Market Talk with Piranha is currently moving to its new home at The new site is up and running but many of the posts need editing as the images and stock charts did not transfer successfully (thanks blogger). I will post all new entries to both blogs – Thank you for your patience while I make this change!

Saturday, June 10, 2006

The “System” is not the Holy Grail of Trading

After reading a forum post earlier in the day, I was prompted to write this short entry. I always here amateur investors talk about that the “best way’ or “only way” to invest and argue why their way is better than everyone else’s. The passion and energy exuded by these beginning investors is wonderful but they are missing the point completely. No one can say that options are better than stocks, commodities are better than options and forex is better than everything, etc... Each investor develops a system that is suited to their own personal character traits and they use a vehicle (stocks, options, forex, commodities, real estate, etc…) that can help them reach their goals.

To say that one system or vechicle is the “way to go” is ignorant.

Pick up any Market Wizard book and read how these men and women made hundreds of millions in the markets using different systems. The only thing they all had in common was money management and risk management. That’s ALL! Every single one of them traded in different ways and used different vehicles but they all watched their risk and calculated proper position sizing techniques. Money management and risk management is the holy grail of investing, NOT THE SYSTEM!

Novice investors will eventually understand this after many years of trading (some quicker than others).

So, if someone ever tells you that their “system” is better, turn away and run and run fast because they don’t know what the hell they are talking about.

Here are some examples supporting my opinion from the Market Wizard books:

  • Michael Marcus turned $30,000 into $80 million trading futures
  • Michael Steinhardt ran a fund that averaged 30% annual return over 21 years trading stocks
  • Tom Baldwin started with $25,000 and eventually traded $2 billion a day in T-bond futures on the floor or in the pit.
  • Paul Tudor Jones ran funds that averaged triple digit returns for five consecutive years trading multiple markets
  • Ed Seykota realized an astounding 250,000% return over 16 years (yes that says 250,000%) managing accounts trading in the futures markets – possibly the best trader of our time
  • Bill Lipschutz traded currencies with a staring account of $12,000 (started out as an architect – very motivating for me since I started the same way).

The list can go on forever but my point remains the same – they all traded different markets from different locations (the floor, an office or their home in the mountains) but they all had one major factor in common: money management and risk management.

Just about every single market wizard refers to position sizing as one of the “holy grails” of trading. Van Tharp (also featured in Market Wizards) coined the phase in his book but he only realized that money management was the holy grail after studying and speaking with hundreds, if not thousands of very successful traders.



At 3:13 PM, Anonymous Anonymous said...

Money management is only useful in a "game" with a positive expectation.

If the market goes into a downward trend for the next twenty years (or more), which is close to what Japanese investors have experienced, no amount of fiddling with investment sizes will allow you to make money. Sure, it can prevent one from losing their entire bankroll, but no one is immortal and they might not survive long enough to see the reversal.

At 9:43 PM, Anonymous Anonymous said...

"If the market goes into a downward trend for the next twenty years (or more), which is close to what Japanese investors have experienced, no amount of fiddling with investment sizes will allow you to make money."

Have you ever heard of selling short?

At 11:29 PM, Blogger Chris Perruna said...

Have you ever heard of reading other parts of the blog? I have several extensive posts on selling short.

Besides, the positive expectancies takes longs and shorts into account.

Read some of my other posts before comments such as this.


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