A Traders Journey Charles Harris

TITLE: A Trader’s Journey: Charles Harris CHANNEL: Charles Harris DATE: 2022-06-02 ---TRANSCRIPT--- i’m a little nervous i haven’t given this presentation before it’s a new one yesterday i cited several brilliant and highly successful traders after years and years of outstanding and consistent performance eventually veered off course and sabotaged her success by breaking the rules some like ray dalio learned from their mistakes and evolved into truly consistent winners with steadily rising equity curves others like victor niederhoffer and jesse livermore continued to eventually slide down after each successive run and were relegated to merely being boom and busters and sadly there’s another traitor to add to that unfortunate list this handsome guy i’m guessing you may not have seen that coming i’m ashamed to admit that after years and years of consistent and frankly exceptional results i too sabotaged my success over the past several years by breaking just about every rule i stand up here telling you not to break year in and year out so i too have not achieved that coveted and elusive status of consistent winter that all traders aspire to but so few achieve this afternoon i’m going to share my personal journey as a trader from humble beginnings as a new employee at william o’neal and company with virtually no knowledge or experience in the stock market to current day with years of experience and lessons learned the hard way we’re going to take a ride on my roller coaster equity curve over the past two and a half decades and like any responsible operator i have to forewarn you this ride is not for the faint of heart so if you’re pregnant have any heart problems back or neck issues are prone to dizziness or motion sickness i recommend you wait outside this section of the workshop is not presented in your workbooks this is my own personal journey with my own personal money and i want to make crystal clear that this is not my performance in the firm in the various accounts i manage for o’neill my performance over the past 20 years in the firm resembles a stair-stepping equity curve that hit an all-time peak earlier this year it’s the type of equity curve you would expect from a consistent winner and that’s not to say that i haven’t had drawdowns or periods of underperformance that were larger or lasted longer than i would have liked because i’ve certainly had both and like anyone i am not immune to making mistakes and i have made many over the past 20 years but i’ve never made any in the firm that would destroy my equity curve and i think when you are accountable to another person who not only entrusts you to grow their money but also to protect their money then you are less prone to making some of the egregious mistakes that can destroy a portfolio in any event my journey is at once a cautionary tale a confessional a thrill ride my own self therapy and the culmination of lessons learned over the past 25 years i’m going to get a bit personal with you i’ve never given this presentation i’m hoping i don’t get emotional some of you may not believe some of the figures that i’m going to put up especially given from where i started and if i hadn’t lived it i may not believe it either i assure you all the numbers you’re gonna see are truthful and accurate because if there’s one thing that i have done consistently over the past 25 years is keep meticulous notes and records so buckle up and enjoy the ride the beginning of my training career really coincided with my hiring at william o’neill and company as a research analyst for the five years prior to that i was a an analyst at a boutique real estate consulting firm now i’ve always been interested in the stock market um back then i didn’t know anything i never made any money in it but i loved it in fact my first investment wasn’t even in a stock at all it was in a mutual fund when i was in college in the 1980s a friend of mine suggested i buy the fidelity magellan fund run by the legendary peter lynch and i took his advice and i bought it in august of 87 i honestly think i top tick the market to the day two and a half months later i had lost a third of my bar mitzvah money my knowledge back then came from watching louis rukizer’s wall street week every friday in public television and my only strategy was trying to find the lowest pe stocks i could now for my first day at o’neill in the research department i loved it i had access to all kinds of broker reports real-time quotes an unlimited amount of data and of course stock charts when i saw those broker reports i thought i had struck gold i mean i had all of the analyst recommendations for all these different stocks and i was very excited about it i remember calling my wife from my cubicle and saying honey we’re going to be rich and my strategy was simple i combed through all the reports and i looked for the report that had the biggest projection and increase in price over the shortest period of time it was that simple so i clearly remember my first investment analyst the solomon brothers had written a report on a little company called today’s man has anyone heard of it okay it doesn’t surprise me they were a men’s clothing retailer in the northeast let me give you a tip never invest in men’s retail men don’t even shop they hate shopping anyway he wrote a report and he projected the price was going to double in the next six months so i bought in at about 4.75 a share in november of 95. a month later the stock had fallen 50 percent i took a 41 loss but i learned an important lesson never trust an analyst recommendation so that was my start the last two months of 95. my 1500 account was now just 900 so i transferred another 2 000 into my account so i had a little bit more to trade and i still had no clue what i was doing but i knew don’t trust the analysts at the time i was reading bill’s book i was learning how to analyze charts and i’d started studying for the cfa exam and my intention at the time was to get my cfa designation and then work at a buy side or suicide firm and i was obsessed with the stock market i stayed late every night after work researching stocks studying charts and so forth i would come in on weekends as well i liked buying low price stocks i didn’t have much money i like to buy round lots and i like to buy on pullbacks a strategy that i still use today now back then trading commissions are really high even at a discount brokerage they were high so with my little account i really couldn’t afford to be buying lots of stocks and racking up these commissions they really dug into my results so i would basically limit my portfolio to just one or two stocks at a time which meant i either put all my money in a stock or half my money in the stock maybe a third but i was taking very large positions relative to the small size of my account so when i was right it had a big impact on my on my account and when i was wrong it was pretty bad so through the first few months of the year i was pretty haphazard but i was making money but you could see that i’d either have big months or bad months but in all in all i was in the black and then in august of 1996 a little company came public called srs labs they were a maker of um audio enhancement software basically they could take regular speakers and turn them into 3d sound so i bought into that company right after it ipo’d after this little tight area and the stock exploded by the end of august my account was up 122 i could still remember visiting the company’s website and listening to the 3d sound coming through the speakers now i will be honest with you i really couldn’t hear the difference but i wanted to hear the difference i mean i was making money in the stock