Animal Spirits Podcast - Talk Your Book: Trading with MarketSmith

Episode Date: June 17, 2019

Michael & Ben sat down with Irusha Peiris to discuss the psychology behind trading, why it's so difficult to become a full-time trader, the types of stocks that can be big winners over time and much more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by MarketSmith by Investors Business Daily. Go to Investors.com backslash animal and get your first three weeks of Market Smith for 1995. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holtz Wealth Management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritthold's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. Ben and I sat down with Arusha Perez from Market Smith to talk about all things training, which are near and dear to my

heart. I feel like you had a really good time with this one. With this conversation? Yes, you were very locked in because I had a great time. And when we walked out of our talk with him, we went to L.A. and went to Investors Business Daily offices. And when we walk out of there, you had like a pep in your step and you, I feel like you wanted to go trade. Oh, yeah. Is that fair to say? So here's a little backstory on my trading career.

I left the insurance company, I think, in early 2010. And when I left, I was delusional. I would be able to find the job in the financial services industry. I didn't know what I wanted to do. I remember hearing terms like buy side or sell us. And I didn't know anything. So what I did when you don't, like most people who don't know anything, is I went to the library and I started to learn. And so I was reading books, reading newspapers, watching people on stock twits and Twitter and studying for the CFA exam.

And so I was unemployed, I guess, from 2010, I guess my job was to learn, that's, you know, which is not really a job. But I guess my parents helped me a little bit with my bills because I had blown through all of the money that I had saved. So when I was in college, I was home and I was a waiter and I was doing that full-time. So I'd saved up a decent amount of money, which allowed me to be at the insurance company for 18 months without earning literally like a single dollar. Did you ever, we talked about this on the interview a little bit. Did you ever have it in your head at any point that I'm going to be like a professional trader and this is going to be my job?

I think I did. So that you like, you allowed that thought to enter your mind that I'm going to do this on my own. My P&L book is going to, that's going to keep me through. I had no options. So I was living at home and I had, I guess I was probably like pretty low, if not on empty in terms of money. Otherwise, I would have moved out. But I had no job.

So my mom passed in June 2011 and she left us some money. And with that money, I started trading rapidly. And I guess the money was obviously emotional money because it was, you know, what my mother left for us. So I was terrified of losing any money. So I didn't really take any big losses. I took a ton of small losses. I was pretty good about that. But I had a really difficult time letting my winners run. And so I would just, you know, it's funny. I think I told the story before, but I thought that I was investing. And then I walked into the TD Ameritrade branch and they were like super nice to me. And you were like the high roller at Vegas that gets

come to the breakfast buffet. Pretty much. So, So they're going over my trades and asking me if I want any help. And I'm like, what are you talking about? Do I look like I need help, sir? And he's like, well, you spent $12,000 on commissions last year. And I was like, no, no, no. Not me. That's impossible.

So he's showing me my trades. I was like, huh, I guess I did short Amazon three times in a week. How many trades was that? Well, it was like $9 a trade at the time. And I guess I was trading options also. So I don't know. I probably did a thousand trades in a year. That's insane. Like, how did you, okay, you're unemployed, but how did you even have time to do any trades?

I was, that's all I was doing. Yeah. So we talked about this a little bit on the podcast with Arusha about, because for me, it doesn't seem to make sense. You said it's harder to let your winners run than cut your losses short. But for me, like the mindset for me is almost the opposite of like the more value investor-oriented of I would have a hard time ever letting go of losers. So it's interesting that dichotomy.

I wasn't buying value stocks. Right. Yeah. I just think it's interesting to talk about that dichotomy between investors and traders where it's a little bit different because investors want to average down. Traders never want to average down. Right. What I think I was doing is I was definitely buying stocks that were in downtrends,

but I wasn't totally catching a falling knife. So I would wait for a washout and sort of buy after like the first high or low or something like that. And I would buy on the breakout. And I'm using like horizontal resistance. but then I would sell in the retest. So if you were to start trading again, tell me how you would use something like Market Smith and what you try to explain to me exactly what they do because I was a little confused at first and you got it way quicker than I did. So my friend John Borman put it really well. If you want to buy a stock that you think it's going to go up, which is the only reason

