Win By Not Losing: A Disciplined Approach to Building and Protecting Your Wealth in the Stock Market by Managing Your Risk
288
Win By Not Losing: A Disciplined Approach to Building and Protecting Your Wealth in the Stock Market by Managing Your Risk
288Hardcover(List)
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Overview
Win By Not Losing reveals how you can make smarter, more profi table investments by first protecting your capital from major bear equity markets. It also shows you how to identify major bullish equity market trends and guides you on how best to participate. By avoiding the major downs and catching the ups, your portfolio compounds gains and allows you to achieve your financial goals.Chasing returns leads to the poorhouse.
With this book's disciplined system for knowing when to buy, what to buy, and when to sell, you can build and protect your portfolio through active management techniques. It walks you step-by-step through growing yourportfolio in bull and bear market cycles. You will master a concrete investing method that lets you trade with emotionless confidence and precision. Packed with links to online resources and personal tips from successful,high-profile traders, Win By Not Losing gives you everything you need to:
- Identify the market metrics that are important to building wealth
- Detect and measure the market signals foreshadowing major moves
- Build a portfolio with strong downside protection, full transparency, immediate liquidity, low fees, and incredible risk-adjusted returns
Your portfolio returns will continue to be disappointing unless you act. It's time to make up for lost profits by taking an active, professional, and nonemotional portfolio management approach to avoid majorlosses and capture gains. Win By Not Losing provides everything you need to build wealth in today's stock market.
Stop watching your money rise and fall without signifi cant net gain with a "buy-and-hold" strategy and optimize your positions as market sentiment changes. In anonappreciating market, investors must actively manage equities to acquire gains. Win By Not Losing presents an active approach that uses rigorous risk-management techniques to preserve your wealth and generate high returns in all equity market environments.
Prominent authors and lecturers Nick Atkeson and Andrew Houghton have culled the best of their work to help you revitalize your trading habits, protect your capital, and beat the market. Through real-world stories demonstrating fi nancial theory in action and how-to instructions for executing their strategic investment approach, these expert authors enable you to:
- Achieve sizable returns through an investment strategyequally focused on when to invest and when to sell
- Avoid major down markets and fully benefit from major up markets
- Access unique financial information to help you staycurrent, think ahead, and build and protect your wealth
Whether you're an independent investor or a professional financial advisor, this refreshing look at investing will change the way you see the markets. Forget what you know about modern portfolio theory and trade to make money in today's markets with Win By Not Losing.
"Anyone with some experience in the stock market, especially the person who wants to move beyond a buy and hold strategy, can find useful tidbits in this book.”
ReadingTheMarkets.com
Product Details
| ISBN-13: | 9780071812900 |
|---|---|
| Publisher: | McGraw Hill LLC |
| Publication date: | 10/18/2013 |
| Edition description: | List |
| Pages: | 288 |
| Product dimensions: | 6.20(w) x 9.10(h) x 1.20(d) |
About the Author
Read an Excerpt
Win By Not Losing
A Disciplined Approach to Building and Protecting Your Wealth in the Stock Market by Managing Your Risk
By NICHOLAS ATKESON, ANDREW HOUGHTON
McGraw-Hill Education
Copyright © 2014 Nicholas Atkeson and Andrew HoughtonAll rights reserved.
ISBN: 978-0-07-181290-0
CHAPTER 1
The Story of Sonny
Some stories start with "I know a guy who knows a guy who knows a guy." In this case, we actually do know the guy. Not only do we know him, we sat next to him on a trading desk for years. The guy is named Sonny.
We start our story with Sonny because he rode one of the hottest of hot streaks that we are aware of. It was not like amassing a fortune on a single major idea like Bill Gates starting Microsoft or Mark Zuckerberg founding Facebook; it was a streak involving an amazing series of wins. It was a streak based on investment discipline in a part of the world in which the odds and expectations say you can't win.
Sonny was born in the city of San Francisco. He lived near Golden Gate Park. The park taught Sonny how to know a streak when he saw one and how to make the most of it.