and i loved it so i decided to add another twenty two hundred fifty dollars to my account now maybe i wasn’t the only one that couldn’t hear the difference because by year end the stock came all the way back down unfortunately i had no cell rules and between holding the stock all the way down and adding to my position my triple digit gain turned into a 24 percent loss by your end i started with fifteen hundred dollars i’d added an additional 42.50 and by the end of my first year i had just over three thousand dollars i lost about half my money at the end of 96 i did something that was a game changer for me i did exactly what bill would have suggested i did a post analysis and i wrote down some rules to govern my trading i still have that original document today my basic rules for these preservation of capital never take a big loss number two always have an expectation of what a stock should do and if it violates that expectation sell it and three trade in line with your personality now those of you that know me know that i’m a little more of an active trader i would consider myself a singles hitter when i swing for the fences i usually strike out so i basically decided to embrace my short term nature and adopt a swing trading approach now what i had not done by that point is really just focus my buying and buying leadership and breakouts i was doing that too but i was also running all kinds of different strategies i would try to buy stocks that were breaking down fast trying to cash a quick bounce i was trying to buy stocks at the bottom of a base i figured why wait for the stock to break out if you can buy at the bottom of the base it made no sense to me i didn’t realize at the time that you don’t notice the bottom of the base until after the fact i figured that out later so i started over again in 1997 this time with a fresh set of rules that i vowed to follow and we were in a strong bull market the nasdaq in 97 was up nearly 22 percent for the year but the first few months were pretty tough the market corrected about 15 percent off the highs but i wasn’t paying any attention to the general market at that time i was just focusing on individual stocks trying to pick some short-term winners and i figured that there’s always something working regardless of market conditions so the year started off with a bang i was up 37 percent in the first month of the year trading remick which is a little company i made 23 in in six days i probably had my whole account in it on margin however by the end of april i came back down with the market and actually gave it all back and then some so it’s down for the year again however by the end of april the market followed through and had a huge 41 advance through mid-october and that’s where things really started to take off for me remember i was trading a very concentrated portfolio relative to the small size and i was looking for quick profits doing my little swing trading and i was immediately redeploying my winnings and trying to compound my account as quickly as i could so i did well in stocks like maverick 2 which i traded throughout the year trust me i didn’t buy it and hold it the whole time but i was trading it i did well in engineering animation which i bought and sold again and again for profits i did well in peregrine systems made 37 in two weeks and i got lucky on some oversold balances made 32 in four days in act networks and 16 in four days in simulation sciences with the use of full margin and short-term compounding i was up 130 percent by the end of may i had reversed all of my previous losses from my start i was finally in the black i decided to add another 42.50 to my account bringing my total capital outlay to 10 000 now the time with the additional money my equity my account was really only 11 000 so i really hadn’t made much money over the previous 18 months but i was in the black the wind was at my back and the momentum was building i made a few good trades in halter marine and para gained technologies and by the end of july i was up 223 percent i was trading without a trace of fear there was absolutely no hesitation or resistance i was in the zone i had very few losing trades during this period and when i did have a loss i was cutting them between five and eight percent in august of 97 i decided things weren’t moving quite fast enough and i discovered options i figured why shoot for a quick 15 to 20 percent gain when the option will double or triple in that time frame now i’ve had a love hate relationship with options ever since i’ve never used them in a responsible way the way they’re intended you should use options to hedge your risk to mitigate your risk i have only used them to increase my risk and increase my leverage and that works great when things are going your way and it’s devastating when they don’t took me a while to figure that out in the second half of 97 about half my trades weren’t options instead of buying a large position in the stock i would buy a fairly large position in the option of ranging between 10 and 15 percent of my account which is pretty big for an option position here are an example of some of those trades dsp group and this is a model book stock made 286 in five days whole foods are traded again and again with gains of 130 to 360 percent avid technology up fifty percent in ten days radical this is a stock by twenty five percent in ten days system and computers two hundred twenty eight percent in eight days by the end of 97 i was up 710 percent and my little account had grown to forty thousand dollars i continued to trade aggressively into 1998 although my focus turned back to stocks having sustained a few bad option losses at the end of the previous year the market was strong during the first half of 98 with an asset moving up 29 percent to its peak by far my biggest winner was engineering animation which i had traded the previous year as well it was trending perfectly and holding the 50-day moving average and you can see it gave many opportunities for a swing trader to buy i’d buy it off the 50 sell it into strength over and over again here’s my by far my biggest winner over the previous 18 months it moved up 300 percent from this initial breakout it was my reliable go-to stock that i made money in time and time again by the end of april i was up 62 for the year my account had grown to nearly 65 000 and for the first time i decided to take some money out of my account transferring 7 500 into savings by the end of june i was up 110 and my account was up to 73 000. i was now up sixteen hundred percent in eighteen months from when i wrote down my rules little did i know we were on the brink of my first legitimate bear market and sadly i had missed the m in canceling chapter as i mentioned i never paid much attention to the action of the general market back in those days i just happened to be lucky to be trading in a secular bull market all that changed in july of 98 the market peaked july 21st at 2028 and within three months lost 33 percent of its value now i had been through some intermediate corrections in the previous year but nothing like this in august of 98 the russian government was forced to devalue their currency and default on their debt the renowned hedge fund long-term capital management blew up in the process and markets everywhere were affected the federal reserve was forced to go in and coordinate a bailout in july my account was down 28 in august another 18 in september another 29 percent and uh in october another 15 in the course of four months my account went from being up 110 to being down 24 on the year my account was back down to a mere 26 000 bucks i was shell-shocked i had busted i was 64 off my highs in four months two things led