There is are large difference between being right and making money. I have never heard any market wizard saying that I was right 75% of times or something even close to that. I have been studying the biggest wealth creating funds and people for the last 5 years and believe me they are not right more than 50% times.
It’s not the markets they trade or even the techniques they use. These are people who rely on different philosophies,ranging from Ben Graham’s long-term valuation techniques to in-and-out technical commodity trading; from dollar-cost averaging to market timing; from buying high-yielding stocks to buying relatively strong stocks with almost no yield. Clearly, a variety of techniques can make money. I find it exciting that numerous techniques can make money, as investors can choose the technique that best fits their own psyches.
The winning methods of successful professional investors are even sometimes contradictory. For example, in the book Market Wizards the successful pro Jim Rogers is quoted as saying that he often examines charts for signs of “hysteria,” and also that “I haven’t met a rich technician.” In the same book an equally successful pro, Marty Schwartz, is quoted as saying, “I always laugh at people who say, ‘I’ve never met a rich technician.’ I love that! It is such an arrogant, nonsensical response. I used fundamentals for nine years and then got rich as a technician.” If you think that is confusing, in the book 'What I Learned Losing a Million Dollars' the legendary John Templeton is quoted as saying, “Diversify your investments.” In the same book, the equally legendary Warren Buffett says, “Concentrate your investments. If you have a harem of forty women, you never get to know any of them very well.” So as I studied other long-term winners on Wall Street, I found that instinctively or otherwise, they had come to the same conclusions that I had. While the methods of Warren Buffett, Peter Lynch, and John Templeton are very different from my risk-management, asset-allocation, market-timing orientation, all of these men have been exceedingly humble, made multiple mistakes, and rarely (if ever) get headlines about a spectacular call. Yet they all use objective methods for picking stocks, their investment philosophy is disciplined and designed to limit risks, and they are flexible when they must be.
The Four Keys to making Money.
1. OBJECTIVE INDICATORS: These legendary investors all used objectively determined indicators, be it Paul Tudor Jones or Warren Buffet's Guru Graham.
2. DISCIPLINE: All the winners are very disciplined, remaining faithful to their systems through good and bad times.
3. FLEXIBILITY: While disciplined, these winners were flexible enough to change their minds when the evidence shifted, even if they did not understand why. In his book Winning on Wall Street, Marty Zweig talks about how bearish he was during a sell-off in February and March 1980: “I was sitting there looking at conditions and being as bearish as I could be—but the market had reversed. Things began to change as the Fed reduced interest rates and eased credit controls. Even though I had preconceived ideas that we were heading toward some type of 1929 calamity, I responded to changing conditions.” In conclusion he states, “The problem with most people who play the market is that they are not flexible to succeed in the market you must have discipline, flexibility and patience.” Barton Biggs once called Stan Druckenmiller “the investment equivalent of Michael Jordan. He is the best consistent macro player.” Biggs said, “He is a combination of being very intellectual and analytical, but also using technical analysis.” In Market Wizards , author Jack Schwager writes of Druckenmiller: Another important lesson, is that if you make a mistake, respond immediately! Druckenmiller made the incredible error of shifting from short to 130 percent long on the very day before the massive October 19, 1987, stock crash, yet he finished the month with a net gain. How? When he realized he was dead wrong, he liquidated his entire long position during the first hour of trading on October 19 and actually went short.The flexibility of Druckenmiller’s style is obviously a key element of his success. So as I learned in kindergarten: expect surprises. Things change.
4. RISK MANAGEMENT: Finally, all of these successful investors were risk managers. Ned Davis asked Paul Tudor Jones once what he does at work all day, and he answered, “The first thing I do is try to figure out what is going to go wrong, and then I spend the rest of the day trying to cover my butt.” In Market Wizards , Paul says, “I am always thinking about losing money as opposed to making money.” He is widely known as a risk taker! Nearly all of the pros I have studied are clear about one thing: they want to control their losses. In Market Wizards , fundamentalist Jim Rogers says, “Whenever I buy or sell something, I always try to make sure I’m not going to lose any money first. my basic advice is don’t lose money.” In the same book, technician Marty Schwartz says, “Learn to take the losses. The most important thing in making money is not letting your losses get out of hand.” In his book, Pit Bull, Schwartz says, “Honor thy stop; exiting a losing trade clears your head and restores your objectivity.” Controlling losses is one lesson I wished I had learned in kindergarten. They did tell me to be careful, but it wasn’t until much later that it sunk in. I learned this from Warren Buffett, who once stated his two favorite rules for successful investing: Rule #1: Never lose money. Rule #2: Never forget Rule #1.
In What I Learned Losing a Million Dollars , the legendary Bernard Baruch is quoted as saying, “Don’t expect to be right all the time. If you have a mistake, cut your loss as quickly as possible. ”In Reminiscences of a Stock Operator, the hero (widely believed to be the legendary trader Jesse Livermore) says, “A loss never bothers me after I take it. I forget it overnight. But being wrong—not taking the loss—that is what does the damage to the pocketbook and to the soul.” Echoing that sentiment,Druckenmiller in The New Market Wizards says of George Soros, “Soros is also the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk away from the position.” Finally, the last word on the subject of taking losses (and making money) goes to Leo Melamed, chairman emeritus of the Chicago Mercantile Exchange. In the book The Inner Game of Trading, in response to the question, “What do you think are the primary psychological barriers that prevent most traders from being successful?” Leo answered: “One of them is the ability to take a loss. You’ve got to know that no risk taker is going to be right all the time. As a matter of fact, I figured out when I was trading that I could be wrong 60 percent of the time and come out a big winner. The key is money management. You must take your losses quickly and keep them small and let your profits run and make them worthwhile.
So, in conclusion, what I’ve learned after all these years is that we are in the business of making mistakes . I’ve never heard Peter Lynch give an interview where he didn’t point out some mistake he has made. And he has said, “If you are right half of the time (in the markets), you have a terrific score. It is not an easy business.” So if we all make mistakes, what separates the winners from the losers? The answer is simple— the winners make small mistakes , while the losers make big mistakes. The Above extract has been complied from various traders and books especially from Ned Davis.