why you buy a stock, it's best to buy one that is already heading in that direction. And so as I'm reading William O'Neill's book in preparation for this podcast, I'm nodding my head. Yes, this makes sense. Yes, this makes sense. Yes, this makes sense. But I have to remind myself often that knowing what to do and doing it are not even close to the same thing. In other words, like, I know how to lose weight. Don't take in that many calories and burn more than you take in. But doing it is very difficult. So what Marketsmith does is they provide you with some really basic screens. They have something called the IBD-50. And it's funny, they have all these different filters. They have a Buffett. one, I think it's a Marty Zweig one, and they have a Jim O'Shaughnessy screen. I don't know if he knows that. So they do, so they have other screens other than just like momentum stocks. But his basic thing is that if you want to own the biggest winners, you buy stocks that are going up, you buy stocks that have explosive earnings, and you have to give it a little bit of room. When I say a little bit of room, in other words, like all of these best stocks are going to have pullbacks. So you can't be

scared out too early. And also, in terms of valuation, all of these stocks are always going to appear expensive based on traditional valuation metrics. And when we talked to Arusha, there were some stocks that were getting annihilated because this was a couple weeks ago. So why don't we go into our interview with Arusha again from Market Smith and Investor's Business Daily and we'll see on the other side. So Ben and I are sitting here in the studios of IBD with Arusha Paris, manager at Marketsmith, and host of Investing with IBD, which is a weekly podcast that is on every Thursday, Arusha, thank you for having us. Yeah, great to be here. So why don't we start off with a quote from William O'Neill who wrote a classic book, How to Make Money in Stocks.

When did he write this, by the way? This is like the 40th edition. I want to say he wrote that in 88. I think the first, it might have to come out a little bit earlier than that. The paper, Investors Daily came out in 84, so it was around that time or maybe a couple of years after. One of the quotes in the book is, in the stock market, history repeats itself. this is because human nature doesn't change, neither does the law of supply and demand. Price patterns of the great stocks of the past can clearly serve as models for your future selections.

That's pretty much the book in a nutshell, is it not? So why don't you just riff on that for a minute? Yeah, it's great stocks behave a certain way in a good market. So when you're in a bull market, the very best stocks are going to continue to outperform the rest of the market. A lot of times they will have a strong uptrend. then they'll take a break and build these bases that we talk about all the time, like a couple the handle. And the very best ones, they're going to explode out of them. The reason why is because Wall Street's behind the story. They don't understand how much market share these guys are getting.

And so what's happening is these institutions, these large funds, they're falling over themselves to grab more and more shares of these stocks. So think back in the 80s like Microsoft. It took a while for everyone to really grasp that, hey, you know, the money was. necessarily in the PCs, the actual hardware with the PC. It was the software where Microsoft was in every computer. It didn't matter what brand it was. They, you were there using a Microsoft operating system. It took Wall Street a while to realize that and realize that they were going to grab the whole market and how big that market was, that actually everyone wanted a PC

at their home. Before, that was unthinkable. But now everyone wanted that. So you're going to see this over and over again for the very best stocks because Every decade, you're going to have a company that's going to change the world. You're going to have a number of companies, a handful of companies in a bull markets that are going to change the world and really change the way we work, live and play. So one of the things that we talk about when looking at the markets is that price drives the narrative in a lot of ways. And it seems like that's the first mover is the price drives the narrative and eventually the fundamentals and people sort of catch up to it. And so the psychology behind that is always so difficult to, I think, wrap your head around, especially for people who have been in the investing game for a long time. And in thinking that if you can just look at this one variable, this price, what can that really tell you?

And I think that's why people have a hard time sticking with this type of strategy. So why is that the case? Why is it so hard to buy these stocks that are sort of breaking out and at new highs? Well, human nature, the way, we're all conditioned to buy bargains. If a computer goes on sale for $300 a great computer, you're going to jump all over it at that point, right? no one likes to buy something high at that time. So that's kind of the first thing, I think, on a psychological basis. Who wants to be the idiot who buys something so high? But the one thing you learn very quickly when you try to take control of your investment decisions in the market by buying stocks is that the market goes completely in the opposite direction of what your emotions are.

And so if you think something's too high, if you're in a great market, those stocks can go a lot higher because they're the very best ones. they're the best merchandise, and that's one thing that people don't connect in the markets or really just in our economy, a lot of the best merchandise goes for the highest prices. So that's really the first thing. Now, it's not just price. It's really relative strength is the other concept. That took me years to understand. We're in a correction right now. IBD put the market into a correction back on May 13th. I think the market did that. Yes, you're right. You're right. You're right. The market. Well, you guys are really powerful. Yeah. The market is following IDB's name. narrative now. Exactly. Yes. So we officially called what the market was doing in a correction on May 13th. And now we're seeing kind of the results of that. You know, sometimes it's hard to believe. But even the very best stocks are getting hammered right now. And the one thing even last week, I was thinking is like, okay, at least a software stock. So it was the ones that were hanging in there. They got destroyed today. It was like perfect for our podcast. I actually told Ben on the way over it. I was like, oh, that's funny. The stocks on the IBD 50 are getting absolutely massacred. murdered, yeah. So to the Ben's point about stocks going higher and lower and the unbelievable, O'Neill wrote in the book, what seems too high in price and risky to the majority usually goes higher eventually, and what seems low and cheap usually goes lower. And I think one of the first