to my ruin my persistence in fighting against the market trying to swim against the tide and that has always been my weakness as i mentioned yesterday i’ve always tried to make money in every kind of market i’ve always thought i’m smart enough to find that rare winner in a sea of red and my other thing that led to my ruin was my insistence on trying to pick bottoms the truth is that it’s all but impossible to consistently pick a bottom in a falling stock you’re gonna be wrong much more than you’re right and even if you diligently cut your losses at five six seven percent if you take 10 or 15 losses in a row trying to catch a balance and a low percentage strategy you’re gonna blow up now can you guess the stock i kept coming back to again and again engineering animation the one i had made all that money in as well as it did it was massacred when the market corrected falling 60 percent in a few months each time i would go in and try to catch a bottom i would lose i would cut my loss and try again again and again now in my experience buying pullbacks in an established uptrend is the most profitable and least risky strategy in a bull market and that’s what i do but in a bear market is is a terrible strategy by the end of october i was devastated i was discouraged and i began to doubt myself i wasn’t sure if that 18-month winning streak was a result of my trading acumen or just blind luck now a few months earlier i had earned my cfa designation and if you recall my original intention was to be an analyst at a at a firm in a buy side firm a sell side firm writing up reports i’d given back the bulk of my gains in such a short period of time that i thought that maybe trading wasn’t for me and so i started looking for a job and i nearly got a job at a small boutique money management firm but ended up getting passed over for a guy with much more experience well the gods must have been smiling on me because i was on the brink of starting a run that would change the course of my life the market bottomed in october of 98 october 8th a week later alan greenspan the federal reserve chairman lowered rates for the second time in three weeks and the indices staged a massive follow-through from the market low on october 8th to the peak at the end of the year the nasdaq rallied an incredible 62 percent with the bull back in full force it started to make money again and managed to make 35 in november another 27 in december and by the end of the year my account was up 29 for the year my account had bounced back to 45 000 and i had regained my confidence as we went into 1999. can anyone tell me off the cuff how much nasdaq was up in 99 this off the cuff it was up an astonishing 86 i had to recheck my numbers like five times because i couldn’t even believe it and i traded through it now in 1999 i made over 700 trades those are round trips that’s an average of 60 trades a month and that’s a lot of trading so there’s too many trades to highlight um keep in mind it actually you don’t notice at the time o’neill had a discount brokerage and i had to trade through it i worked at the company i traded through the o’neill discount brokerage i traded so much in 99 that i paid the firm back twice what they paid me a salary [Laughter] true story during that year i traded primarily stocks i didn’t trade options i trade true to my i stay true to my strategy of short-term singles and i try to compound my money as quickly as i could my win loss ratio in 99 was about 60 my average holding period was seven days my average gain was 16 my average loss was 6 now those stats might not seem that impressive but they resulted in being up 10 out of 12 months eight of those months were double-digit months of those eight double-digit months five of them were monthly gains of 39 or more i ended 99 up 1031 with over a half million dollars in my account i promptly took out 180 000 to pay my tax bill i was feeling pretty good about myself well that might be an understatement i thought i was a market wizard and i thought it was only fitting that everyone knew that [Applause] my wife cringed when she saw that license plate gil morales one of the pm’s at o’neill called to tell me i was an idiot he said that’s a bad omen of things to come and he was right but he was a little bit early later that year in 1999 an amazing thing happened to me something i had always dreamed of but never expected i got a visit from bill now bill rarely came up to the research department he really came up about once a year to give us a pep talk to give the analysts a pep talk tell us you know we should get involved in the stock market and tell us the amazing potential to change our lives now the head of the research department was aware i was an active trader and i had asked her that if there’s ever an opportunity in money management i’d like to be considered because no one knew who i was i was just a research analyst in the research department and remember i was trading through the o’neill brokerage so they can you know if they wanted to can monitor how it was doing and they could audit my performance so one morning i’m sitting at my desk and in walk spill and he walks right over to my desk and pulls up a chair i could see all the eyes in the department were on me and we chatted for a few minutes and he said let’s grab some lunch you took me to soup plantation and he said he needed a research analyst to support the pms i said how about making me a pm he chuckled and said all in due time right now i need an analyst of course i accepted the position now he did have some present words of wisdom for me a few weeks later at the firm christmas party he asked me how i was doing for the year and i told him i was up a thousand percent and he said just remember we all put our pants on one leg at a time at the start of 2000 i moved into a cubicle right outside bill’s office he set me up with real-time quotes and our wanda charting service and turned me loose now i was an analyst for the pms and every so often i would write a one-page report on some stock the the guys were trading or interested in but they really didn’t ask that much of me and so it’s pretty much able to trade my own account my own personal account with very few distractions and i did a lot of trading the first two and a half months of 2000 um started back where the previous year ended the nasdaq was up 26 in that two and a half month period on top of the 86 month game the year before the market was euphoric stocks were going crazy climax tops which are typically pretty rare abounded everyone was getting involved in the market the market pundits were saying that there was a paradigm shift that the old rules don’t apply when that kind of thinking becomes commonplace you know you’re near the end as livermore said there’s nothing new in wall street my biggest winners during that little two and a half month period were in the internet and biotech sectors which were on fire some of my winners were noven pharmaceuticals cell genesis which was my biggest winner and connection systems you can see the stocks were just going insane every stock was going insane in the month of february alone i was up 93 and i hit a milestone i had my first six-figure day i had two more of them in the next five trading sessions the market peaked march 10th of 2000 and i was up 240 percent by that day i was making more money than i ever imagined i decided to wire another 325 000 out of my account following the peak there was a brief pullback and balanced off the 50-day moving average and then the market fell apart within five or six weeks the nasdaq had broken 36 percent stocks were crashing cell genesis my biggest winner was down 70 percent by the end of march toward the end of may the market