at it.
I'm going to talk about the next two keys, and that's there, basically, we run them together. Concentration and risk reward management go hand in hand. And the reason why is again, you're not gonna make big returns if you're wildly diversified all over the place. You're gonna have to get concentrated if you want big returns. And you want to consistently turn out big returns year after year, you're gonna have to get your portfolio concentrated. You're gonna have to get away from thinking that diversification is going to protect you, and that the first of the keishon is is a good thing for your portfolio. It's not. It's not to a certain degree. To a certain degree, but diversification is just going to limit your your upside. And I'm going to show you that mathematically in just a second.
But you know, it's all based on how you manage your risk reward. If you're, you know, if your plane is upside down, and you you're not doing very well a good job at managing your risk reward ratio, well, then the more concentration you have, the more you'll lose. If you have a negative, you know, you don't have an edge on, or a positive edge. We show you some math here. This is just taking, we have a little calculator that we have on for my members that you can put in your various parameters and then see how they would play out. Like we call it result based assumption forecast. So if I took a hundred thousand dollar portfolio and I had a position size of 10%, I used to 10% position sizes, and my desired return is 40%. I have an average gain of 12%, and a loss of an average loss that is of 6%, with a 50/50 batting average. So half my trades are 12% winners, half my trades are 6% losers. Right? I take that and I take a look, I put it into, you know, we call it the hopper, and we look over here. It's gonna take 134 trades to get to that 40% return. Now, that's doable. I've done a few, I've done 250, I've done 500 trades in a year, swing trading. So that's very doable. Right? So now let's just, let's just take and we'll up that position size to 25% now. And I'm not saying that every one of your trades should be 25%, but this is where I shoot for when I try to get built into a position and have some of my bigger position to be 15, 20, 25% of my portfolio. Now, that same 40% return is going to be achieved with just 54 trades. So see, you have to do far less trades.
Now, if we take a look here, don't we do 134 trades with that same concentration that gets us 100% return? Now doing the exact amount of trades as we did before. Now, of course, if you're like they said, if you have a negative expectancy, raising your exposure is going to actually hurt you more. So you have to be a a profitable trader. But once you are a profitable trader and you're managing that risk reward, it's important that you realize that you don't want to be too diversified. So we covered timing, turnover, concentration, risk reward management, as four key principles to to get a superior performance.
Now we want to talk about drawdowns. Because when it's all said and done, I I mean, I had clients, I'm not going to mention any names, but we had one client, they managed a hedge fund, and they they literally were up over a thousand percent. The hedge fund was up over a thousand percent. A year and a half later, they were down over 99%. And the funny part was, they sent out a letter to their investors and they said that they felt they could get it all back within 12 months, which was extremely comical. They actually, of course, went out of business. But they were in that, they were hugely leveraged and in Qualcomm and some of these names that were the big high-flying, and they were they were leveraged.
But drawdowns are really, and if there's anything that if I look back at my career and my performance in the market, I'm proud of the fact that I had a lot of big years, and I've gotten a lot of those triple digit years. But it would be meaningless if I gave it all back in the bear markets. What I'm really proud of is that 88% of my months have been positive, and almost all my quarters. I've only had a few quarters in in several decades, in several decades, I've only had a few quarters that were even negative, and they were all, they were all single digit. So this has really been the key to my success. And I'm going to go over with the four principles of how how I'm achieving that.
Dave, you know, as far as, you know, drawdowns are concerned, I know you had early on, you know, you had where you you were up big and then you gave it back, and that was sort of a big lesson for you. Any words of advice as far as drawdowns are concerned, and, you know, your own story, what you learned from it?
And yeah, you should, you should use. We can go, we can go through this. You know, teach you all these rules, you can read all the books that that Mark's put out and Bill's put out. But a lot of this is learning from yourself. And so when you do have a drawdown, and you do get hit, the market takes money away from you, don't get so down on yourself, but take it as a learning experience. Because what I did is, when I first started out, I took an account and I doubled the account, and then I lost it all back and more. I mean, I went from 30 to 60,000, and I came down into that like the low 20s. And I spent an entire weekend going through every mistake that I had made for the last year. And I learned from those mistakes. And I said, I'm gonna get so disciplined. I'm only gonna look for this exact setup. And when I got down to that point, and got that determined to only look for that setup, that's when my performance started taking off. But it all started from studying my mistakes and and learning from what I had done.