thing that market participants are taught just very generally is buy low so high, which is probably the worst advice, at least for a trader, that's suicide. Now, if you're a longer-term investor, that's probably still bad advice. But in terms of like these breakouts and the patterns repeating. Could you maybe just talk a little bit about the psychology of what is a cup and handle and what causes that behavior? Yeah. So first let me go to that, back to that relative strength. So we're in a correction. Now what's going to happen is if this turns out to be a more serious correction, kind of like at the end of last year where things really started sell off, all the stocks are going to go down initially. But then the very best ones will start going

sideways first while everything else goes down. That's relative strength where you're going to have all those participants. They're getting rid of everything. But they're like, you know what, I'm going to hold on to this very best stock. And in fact, I might buy some more because, according their view, this is a great price for them, right? So they're going to start buying it. They're going to go sideways. Now, as the market gets a little bit better, now those stocks are going to start moving up first, too. Arusha is drawing a textbook cup and handle with his hands.

Exactly, exactly. There's your cup with handle, right? So that's the psychology right there. And that's the reality. The best stocks will form that cup with handle. And they're the first one to go in the new high. So we talked about, we just spoke about software stocks. Guess what the first group was to go into new highs when the market came around in early January.

So all these software stocks, they were forming these cup with handles during the end of December and the relative strength. And we measured the rel strength also by the rel strength line measuring against the S&P 500. Their rental strength line was in new highs at that point. But so right now, they're getting hit, at least today is Monday, June 3rd. And they got hit way harder than the market. So how do we know whether that relative strength is turning? Is today just an aberration? Is it a one-day thing? Like, how do you monitor this going forward to know whether the previously strongest stocks, software companies, whether that trade is over? Well, the first thing is they've gone on great runs, right? So one of the things that Bill talks about in the book is for most of the stocks that you're in, if you're buying out of these couple of handles, if you've gotten in some of these great stocks, if you're up 20%, you want to consider taking some profits at that point. A lot of these software stocks went up way more than 20%. And so you want to be lightening up at this time. Even the best stocks are going to come down when the market's coming in.

So that's what we're seeing. Now, the ones that you lighten up are the ones that are getting hit the most, and they're breaking key support areas. So one of the key support areas that we're going to use the 50-day moving average. So if you start seeing some of these stocks breaking the 50-day on heavy volume, that's a warning sign for us. And many times that's a sell signal for us. And so we'll use that as a thing.

okay, we'll lighten up on some of those and then we'll continue to hold some of the other ones that are still above the 50 day or finding support on the 50 day. Why the 50 day? And I guess does it even really matter? Because if they're breaking the 50 down heavy volume, they're probably breaking the 45 day or the 56 day. I guess my point

is that you could use a 50 day, but you could use any variation in between. Or are you using it like, do you trade directly off the 50 day? So we use that as a specific point of reference or just an area? It's an area. Okay. Yeah, it's not a magic line. They're not going to magically stop on the fifth end.

Now, I've heard other people are using like 65 day moving average. Why is that? Is that 13 weeks or something? That could be it. Yeah, I've just, I've heard all different variations. In the end, what I always tell people is, especially this, learn the main concepts of what the book is talking about because those are very, very real. And then make it your own.

If you find something else is working better for you, if you find yourself, you're better at a quicker trader, consider maybe the 21 day moving average. Because a lot of times the best stocks will hold that for a while. Now if they start to break, the next trip is down on the 50 day. And you can't handle that kind of real big sharp pullback. Maybe that's for you. If you're a longer term, if you're a really longer term, maybe use the 200-day moving average, which is like Facebook, when Facebook broke out in 2013, and that was the, it was in July 2013 massive gap. If you want to talk about buying high, it gapped up to $33 at that point.

It was like the highest point ever. Who would be crazy to buy to that point? It looks pretty good buying now when it's over 100 or wherever it is right now. it took four years for it to finally break the 200-day moving average. So you want to learn kind of these larger concepts and then really adapt it to you. But I use the 50-day moving average. It's a 10-week line on a weekly chart. And a lot of the best growth stocks, just by going back in history and just studying these things, they generally respect that line. So I think your point of figuring out your right personality type is an important one because that kind of helps you define your sort of time horizon, your risk profile. Do you think that there are certain people that their personality type is just more suited for trading these kind of stocks and people have to kind of figure it out on their own?