was down 41 office highs but a very strange thing was happening i kept making money i got lucky cashing a few oversold bounces i made money shorting the market and buying some put options and that’s something i never did but i guess i did it for the first time and made a little money by the end of april i was up 29 percent and i held my gains being down just five percent in may i decided to wire another 150 000 out of my accounts at the end of may the market followed through and had a seven week tradable rally advancing 24 and i remember it well because this is the exact time that bill made me a pm and staked me with some money in the first six weeks of trading the firm money i was up 50 and for a short time i was flavor of the month bill moved me into his office he became a mentor to me we spoke every day i went on business trips with him and i felt we became really close likewise i was killing it in my personal account during this rebound rally i was up 25 in the month of june and another 17 in july after a brief but significant 18 pullback in the second half of july the market had one last bounce to challenge the july highs advancing 21 off the lows my personal account was up another 50 by the end of august i was up 652 percent we had just closed escrow on a brand new home beautiful home but i was doing so well i was already looking for something bigger and better i remember telling my wife at that time i would never make less than a million dollars a year and i would never be up less than 100 percent a year that was my worst case scenario i peaked i peaked september 14 2000 up 824 for the year and that’s following a thousand percent gain the previous year at that time the nasdaq was down four percent and 24 percent off his march high on my peak day i was up 109 000 from the start of my 1997 trading when i started with my rules that’s compared to 203 for the nasdaq my investment had grown from an average capital outlay of 7 500 to nearly 2 million and it would have been much much higher if i hadn’t taken so much money out of the market on the way up even so that’s a 254 move without a single long-term capital gain it was exhilarating and it was intoxicating up to that point in the year i had made over a thousand trades and i was printing money even with the market well off the size and i couldn’t stop trading and i didn’t see any reason to to stop so the bear market really got ugly right after that point the nasdaq fell forty percent into the end of the year and it was impossible to make money on the long side and that’s how i traded in the two days following my september peak i was already off a quick 14 and at that point i made one of the smartest decisions in my life remembering how i busted in 1998 and feeling that i was losing control i began wiring money out of my account big chunks of money in an effort to protect myself from myself in september i transferred another 600 000 out of my account followed by another 150 in october i diversified by buying um a limited partnership in real estate i put some money in mutual funds for the long term i put money away for private school and college for my young kids i put money aside to finish our home the landscaping and build a pool i put money aside to pay taxes and i had money left over for a rainy day but i couldn’t stop trading i was like an addict i kept trading and i kept losing into the end of the year by the end of the year i had managed to wire out close to 70 of my assets of my money from my september peak but most of the remainder i lost by your end and i was burnt out and i needed a break so at the beginning of 2001 i decided to focus all my efforts in trading our retirement accounts as opposed to this tradable margin account that i just showed you all of my trading up to that point were short-term capital gains and i was bitter to be splitting my profits with the government year in and year out it would be many years before i restaked my tradable margin account with any size so my main trading vehicle became my wife’s sep ira account and it had been growing nicely over the years nowhere nearly as quick as that margin account but you know i traded it more slowly more conservatively but it hasn’t done pretty well now by this time again i was so burnt out and exhausted from so much trading i decided to really emulate bill a little bit more and try to focus on capitalizing on some big winners jesse livermore’s words resonated with me it’s a big swing that makes the big money for you so 2001 uh the first quarter 2001 was a rough time in the market after following a brief rally in january the market went to a tail spin falling 44 percent into early april but lucky for me i had come across skechers and i traded it aggressively during the first half of 2001. i entered the trade the day before the breakout and i traded around a core position by the end of may i was up 121 while the nasdaq was down 15 although i did give back a chunk of money as the market rolled over now in september the nation suffered the 9 11 terrorist attacks i remember driving to work that day that morning listening to the news commentary of the planes hitting the twin towers the market didn’t open that day and it remained closed for four days when it did finally open it corrected 18 in five sessions it then found a bottom staged a fifth day follow-through at the end of september and rallied strong through the end of the year rallying 41 off the lows defense stocks anti-terrorism stocks and cyber security stocks for the big leaders for remainder of the year i made big money in bradley pharmaceuticals physionics which was a facial recognition software company and entrust which was a cyber security turnaround play that i had a precedent for by the end of 2001 i was up 229 with the nasdaq down 21 not a bad way to end my first year trading the retirement account and i didn’t pay a penny in taxes i was emboldened and i began to dream this is when i created that spreadsheet i showed you yesterday on my road to a billion dollars now as i mentioned i had a president for the interest trade it was another little cyber security turnaround called secure computing now you can see this you can’t see the action up here but the stock is way up here it fell fell fulfill i had this kind of climactic gap down this long consolidation phase and then it perked up came back into the the 50 had a huge move up and then another pullback to the 21 day moving average the stock was up 10 fold in 20 weeks and trust similarly had a deep fall from grace big climactic gap down consolidation phase perked up off the 50-day pulled into the 21 day rushed up and came back in exact same looking chart now and trust was up over 200 percent by early january and based on the president the secure computing president which went up again 10-fold in 20 weeks i expected interest to double again within the next four to eight weeks now i was up huge on the stock my confidence was surging i had built a 75 position in the stock going into earnings expecting the gap up what i got was a gap down the stock flows down 31 that that day on ginormous volume my account was down 25 in a day now from that point forward things got worse 2002 was a brutal year in the market the nasdaq fell eight of the first nine months correcting 41 to its low in october in typical form i continued to swim against the tide doing my best to make money on the long side in a sea of red but it was just too difficult by the end of september i was 50 off my highs my compounded gain had shrunk from 229 percent to just 53 i had busted again the bear market ended in october 2002 the nasdaq had fallen an insane 78 percent in two and a half years on october 15th the market staged a powerful fourth-day