A successful self trader – Rule # 32
Well you need to take this rule with a pinch of salt. Mercenary is a person who changes sides based on whatever is best for the situation. That is the job of a trader too. In the stock market you face many choices. To trade or invest is one choice. To go long or to go short is another choice. To hedge or not to hedge is another. The answers to these are simple if you start thinking like a hard-boiled mercenary.
How to trade like a mercenary
Being a mercenary is not a very complimentary statement. At least in war! It refers to those set of fighters who have no national loyalty but fight purely for money. But more importantly, they prefer to always fight on the winning side so that they can live to fight another day. A trader in the stock market needs to think like a hard-boiled mercenary. Focus purely where the winning action is.
To understand this concept, one needs to look at two instances where investors lost huge sums of money by not behaving like a mercenary. Firstly, in 2008 most people with an ear to the ground would have told you that something was rotten in market valuations. US had started imploding in 2007 giving enough time for Indian investors to embark on a course correction. Needed to be a mercenary!
The second instance was in 2012, when the trend decisively shifted from the aggressive high beta stocks to defensive stocks. The trend was visible from year 2010-11. A flailing economy, downward capital cycle and bad assets meant that it was the time to shift tack from high beta to defensives. Most high betas lost heavily while defensives held strong. A mercenary approach would have helped.
3 TRADING LESSONS FROM A MERCENARY
Always go with the winners
That is the first lesson from a mercenary. Never bet on what is justified and what is not. Focus on what approach is likely to win and where the headwinds are already visible. A mercenary is quick to adopt the winner’s side!
Change tack easily and seamlessly
Like a mercenary is never bound by national loyalties, your strategy should not be bound by your loyalty to any belief, strategy or approach. Be flexible and crafty to change your style, strategy and bias based on the market dictates.
Survival is the first and foremost duty
That is exactly what a mercenary believes in. It does not matter which side you are in as long as you are winning. You are not committed to stick to a fallacy to the very last. There is no shame in withdrawing from the battlefield to live and fight another day.
“Being a mercenary is all about getting real. You don’t want to be the last man standing on a sinking ship” – Robbie Fowler”
6 WAYS A MERCENARY OPERATES IN THE STOCK MARKETS
- A mercenary believes that you must first pillage then burn. It is ok to realize that your strategy is going wrong and make a U-turn. But just changing tack does not make a successful trader. Like a mercenary, he has to first pillage. See what best capital you can extract from a situation before changing tack.
- A mercenary is never afraid to be the first to shake up the stupor. Like a mercenary, a trader should be purely driven by the profit motive. It does not matter if, in doing so, you go against the crowd and earn popular condemnation. There are times a mercenary trader needs to take the explorer’s risk.
- A sergeant in motion always outruns another not in motion. That is true of markets. It is ok to occasionally be on the sidelines. But a real hard boiled trader always has to look for opportunities. Keep trying out new ideas and keep changing tack if they don’t seem to work. Stupor is hardly golden in trading.
- No strategy is as great as the profit the strategy generates. A mercenary believes that at the end of the day you will be judged by the amount of money you make. Whether you change tack or you refuse to change tack; that is what matters. That should be your only criteria to assess yourself.
- Sometimes the only way out of a mess is through the mess. That is a great lesson for traders. Traders who lost money in the crash of 2008, just waited out. The smarter guys jumped into the mess and decided to short the market. Not only did they make money, but also made a pile to go long later.
- The longer everything goes as per plan, the bigger the impending disaster. This is one of the most important lessons from a mercenary. And it is equally true in stock markets too. The law of averages always tends to catch up with you. The better you are prepared for it, the less the pain.
SHAPING YOUR TRADING STRATEGY LIKE A MERCENARY
There is a famous saying among the mercenaries that if the damage to your gun is covered by warranty, then you did not inflict enough damage. That is true for a trader too. If you are making small losses, then it means you are not taking enough risks. It also means that you are unlikely to ever make big profits in the market. Like a mercenary, a trader should always live in anticipation of that big wager; and actually bet on it.
If you are taking a huge risk, as well get paid for it. This is the basic rule for any market trader. If you have undertaken a 30% downside risk on a stock, no point in getting out after a 5% appreciation. That is a waste of the risk you have taken. A smart trader ensures that he adequately gets compensated for a huge risk. Otherwise why to assume the risk? But above all, like a mercenary, a trader never expects favours from the market. That mercenary quality, perhaps, distinguishes a good trader from a great trader!
TAKEAWAYS FROM THE “TRADE LIKE A MERCENARY” DEBATE
One of the greatest traders of all times, Stanley Druckenmiller, was a perfect example of a mercenary trader. No doubt, his fund returned over 30% for 30 years in succession. One of the most outstanding examples of a mercenary trade was his bet against the British pound in 1992. The trade was bold, the risk was measured, it was a change of tack and the fund had bet a substantial portion of their capital on the trade. Not surprisingly it earned $1 billion in 1992. So much for mercenary trades!
For a mercenary trader it is the outcome than the process that ultimately matters. This is best summed up in “Zen and the Art of Motorcycle Maintenance”. To live only for some future goal is shallow. It is the side of the mountain which sustains life, not the top. Here is where things grow. But of course, without the top you cannot have sides. For at the end of the day, it is the top that defines the sides. That precisely talks about a typical mercenary trader’s need to focus purely on the final outcome