What I did, are you ever buying a stock that's plummeting? Oh, no. No, I'm usually always behind a stock that's going up. I just, there's no reason to buy a stock that's in a downtrend or a stock that's getting hit extremely hard because there's a reason why they're getting, you know, they're getting hit like that. Either the bad news, bad news has come out, earnings have slowed down, or sales have slowed, or something negative is happening. I am always buying a stock that's in an uptrend that's maybe coming out of a base, after once on all the direction going in your direction.
So rule number one is to always trade directionally. And when I say directionally, that's the trend, the long-term trend, the intermediate term trend, the short-term trend, and the action that's happening that day as the stock is moving. You want everything to be put, all the trends in your favor. And that's that's what I call stacking probabilities. You want to stack probabilities. When you start stacking probabilities, it becomes it becomes multiplication, not it's not addition. It's not 1 plus 1 plus 1 probability equals 3 or 4. It's a multiple of that. When you start putting all these things together, they give you a much higher probability. I'm always moving, I'm always buying in the direction of a trade.
Here's an example, and I'm going to show you some examples here in just a minute. We're gonna show some charts and some, I'm sure some recent trades too, that I've just recently done. So this is WR Grace. At the time, they had some asbestos issues, and they they started to get them resolved. I forget, but there was, you know, court cases and so forth. But the stock set up really nicely. I remember, if I remember correctly, there was a correction in the market in O4, and this came right out about just a perfect, perfect VCP pattern, just beautiful. And you see I'm buying it as it turns up. And this is another thing I wanted to have Dave talk about, because back when I was just starting out, and I was reading the very, very beginning issues of Investor's Business Daily, and I actually attended a seminar with Bill and and David. It was like it was right in the beginning too, because it was like 25 people in the room, no one or even, you know, knew about them at the time. Dave said something, and I didn't never forgot it, and I've been living with this principle ever since. He said, the best thing that I would I know that I know I'm gonna have a profit in the stock is that I'm off right away on it. That, you know, usually the best names and the biggest gains that I've made are profitable right away. And, you know, I found that when I look back, because I keep a record of all the trades that I've made, and we do a lot of post analysis, we find that that's so true. That when the stock gives you a hard time from the beginning, it usually, you know, ends up being a poor performer. And when they're hard to buy, and they just come out, and and they're, you you wish you bought more. You know, this is the perfect example. You see, just came out, and it was up. I held on to this stock for quite a bit. I didn't make the full 147%, but I made up, I made a big move, it was close to 100% in a pretty short period time, just a couple months. And the reason was, and this is an O'Neil rule, basically, and I don't always follow this, but coming out of a bear market, if a stock shoots up 20% you know, in a very short period of time, and the pullback is very shallow, and it recovers very well, I usually hold that and give it because it's shown me such strength.
Here's a recent name, this is Shaq. I was in a fur trade, but you can see the same principle. I'm just buying it off here. This is what we call a cheat area. It's basically just a low handle, if you will. Sometimes you get a few different pivots and handles that will form. If it's in the very lower third, we call it a low cheat. If it's in the mid third, we call it a cheat. And if it's in the upper third, we call it a handle. That would be the classic O'Neil cup with handle. But um, you can see as the stock it goes through this consolidation, as it's turning up, that's where I'm buying it. And then I'm at a profit right away. It gives me a little cushion. I'm able to go and hold into earnings to take advantage of the gap so well. And then I actually sold it too early. I into this gap. I think I sold some a little bit right up here, and then it drifted a little bit higher there.
Okay, let's talk about another principle of minimizing drawdowns. So another thing that I do that I really feel like this is one of them, the absolute most important. And the the things that have been the the principle that has been most responsible for me not having big drawdowns, and that is that I always expose progressively. And what that means is that I never just plunge into the market on my opinion. Even if things start looking really good, and everything starts taking off, I'm usually just putting a toe in the water. And I'm gonna take a few trades. And I say, I'm in 100% cash. And we're in a correction. Some stocks are setting up, they start emerging. Are you sure we're in a correction? Some stocks are setting up, they start emerging. Are usually going about 25% invested. If things are really looking good, I might go to 50. But usually my first toe in the water is 25% invested. And I might buy two stocks at 10 or 12% positions, or maybe four or five stocks at 5% positions, just a toe in the water. Things start working, I move it up to 50 pretty quickly. And if they work from there, I try to go to 100 as fast as possible. But I'm always pyramiding on my success.