In his early teens, Sonny spent a lot of time in the park. The park had 22 tennis courts and attracted many world-class tennis players. Guys would come from all over the world to play tennis there. Sonny spent a lot of time on those courts on his way to becoming a world-ranked tennis player.
Sonny was a self-made player. He honed his technical tennis skills by watching others play. Sonny's specialty was street ball; he could hook with the best of them. He played the mind game and never backed down when challenged. He was also physically gifted in a way that suited the demands of tennis well.
Within sight of the tennis courts were the old guys playing backgammon. Like the courts, the park attracted many outstanding backgammon players. Thus, in one spot, you had many of the world's best tennis and backgammon players. As a 13-year-old, Sonny could not resist the temptation to wander from the courts and into the world of backgammon. He would play backgammon for hours and hours against the older guys. At any one time, there would be six games going at once. Players would pair off according to ability and move up and down the line of boards on the basis of their winnings. Gambling was always part of the game and sharpened Sonny's concentration.
As good a tennis player as Sonny was, he became an even better backgammon player. Like all the best players, he knew exactly what to do on every single roll of the dice. Six hours a day of backgammon on the weekends and in the summers can do that to a person. The odds favored Sonny against anyone who did not understand the underlying probabilities and subtleties of the game perfectly. Sonny was a street-smart kid who was a natural when it came to intuitively understanding odds and risk management. Sonny's combination of a mathematical brain, street savvy, and not flinching or backing down when challenged emerged as a powerful combination of skills that served him well in larger venues such as Wall Street and Las Vegas.
Sonny began betting before investing. In sports, there was always gambling with Sonny. Betting on sports migrated into the more disciplined betting associated with world-class backgammon. Backgammon was interrupted by occasional trips to Reno and Tahoe. Everyone Sonny knew gambled. Although it might seem like a lot of money to most, Sonny felt he started small with an average bet at the blackjack table of about $500 to $1,000 per hand.
On one of Sonny's first trips to Las Vegas, he won 20 blackjack hands in a row. His average bet was $1,000. His winnings reached $20,000. He stopped. Sonny knew the odds were stacked against him in the casino. Without emotion, he understood that one of his few protections was to just stop playing. Rather than letting the excitement and emotions of a big win overwhelm his thinking, Sonny remained cool and firmly grounded in probabilistic math. Whereas most first-time Vegas winners give it all back by feeling good and getting careless, Sonny just walked away. His early years playing some of the best in backgammon, often with meaningful bets at stake, prepared him for seeing this streak as just another day at the office.
Sonny came to Wall Street during the time of Michael Milken's fall from grace and the junk bond market collapse in the late 1980s. Government-backed bonds, including municipal bonds, were selling for pennies on the dollar. Sonny's firm would put a sizable markup on the bonds and sell them to individual investors. Whereas Sonny's profit from the markup was significant, his client base made out like bandits as almost all the distressed bonds purchased ended up paying out at 100 cents on the dollar.
Two years later, Sonny was sitting on the trading desk of one of the fastest-growing investment banks in the world, selling growth stocks to investors during one of the greatest boom cycles ever experienced in the financial markets. His clients loved him for his tenacity in protecting their interests on trade executions and deal allocations. From a base of $40,000 per year, Sonny was soon taking home seven figures and enjoying a hot streak of epic proportions.
While the stock market raged, Sonny found time to continue his regular trips to Las Vegas. His average hand had grown from roughly $1,000 to $50,000. Yellow chips ($1,000) were being replaced with brown ($5,000), orange ($25,000), and white chips ($100,000). With one, two, or three hands of blackjack going simultaneously, Sonny would play an average of 400 hands per hour, seven times the amount of most Vegas gamblers. At $50,000 per hand and 400 hands per hour, Sonny was moving roughly $20 million an hour.
