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I have worked in this industry for some time now and I have noticed some common themes amongst the ordinary investing public. When they come to me many of them want to know the secret formula. Is it correct to use one indicator over another or to use a combination of indicators or perhaps not to use technical analysis but instead to find a winning trader and copy him/her? What’s more many so called trading courses actually advertise that they have the secret formula! It bugs me. I once had a guy constantly interrupt a seminar exclaiming why did he need to know about risk management and why did I not just give him the formula for beating the market.

The Gods honest truth here is that the markets are so dynamic that any individual strategy can be successful in the short term but it must be adaptable to changing market conditions. Even the much hyped Black Scholes mathematical formula for which the creators received the Nobel Prize for eliminating the risk inherent in options pricing ultimately failed on back of the Asian financial crisis combined with Russia’s debt default. That improbable combination of events could not be quantified and so it was not part of the formula. The firm LTCM with combined open positions of one trillion Dollars had used it exclusively, was bailed out by the Federal Reserve. So if Nobel Prize winners cannot predict what the market is going to do what chance do we have?

The financial markets are full of dangers and mysteries that have not yet been reduced to a set of financial parameters or formulas. I DON’T HAVE THE SECRET FORUMLA. When do you admit that you are wrong and start all over again, or when do you hang on and assume that the markets will turn around? That is the biggest decision we all have to make. What is clear to me is that the un-knowable cannot be quantified and therefore any trader who wishes to be successful must understand that he is playing a game of probabilities and that in spite of all of the technical analysis and all of the egos, the outcome of any individual trade is random. Academics it turns out make terrible traders and good traders know that when they are betting their rent money in the pits of the CBOT they will attempt to eliminate the risk as soon as possible but also understand that large profits cannot be made without taking on risk. The judgement here is a thin line and partly an art layered on top of a trading plan.

One thing that is clear though, over the last several hundred years, we’ve been able to identify some people that can do it better than others and the Market Wizards books meet many of them. They don’t necessarily go to MIT, and they don’t necessarily have degrees in mathematics. They are the kind of people that can make that judgement that says “something is different here, I’m going back to harbour until I figure it out”. I reluctantly quote Gordon Gekko of all people. “Give me guys who are poor, smart and hungry”. Those are the kind of people you want running your money.

Gary –