- Written by Marc Courtenay
- Wednesday, 18 October 2006
What I’ve Learned In 30 Years
by Dennis Gartman
I’ve been in the business of trading since the early 1970s…
I’ve been a bank trader, a member of the Chicago Board of Trade, a private investor, and for the last two decades, the writer of The Gartman Letter, a daily investment letter.
I’ve survived, but often just barely. I’ve prospered; I’ve almost failed utterly. I’ve won, I’ve lost, and I’ve broken even.
As I get older, and now in my mid-50s, having seen so much of the game, I think I can share with you what it takes to survive and prosper in the markets.
Looking back, if I can share just one simple thing with you today, that will benefit you the most in the markets and in life, it is this:
Do more of what is working and do less of what is not.
This is a simple rule when you see it on a page. But it’s a difficult rule to act upon. Let me give some examples...
If you find you’re consistently hitting the ball with a slight “left-to-right” tendency on the golf course one day, then it would be best to keep doing that on the course rather than attempt to re-work your swing. Doing more of what is working works on the golf course, and it works in investing, too.
If you find that writing thank-you notes, following the niceties of life that are extended to you, gets you more niceties in the future, then you should write more thank-you notes. If you find that being pleasant to those around you elicits more pleasantness, then be more pleasant.
And if you find that cutting losses while letting profits run – or even more directly, that cutting losses and adding to winning trades – works best of all, then that is the course of action you must take when trading/investing. It is simply doing more of what’s working.
Adding to a winning trade, while cutting back on losing trades, is the one true rule that holds – and it holds in life as well as in trading/investing.
On the flip side, averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. The only thing that can happen to you when you average down in something you own is that your net worth must decline. Oh, it may turn around eventually and your decision to average down may be proven fortuitous. But for every example of fortune shining, we can give an example of fortune turning bleak and deadly.
By contrast, if you buy a stock (or a commodity or a currency) at progressively higher prices, the only thing that can happen to your net worth is that it shall rise. Eventually, the last position you buy, at progressively higher prices, shall prove to be a loser, and it is at that point that you will have to exit your position.
If “location, location, location” are the first three rules of investing in real estate, then the first two rules of trading are these: “never add to a losing position and never add to a losing position.”
Here in our offices, where we trade our own money, we constantly ask each other, “What’s working today, and what’s not?” Then we try to the very best of our ability “to do more of what is working and less of what is not.”
We’ve no set rules on how much more or how much less we are to do, we know only that we are to do “some” more of the former and “some” less of the latter. Our process is simple.
We are certain that great – even vast – holes can and will be proven in our rules by doctoral candidates in business and economics. But we care not a whit… for this rule works. Rules like this have proven they work through time and under pressure. So we try our best to adhere to them.
Let me repeat the most important rule I can sure with you:
Do more of what’s working and less of what’s not. This encompasses the rule: Never ever under any circumstance add to a losing position.
After three decades in the world of investing, this is the simplest, most valuable piece of advice I can give you.
I Was Wrong
I try my best to live by my rules every day… every week… every month. In short, when I stand by my rules, I prosper; when I don’t, I don’t. The rule I’ve shared with you today sounds simple, but it synthesizes all the modest wisdom I’ve accumulated over thirty years of watching and trading in markets.
I don’t have words powerful enough to express how strongly I feel about this rule… but for you own good… Just follow it!
Editor’s note: Today’s trading secret from Dennis Gartman is just one of his 13 rules of speculation contained in chapter 2 of John Mauldin’s book, Just One Thing.
The book is a collection of essays from some of the greatest investors in the world.