This is a transcript to Mark Minervini's webinar which was released in 2015. In this market environment, the rules make a whole lot of sense.
3 Keys to Superperformance
Rule 1 Concentrate - don’t diversify
Keeps things manageable
Keeps you focused
Allows you to be patient - the luxury of integrity
Focus on the very best names
Discussion: You want to be able to manage your holdings. If you have big positions, you become attentive to those. If you concentrate, and when things work, you compound very rapidly. You do not need to be in the market every time as once you start buying positions timely, you move your equity fast. Concentration also allows you to focus on the best names. An example strategy is building a 10-stock position for 10% each or 4-5 position at 25%. You can start at 5% position then if it moves and become 10%, you can add to the second base. Mark shoots for a 25% position. Starting from 5% and building from there. He does not go all-in at once. Diversification doesn't protect you, it only dilutes you.
Rule 2 Turn over your portfolio
Forget about taxes
Forget about getting the high
Forget about your ego
Nail down decent profits when you have them
Discussion: Take profits when you have them. Trim stocks that are not going well. Never think of taxes when buying and selling stocks. Ask, "is the position right to be sold, should it be sold?" It is better to pay taxes on a profit than not paying taxes on a loss. Throw your ego in the thrash can. You will be wrong. You just need to keep those losses small. Learn from your losses and winners.
Rule 3 Time your trades
Time is money
Learn how to identify a VCP (Volatility Contraction Pattern) set-up
Develop “sit-out power” - only trade proper set-ups and allow them to come to you
Discussion: You can't time the market but individual stocks can be timed very effectively. Learn the Volatility Contraction Pattern set-up. Regardless if Indexing is working, you get leverage with individual stocks. The general market can go up 20% in a bull market, you'll have individual names in twofold, 20-fold. That's a leverage factor there.
Rule 4 Manage the risk reward relationship
Do the math
Don’t risk more than you expect to gain
Monitor your gains regularly
Rule of Thumb: Cut your losses at 1/2 your gains
Build in “failure”
Approach every trade "risk first"
Know where you're getting out before you get in
Write it down
CUT YOUR LOSS quickly - don't vacillate
Failing to adhere to stops is the single most destructive mistake made by all investors.
No big losses; No forced trades
Discussion: You cannot be right all the time. Best case scenario is 65%; less than 35% that's when you scale back activity. You have to set a spot when to get out (stop loss). You do not want to suffer from huge losses. Monitoring your gains gives you an idea on what right things you are doing and then adjust that loss which should be 1/2-1/3 of that gain. Do not worry about being right all the time. Use the risk/reward relationship in cutting your loss relative to your gains as your edge. You can still be profitable even if you are only 35% right of the time. Do not build a system that is planning for the the best and expecting the best. Expect the best but plan for the worse. Mark has a sign that says, "No big losses, No forced trades." Set your stop loss immediately so you do not sit there and argue with yourself and start rationalising as the stock gets closer and closer to the stop. If the stop gets triggered and the stock pops right back up, just get back in on the next set up. Remove your emotions by being disciplined. Act like a robot investor.
Rule 5 Trade Directionally
Only buy in the direction of your trade
Never average down
Multiple timeframe alignment
Determine if the “train” is on schedule
Discussion: Look at the trend on a long term chart down to intraday. Mark buys pullbacks but he waits for the stock to stabilise and starts trending back up. Do not average down. It is a guaranteed way to hurt you. Do not compound your mistake by adding to it. If you are trading a growth company, then they start reporting weak earnings, the stock could drop violently. VCP is just reading the supply and demand. Breakout is the difference between retail and institutional buying. As institutions remove supply, you will see explosive moves on the chart as the buying continues.
Rule 6 Build on success
Trading is not an on/off business
Let small wins finance larger risk
Trade largest when trading your best and smallest when trading your worst
If you’re not profitable at 25% or 50% invested…
Discussion: Mark is proud that over the years, his drawdowns are very minimal. Let your smaller wins finance your larger risks. Increase your size as you gain some traction. Those profits offsets your risks. People scale back but do not scale up. Press the gas if things are working, break if things are not. There is no reason to add if you are not making any money.