Now, let me explain why this is important. And this is a, this is a key sentence right that you should always remember. If you build into your exposure when you're trading well, and things are going well, and you scale back when things aren't going well, you're going to get ripped around every now and then. You will zag against the zig, if you will. But what's going to happen is when you finally get into a bull market or a bear market, you're going to be trading at your largest when you're trading your best, and you're going to be trading your smallest when you're trading your worst. So it will protect you in the bear markets, and it will make sure that you're invested heavily in the bull markets. And that's all the noise in between is is is or is going to be there. But this is where it really all comes down to is when you have to make the money in the bull market, and you have to keep it doing the bear markets.
Now, very simply, let's just use a full position at 25%. We'll call a full position 25%. So a quarter position will be 6.25%. Right? So let's say going on at risk $500. And I'm trying to, you know, be a two-to-one trader. So we'll just use, you know, once you get a two-to-one gain, you're selling it. So I take $1,000 profit. Well, now I can take that thousand dollars and I can bump my position size up and I can risk a thousand bucks and go to a 12 and a half percent position. Now, let's say I get another profit. I can now move that and move that and risk two thousand. So maybe I lose on there, I still have a thousand dollars left over that's in my P&L that can now a finance a half position and I can go through this whole cycle and and not lose anything. Okay? Now, if if things are working, and I start pyramiding at some, maybe say, well, who the hell wants to break even, right? Okay. But if things are working, and I keep pyramiding, and things work out, and I don't get stopped out of these names, now I've got myself at a big, at a nice invested position, and I've really positioned myself well. But if things turn around on me, I'm out of the market. So bending, just bending with the market, bending with the market.
I know Dave, I know that, you know, your your toe in the water guy too. You know, you you're not gonna just jump in and any, um, you know, we all have our own sort of little ways we do it and rules that we do. I know, you know, you and I are both, you know, more conservative than we used to be. You know, we're not doing a whole town in one name anymore. Any any rules for, you know, or guidelines for usually determined?
I now I usually go. I have 10 stocks in my portfolio. And when I'm buying a position, a new position that's gonna be 10% of my my portfolio, I usually start at at a 5% position. I just figure what I'm gonna put into that count and and I start with a 5% position. And if the stock starts working out pretty quickly, then I'm then I move that up up to 10%. You know, you sometimes it might be the same day, but in lots of times it's the following day or the third day. And so I'm I constantly just adding money to positions that are already starting to work for me. If that 5% position starts down and and starts coming off, I'm not going to be adding any money to it until I can see it's holding and starting to go back up up through new highs. So it's it's going back to that principle of always adding to winning positions and not adding to losing positions. And and then as time goes on, if I get if I have a nice 10% position, and that stock makes a nice move and it's, you know, I'm up 20 or 30% and it builds a whole new base, well, I might even double the position at that points because if you can get one or two great stocks in a year and you add to them on progressive basis, that's where you're gonna make up for all the small losses you might take and have have great gains over a year period of time in your account.
Yeah, and this really goes bright, you know, and flies in the face of where I see a lot of people. They tend to revenge trade. So if they start to have losing trades, they'll so ramp up their exposure and try to get it back quickly and start doubling up. And that's how you blow yourself up. You've got to be humble. All right, I've been doing this now for three over three and a half decades. David's been doing it for four decades. And we still have to cut our losses. And if we're wrong, you know, we haven't gotten so good we're we're not gonna have losses, and you're not going to either. So you have to realize that, you know, revenge trading and trying to make it up and going in there, you've got to bend in it sometimes. You know, your people like they'll send us emails and and messages on Twitter and say, you know, all right, you know, I scaled up and then everything started getting hit, then I scaled down, everything started taking off, and it's not working. Okay, but again, that's the noise in between. But that's the price. It's like an insurance policy. Okay, if that's the insurance, that's the small price that you pay to keep yourself in the markets, or the good markets and heavily invest it, and out of the markets that are poor.
Just a quick note too, if you're looking at, you know, some of these charts and they have low prices, some of them might even show, you know, it's pennies. It should be split adjusted, so they're not the actual price. I'm I'm not buying, you know, stocks that are trading at 20 cents or even usually $10. It's usually going to be a no higher price names.