follow-through and rallied 37 over the next six weeks with the turn in the market my account stabilized but i was psychologically wounded and i didn’t take full advantage of the huge bounce off the bottom i ended 2002 down 50 percent it took until april 2014 2004 for my equity curve to get back to new highs that’s two years and three months of precious time loss just getting back to where i was this leads me to talk about the power of compounding the secret to building wealth is to harness the power of compounding now the power of compounding requires two essential elements return on investment and time you need both or it doesn’t work now by definition only the consistent winner can harness the power of compounding it doesn’t work for the boom and buster because they take too much time making back all their losses again and again and again in march 2003 we saw the start of a new secular bull market the next five years were a great time to be trading there were many great model stocks during this period that made amazing moves once again i vowed to stick to my rules and i began a long run of more consistent results during the five years from 2003 to 2007 i traded like a consistent winner now to be sure i made mistakes but none of them were fatal mistakes for the most part i handily beat the market by a wide margin i wasn’t experiencing the crazy performance i had on my margin account in the late 90s but you have to remember this was not the tech bubble the tech bubble was its own special unique period which we may never see that again it was kind of a once-in-a-lifetime and i was also trading without the use of margin which limited my upside but to be fair it also limited my downside during those five years my sap was up 452 percent for kagar 41 compared to the 99 return of the nasdaq which is a 15 kgar some of my winners during that time period were oh that’s my performance over that five year period some of my winners were laser scope in 2003 and 2004. mgi pharma apple in 2004 2005. intuitive surgical these are all great model book stocks google and 2007 baidu and first solar which is one of my biggest winners so those are really great years but we were on the cusp of the financial crisis and our second major bear market in a decade so again 2008 was the financial crisis and it was a terrible year except for a couple of short-term bounces you know little tradable rallies the trend was distinctly down and the only thing to really do was to stay out of the market that’s precisely what bill had the pms to do in the firm but in my personal account i did what i always did i tried to find the rare winner amongst the sea of losers and for a while i held my own going into the end of august i was up eight percent compared to the nasdaq’s nine percent loss but by the end of september all hell broke loose and the indices started to crash from mid-august through mid-november the nasdaq plummeted an astonishing 48 and i went right down with it by year end i was down 29 compared to the 41 drop in the nasdaq it wasn’t a good result but it could have been worse it could have been a lot worse so i licked my wounds and prepared for the next bull market march 9th 2009 the nasdaq hit what would turn to be the bear market low down 56 percent from the november peak and still down 75 from the march 2000 peak on march 12th the s p 500 staged a follow through day a fifth day follow through and suddenly we’re in a new bull market now like the 2003 2007 bull market that followed the tech bubble burst the bull market that followed the financial crisis was powerful and consistent and offered amazing opportunities to parlay your wealth my returns were strong and consistent over the next five years again handily beating the performance of the nasdaq i again experienced what it was like to trade like a consistent winner over that five year period i was up 660 percent of 50 percent kgar compared to nasdaq’s formidable percent return or 22 kgar some of my big winners during this period included green mountain coffee source fire apple and acme packet in 2010 and 2011 and then towards the end of 2011 i caught the turnaround in the housing sector after a nearly six-year route where the publicly traded home builders had fallen by 80 to 90 percent and the private home builders had either gone bust or were acquired or merged now this was a trade this home building trade was something that i had been planning and patiently waiting years for in fact i did a whole presentation on this trade at the 2012 master’s workshop i doubled my money in 2012 primarily trading the housing stocks so you can imagine that i was feeling pretty good about myself by the end of 2013 and i was proud of my performance over the 13 years from 2001 i was up 4 800 percent this is in a non-margin account it’s a 35 kgar compared to the nasdaq’s 69 percent return or k garb just four percent my net worth was building now it’s compounded annual growth rate my net worth was building and i was dreaming about a bright future of abundance and wealth as we entered 2014 one of the stocks that was following closely was tesla which had staged a massive move the previous year and had built a second stage cup of handle base tesla was one of my biggest winners in the firm that previous year in 2013 i knew it well and i had a lot of confidence in it and this stock also reminded me of a stock i did very well in six years earlier first solar these stocks behaved almost exactly alike during their initial breakout runs and i was betting that tesla might act like first seller coming out of this first the second stage base and indeed they traded exactly the same until they didn’t you can see first solar built the second stage cup with handle broke out around the 50-day moving average ran up had three pullbacks to the 21 day moving average had a little gap up and then a gigantic gap up tesla formed a second stage base broke out at the 50-day moving average ran up had three pullbacks to the 21 day this one stopped at the 10 had a little gap up and then a massive gap up exactly the same it was uncanny how similarly the stocks traded it was it was as if i could see the future my convictions soared with the size of my position i had so much confidence and was doing so well in this trade based on the president that i started to buy call options lots of call options on february 25th when tesla had that huge gap up just like my president had predicted i had my first seven figure day my account was already up 62 on the year and we weren’t even into march i was trading from home that day and i remember calling my wife over and i said look at this i was beaming there is no better feeling than having your analysis and expectations realized on a well-planned trade it is intoxicating she looked at me and said honey that’s a lot of money maybe you should sell and take a break i said sell this is just the beginning i’ve worked hard all these years just to get to this point we’re at a new starting point now this is where things start to get really exciting i peaked six days later up 71 percent year-to-date up 8 300 for my start in 2001. now the truth is at this time by this time i had made enough money so that we could live very very comfortably for the rest of our lives but i wasn’t satisfied i was really dreaming big i fashioned myself as a modern day jesse livermore i would buy a big home on the beach in malibu and throw lavish parties for all my friends not that i was anywhere as rich or successful as jesse livermore but i figured that if i could double my account by year-end which i thought i’d have no problem doing then i could pretty much do whatever i wanted and live wherever i wanted from that point on and i hadn’t even reached my 50th