Don't Make Big Bets

"Back in 1982, while I was within the process of training to become a stock broker, I was on the floor of the AMEX where I met an options specialist. I had been trading options since 1974. So, to meet an option's specialist to me was like meeting a rock star. Needless to say, I was full of questions and as one question lead to the next, the exchange closed trading for the day at which point I was invited to join my new mentor for a beer.

There are two very distinctive things I remember from that encounter. The 1st was the reply he gave me when I asked how he made his money. With beer in hand, he said "I never make big bets." I lean a little one way, as he tilted to the left, or I lean a little the other way as he tilted to the right. He repeated this swaying until his beer was gone.

After ordering another round, he turned toward me and said, "I'm going to give you the best piece of advice anybody will ever give you. I want you to take a $100,000 paper option account and try to lose all of the money." I started to laugh. He did not. He then said, looking me straight in the eyes, "You will not be able to do it." He said being a good trader is not about making money. Making money is about being a good trader. And being a good trader is about having the right rules to make a decision and then following those rules. So when you try to lose money, you are just as likely to fail as you are when you try to make money. The difference being in this exercise is to separate the two motivations.

Then he started to laugh and concluded his thought trend by saying, "When you finally
have figured out how to lose consistently, and your paper portfolio is gone, you are now ready to trade. Simply flip the rules around and you'll have your money making trading system. And always remember one thing - that there are two sides to every trade. You just have to learn on which side to lean."