With splits and doubles, Sonny would have as much as $300,000 out on the table on a single hand. Having been tempered by years of making calculated bets, Sonny did not flinch or change his discipline when the stakes became stratospheric. No matter how high the stakes went, Sonny kept his emotions out of the equation.
Casinos would spend as much as $200,000 to have Sonny visit. Private jets, including Boeing 727s with gold-plated everything, were sent to bring Sonny to the casino with a group of his friends. Sonny's hotel room would often be 10,000 square feet with a private pool and golf area, about five times larger than the average American detached home. A few hours with Sonny at the poolside cabana could cost the casino $15,000.
One evening, while visiting Sonny in a Vegas casino that subsequently shut down its "whale" gambling group because of him, we asked Sonny if he could think of anything the casino would not provide him if he asked. After careful consideration, Sonny said no. Private jet flights to Paris, three personal assistants, any amount of extravagant gifts, and so on, made it clear that the casinos meant business.
In 2001, Super Bowl XXXV was held in Tampa, Florida. A casino called Sonny and said it would send Hall of Fame quarterbacks John Elway and Jim Kelly out to his house to pick him up in a limo and escort him to the game in a private jet. Sonny's tickets were in the same section as the players' families, and he would be brought to the game from his hotel with a police escort surrounding his limo. Sonny told the casino to send the jet but said he would replace the quarterbacks with eight of his friends and he wanted to stop in New Orleans on the way out.
In New Orleans, Sonny was the show. The casino was not used to dealing with $50,000 hands and had only $100 chips readily available. The dealer was so nervous that he could not stop shaking and sweating. As usual, Sonny was moving fast, and the dealer was really struggling with the math of managing so many chips. On one hand, the dealer made a $60,000 payout mistake in Sonny's favor. Sonny ended up winning $260,000. He then placed bets on the Super Bowl coin toss and winner for good measure. Needless to say, Sonny won the flip and the Ravens paid out nicely.
Although the gifts and privileges extended to Sonny may seem extravagant, they are part of a calculated bet. Casinos have what is known as a "theoretical," or "Theo," that they apply to their high-roller customers. It is the theoretical win percentage formula the casino uses to calculate what its win percentage should be over time. Essentially, the Theo is a calculation of the expected profits to the casino by multiplying the player's time played by the dollar amount played by the winning percentage. Every hand played by Sonny is tracked by the casino. They could tell him exactly what cards were played and how he bet through his entire history with the casino. Solely on the basis of the numbers, Sonny looked like a good customer.
Although a casino has the underlying odds of blackjack on its side, it attempts to tilt the game further in its favor by bringing emotions to the forefront. Players who fly in private jets, stay in big hotel rooms, and are treated like royalty often become addicted to the lifestyle. They can't stop because they want the gratification of the special attention. Time is working against them. They are no longer the disciplined gamblers they once were but addicts to the high life. These players also can feel indebted in a subtle way to the casino. Losing becomes not a loss but just an indirect way of paying for the lifestyle. Casinos will do all they can to make gamblers feel bad about losing. The emotional reaction can make gamblers not want to walk away until they are winners again. Once again, the casino has extended the time of play and the probability of capturing its Theo.
Sonny never forgot who he was and where he came from. Before going to Las Vegas, he would spend up to two days making sure that the game was arranged in accordance with his rules. Sonny does not gamble unless the game meets his rules. Big-time gamblers negotiate a "discount" on lost dollars. In this case, Sonny would not play the game unless the discount was set at a minimum of at least 25 percent. In other words, if Sonny lost $100,000, the real loss was reduced by 25 percent to $75,000. Sonny would play on the "rim." A rim is essentially a line of credit. The difference between playing on the rim and taking a mark is that rim credit does not slow the speed of play. When Sonny hits a streak, the first thing the casino wants to do is slow the speed of or even stop play. On the rim, this is not possible.
The other aspect of playing on the rim is that it makes the credit drawdown highly visible. Two pit bosses stand behind the dealer and make sure that the accounting of the credit line that is shown on the table is kept current. For Sonny, this forces a certain discipline by which he never confuses the money stack as his until the rim is paid off. In any event, Sonny sets his loss limits well before the game begins. He walks away when his preordained loss limit is reached without exception.