birthday and this money was tax free i had converted it to a roth ira years before and paid the taxes now the funny thing is that anyone who really knows me knows that i would hate living like that and that’s really not me but maybe that’s who i thought i should be we’ll get to that later so anyway back to the first solar precedent i was anticipating a similar run in tesla’s first solar first solar moved up 160 in 14 weeks so i figured tesla still had six weeks to go but it wasn’t to be instead tesla started to fall along with a whole cohort of other high-flying stocks the precedent was broken but i refused to believe it i had been so right that it was impossible to be wrong it is hard for me to explain to you what happened next it is painful and it is embarrassing and it is it’s as if something broke inside my brain i began a long and severe downward spiral unlike anything i have ever experienced over the next few years i slowly turned away from everything i knew about the market everything that led to my success and i became the worst type of amateur one who’s emotional fearful didn’t trust himself and either had too much or not enough confidence tesla came down to the 50-day moving average found support and bounce for a day and then undercut the 50-day moving average all the while i was buying more and more call options anticipating a sharp recovery now i was aware that the president was broken but i stubbornly held on anyway by the end of march just four weeks after peaking i had given back all my gains and then some i took massive losses on my options most of them going to zero millions and millions and millions of dollars down the drain and from that point on i really struggled my head was in a bad place i was flailing i should have stopped all together gather my thoughts get my head on straight but i didn’t i kept trading and nothing seemed to go right by the end of october i was down 60 i was down 36 percent and 63 off my highs in just seven months i managed to stabilize by the end of the year but i had busted again a spectacular 13-year run by the end of 2014 i was down 26 percent for the year in a depressing 56 percent off my peak during the first half of 2015 the market traded in a choppy fashion but with an upward bias and it wasn’t up much but this kind of market with the frequent pullbacks did offer opportunities for someone who could swing trade and i did okay now my mental state was still injured i was very disappointed but i had done a post analysis at the end of 2014 and i was eager and i was confident that i would recover i mean livermore recovered from worse so i would too i had success and turnaround plays in lululemon and mobileye i did well in nxpi semiconductor i even caught the turn in tesla this time sticking to the stock not the options toward the end of june i was up nearly 30 percent compared to the nasdaq’s nine percent gain i was still well off my peak but i was making progress in august of 2015 we had the flash crash the nasdaq fell 18 percent off the peak most of that damage occurring in four days and i was hit hard i gave back the bulk of my gains for the year but i also participated in the bounce so by the end of september i was still up 19 on the year compared to the nasdaq’s 1.6 return but from that point on i really struggled you can see how choppy the market was and now it was in the sideways choppy consolidation it was really too difficult to make money particularly on the long side probably on any side for that matter it was a stay away market except i wasn’t staying away i closed the year down nearly nine percent compared to the nasdaq six percent gain i was now sixty percent below my all-time peak in under two years 2016 was another volatile year in the market it was a really tough year the nasdaq was up seven and a half percent by year end but the choppiness and the headline risk made it really difficult to navigate even for the very best traders who were on their game but for me who was in the midst of a devastating losing streak and it completely lost his way it was next impossible to trade well when your head isn’t screwed on straight the rule is to simply stop trading take a break the market will be there when you come back and when you do come back you start off small right you test the waters you test your ability to stay disciplined but i kept trading full force ignoring the fact that the market was not in an uptrend and breaking every rule in the book the first part of 2016 was terrible there was a 19 intermediate correction followed by a recovery and then sharp pullbacks related to brexit and then the presidential election was this a really tough market to trade and as you might expect i came back to my white whale tesla i bought it at the tail end of 2015. just day before days before the market was about to break wide open and i bought it on this premature break out above resistance um don’t ask me why no it’s not a proper pattern um at the time i was just trying anything i was pretty desperate hoping for something to work i was not in a good state of mind the fact that it broke down a few days later on heavy volume a gap down did not dissuade me i had become the proverbial long-term investor i was done taking losses done i knew in my mind that it would come back eventually and i was going to hold it no matter what now the funny thing about the market is that it has an uncanny way of knowing your breaking point and everybody has a breaking point i always say the only reason not to the only way not to capitulate is never put yourself in that position i held on for dear life as that stock kept falling along with the general market day after day i buried my head in the sand and i tried not to look by the time it broke 150 i was in full on panic mode i was afraid of completely blowing up and losing everything i finally came to my senses and capitulated suffering a 40 loss in six weeks i was completely devastated but i was also thankful to be out of the stock no longer a believer i thought the stock would break another 50 to 60 points what the hell do you think happened next this is what happened holding the stock shot up 90 in two months i can’t believe i’m telling you this i lost so much money it’s hard to comprehend i was now 77 off my highs in two years i had never experienced a streak like this i stopped talking to my wife about trading i was ashamed i was embarrassed i was depressed i just kept it all to myself but she knew it was bad you cannot hide this kind of damage but i still had a stake even if it was just a fraction of what i had at my peak and even though i had completely lost my discipline i couldn’t seemingly put on a winning trade to save my life somewhere deep down i believed in myself you know i had started with virtually nothing i had built it up into something significant everything i owned everything i had in the material sense my whole way of life standard of living came from my profits in the market and as bad as it was i still had a significant stay compared to what i started with so i knew that i could if i could get back in the zone i could rebuild my fortune now you would think that after the second tesla debacle things couldn’t get much worse but you would be wrong i believe that i could right the ship but honestly guys i was pretty effed up you can only imagine the kind of stress i was under it affected every part of my life my marriage my kids my career everything suffered now we didn’t live an extravagant lifestyle but we had a very nice life my kids were in and have always been in private schools private college we did a lot of entertaining and we had expenses i was constantly pulling money out of the market to make up the difference the stress i was under