Read the whole blog post to the end, so you understand the secret insight given near the end that you will not want to miss under any circumstance.
There are many different ways of extracting profits from the financial markets. You have numerous different options and strategies and markets to trade.
In fact, one of the things you can do if you are just starting out is to research a little bit of every single type of trading strategy, as I talked about previously.
Though, I must caution you to beware what some other people may be peddling. The average trader just feels so overwhelmed and is unsure how to figure out the truth about things.
And the best way to do this and gain clarity is via some personal stories of mine and tying them into the universal principles of speculation.
Penny Stocks Vs Global Macro Trading
From time to time you may get pulled into various worlds of trading. One world that I got pulled into was that of forex robots and what all my other buddies were doing when I first got started. I tell this story here and how I had to have the courage to think different and be different. There is power in going in the opposite direction.
As Earl Nightingale said:
“Whatever the great majority are doing, do the opposite. You will probably never make another mistake again.”
It doesn’t always work. It is just a general rule. But it can be quite a good one. As a simple example, there are some people I know, for whom 95% of the ideas that come out of their minds and mouths are just really horrible.
Now, moving onto to penny stocks. This is another world of trading that some people may be trying to drag you into.
Let me tell you stories about two people who I met who traded penny stocks among other things.
#1 – The Super Enthusiastic, Fat Penny Stock Trader
This man had a five figure portfolio, and it wasn’t doing too well. He wanted my help.
I owed him a favor, so I decided to look over his portfolio. This was over a year ago.
Driving in his car, he told me his “war stories” of how he made hundreds of thousands of dollars in penny stocks a few decades ago, with such enthusiasm, you would have thought he was 17 years old. Though, where all the money went I do not know. (I will give you another hint: If you want to listen to and read about war stories, listen to global macro war stories – such as ones found here by Stanley Druckenmiller.)
I previously did not know he traded so many penny stocks. So when I looked over his portfolio, I easily saw the problem. He would buy all these low priced stocks and hope they would go higher. The equity bull market was raging in 2013 and 2014, and he was stuck in all these penny stocks that did not do anything.
In some cases they fell so much, they were threatened to be delisted from the exchange. In order to stop that, some companies would reverse split to push up their stock prices, which would reduce the number of shares held by the shareholders. No wonder this man had so much anger over the amount of shares that he owned was being reduced.
He asked for my recommendations. He wanted a stock pick. I told him, I only had one really good idea at the time that he could potentially hold for over a year. It was to buy Apple (AAPL) stock. “But” he said, “it is trading at over $500 a share.”
This was before the stock split.
“How many shares could I possibly buy?” he asked.
He was thinking in terms of how many shares could he buy, rather than thinking about the universal trading principles. This is the challenge when a trader does not have the proper trading mindset. They have all these beliefs about the market, that just aren’t useful to making much money.
You trade your beliefs about the market. If you want to make your money, then change your beliefs about what trading strategies to use, about what information is important, about how to interpret information.
He should have been thinking about the reward to risk ratio and potential win rate of the trade.
I told him: “Whether you buy 2,000 shares of a low priced stock, or 100 shares of Apple stock, if they both go up +50%, then you make the same money.”
“What’s the difference?” I told him.
But he still didn’t get it. Eventually, Apple stock did rise over +70%, as discussed in depth in The Apple Trade.
He had over 80% of his portfolio in a single bank stock. I told him just sell that out and buy Apple stock. It is about the same amount of risk and that Apple stock had much more upside than the bank stock. I wouldn’t recommend someone placing 80% of their money in a single stock. However, in his case, with his type of mentality and appetite for risk, and the situation at the time, it seemed a much better plan than what he had.
He didn’t trade penny stocks to make money. That is what he thought he did it for. He was loaded with cash from some other ventures, and gambled at the casino and penny stocks, just for the action. Instead of thinking about how he could make more millions, he just pissed it away as the money came in. He didn’t have much other vision in life.
He didn’t trade penny stocks to make money. That is what he thought he did it for. The real reason was that he just liked the action. He was in it for the excitement.
Well, you know what, I don’t believe trading should be boring. Where you should strip out all emotions, etc. I believe you should have excitement – rational excitement rooted in sound trading plans. You are excited about executing your process every day and thus have positive expectations that it is going to be a “Money Day.” If you have ever seen Paul Tudor Jones trade in the 1980’s, you would see he put out a lot of energy – in his voice shouting orders through the phone, and also physically in his trading office.
Jack Schwager describes Paul Tudor Jones in the book The Little Book of Market Wizards:
“As he was responding to my interview questions, Jones kept his eyes on the large quote monitors spread across the room, intermittently shouting orders to the exchange floor in a particularly frenetic style, the trading equivalent of a professional tennis player aggressively returning a volley.”
#2 – Penny Stock Trader In and Out of Government Help
This is another elderly fellow I met. I told him I was a trader and immediately he started dispensing his wisdom to me. Telling me about the money he had made in penny stocks. Made $5,000 on one deal, $10,000 on another deal, etc. Getting deeper into his story, it seemed like he was on and off government support for many years.
The strange beliefs and philosophy did not stop there. This man also told me about how he had a “system” for winning in the casinos.
Next, he followed up with Federal Reserve conspiracy theory stories. (don’t these people always seem to have all the conspiracy theories?)
Insight: Think About The Future
The lessons here are to think about the future. Don’t just think about the next “gig.” Don’t just think about the next trade.
You have to think about those because, well, you don’t want to be looking backwards, nor forward. You want to be making the most of the current day.
However, you also want to be asking yourself: Is my trading style and the financial instruments I am trading offering an opportunity for growth? What am I becoming in five or ten years?
The key is to build skill in the enduring inefficiencies that you can trade with a $5,000 account, or a $500,000 account, or a $5 million account.
For, if you trade the liquid markets – you gain skill that you can use forever. When I got good at trading the currency market, I knew I could apply my methods to other markets as well. And I did successfully apply my methods to the futures markets and stock market as well. That is the power of knowing about and applying the universal principles of speculation.
The Paul Tudor Jones Secret
Ever wonder why Paul Tudor Jones was able to generate triple digit returns with just a few million under management in 1984, then be able to trade effectively with over $100 million AUM a few years later, still generating triple digit returns? In fact, he generated a larger percentage gain – of +200% in 1987 with over $100 million of dollars under management, while he “only” made +136% in 1985, with a far smaller account.
Ever wonder why he was able to generate such quick growth?
It is because he knew how to trade the liquid stuff – the S&P, bonds, etc. Not the penny stocks.
Therefore, the principle and insight is: learn to trade the LIQUID STUFF. The liquid financial instruments. So you can have an edge your whole life and compound profits with a larger account.
In conclusion, there is a huge different in profit potential and growth as a trader between penny stocks and global macro trading.
As Colm O’Shea said in Hedge Fund Market Wizards:
“The reason I like macro so much is because I am a small fish swimming in a sea of real money.”
Which is why, if you ever look at any of the lists of top traders for the year, you will find a commonality: None of them made the list via penny stock trading. Because there is no liquidity there.
The closer to the trading truth you go, you get closer to the money.
The closer to the trading truth you go, the more money gets deposited into your account.
If you would like to grow as a trader, and know how to trade the liquid financial instruments, then click here for the Order Flow Mastery Course.