Or how do you think that plays into getting comfortable investing this type of system? You have to find on your own, I think. I'm not very good at like the short term trading. There's no way. Like years ago, I tried day trading. Well, what do you define that short term? There are a couple of things. Day training is a super short term.

term, right? So I eliminate that very way. So you go home flat. That's straight. Exactly. Exactly. Yeah. So you go home flat. Being glued to the monitor for eight hours a day is not for me. It's just too much noise and too many decisions. So that, I was getting ulcers at that point, just walked in the markets too much. The way I kind of define short term trading is probably a couple of weeks are holding position. To some people, that's long term. I know. Exactly. Yeah. The way I define our system, the can slim system here, what Bill O'Neill's talk about in the book, that's more intermediate kind of trends you're trying to capture. It's around like three months or so. It really depends on three to six months, I would say, on that. And then the long term, obviously, you're going

kind of for like the long term gains on that. So that's kind of how I define that. But yeah, when you get to the short term part, it's probably up to anyone's guess of that. So you said, and to piggyback off what Ben said, you said something along the lines on like, if you're this trader, if you're that trader, how do you know what type of trader you are? So let me just give one and buy examples. So I traded stocks for about two years without spectacular success, obviously. Not great failures either. I didn't take any big losses, but here's what I did.

I would buy a stock at a breakout and sell it on a retest, always. That was like my M.O. I just, I don't know why. I just, it was like a fly to a... We were all waiting for you when you sold and then they run the stock for. Pretty much. So it took me a long time. Actually, that's not sure.

It took me like about a year and a half to figure out that this wasn't for me. Is that something that can be learned in a book? Like, don't you just have to sort of figure out what your personality is? And the only way to do that is to just go ahead and do it. Yeah, you can read as many books about riding a bike, but you're not going to learn to ride a bike until you actually get on and fall off the bike a number of times. Really, two years and not a lot of time. Like, I spent over two years just selling.

And I didn't realize this at the beginning. What do you mean just selling? Well, when I really got serious about this, it was around 2000, 2001. In 99, I was like everyone else, I was buying tons of stocks based on what my friends told me, right, or the water cooler. roll those stocks up. I had no idea we're in this dot-com boom at this point

and everything's going up massively too. This is amazing. Exactly. I'm a genius. And then 2000 wrote them right back down. So that's really what

inspired me to start reading this book, start reading IBD. Learning about risk management. Exactly. Yeah. But so you said two years was maybe not enough time

and maybe it's not. But what is the right amount of time? What if you go for seven years and you're not making any progress? At one point, you're like, you know what?

Maybe this is harder than I thought it was and this is just not for me. It's not easy. That's for sure. I think the time horizon really, I've met some people who've gone for seven years. It probably took me a good three, four years before I started making progress on it. I met others that have gone seven years and they make products and now they're phenomenal traders.

When you see these stupid hacks on Twitter or get rich quick, what do you say to that? I think it's like anything else. If it seems too good to be true, probably is. This is what I would do, right? If I found something that I could generate money, I had a money machine every day, do you think I'd tell you guys? I'd be huddle the way on an island somewhere and just trying to hang on to my gold at that point, hoping no one else this car is a secret. Yeah, and I think that this idea of investing in stocks that are doing well in relative strength and momentum, like you said, it's counterintuitive. So in a way, I almost look at it as another form of contrarian investing in that a lot of people just, it's not going to feel comfortable to them to be in those positions.

That's true. Now, here's the one thing we haven't spoken about yet. The big part about the system for when you're looking for stocks to buy, 70% of the reason is fundamental. Okay, we're looking for actually great companies. Now, we spend a lot of time on charts because that's the hardest part to get. But it's these great companies and really these next great companies that are going to merge over the next 10 years and start to dominate and we're using their services. Chances are we're probably using some of their services right now. Those are the ones that you really want to be focusing on.

So some of Bill O'Neill's really big winners, one was in the early 90s, Amgen. One of the first biotech companies came out. They had the relative strength during a correction. They were making new highs. And he bought it out of a cup at that point. And it went up this monster percent. And the other key is he had a lot of concentration in it. He didn't have a 2% position, 5% position.

He had like a 20, 30% position, even more at it. And this is why we have such really, when people read the book, we have really aggressive cell rules too, because we're much more concentrated than the norm. out there. We're going to try to build up a 20, 30% position. All right. So I'm glad you mentioned that because I feel like position sizing is probably one of the most important parts of trading. I know for me, one of the reasons why I maybe had trouble is because my positions were too large. So I had the profits initially and then they were taken away from me and I got scared that I was going to go negative because I was trading with the position size that I was

uncomfortable with. How do you think about position sizing when you're trading? Usually, what I think is like a beginning of a new market or a bull market, a lot of times what I'm going to start off with is a 10% position in a stock that's on top of my watch just then it's breaking out. So I put a 10% position in it. Now if it starts to move up, I'm going to add to that position. We have a pyramiding where within like 5% of the buy point, we're going to slowly add. So it'll be a 10% then 6%, then 4%. So we're adding to our winners, but at a smaller percentage too.