So the next thing that I do, and that really helps me with my drawdowns, is that I protect my breakeven point as quickly as possible. Now, there's there's a little bit of latitude there, or that's a, you know, that's a relative term. The key is not to choke the trade off. You want to protect your breakeven point as quickly as you can, but give the stock enough room to fluctuate normally. And and that's what takes time to learn on what is a normal action, and what is abnormal action. When you know what's normal, then you know what's abnormal, and you know when you have to get out of the trade. So what I normally do is, if the stock is, you know, moves on, let me see if we have a chart here. Yeah, okay. So here's an example.
Of a recent trade, not too long ago in January, it started rolling over. The market went into a correction here, going into February. And this stock, you know, went right in as the market started to top there. But I bought it coming out, right here. You can see a little base coming out. Stock ran up, and because the market got a little heavy, I actually sold a little up here, and I, and I cushioned myself a little bit. And then it came in, and I got, and I got knocked out at breakeven right here. And then, of course, it's not going a lot lower. The market corrected. Now, that's how it happens sometimes. Sometimes I'll, I won't even sell any as it turns up. And what I normally do is, if the stock goes to its first pullback and then goes into new high ground, I'll then move my stop to breakeven. And that'll, I usually don't move my stop to breakeven. I stick to my original stop until the stock goes to a first natural reaction and then gets into new high ground from there. And then the breakeven point becomes a critical level that I'm usually protecting. And then from there, let me see if we have another example.
Okay, so here's another example of, you know, where sometimes, you know, it hoses you. Here's a perfect example. I bought this stock back here in June, and it came out of a nice big base here, a nice tight pivot point. Came out really well, and you can see it had a little natural reaction, then went back at the new high ground. So that's my, that's my cue to move my. And, you know what, I should be using my, I'm sorry, I should be using a pointer. There we go. There we go. Sorry about that. I'm thinking the whole time you're seeing my pointer. So right here, we break out, we come through a little natural reaction here, and then we get into new high ground. So then I move my stop to breakeven. Unfortunately, stock came back really quick, knocked me out, and then ended up taking off. Now, that happens. That, like I said, that's the price that I have to pay sometimes. It's gonna happen. There's other times I move my stop to breakeven, keeps going, I, I ratchet it up, and I end up taking advantage of a big gain. It, you know, again, it's all about what you do over time and what happens on average, not any one particular trade. If you've got a Monday Morning Quarterback and say, "Oh, well, I should never do that again." That's like saying, you know, you, you had aces, which is the best starting hand in poker, and you lost with them. So you say, "I'm never gonna play aces again." Well, that wouldn't be too smart. That's the best starting hand you can have. Or you win with a pair of threes, and then you think, "I could always play a pair of threes." You don't judge stock ratings about probabilities. You have to think over the long term. You're gonna make hundreds of trades, thousands of trades. I've been over and over. Mark, if you go back later. Another thing, and I do this a lot. Let's say, let's say you did buy it on the breakout, and the stock pulled back, and then you got sold out, and then it came back up, and it set up again. Well, this, this stock gapped. But if this stock started breaking out, and it wasn't too far extended, and came through that 48 area, you can buy it back. That's where your ego, you have to throw your, your ego into the trash can every time you step into the market. Because just because you lost money on it, you took a small, you step into the market because just because you lost money on it, you took a small loss, doesn't mean that you can't buy it back again. And I sometimes I've lost money two or three times in a stock, and finally, I buy it again, and then the thing just takes off and goes. So that's, that's where the, you know, ego, or you have to just dismiss it and and look at every situation. Getting into a more advanced, more advanced techniques of that, that's what we call a reset. There's a pivot reset, a pivot failure reset, a base failure reset. These are things, of course, that we'd have to spend a lot more time on.
Oh, absolutely. David is a hundred percent correct. You know, you, you don't, don't think that, you know, the stock has it out for me, or or that, you know, it's bad. This stock's bad luck. If it sets up again, the fundamentals are there. You know, just because their stock stopped me out, it's highly unlikely that the fundamentals changed that dramatically in just a few days, unless this was on some key report that had some horrible news. But it wasn't at the time. So, you know, you can still have all the, you know, all the fundamentals are there. Let me just move on here. I know I'm kind of pushing a little bit quick here now because we're running, running tight on time. Let's see. So here's another one. This USA K, as a trucking company, and it's real tight. You know, I bought it thinking, you know, as for a trade here. It had a nice, they came out of the gate pretty nice for a few days, came back. And a lot of times, what I'll do is, I'll rather sell some of it as it runs up quick, and then move my stop to breakeven. Or what I'll do is, I'll breakeven, I'll move my stop to breakeven on half my position, and then I'll maintain my stop on my, my original stop on my other half. And that's what happened this time, where it came back and knocked me out of half. But then it was able to move up here. I got a nice gap on it. It took off, and I sold it into the, into that rally, and have myself a little profit on it. Finally.
