Hitting The Home Run
April 30, 2017
Markets are about survival. That’s it. We survive, and the profits will eventually flow. The people who always view markets with big $ signs in their eyes (always focusing on the huge profits) will not survive. And if we don’t survive, then there will be no $ signs. The only way to get the huge profits is to actually survive in the first place. We’ll never be able to get the big pay day sitting on the bench, or getting ejected from the game, or having fouled out. Makes sense, doesn’t it. It’s about trying to hit singles. It’s not about swinging for the fences. We become much better traders when we finally figure that out. For every Tom Baldwin, who is one of the greatest, there are 10,000 people who lose it all. We all respected and admired him. Tom liked to bet big, huge in fact, but he had a plan. He was generally scalping and had an exit plan. He wasn’t betting on the outcome, mind you, only making a “reasonable” bet that he could get out with a single, but in enormous size. Eventually he started going for bigger trades, but only after he had built up his account hitting singles – he survived. However, this is what can happen when you go for a home run, even with one of the greatest:
“I’ve made $2 million in a day, but I’ve lost $5 million in a day,” Baldwin says. Five million dollars. Lost. One day.
On March 17, 1989, Baldwin, at the age of 41, started trading early. Here’s how the Chicago Tribune later reported what happened:
The time: early morning, about 7:25 a.m. Within minutes, the government will release the latest producer price index figures, statistics that can send bond prices rollicking. Baldwin is bullish and has been buying T-bonds since the market opened at 7:20, believing bond prices are about to soar. The news hits. Nearly 500 bond traders and brokers erupt in a maelstrom of shouting and waving. Buying and selling. By now Baldwin has purchased a whopping 6,000 T-bond contracts. His market position is the equivalent of the annual budget of a Third World country. He controls a staggering $600 million worth of T-bonds. The market turns. And tanks. And keeps on tanking. Baldwin has guessed incorrectly. He furiously begins to reverse himself, closing out his positions. One after another. All 6,000 of them. By 7:45 it is over. The dust settles. Baldwin studies his trading card. He has lost $5 million without blinking.
Now worth “multimillions”–true to trader form, he won’t tell how much money he has–Baldwin is able to look back at that day with little emotion. “The market went down, straight down for two points and there was no out. It was instantaneous and never came back,” Baldwin now explains quite matter-of-factly, adding that most people view what he does as gambling.”
Most people focus on the outcome, way down the road. That’s point Z. And they feel like they’re getting in at point A. Why do they feel as if it’s point A? Because they’re only focused on point Z. So they believe that it must be point A right now. Geez, gold is going to $10,000, so what’s wrong with buying it at $1900. But it’s way more likely they got in at point M, or so. Why? Because someone who is only focused on point Z, probably has no idea that the entry point is far more important than the outcome. The focus mainly being on the entry point is how to get control of risk. The focus only on the outcome (point Z) is how to maximize risk (and to minimize the probability). That specific trade or investment has virtually no chance of working. And the reason for all of the hoopla about the Big Short, is because there was no film done about the “Great Margin Calls And Account Blowups” for all of the other people shorting back then.
There’s a much lower probability that you can hit a home run vs. hitting a single. However, obviously the rewards of hitting a home run are much greater than for hitting a single. But so are the risks. Keep that in mind. However, if you focus on hitting singles, and surviving, then you’ll still have a chance of hitting a home run. You can’t hit a home run if you’re not even in the game. So if you only focus on hitting home runs, or worse still grand slams, you’re finished. Just hang up your cleats now while you still have some money left.