So the average cost doesn't go up as much. So that's where we look at the final position. So in the beginning of a new bull market, I may have 10 stocks in all 10% positions in them. Now, a few of those stocks, they're going to go up immediately and I'm going to have the 20% position as I pyramid it. A few of the others are going to immediately sell off, go down 5, 8%, and force me to cut my losses. Then the rest of them, they may just kind of go side with a meander. Maybe I'll end up getting out of them because they're just not doing anything and something else is breaking up. But in the end, I think where the genius from Bill especially is, when you're using this kind of system, you're listening to the market.

You keep adding to your winners and you're cutting from your losers and free the opposite of what most people do. Yeah, exactly. So what's more important in terms of risk management, if you buy a stock and it's down 8%, but it has a broken support levels, would you sell? The way I do it is whenever I buy a stock, I always know my exit strategy. So yes, my ultimate is 8%. I'm going to sell because that's kind of just my agreement that I have myself. where it's like, okay, here's my trading point. I'm taking. So if I put a 10% position, I'm selling at 8%. That's a 0.8% hit to my portfolio. So you live to fight another day. I live to fight another day. And 0.8%. I can recover from that pretty quickly. How often do you buy a stock after you've sold

it? Like, let's say, because I was a notorious revenge trader, like I'm going to make it back the way I lost it. But seriously, what if a stock that you sell actually turns around and goes higher and starts to look good again? You should buy it back if obviously the story and the fundamentals are there. And if it comes back, you really should buy it back. There was a few years ago, it started with a name, I'm drawing a blank on it. It's strong move up and came crashing down. I got out of it. A week later, Rockets back up. And I was like, no, this market's too choppy. I don't want to get fooled again by it. And the stock went up on 100% at that point. Did you buy it? I bought it later. I didn't buy it back at that. So it's like, so you should always buy it back. Now, here's the thing. And, you know,

I've been doing this for years, and I broke that kind of cardinal rule right there, right? Because the market, especially right now, the markets are really volatile. If we end up getting back in a market uptrain, you're going to be a little gunshot because you've given back a bunch of profits. But you do want to buy some of those back. Now, if you mess up, that's fine, get used to it. You're going to make a lot of mistakes in this. The one thing, and I'm hearing this from you, the one thing I've learned in the markets is you're always going to buy too late and sell too soon, right? So you're just going to be miserable. This is not a place to be happy, right? And so, my goal is just make money. As long as I'm kind of growing my equity curve and avoiding these major corrections and not giving so much back and living to play another day, that's the biggest thing. So you just said something that's very important. You spoke about goals. So, and this just sounds like a ridiculously basic question, but I think it's important. What are the goals of traders? Is it to take control of your own retirement? Is it to have fun? Is it a hobby? Is it to beat the S&P 500? Like, what are the goals of trading? What are you hoping to get out of it? My goal was when I round-tripped in, and gave me more back in 2000, that was kind of my first

realization that buy and hold wasn't necessarily for me. I wanted more control. I didn't want to ride down a bare market. My goal is to not ride through bare markets and to have money to work when I have a chance. When 50% of the game is when the markets are an uptrend. If you can invest when the market's an uptrend, you already have 50% of the game at that point. The odds are in your favor. So my goal was never to really suffer a problem. portfolio destroying event like I did back in 2000 and to just consistently grow it. I was never looking for the always put all my money into kind of the rocket ships and kind of like Bill O'Neill done that a number of times. For me, it was just kind of more steady progress and

just continued to grow the portfolio when the time's right. Now, where it kind of validated for me personally was when I was completely on the sideline in 2008. I was just following the rules. I was a customer at that point. I was just following the rules that Bill was talking about. Market was in correction. I got out in the end of 2007, like I think it was Halloween 2007. That's where the market really topped. I sold into highs at that point. And the stocks, of course, went higher and I was miserable.