was off the charts and i was completely exhausted trading is a demanding profession under the best of circumstances it requires you to show up every day and be at your best to be at the top of your game if ever i needed a break it was now you know i’ve never taken a break in 20 years actually 25 years and i was burnt up but i kept going instead of taking a break i committed to finding the next big winner that would dig me out of this hole i was going to find the next huge multi-year model book stock now in july of 2016 a rally happened amongst the fiber optic stocks and that played in perfectly with my new plan to find a big winner a new big secular growth stock and a secular theme and so getting on board the fiber optic trade i made money in lumentum aclero and finisar but the one i really wanted was acacia this was going to be my model book stock acacia was a new hot ipo in the fiber optics space it had amazing earnings huge estimates and a reasonable valuation but i hesitated being in the frame of mind i was in i needed to be sure that this was going to work i was afraid to buy something that was unproven and sticking straight up in the air so i waited and i watched and i watched and i watched and i watched the stock was up 170 in nine weeks finally i had an opportunity to buy on a pullback to the 21 day moving average averaging in around 107 a share now as you might expect i was armed with a historical precedent my old standby first solar from 2007. now you would have thought i would have given up on this sucker by now but you know can i say sometimes they work the similarities are obvious first solar was an ipo broke out of an ipo base ran up had a huge gap up pulled back to the 21 day went to new highs pulled back to the 21 day acacia new hot ipo broke out of an ipo base gapped up pull back to the 21 day new highs pull back to the 21 day yes the stock has already been up a lot at this point but based on the first solar move there was another huge move right around the corner in the four months following the second pullback in first solar the stock rallied 140 percent in four months so i was ready to clean up an acacia this is what i was expecting i sold my current holdings and the other fiber optic stocks with a handsome profit and positioned myself aggressively in acacia i wasn’t going to pass up this opportunity to make back my losses in a stock about to double i loaded up and i waited for good things to happen but once again the historical precedent didn’t work acacia started to falter after a one-day balance off the 50-day the stock gapped down on set on a secondary offering decisively breaking below the 50-day moving average closing at the lows this is a clear and ominous sign to bail out we all know that the stock looked to be looked like it was heading lower maybe a lot lower i couldn’t believe it what about my model book stock could this really be happening how is it possible for anyone to be this unlucky i was seriously thinking that there was someone out there that put a voodoo curse on it well obviously the thing to do was to sell my position and cut my loss but cell i did not what i did do was dig in my heels and become an expert on the fiber optic industry now i am being deadly serious with you when i tell you i am very very technically challenged you can ask mike webster pretty much my only strategy to fix anything electronic is to unplug it and plug it back in so for me to understand anything as complex as a fiber optic industry and coherent transmission is next to impossible and yet i read everything i could get my hands on and i did my best to understand the space and acacia’s unique market leading optical internet products for the data center and i am not exaggerating when i tell you i had a binder this thick filled with articles devoted to this i mean you should have seen me i was listening to the conference calls i would listen to how the analyst asked the question i would listen to how management responded and then i would try to interpret the analysts interpreted how the analyst responded to management’s response i mean it was crazy i mean i was literally out of my mind the ego will make the most elaborate justifications and rationalizations to keep you in a losing trade it will cause you to ignore the most obvious facts and focus on instead on any shred of evidence to support your position it will protect itself from being wrong at all costs even if that cost is losing everything you have the lower acacia went the more my knowledge grew i was reading the press releases i was reading the press releases of their competitors i was watching youtube videos on fiber optic technologists i was re reading and re-reading the analyst reports over and over again every single one of them every one of them without exception had a strong buy rating on the stock how could it be possible that all of us could be wrong bill’s voice haunted me the market is always right opinions are all are often wrong by year’s end i capitulated i had a large portion of my account on this loser and i was down nearly 50 on the stock i was down another 58 in 2016 83 off my all-time high just a few years earlier i could have stopped working all together and lived a very comfortable lifestyle of travel and play and now i found myself in this horrible predicament and stress beyond belief was a huge year in the markets the nasdaq was up 28 but as you would expect i was in no condition to trade honestly i was complete basket case it was time to tell my wife where we were and it didn’t go well she had had enough and wanted off the roller coaster and i couldn’t blame her we officially divorce at the end of 2018 after 27 years of marriage we continue to be the closest of friends and excellent co-parents all i can tell you is that it is extremely difficult and painful it was just a difficult and extremely painful period of my personal life i would not wish it on anyone things actually got worse in 2017 before i hit rock bottom and i was depressed i was confused i was embarrassed i was ashamed i ended that year flat and the turmoil in my life really persisted through 2018 somehow coming clean as to what had happened and where i was where i stood helped me to focus and get back on track i was able to make some progress in the first half of 2018 i closed up 23 percent outpacing the nasdaq’s nine percent gain at that point we separated our assets and the account was frozen until the divorce is final okay so you are probably thinking how on earth did you let that happen and trust me i have wrestled with that question for the past five years i even have a therapist that’s helping me grapple with it how does a person who is clearly so capable of succeeding in the markets and was able to achieve spectacular heights end up sabotaging himself with a string of bad choices that fly in the face of everything he knows and everything he teaches well this is where we move from trading psychology to just psychology yesterday we talked about the mindset of the consistent winner and the rules that you have to follow if you’re going to be successful and there’s nothing complicated about those rules right cut your losses quickly let your winners run add to a winning position not a loser trade in line with the market don’t over concentrate predefine your risk and so on and so forth but it’s one thing to know these rules and another thing entirely to follow them religiously on every trade the interesting thing about trading is that you can follow the rules perfectly 99 times in a row and have huge success but if on that hundredth trade you violate one or more rules with a big position you can unravel all your previous success in virtually no time at all 99 good good decisions