Richard Dennis was a spectacularly successful commodities investor in the 1970s and 1980s until one significant loss in 1988 pretty much wiped out his entire career. Here is some of his investment advice, published in the late 1980s, around the time of his wipeout.
- Make all of your mistakes when you’re a beginner because lessons come cheap.
- Be just as willing to be bullish as you are willing to be bearish.
- Losing money, you should take a break from trading.
- Trading is all about odds.
- When markets go sideways, a lot of false signals get generated.
- It’s easy to make a good trading system, but hard to stick to it.
- Good traders reflect on their good and bad trades (especially the bad ones).
- Place your stop beyond the price where everyone else is placing his or hers.
- Generally, don’t trade counter to your trend-following system’s bull/bear decision. Doing so may occasionally be profitable, but your system tends to be right most of the time (assuming you’ve vigorously tested your trend following system using historical data).
- Never enter into a long position because the downside risk is “limited” or a short position because the security is “overpriced”. Cheap securities can get cheaper and vice versa. For example, Long Term Capital Management (LTCM) calculated the odds that certain catastrophes would happen, which they traded upon. After 4 years, LTCM went bankrupt because a once-in-a-bajillion years disaster unfolded.
- You need a price stop and a time stop, which is an order to close your position if it’s still not profitable after a significant amount of time.
- Trading with the trend, you should never put out a short in a bull market.
- With different price patterns than other securities, stocks behave less predictably and trend less than others because unlike other assets, stocks have no fundamental use (they’re tools for speculators and institutional investors).
- When you’re trading poorly, cut back.
- A victim of its own success, technical analysis is now used by so many traders that it’s become more difficult to utilize profitably.
- False signals are becoming more and more common. As a result, you should never be an intermediate time frame trader but instead trade long term or short term.
- Don’t hold a market opinion too tightly; you might be wrong and miss a major trend.
Dennis later came back, realizing that his wipeout was the result of not strictly adhering to his rules. As such, he became a computer trading, making several large returns in the mid-1990s, but ultimately incurring another huge loss in the late 1990s, effectively ending his investment career.
On a side note (this is somewhat irrelevant to Richard Dennis’ investment advice), Richard Dennis and his friend made a bet. Dennis believed that a good investor can be trained, while his friend believed that an investors skills were innate. They taught everything they knew to a group of investors called Turtle Traders, and the result was that while a good trader could be trained, a great trader needs to have innate capabilities.