- Individuals who have a few thousand dollars,
they need to think very differently.
You can be meticulous, you can be like a sniper,
I say trade like a sniper, where you have a small account,
most people who have just a small account
they look at it like it's a bad thing,
they're like "ah, I can't wait 'til I have
a million dollars, a billion dollars,
and I can allocate to different things,
and I have seven longs and three shorts."
And for me, I like trading with a small account,
because I can make a few hundred dollars
or a few thousand dollars a day,
and then I step away, I literally am done
for the day right now, so you're helping me stay away,
because I'm a degenerate gambler too;
I just have learned the rules.
And I know this isn't necessarily the basic of trading,
like you wanted, but that's what this is!
- So I love how you say you're a degenerate gambler
and a lot of your students are.
Let's be honest, a lot of humans are, right?
We love to take a punt.
- A lot?
We all are, everybody wants that!
We're alive, life is exciting!
If you're not excited about it then it's just boring.
So for me, I do like the excitement of making money,
but again, 20 years of trading now has taught me rules.
Like, I might make money on some trades, but it's too risky.
What if I can't control my risk?
Every time you put your money into the market,
anything can happen.
You can lose a lot, so if you're not disciplined,
with rule number one, cutting losses quickly,
it can go away, like most traders.
- So it's like mental discipline.
You said about "going to war",
I had Jocko Willink here, US Navy SEAL,
and if you asked him about his time in Ramadi, in Iraq,
with his troop, I bet it's all about mental discipline.
Because he said "look, sometimes you're taking fire
from everywhere, you might be the big, bad Navy SEALs
from America, but you fall back.
It's constantly about discipline or your guys get killed."
- It's all risk/reward, right?
You might see the end goal, where you're like
"oh my God, this big shiny goal at the end",
but then it's just not worth the risk,
because to get there you might lose everything,
or you might blow yourself up.
So for me, I make baseball analogies,
I say I like taking singles instead of going for home runs.
There's ways where I can make more money,
but I might risk losing everything, and I can't risk that.
For me, I want to build my account gradually,
block by block, and sometimes I have to take
one step backwards with a small loss.
But I never wanna go all-in, I never wanna use leverage.
People say "I'm so sure of this!",
and they go all-in, and what is that bad Kevin Bacon movie
from the 1980s, where he loses everything
in the stock market?
- I don't know!
- He's an options trader and then
he becomes a bike messenger,
then there's bike messenger wars.
- Sounds familiar, I dunno.
- This is what happens, and he goes all-in;
never go all-in, remember from Kevin Bacon!
- To a baseball analogy, there's that movie, Moneyball.
- Yeah, fantastic!
- Which is interesting, and if people haven't seen it,
it's a great movie, I think Brad Pitt's in there,
and the other dude, the fat dude, whatever his name is--
- Jonah Hill.
- Yeah, Jonah Hill, he's great.
- And it's a true story!
- And that's all about the singles.
That's all about playing the numbers
so you can win consistently and get to the World Series,
as opposed to trying for the flashy moves,
the big grand slams, right?
- And it's also analysing--
- Numbers.
- Everything a little differently.
People before that, would just look at hits,
like "okay, what's his batting average."
But this is like, what if the fielder
made a really good play but it should have been a hit?
So what does that count as?
You can't control what the fielder does,
but you can see a little more to the stats.
And that's basically what trading is,
you're looking at the stats a little more than just
what is a company's revenue?
What is the growth rate?
What is the P/E ratio?
Very basic stuff, which long-term investors love,
but trading, you have to look a little more,
behind the plate.
And it's actually good; value investors,
there's nothing wrong with value investing,
it works over decades, but they don't understand
how a company like Instagram got bought out by Facebook
for one billion dollars, value investors cried,
they said "no, Instagram has no business whatsoever,
they had like 12 employees, that's a terrible play!"
Now Instagram's worth 50, 60, 70 billion,
depending on who you ask it was one of the best
acquisitions of all-time.
But they bought it when there was no business,
but they had a lot of users, and they had a popular app,
and Facebook could envision
building revenue on top of that.
So the world has changed a little bit,
and you have to think "what can be valued in the future?",
as opposed to just right now.
A lot of companies report good earnings right now,
and you're like "oh yes, this company just reported
record earnings!"
And then the stock drops, and you're like
"but they reported record earnings?"
But maybe on the conference call, they said
"we're doing well now, but we have two new competitors",
or "we're doing well now, but we have to ramp up
research and development costs."
So the world, and the stock market and finance
is very forward-thinking, and you have to be too.
- Let's talk about cutting losses.
'Cause you kinda went over it briefly,
but it's such an important concept,
and this is that, Tim was just talking,
on the wins, you lock-in, and the losses, you make small.
And first of all, for anyone watching,
it's actually not human to cut losses.
- It's counterintuitive.
- Most humans buy high and sell low.
And so they invest, and when it starts going down,
they think--
- Double up, triple up.
- "I'll double up, I'll triple up,
because I don't wanna take a loss."
- Correct.
- And when it starts going up, they think
"I'll wait, I'll wait, I'll wait for it to get more."
So it's fear and greed.
And the natural human tendencies,
is to go big on your losses and cut your gains,
so you actually have to be counterintuitive and disciplined.
- 100% counterintuitive.
So this is why learning lessons and practising ,
when people say "I want to get into trading",
I say "whoa, slow your roll first of all,
study first, and then let's say you want to start
with 10 thousand, lets start with two thousand instead."
Because you're probably gonna lose in the beginning,
'cause you have to learn these weird rules.
(electronic music)