In addition to setting the discount and establishing the rim, Sonny would often require that the casino provide him with two dedicated tables. At this level of blackjack, no other gamblers are at Sonny's tables and usually no other gamblers are in the room. It is somewhat akin to an old-style western gunfight in which the street is cleared and the two gunfighters square off at 20 paces. In this case, the stage is cleared for the casino and Sonny to go at it one on one. When we watched this first hand, our palms were sweaty and it was mind-blowing how fast the money and chips were moving. His ability to stay disciplined and nonemotional seemed almost inhuman.
The lengthy preparation did not affect Sonny's playing discipline and his ability to quit the game when he was ahead. During one visit, he played for eight minutes and walked away with roughly three times the annual income of the average annual American household. The casino spent the money to bring Sonny and his entourage to Vegas, prepare the gaming room in accordance with Sonny's requirements, pay the staff, and take care of Sonny for the remainder of the weekend. Sonny's group arrived in Vegas fresh with excitement for the big game. With eight minutes of elapsed time from start to end, the crowd clearly felt let down. None of this affected Sonny's discipline. He achieved his win target and quit on the win. Done. Eight minutes. Money in the bank.
When the casino later attempted to have Sonny pay for some of the expenses of his trip, including the $15,000 poolside cabana bill, he flatly refused. Sonny and the casino both understood the Theo and both knew that Sonny's primary safety mechanism was to stop playing. Sonny never lost sight of the math behind the game.
Sonny has won millions in Vegas over two decades. He has been one of the largest successful gamblers in the world. On one trip, Sonny tipped his casino host a house. Only two casinos have any current interest in having Sonny play. The only reason those casinos invite Sonny back is that there is high management turnover in these publicly traded companies and every new manager makes the same mistake of looking at Sonny's Theo and thinking this will be the time that he gives it back.
Sonny's secret is streaks and discipline. He plays high-velocity blackjack because the streaks occur at a higher frequency than they do in games such as poker and craps. Sonny would prefer not to wait too long for the next streak.
Before the streak comes, Sonny is patient. When the streak comes, he ramps up his investment exposure fast. As soon as the streak starts to end, Sonny walks away. He is not worried about walking away in six minutes if the streak comes fast. The time of play is inconsequential. As the winnings accumulate, he will often require the casino to cash him out. Once he is cashed out, the casino house rules do not allow Sonny to recash the check. If his money is in chips, he will often place the chips in a remote safe. Sonny does this to make sure that he avoids a major loss.
Sonny is not trying to win every penny. It is impossible to know if a streak has begun until it has shown some momentum and impossible to know it has ended until losses occur. Somewhat as in the stock market, he is not trying to bottom- or top-tick the trend; rather, he is trying to catch the bulk of the up move while avoiding most of the down move. As a whale customer in the casino playing his own tables, Sonny can ask the dealer to reshuffle the cards at any time as a way to interrupt downward momentum and can speed play and increase the size of the hands on upward momentum.
Having seen 20 winning hands in a row at the blackjack table, Sonny knows that streaks can have a powerful compounding effect on wealth. At $50,000 per hand, Sonny works with enough money to make the positive effects of catching a winning streak last. He knows that it is critical to bet enough to make a difference.
It is not about luck with Sonny. He spent years working in probabilistic betting environments with steadily increasing stakes to develop a keen sense for streaks and how to use a disciplined approach to capitalize on them. No matter what emotional temptations are presented to Sonny, he does not stray from his discipline. The few times Sonny did stray served as an expensive reminder to stick to his plan. Sonny only plays games that he knows inside and out and in which the rules are set the way he likes them. He does not play where he is unfamiliar and the risks are not known. Sonny is acutely concerned with not giving the money back and avoiding the big loss. He uses a variety of risk control measures, including walking away at any time to make sure he remains on the plus side. He is willing to be patient and wait for a positive streak to emerge before betting big. A series of small losses are made irrelevant by a string of large winning bets. It is not about the frequency of wins but about the magnitude.
