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Trading is funny—sometimes things are going really well, and sometimes things are going very poorly.

If things are going poorly, you should do something different. If things are going well, you should do more of what you’re doing. Do more of what works and less of what doesn’t. This concept is so simple—and so powerful—and yet most investors fail to understand it.

Another way to phrase this: Do not interrupt a trend in process.

I have always said that it is a bigger sin to cut your gains short than to let your losses run.

With all that in mind…

Risk Management

I read a news story the other day about a Canadian guy who started out with $88,000 in Tesla stock and ended up with $300,000,000 in Tesla stock… and then lost it all.

Obviously, there was a lot of margin debt involved. He actually ended up suing his broker, on the grounds that they should have done something to stop him, and while I am a firm believer in personal responsibility, I don’t entirely disagree with this guy. You have a guy who is up $300,000,000, and you send a couple of goons to his house to strap him to his chair and torture him for his passwords so they can put him in T-bills.

Anytime you make a lot of money in the market, you have to be careful because there is always a risk of ruin. You could lose it all. I’m sure that Mr. Tesla Stock didn’t believe that there was a risk of ruin when he was up 300 large. It can always happen.

I’ve had a good couple of months in the markets, and I think the gains will continue. But… I roll up options, take bits of profit along the way, and hedge. There’s no way to “lock in” the gains without liquidating the positions, and you don’t lock in 20% when you believe you can make 80%. But you have to manage risk, which is otherwise known as being an adult.

Luck or Skill

So, the guy who made $300 million in Tesla, was he lucky or skilled?

Well, in any big trend, you are going to have one person who flips heads 50 times in a row—it’s just probability. Monkeys on typewriters. But there is a skill element of it too—he probably knew the company Tesla inside and out, recognized the growth opportunity, and bet everything he had on it. The unskilled part is giving it all back. He did not manage risk along the way. He did not roll up options, take bits of profit, or hedge.

Look, if you are in a winning trade, what is the goal? The goal is to get out at the very top. But that’s an unrealistic expectation because you won’t get out on the top unless you are even luckier. So, the question is: Should you sell on the way up, or should you sell on the way down?

Let’s go back to my earlier comments about doing what works, and when it stops working, stop doing that. If you naively set a rule that you would liquidate the position whenever you sustained a 10% loss, in the case of Teslaman, he would have escaped with a $270,000,000 profit. If he quit smoking, he might be able to live on that.

Of course, human emotions take hold, and you say to yourself, It will come back; it’s just a correction. Maybe you set the stop a little wider, say 20%. You see where I am going with this.

Enough Money

I have another rule of trading: Sometimes you just make enough money.

Let’s say I buy 5,000 shares of stock XYZ, and I am right, or I am lucky, and it goes up 20 bucks. I now have $100,000 in gains. I can do a lot with $100,000. I can buy a lot of art for the house. I can donate some of it. I can buy a new car!

You see, when we are trading with our brokerage account apps, the money appears to be an abstraction—just numbers on a screen. But the numbers are real money. Think of what Teslaman could have done with that $300 million—planes, boats, automobiles, and charity. The gains were intoxicating, and he lost track of the fact that it was real money that you can buy stuff with. I never lose track of that. I never lose track of the risk.

This is all trading psychology stuff that I like to talk about, and if I ever get my act together, I will write a book about it. But I have a bunch more books to write in between.

Speaking of which! This is the last time I will bug you about buying a copy of NIGHT MOVES, my short story collection. It’s early, but as I write, it has 4.9 stars on Amazon. And no, my mom hasn’t reviewed it, yet. This is the fiction that people ache for. This is what is missing in American literature. I don’t write bad books, and I don’t recommend bad books, either. Get NIGHT MOVES here.

By the way, for those of you living in New York, I am having a book signing in NYC on Wednesday, October 16, at Irregulars at 1152 First Avenue on the Upper East Side, from 5–7 pm. Really hope to see you there! You’ll get to meet me and a bunch of subscribers in person and have a few laughs.

Jared Dillian, MFA