Grail Investing

On the CNBC Web site there is a post by Doug Hirschhorn, a trading and investing coach. He suggests four things traders can do to improve their performance for 2010. His suggestions happen to be exactly what I believe as well. So I want to go over them with you along with my comments.

1. Trust your gut If something looks like crap and smells like crap, then chances are, it is crap. Listen more to your gut to tell you when to cut a loss and move on.

The longer I live the more I think that intuition plays an important role in trading decisions. However, I think intuition is more valuable to experienced investors than to the inexperienced. After so many years in the markets it is very rare that I see something happen that I haven’t seen before. When I see the market make an extreme move my gut tells me what is likely to happen in relation to past similar experiences.

However, if you’re new you don’t have very many experiences to draw on. So intuition is not as helpful. But I think Dr. Hirschhorn is making a larger point. Even if you’re an investing newbie you still shouldn’t be in an investment that makes you uncomfortable. If it doesn’t feel right to you personally don’t do it.

With Grail Investing strategies we try to take as much of the guesswork out as possible by emphasizing limited risk, exit strategies, and superior position sizing. But you still have to feel that it fits your personally.

2. Keep it simple If something is working, keep doing it. There aren’t any bonus points for being clever. The money is the same color no matter how you make it. So do the simple things and chip away at the profits. I once had a client who felt he had to do complicated trades in order to make money. Bottom line was, he was wrong. Keeping it simple is the proven strategy for success.

Absolutely. There is absolutely no evidence at all that complicated investment strategies are more profitable than simple ones. In fact, the opposite is usually true. And we try to keep it as simple as possible.

3. Probabilities don’t lie If you’re not carefully tracking the metrics on your trades, you might as well be gambling at a casino. Make it a point to track the data on your trades and study them. That way, you can do more of what’s working and less of what’s not.

You have to stick with strategies that put the probabilities in your favor. That can only be done by constant monitoring the data on our trades. With our spreadsheets and our daily and weekly posts, we do that.

4. Avoid speculating and predicting I can’t begin to tell you how many times I see traders blow up their accounts because they try to speculate or predict what’s going to happen in the future. The simple fact is, no one knows. Even the best traders have a winning percentage of around 50 percent. That means successful trading is not about being right, it’s about what you do when you’re wrong. The bottom line is, trade what you see, not what you think.

This one I’ve beaten to death but it’s the one I believe in most of all. Watch the financial media on TV. Read the market commentary on the Web. I’ll bet you’ll find that the great majority of it involves some kind of forecasting or predicting. Hirschhorn is exactly right. No one — absolutely no one — knows what will happen in the future. And as long as you’re using good position sizing and risk management techniques you can be very profitable being right just 40-50% of the time. I realize just trading what you see and staying away from predictions is boring, but the truth is that systematic and profitable approaches to the market are boring. Look for excitement somewhere else rather than what you’re doing with your money.

I have heard of Dr. Hirschhorn but I’m not very familiar with his work. But if the above is representative I’m impressed. His Web site is called Dr. Doug.

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