But then a few weeks later, they all came crashing down. And then I was out most of 2007 for the simple reason. There wasn't a reason to buy. Can you produce a timestamp? Yeah. So it sounds like you personally would be happy with, I'm just making this up, 80% of the upside and only 30% of the downside. Like that would make you very happy.

even less than that upside. I think if you miss out on the 20% of the coming off the bottom and 20% at the top, that's still 60%. It's funny with our stocks, they move up super fast when those windows open, and you can do insanely well at that point. If you have 20% positions or 15% positions and you just have a handful of stocks and your line up kind of like the first few months of this year, your portfolio could really run at that time. And then the windows really shut and then you're just kind of treading water and waiting for the. the next kind of wave to come along. So you can do really well just by participating just a short amount of time every year in the market. So it sounds to me kind of like your, you have a system in place and you have some rules of thumb, but the sort of hard line

rules that you follow are more on the sell side and the buy side allows them more discretion. Is that fair to say? Where you have, it seems like you can change things on your position sizing and when you're buying, but the sell rules are sort of hard and fast. Yeah. The number one rule that we always teach is cut your losses. It's defense first. Defense wins, And so we're not going to give too much back. And then by doing that, you're going to have enough money to keep learning when the opportunities are there. I think that's the biggest thing. So who are you teaching to? Who are the clients? Who are using the products? Are these retired people that are looking for a hobby? Are these new traders? Are these like who are the clients? Well, for markets, it's a whole range. I mean, really for IBD, it's a whole range too. But markets meant now they've kind of gone through the process for a few years. So same kind of process I went through. First couple of years, I read IBD. I didn't know anything about stocks. And so I read the book. I read IBD. I went in a seminar with Bill and then just started to wrap my head around it. As I got more serious, now I started to subscribe to back in the day, it was called Daily Grass before it was called MarketSmith.

I started subscribing that and try to start learning on that one. So it's everything. But these are not people that are full-time traders. They have a job. Yes. I always tell everyone because the people will, they always come with me with this question and say, I want to be a full-time trader. I want to quit my job. And I'll that. I was like, don't ever quit your day job. And the last, if you're sure was so good, you know, why aren't you retired and things like that? It's like you never want to quit your day job and have a steady income. Because if you're going to try to depend on your trading to generate income and to survive, you're going to do dumb things. You're going to force. Exactly. You're going to force. You're going to lose money at that point. It's amazing how the market is going to take the money away from you when you need it most, right? And it gives it to everyone who doesn't need it. So you want to truly just listen to the market. and be there when the market's actually ready to give you money. And the plenty of times it's not going to do that. Isn't this so much easier said than done?

Because like I said earlier, it sounds so simple. Hey, listen, you buy stocks that are going up. My friend John Borman said the best, if you want to buy a stock that you think is going to go, buy one that's already going up and makes a lot of sense. You just avoid the stocks that aren't going up. And that's it. That's all you got to do. Of course, it's not that simple.

It's so hard. It's that mental game. You're fighting yourself. It's like golf. You have one good shot and you're like, you know what? I think I'm getting better at it. this, right? And so same thing with the markets. You're always finding yourself, we're always kind of doing post analysis where we're reviewing our trades. And that's the most, you want to talk

about misery and just a really tough exercise. Go back and look all the dumb things you've done over the last year. That's why I stopped trading. I'm serious. I kept a diary. And every time I would make a trade, I would write down the price and the, I'm using this in air quotes thesis. We actually went through his diary on the podcast and got a couple good laugh because you see it now with the benefit of hindsight. I wasn't kidding. I was being very serious, but to read it, it sounds like a joke. And it was because I had no idea what I was doing.

But there's a lot of gems in that, right? Because if you go back and say, okay, if you figured out there are two or three things that you're doing over and over again, we'll stop doing those. And that can make a huge difference to your portfolio. So in terms of where people are actually doing their trading, obviously we live in the real world and in the real world, you have to pay taxes. So do you suggest that people behave differently? in their taxable money and their retirement money

or do you not even go there? Do you just view it as sort of you do whatever you got to do? I don't really go there. Even in the book and I've heard Bill say this and allow them more experienced traders even say this, you know, don't worry about the taxes. You have to listen to markets. The stock is selling off and giving a big sell signal. A lot of times people are saying, oh,

I'm up 60% on the stock. You know, I'm going to go for the long term gain. But if it's going to be major sell signal, another couple months, you might not have to worry about that gain and paying taxes anymore on it. So, yeah, for me personally, if they're giving those sell signals, playtime's over. Maybe this is a question for both you guys, actually. It was never my personality to be a trader. So obviously, again, and maybe this is a personality question,

but which one's harder? Selling for a quick loss if you just buy a stock and you just are kicking yourself, like, why did I do that? Or holding on to a gainer that just keeps going up? Like, which one is harder? There's a no-brainer for me, too. Holding on. Oh, holding on easily. I never took a big loss. I was very good at cutting my losses. You know, I never lost more than one percent of my portfolio on a single trade, but I couldn't hang on to the winners. I just couldn't do it. I think I could have tried forever and I wouldn't be able to do it. Like every now and then I have to convince myself that I'm not a good trader because every now and again, I'm like, you know what? Maybe it's time to dust off the old boots and see what I got.