wiped out with one really bad one it is no different from a recovering alcoholic having one drink after 20 years of sobriety and starting all over again when i think about it probably three quarters of my losses in terms of money were the result of three disastrous trades two in tesla and one on occasion so the question again after so much success after so many years why did i break virtually every rule in the book well i can’t speak for other boom ambassadors like niederhoff or livermore but my own personal journey of reflection awareness and growth has led me to this i sabotaged my success because deep down i didn’t feel i deserved it i didn’t feel worthy how i felt on the inside wasn’t matching up with how i was doing on the outside so unconsciously i did something about it and put the two in line now i wish i would have invested in some therapy before i lost all that money but it is what it is when i was at my peak why was i thinking about mansions in malibu and throwing lavish parties i was already living a pretty nice life i still am but i wanted more was i trying to prove to everyone how smart i was how rich i was how successful i was because i didn’t feel it on the inside the truth is that no amount of money or empirical success can compensate for a lack of worthiness as my therapist said it’s really cool to make a million dollars in a day but it doesn’t make you a better man so what exactly is worthiness worthiness is a feeling that i matter i’m valued in a in an authentic way how do we achieve worthiness how do we find value well this is where the hard work comes in this is what i’m working on through therapy feeling valued feeling a sense of worthiness comes from connecting with others through relationships it’s an internal thing seeking value externally doesn’t work it’s a slippery slope when you equate your sense of value with money status cars houses possessions and so forth i mean do you ever really have enough money isn’t there someone else out there who has more than you when you link more money to more value you’re in trouble money will never be enough if you don’t feel authentically valued by another person without judgment i’m sure that each of us is dealing with our own demons but i’m betting that i’m not the only one dealing with a sense of worthiness in fact i think is pretty common amongst most people so what can a person do again this is where the hard work comes in anyone can figure out what they’re doing wrong but figuring out why is another thing entirely it is not enough to do a post analysis figure out what rules you break and promise yourself you’ll never break them again if that’s all it took we would all be consistent winners in fact when i go back through my trading journal over 25 years and look at what i wrote after each successive fall it turns out i write the exact same things every single time i knew everything i needed to know about trading 25 years ago so we have to go deeper at least i do how many of you familiar with brene brown all right a few of you she has a ted talk on the power of vulnerability i recommend all of you watch that ted talk it’s probably one of the four or five most watched ted talks ever it’s got millions and millions of views um since most of you haven’t seen it i will summarize basically brene brown is an academic she’s a phd in social work and she’s a social worker and she studies connection and what gets in the way of it and connection is why we’re here okay connection is what gives meaning and purpose to our lives and what she found is that what’s getting what gets in the way of connection is shame is there something about me that if people knew or people saw i wouldn’t be worthy of love and belonging and the thing about shame is that it’s universal on some level everyone feels this i’m either i’m not good enough i’m not smart enough i’m not rich enough i’m not beautiful enough and so forth so for a connection to happen we must allow ourselves to be seen really seen and that requires vulnerability vulnerability being an act of courage not an act of weakness and what she found was that the difference between people living with a deep sense of worthiness versus those who struggled for it was that it was a sense of courage a courage to be imperfect these people were willing to let go of who they thought they should be in order to be who they are and that answers the question as to why i decided to take you on this journey as a trader it’s a part of my own healing process relating it back to trading if you’re living and trading from a deep sense of worthiness then you really don’t have an ego to protect which means there’s no reason to rationalize and hesitate over commit average down refuse to cut losses in all the trading errors that we make in protection of our ego i’m guessing that the consistent winners don’t have an internal deficit to fill they’re not looking for the market to fill some hole to fill some void so they can act and follow the rules without any internal conflict now i think everybody probably has their own crap to deal with um you may have other issues you may have other limiting beliefs but the point is that until we figure out what’s holding us back from reaching our potential we will continue to sabotage the success and struggle to become truly consistent winners so now you have some insight on what possessed me to share the story with you truthfully i had some reservations i had a lot of reservations um i mean let’s face it it’s kind of embarrassing i’m not terribly proud of how it ended but then again it hasn’t really ended has it a bad chapter doesn’t define your story or doesn’t have to define your story while greatly diminished i still have a stake i still have the opportunity to rebuild and that’s the great thing about trading and the great thing about the markets is that the market is always open offering a constant never-ending stream of opportunities and as long as you have a stake and the right mindset the possibilities are limitless now am i a little bit bummed that you know where i am now compared to where i was at my peak of course i am but i’m not as discouraged as you might think when i think about where i was 25 years ago with virtually nothing and what i was able to do with it i know that in time i’m going to reach new heights it’s not really a question of if but a question of when but i don’t have a timetable um i don’t know how long it’ll take but i know this that when you’re in the zone things can happen pretty quick this year my roth ira is up 54 my margin account that i funded refunded back last year is up 182 so i’m on the comeback the question is when i recover will things be different will i be able to hold on to it have i become a consistent winner so the answer to that question is yes but talk is cheap the truth is i always feel a new sense of confidence and inner strength when i’m trading well so i’m gonna have to let the results speak for themselves the truth is i’m a work in progress and we’ll just have to see so to wrap up my hope is that you are able to learn from this experience realize the incredible potential there is in the market to build wealth as well as the ever-present potential to sabotage and squander that wealth if you lose your discipline if you haven’t yet achieved the status of consistent winner don’t give up don’t be discouraged most elite traders who fall in that group lose one or more fortunes along the way it takes that in order to have the mental shift and growth to develop the winners mindset just like you can’t build muscle without anything to lift most people can’t become consistent winners without inevitable setbacks so good luck [Applause] um [Applause] thank you thank you i really appreciate that