Defence is the Best Offence

Mark Minervini is one of the best traders in the stock market. From 1994 to 2000, he achieved a super performance of 33,500 percent of compounded total return, averaging 220 percent per annum, during which time he won an U.S. Investing Championship title in 1997 with a 155 percent return. He was also one of the selected traders who were featured in Stock Market Wizards (Schwager, 2001), which is a collection of interviews with America’s top traders in the stock market. But return is only half the story: during that time, he had only one down quarter, with a bare loss of a fraction of 1 percent.

So, how was Minervini able to achieve such an amazing success? In his own book, Trade Like a Stock Market Wizard (2013), he described his trading philosophy as follows:

“My philosophy and approach to trading is to be a conservative aggressive opportunist. Although this may seem like a contradiction in terms, it is not. It simply means that my style is to be aggressive in my pursuit of potential reward and at the same time be extremely risk-conscious. Although I may invest or trade aggressively, my primary thought process begins with ‘How much can I lose?’ not just ‘How much can I gain?’”

He illustrated his style with a small trip to the casino:

“The first time I saw seven-card stud being played at a casino, it didn’t take me more than a few minutes to see the similarities to trading stocks… After a night at the table, I was ahead about $1,400.

“I played cards the way I trade stocks: immediately folding the ones that didn’t work out as expected. If I didn’t receive a decent playable hand on the deal, I didn’t continue betting against the other players.

“Undisciplined players looking for ‘action’ always show up at the poker tables. The stock market is no different except that most stock market investors are even less disciplined than most poker players. The Achilles’ heel of most gamblers and speculators is the desire to play every hand, a common human weakness that allows impatience to override good judgment.”

He also described how this management of risk helped him to come from behind win the US investing championship in 1997 with an amazing return of 155 percent:

“In the first quarter [of 1997], I was up just a little over 8 percent; that was not nearly enough to qualify for the top spot… During the first two quarters I was in the top 20, but there were opponents who were far ahead of me. I knew that I must not let being behind affect my trading or cloud my judgment… I made a commitment to stay with my game plan through the entire year, knowing it was sound.

“By the third quarter, things had changed quite a bit. I was now neck and neck with my closest competitor, separated by a mere tenth of a percentage point. I was in first place, up 110.10 percent, and the trader in second place stood at an even +110.00 percent. Then, in the fourth quarter, the market corrected… I knew that during a difficult period not only would my discipline avert giving back my profits, I could actually make money trading… I traded fiercely and pulled away from the pack. My final tally was a total return of 155 percent, almost double that of the nearest competitor. I was grateful to be named the 1997 U.S. Investing Champion by Money Manager Verified Ratings.

“The point of this story is simple. The uneven playing field of highly leveraged options and futures traders trading against straight stock guys could have pressured me to take on too much risk or overtrade. I also could have gotten flustered when I was significantly behind and tried to make an adjustment, breaking my own rules. But I didn’t. Instead, I focused on my trading plan and the two elements that were absolutely critical to winning over the long haul: consistency and risk management.”

So here the secret from one of the greatest stock market trader of all time: be consistent and control your risk, then the return will find you one day. As legendary fund manager Paul Tudor Jones said, “The most important rule of trading is to play great defence, not great offence.” (Schwager, 1989)

References:
Minervini, M. (2013). Trade like a Stock Market Wizards: How to achieve superperformance in stocks in any market. New York, NY: McGraw-Hill Education.
Schwager, J. D. (1989). Market Wizards: Interviews with America’s top stock traders. New York: HarperBusiness. Hoboken, NJ: John Wiley & Sons.
Schwager, J. D. (2001). Stock Market Wizards: Interviews with America's top stock traders. New York, NY: HarperBusiness.