Although the odds say the casinos should be more than happy to welcome whale business, many of the major casinos are moving away from this part of the market. The margins are too thin. By bringing in lots of average gamblers who make small bets, a casino expects to achieve a 20 percent profit margin. They have yet to make money on Sonny after 22 years. What is scary is that Sonny believes he is becoming more disciplined and efficient with time.
The reason why we started this book with the story of Sonny is that his experience and discipline go a long way toward explaining his "luck." Sonny's approach to blackjack holds important lessons for successful stock market investing. Know the game you are joining. Play the game according to your terms. Set out your plan before you play and stick to it. Be patient and wait for the right times to make your money. Do not worry about small losses as you wait to capture big wins. When a trend comes, recognize it and invest enough to make a material difference in your overall portfolio. When the trend fades, stop investing. Do not hesitate to walk away when the market is not conducive to making money. Have a plan for holding on to your winnings. Keep your emotions out of the investment process.
(Continues...)
Excerpted from Win By Not Losing by NICHOLAS ATKESON, ANDREW HOUGHTON. Copyright © 2014 Nicholas Atkeson and Andrew Houghton. Excerpted by permission of McGraw-Hill Education.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Foreword Charles Githler xi
Our Offer to You xv
Introduction xvii
Authors' Note xxiii
Part 1 Streaks and Investing 1
Chapter 1 The Story of Sonny 3
Chapter 2 The Nature of Streaks 13
Chapter 3 Why Should We Invest? 21
Chapter 4 The Story of Mr. M 25
Chapter 5 Building Blocks 33
a Money "M"
b The Cost of Money: Interest
c Gold
d Bonds
e Stocks
f Confidence in Stocks
Chapter 6 The Story of Modern Finance Theory 55
a Investing 101
b History of Financial Theory
c Random and Efficient
d Normal Distribution
e Correlation and Modern Portfolio Theory
f Capital Asset Pricing Model
g The Market Portfolio
h Portfolio Optimization
i Conclusions
Chapter 7 The Story of Mike 93
Chapter 8 Style 105
a Technical, Fundamental, and Quants
b Stocks, Bonds, and Options
Chapter 9 Your Brain on Stocks 113
Chapter 10 Observations from the Trading Floor of an Investment Bank 119
a The Sell-Side Analyst Conundrum and How Earnings Momentum Can Be Predictable
b Institutional Stock Buyers
c Cross-Asset Class Price Manipulation
d Information Distortions
e Investment Period End Markups and Markdowns
f Unequal Information Distribution
g The Institutional Stock Marketing Process
h The Insider and Private Equity Information Advantage
i Trade What Is Versus What You Want It to Be
Chapter 11 Risk 135
Chapter 12 A History of Mutual Funds and the Story of Jeffrey Vinik 149
Chapter 13 Paradigm Shift 155
a Shift One: The Buy-and-Hold Era
b Shift Two: The Return of Active Management
Chapter 14 The Story of Neil Peplinski and Good Harbor 165
Chapter 15 What Is Tactical Investing? 177
Chapter 16 The Story of Vinay Munikoti 185
Part 2 Applying a Tactical Trading Discipline to Profit from Investable Equity Market Trends 191
Chapter 17 Capturing the Ups and Missing the Downs: Five Steps 193
Step 1 When to Buy and Sell: Learn to Identify Bullish and Bearish Markets
Step 2 What to Buy When the Market Is Bullish
Step 3 What to Own During Bearish Periods
Step 4 Take the Emotion Out of Your Investment Strategy
Step 5 Start Today
Chapter 18 Do Enough to Make a Difference 217
Chapter 19 Knowing If It Works: Attribution Analysis 223
Chapter 20 Seeing the Forest for the Fees 231
Chapter 21 Parting Shot 239
Sources 241
Index 243