Um, let's talk about selling into strength. And again, this is really the hallmark of a professional. Is to sell. Amateurs get all in. Amateurs and the stock's going up, and they start having all kinds of illusions that the thing's going to keep going forever. And then because a lot of times the momentum is so great, they'll sell it, and then it'll go higher, and go thinking, "Alright, that was a dumb thing to do." But again, you can't Monday Morning Quarterback. You're not gonna get the high. The chances of you getting the high, even once in a blue moon, are almost zero. So it's really, you shouldn't even think of that. You're trying to do is make a decent profit, just make a profit, and make more than you're risking, and do it as many times as you can that it's meaningful enough for you to go to compound a nice big return at the end of the year. And here, you know, very simply, I'll show you a way that I, you know, played a recent trade. This is Shutterfly. We were actually talking about it today, David and I. It's now this stock is topped and looking like a short par maybe. So it comes out of this power play here. Some people call it a flag, and comes off a little cheetah area. Coming out. A lot of times these little flags, I'll buy. Come out the cheetah area. So I buy it here. It runs up, and I reduce, I reduce my position, and then I move my stop to breakeven. So what's happening now is I'm free rolling the trade. I'm going to make money no matter what, unless it gapped it down and gets this giant gap maybe on news. You know, that's the only way I could lose money on this, and would have that gap quite a bit because of course, I've already nailed down a profit. Now, as it started to go through this basing period, I was actually going to add back to it. And very often, what I'll do is, I'll trade around my position. So I'll trade out of some. It resets as it turns back up, I'll trade back in. So I hold part of it, I trade part of it. That's called trading around your position. But what happened was it gapped out. So instead of having the opportunity to buy it coming out, it got ahead of itself so quick that I actually just sold it and took the profit. So this is just a very typical way that I'll play a swing trade.
Let's see. So this is another one recently, not too long ago, ORGX. Where I bought it again, very similar. You see almost the identical type of trade where it's a very high momentum, corrects, doesn't correct much. And as it comes through that low cheat, I start buying it. I sit through it as it consolidates. It runs up, I'm up 23%. I reduce the share. I sell some of my position. Now I'm up almost 40%. I sell a little bit more. Now I start back stopping it. And it was up to him back in when I was only up 22%. And I decided, that's it, I'm out. And stock came in from there. But I just stuck to my original stop until his Netflix. This is a recent trade in Netflix. So I bought Netflix. You can see it was putting in this base. If you'll notice, everything that I do has VCP. Okay? For those of you that understand VCP, you know exactly what I'm talking about. For those of you who don't, you should refer to my books and also to O'Neill's book. Bucket look at the couple of handles and look at what we're talking about and the characteristics that should happen while you're getting these price consolidations. You can look at charts going all the way back to the 1800s. Same thing. Timeless. This is never going to change. It's simply the law of supply and demand on display. So I'm buying it here, right? It's coming out of this, coming out of this nice little tight area. We run up a bit, I reduce some. We run up some more, I sell it into the strengths. So again, you see I'm using, I'm using strength. I'm almost always selling it to strength unless I'm being forced out and it's coming back in. Then I'm being forced out of the stock. But I don't want to give the stock a chance to break. I don't ever want to give the stock a chance to break. I want to get out when the getting's good. Because what can happen is, just like, you know, say I wait here and I used to keep waiting in backs to say, "Well, let me see." And total starts rolling over. And then look at here, Wham! It gets, you give up all this ground in such a short period of time. You would have been better off selling it on this first rally phase and not even waiting. So a lot of times, if you get out when the stock's up, you're do better than if you use a moving average or something and wait for it to roll over and to have a trailing stop. So I'm always trying to sell into strength.
Dave, are you, you know, not when you're at a profit, are you using strength for selling? Has that been part of your repertoire for a number of years?
