I was asked to expand on my Big Money Mentality post which explored the mentality of traders who start with small sums of money and make fortunes. As a refresher, these guys didn’t think of trading as a side pursuit, trading was their main source of income. At the same time, they had pretty much their entire net worth (and often times multiples of it due to leverage) in the markets.
Based on those two facts alone, I think it is safe to say these guys were not common. I know of very few people who think like this or are willing to take the risks. When you look more closely at the results over time, risk aversion is probably a good thing unless you’re willing to go broke on your path to glory.
A point of distinction is probably necessary – these traders often times did manage money for others, but this was usually after they got wealthy trading for themselves. In short, these guys got wealthy trading moreso than earning fees.
One more point, following the path of these traders is almost certainly a bad idea for 99.9999999…% of people. If you have to ask yourself if their path is a good idea for you, you probably already know the answer.
So, beyond viewing trading as a primary source of income and having everything in the markets, what other commonalities were there among these traders?
They used a lot of leverage. The number that comes up frequently throughout trading history is 10:1 leverage. For every $1k they had in capital, there would be $10k in market exposure. So, a 10% move in their favor doubled their money down (which was often everything) and a 10% move against them wiped them out.
While 10:1 shows up frequently in trading literature, sometimes the leverage got even larger. For example, Livermore was 30:1 at points in his career. When he was this leveraged, he often had taken mortgages on everything he could to get more margin capital (aka money down).
In case the severity of what Livermore was doing isn’t clear, at 30:1 a ~3% move in his favor would double his money while a ~3% move against him would wipe him out. Given this, it is no wonder Livermore went broke several times. Imagine taking all your money and borrowing against everything else that you could then going 30:1 leveraged in a market in hopes a 3% move against you didn’t come before a 3% move in your favor. It is hard to consider this anything but insane gambling. Moving along…
These guys had huge swings in their fortunes. Good examples come from my post on Livermore’s net worth and from Michael Covel’s book which shows the returns of Richard Dennis for 1983:
Jan 1983: +53.33%; Feb: -5.49%; Mar: -27.82%; Apr: +29.01%; May: +4.11%; Jun: -30.42%; Jul: -15.88%; Aug -5.57%; Sep: +16.87%; Oct: +29.89%; Nov: -6.10%; Dec: -13.90%
Dennis made it clear he was trying for something “spectacular” and he knew big results required big swings. That said, few investors could stick with it and, when you look at those swings, it isn’t a big mystery as to why.
In terms of how they traded, these guys mostly took big directional bets and added to positions as they went. So, they might not start with everything on the line (Livermore liked to use his “probes” which were smaller initial positions to “test” the market) but, as the position went in their favor, they kept adding to a position eventually putting everything (or very near it) on the line.
With that in mind, in the late 1970s a guy turned ~$2mm into ~$100mm in the gold bull market and his son, Kelly Angle, wrote a book about the experience. If you read the book, it provides a behind the scenes view of a huge win. At one point in the story, Angle’s father would’ve been completely wiped out had gold gone down a few percent which anyone who trades will know is insanely aggressive. One of Kelly’s quotes summarizes the story well:
Here he was leveraged out the wazoo in a trade that was placed absolutely perfect in a once in a lifetime bull market.
In case it wasn’t obvious from above, these traders were mostly following price trends. As to how many markets they traded, it was usually one to three (no diversification) which brings to mind a Seykota quote:
The fastest way to make money: go all on one thing in at the start of a huge trend. The fastest way to go broke: go all in on one thing at the start of a huge trend.
Next, they often lost it all more than once. If you mathematically study what it takes to turn nothing into a fortune, you find out that, if you maintain the necessary risk levels long enough, you go broke. So, if taking this kind of risk, you’re making a bet that you’ll get the timing right because, if you keep playing indefinitely at the necessary risk levels, it is only a matter of time until you’re wiped out.
This might be a good point to share that most legendary traders who don’t go broke become obsessed with survival and view survival as the key to long-term success – weather the storm and eventually the easy times return.
What else? I notice many of these traders made huge gains early in their careers usually by virtue of very aggressive risk taking at an opportune time spawned by luck, inexperience, and a lack of hard lessons learned. A commonality of these traders, to the extent they remain in the public eye, is they eventually end up advocating in favor of much less aggressive risk taking which almost certainly comes from eventually getting clobbered.
On the point directly above, my guess is the general population thinks it is virtually impossible to turn almost nothing into a fortune but, by virtue of aggressive risk taking and lucky timing, these guys actually did it. My point is that, by making a fortune by trading aggressively, you not only believe it is possible, you know it is and that knowledge or belief impacts how you operate (as I explored in another post). Perhaps early success, before you know the real odds, is a necessary ingredient for exponential trading success.
Next, while it might be driven by the two points above (i.e. by actually doing it they know it is possible) these guys don’t seem to think like the rest of the world. In terms of what I mean, there is a scene in the movie Casino where Japanese “whale” gambler, KK Ichikawa, after a series of events, bets smaller than usual and wins. But, despite winning, he views it as a loss because, if he were betting in size, he’d be making multiples of what he made betting small. I think this same kind of mentality is present in many of those who have made fortunes. As to the underlying motivation, we’d probably need to consult a psychologist.
Most people say if they hit a certain amount of wealth they would walk away from the table or, at a minimum, they would significantly curtail risk. 10% on $10mm is a lot more than 10% on $100k. But, whatever the reason, these guys don’t think like that. They appear to have a mentality that focuses on total dominance which, as per above, rarely ends well.
Again looking at Livermore as an example, after his 1929 era wins, he was one of the richest men in the world (top 10 per biographers) but he kept on betting big and wiped out yet again. My point? If you make it to the top of the Forbes list and you keep swinging for the fences, it seems something other than money is compelling you. As to what is compelling such actions, I find it hard to fathom.
That about covers the things I’ve found in common with the rags to riches traders. If you have additional thoughts or feedback, feel free to share in the comments.
This was excellent George! Very much appreciated!