Well, here's the thing. We're all using the word trading here. You don't necessarily need to be a trader also. You can use weekly charts. You can try to use the longer term. Hey, here's a buy signal. I'm going to buy out this cup with handle. And my absolute rules are, okay, if it's down 8% I'll sell it. If it's up 20% I'll sell it. Now, there's one exception to that. So, For most of them, you want to lock in your gains at 20%. Or usually what I say is I at least take some off. But there's that kind of one out of four rule where if you think it's a game-changing stock, and the more you study some of these great, great stocks, you start to realize that you'll notice some companies that are just changing the world.

They're like, whoa. Honestly, now they're not doing well right now. But this was years ago when I first saw their car, Tesla, 2013, it was like the nicest car I've ever seen. And I remember telling a friend who was, we were just walking around and he was asking me about the system. I said Tesla could be one of these great stocks in the future. It's like it'll probably take a couple of years when they get earnings and sales. It wasn't. It was actually a couple of months later.

They started going. But they were public for a while before the stocks started. They were public for a while, right. The fundamentals were never there. The fundamentals started to come. So where it really started going was once they completely beat their sales estimates and they started getting the sales and they started rocketing up at that point. And then that next earnings report, they actually started reporting.

some positive earnings on a non-gap basis. So that's what really, so they had an epic 2013 run and it was kind of that classic. And the way I discovered is that wasn't even through Marcus Smith. It was through, I just saw the car and I said, wait, here's an electric car that's $90,000 that's selling out like crazy. If he pulls this off, he could change the world, right? So that's kind of the, once you study some of these companies, these great companies, I mean, Apple's the easiest one when they came with the iPod, look how quickly they changed the world, right? That's like kind of the perfect cancelum stock. thing is, aren't these great stocks very easy to identify in hindsight? And in real time,

it's obviously much more challenging. Which is why you have to go back and study some of these. Because an Apple, the crazy thing, I was actually in Apple in 2004, just by going run through my screens. And I saw this massive volume coming in. And I was like, wait, that looks like a couple of handle. And there's a really strong breakout. But they have this really expensive iPod that I had the Archos. It was like an Archo's jukebox or some were that. So the MP3 at that point, right? I was like, I'm not going to pay $400 for an iPod, but I didn't realize at that point that, hey, high price, you know, people are willing to pay this much money.

So I didn't put everything together. So you have to put the story together, too. But then you just kept seeing them as they kept reinventing and come up with iPhone and iPad and all this kind of stuff. So they had multiple runs. Netflix is another one where all of a sudden you have to go, remember guys, remember Blockbuster? Now you have to watch.

You got to watch first with streaming on the computer. Then they started putting an Xbox and all this kind of stuff. But the more you kind of study these great stocks of the past and start to realize that, hey, they're doing this game-changing thing, that's where you're going to start to catch these newer ones quicker. Now, Marketsmith, we have so many of the things just automated right now where we're going to tell you what stocks are breaking out. We're going to show you what stocks are setting up. And so they're just going to kind of filter there. We're doing everything we can except tell you what stock to buy. And the funny thing is that we'll all be in the same stock at the same time.

People are using MarketSmith. We're all going to be there or even reading IVD. At the exact same time, I don't have the couple of handle will be there. But the difference, and you guys mentioned it earlier, it's the managing. Everyone's going to manage. I mean, even Bill Neal came and said, hey, you know what? I love this stock. Netflix.

I love it. I'm all over it. And I'm like, okay, Bill, I'm going to buy it too. Right. We're all going to have different results. And he's probably going to have much bigger result because he's going to have that conviction and say, no, this is all. So when the stock's kind of like now, when they come in really hard,

I might get scared out and say, screw this. I'm out of it. And he's going to, yeah, he might add or he's like, no, this is the best stock in the market. I'll get rid of everything else, but I'm going to hold on to this one stock. A lot of the book and the system is about patterns repeating themselves, great companies, patterns repeat because human beings are the ones buying and selling these stocks. But one thing that didn't exist in the past that exists in Spades today is the knowledge of this and the computers that see what's going on. And is there a danger that. what used to work so well won't work anymore and if it doesn't exist why is this something that

cannot be armed away well it's definitely working still and now there's always kind of it's like everything else it's like history doesn't repeat it just rhymes so there is a slant on it now with the computers and things like that well i think what's happened is if you're too short term and if you're using daily charts or interday charts and you're really just watching it way too closely you're going to get shaken out because these these algos these days they're going to bring these stocks down so fast to the point where you're going to panic. And it's amazing. Every time when I feel that, it's getting closed, I'm going to have to lighten up. And I know I'm going to sell near the low at this point, but I'm lightening up some just in case. And then you'll seem to just kind of