Yeah, yeah. Yes, it at times. When the stock is, think about this stock. Is if you can watch my pointer, it was going up at this angle, and then it started almost going straight up. When I, when I have a stock that's going straight up like that, I watch it very, very carefully for signs of a top. And when I see a reversal on volume, or here it looks like it had an inside day and gapped down, I, I do look to cut down the position. I don't want to lose the position because it's usually a very, very good stock. But I will cut it back, and I'll cut it back dramatically if it starts showing those tight signs of topping. Well, what, and what this one did, it looked like it started building a whole new base again. Did not break out, but actually broke down. And that's where the room, the rest of the position, if if I had owned this, would have been gone. But I look to see those signs of when something is getting very, very excessive. And there are, there are some signs where we've had some technology stocks recently that have had those signs of excessive moves to the to the upside. Yeah. And if I was in much lower, and I have a very big long-term gain on it, may playing it for a big move, I might wait for it to break down a bit, and I might give it that type of room. But what I was doing here, and and to David's point, is I started to see these Fang stocks really starting to get very popular, and what I call crowded. And I was looking for some type of blow-off move. And that's sort of what we got here. This is sort of a little mini, a little mini melt up. So I'm just gonna sell right into that because I know that it's gonna break hard once it comes in off of that. So I'm in the later stage of the bull market. I might be treating things a little bit differently. If I was, you know, buying this stock coming out of a, off of a bear market, I probably wouldn't be selling, you know, any of my shares or or maybe reducing a little bit, but I'd be holding for a much better move. So really, it depends on where it occurs. Yes.
I'm Mark, and we would like one recent example. Someone asks, I saw when someone asks the question, "Do I still own Ali?" It's Ali's Bargain Outlet, and I still own it, and I've owned it for over two years now. But there have been times where the stock, it just even recently had a really nice run from 66 to 90. And right before earnings, I cut back on the position to just to take some profits because that thing was going straight up into an earnings report. So that's an example of selling into strength when it's, when it's so good, and it's had such a good run, it's time to reduce the position and just take some off the table. Yeah. And Ali's, you know, that's it. That's a name that David and I bought, I think on the exact same day. We bought it coming out of that nice IPO base, and I traded out of it, and then I come back in. It traded out of it, went back in. And he's been holding it pretty much the whole time. I'm pretty sure he's way ahead of me right now as far as gain on the stock. But again, you know, there you can trade it different ways. You can trade around your position, you can book. But here's the point I wanted to bring out. And Ali's is always a good example. Ali's is a name that if you were to ask the average person about Ali's, I doubt, you know, but a few out of a hundred would know who Ali's is. I happen to know because there's one nearby in my neighborhood that I, and I go to what every now and then. But um, most of these big winners are big winners before they become household names and everybody knows them. Again, I'm gonna swing back. I wanted to start with the Fang names and the and the the Amazons, and I'm going to end with those because you, you really have to start to move into areas that you might feel uncomfortable with. Smaller names, relatively small names, small mid-cap names, names that you haven't heard about, technologies that might be new technologies. That's where you want to look. When I was buying the Amgens, and even Microsoft, then Dell, and Cisco, and Amazon, when I was buying these stocks when before they made the really moves. Me, see, I know we have some charts. Is Yahoo? You know, I'm buying this in '97. You know, no. But I always make the jokes. I went to the institutions and I said, "You gotta buy Yahoo." And they said, "Yahoo? You know, what are you talking about? That stock trades at 938 times earnings." And I'm like, "Yeah, but it's breaking out of a base, and it's this incredible technology." And, you know, and everybody just laughed at me. And then, then the stocks of 8,000% two years later. So, so these are the type of names that, you know, again, if you take a look at. Listen to go past that Amazon. Here's what I'm buying. You know, this is my first purchase in Amazon. Amazon goes up 2,500% in just 16 months from this point here, and almost 80,000% over the next two decades. Now, you want to buy Amazon now and hold it for 20 years? Yeah. Yeah, I could tell you right now, you're not getting 80,000% out of it the next 20 years, and I doubt you're gonna get 2,500% in the next 16 months. Okay? But that's when at this point, nobody even knew Amazon. And those who did, hated Amazon. Amazon was one of the most hated companies for a law, as far as I can remember. It's only in recent, very recent times that people started saying that Amazon could even make money. I was thought that Amazon would never make any money. So you want to find the next Amazon. No. And I hope everybody, this has been helpful. I know we can only cover so much in an hour and 15 minutes or so, but hopefully, this is a, this helps you move you a little bit further along on the learning curve. Okay, take care. Thanks for coming.