Rule 7 Protect your breakeven point ASAP
2-3x risk above average gain
Never let a good size gain turn into a loss
Backstop your profit
Order of Priority
a. Cut your loss
b. Protect your line
c. Protect your profit
Define your risk
Move stop to breakeven ASAP
Protect decent gains
Discussion: Protect your break even point as soon as you can without choking off the trade. If your stop is 5% and your average gain is 10% and the stock shoots say you are up 15%. Now, you are up 3x your risk and up 1.5x your average gain. Move your stop up by half or break even or slightly below break even or take a bit off the trade and free-roll or protect you average gain. You can be creative on this. Never let a decent-size gain turn into a loss. When you put a trade it is all risk. There is potential upside but you are at risk at that point. If you are up 25% on your position in a matter of few weeks, you might want to consider keeping that a bit longer, as that is a sign of a superperformance stock. You will probably see these stocks in the IBD list. A 50-day rule is buying a stock as it comes out of consolidation and use 50-day MA as base. This works best as the market comes out the bear cycle. O'neil said that if a stock is up 20% in <8 weeks, you should hold. Some of these stocks can move 500% to 800%.
Rule 8 Sell into Strength
Get out before the stock can break
It’s better to sell early than late
Selling half is a win/win solution
Discussion: Sell on the whip up. Do not fall in love with the stock. The goal is to make money off the stock. If the stock has moved up and you are thinking of selling it, sell half. This is to put you on a win-win psychological position. If it moves higher, sell half again. Protect your psychology as much as you protect your capital. Be careful selling your whole position of a very strong stock as it may be difficult to get back. Mark trades superperformers. He does not hold them.
Rule 9 Conduct post-analysis regularly
Results don’t lie
Look for commonalities
Improve your weaknesses
Know the truth about your trading.
Trading is a very emotional game.
Discussion: Individually we need to know what our strengths and weaknesses are. Everybody who trades has certain things they do over and over that is their Achilles heel. This is because trading is a very emotional game. Some individuals are nervous and jumpy, some are calm, some are not afraid of risk, some are scared to death. You cannot mentally comprehend those in a quantitative way. What you can do is pull the charts out, journal your trades and get some insights. You'll be surprised to know what you have been doing that is preventing you from progressing. Mark was not profitable for 7 years because the learning curve on his time was not the same today. He stuck to it because he knew that once he got it, it would pay for itself. Once you make your breakthroughs, it will be a lot easier. You cannot be good at this overnight.
Rule 10 Avoid style drift
Define your trading style
Be willing to sacrifice
Become a specialist
Discussion: The only Holy Grail is managing risk/reward ratio which is applicable to all strategies. Whatever strategy it is, you got to master it. You got to be willing to sacrifice other strategies. Figure out what works and make sense to you.
If you’re not getting the returns you desire, don’t blame; take responsibility, take action, learn… repeat!
Most important, believe in yourself - you can do much more than you can imagine
Rules are of no use unless you follow them
Three types of traders:
Discussion: There is no special talent in trading. Do what works over and over. Believe in your own availability. This is all about probabilities. Follow your rules.
Thoughts: I got into trading because of this. I experimented many strategies now. Day trading worked for me but I was in a disadvantage as I could not trade daily due to work. I was forced to stop day trading because of the changes made from my broker and decided to hold positions longer. I made my research on how to effectively play my trades on a longer period and Nicolas Darva and Mark Minervini's strategy made sense to me. I am way calmer with my trades and can think a bit better. I don't play penny or meme stocks. My personality suits well on chart and fundamental analysis. Mark's rule although simply laid out will not make sense to those who do not have skin in the game. But, it is a good guidance to know for those who have not traded or new to trading. I believe that 2020 stock market fast tracked my learning curve and that stock picking really does offer leverage against passive investing. I own index funds but has no intention in aggressively adding to them at this point. I don't need dividend income quarterly when I can capture more in a few days or weeks given correct position sizing with my trades. I am not in hurry to make those huge gains, I am more keen in knowing my psychology and decision-making in a quantitative way. I am giving myself until end of 2022 data to get a solid insight of my actions. I will focus on Minervini's strategy. Resources are free online nowadays. I think I'll be fine.
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