run it right back up. But if you use weekly charts and you kind of take a larger view and remove more of the noise, that behavior is still there. There are still, even this year, you're seeing a lot of these great stocks, they break out a couple of handles or they broke out a couple of handles that ran up 20 to 30% even more, now they're coming in and building a new base. So that behavior is still there. So on a longer term view, there's a reason in those first 100 pages in the How to Make Money in Stocks book, those are all weekly charts because there's only so much you can kind of arb away when the true intention is this is a great, great company that's changing the world

and these large institutions have to start owning shares of us. Arusha, thank you very much for speaking with us today. we had a great time. Hope our listeners get something out of this. To learn more, go to Marketsmith.com. Thanks, everyone. So I've been thinking about, like, jumping back into the trading game. I think you should do it just for podcast content alone. So here's the thing. Isn't that a write-off? Well, I would do it with, with very little money. I actually, I've never had the inkling to be a trader, but I actually enjoyed this conversation because it's interesting to

get into that mindset and psychology because, again, I just, it would never click with me to, I would have to have it so systematic that I'd be completely out of the system of I was doing it. But I imagine part of the fun is actually getting in there and getting your hands dirty and doing it. So here's the thing. I do wonder whether or not I can actually implement what I've learned into some sort of like relatively coherent trading system. But I don't know that I really want to spend any time on it. You know what I mean? Again, I think you should do it just for content alone. But, I mean, isn't there a way that you could, Arusha talked about different timelines and horizons?

Couldn't you do this on a maybe a longer time horizon where you're not doing it every day? And you're buying, buying those stocks once a month or once every two weeks. I could certainly do this sort of thing where it's like, okay, every Friday afternoon, check in on your stocks, have rules going in where you're going to sell. And if they're below on Friday closed, just get out and that's it. I don't know. I have, I'm undecided. But I did very much enjoy it. I certainly still have no illusions of grandeur that I could beat the market or anything.

You have the traders lingo down, though. Well, you guys were immediately talking about breakouts and cup and I never knew what a cup and handle was. So I learned some things. I spent so much time reading all the candlestick pattern books. And I was really sort of like in that world for a little bit. But let's just say that I did it. And I was really successful. And it would have be because I'm good or anything.

It would be because of their system. It would be because these growth stocks are. working really well. Obviously, they've been working really well for the last 10 years. I don't know that now is necessarily a time to implement the strategy. Once you got back into these growth stocks, that would mark the bottom of the value versus growth. Right. 100%. But here's the thing. Let's say that it really works, and I start up with $1,000. And let's say that I crush it and I'm up to $1,500. Right? I gain 50%. But so what? Because that doesn't move the needle. So it's not as if, Like, it's not as if I can translate that success with $1,000 and be as successful with $10,000 or $20,000, because the higher the dollar amounts get, the more likely you are to make emotional decisions.

Yeah, it depends on how much you really want to put into this. And I think. Because, like, $1,000, I might as well be paper trading. Yeah, but I think. Right. Because even if I, even if I, let's say that I take a, let's say that I have 10 positions evenly split, right? And there are $100 each. And one doubles.

And I make $100. bucks. So what? True. But I mean, part of it is, isn't this scratching an itch in a lot of ways? Like, if you can do this and then leave the rest of your portfolio alone, isn't it worth it? Well, maybe. I just don't know that $1,000 is enough to scratch it edge, but I don't know what the right number is. But I think for those people who want to potentially dip their toe in the water and see if they can make it as a trader and they have the correct mindset in psychology, starting small is a really good idea because I think even starting with $1,000 is better

than paper trading because you can't, you can't simulate what it feels. like to lose actual money. It's like whenever I go play blackjack and I'm betting $20 on a hand, I still get those weird butterflies in my stomach, even though it's $20. Like, why should I care? But your body like just has these reactions that you can't even control. Yeah. So when I was, when I was trying to make it, I was trading with dollar amounts and I was in hindsight, where they were way too big and was definitely irresponsible. I think the best thing that could happen is I open this trading account and just do terrible. Or you could just start it with $1,000 and then leverage it 10 times, then you have more money to play with.

But what if I do it and it just goes about as bad as expected and it's just a really good reminder? Like, oh, yes, this is actually really, really hard. Then we get a few laughs out of it. Yeah, I'm telling you, probably worth it. Perfect. Probably worth it. Thank you to Arusha and Market Smith and Investors Business Daily for coming on the show. We really appreciate it.

Hope you enjoyed it. Thank you.