I made a documentary film that featured Nobel Prize winners, top traders, fund managers, and professional poker players. Some people questioned why poker players were in a film primarily about markets and the recent economic crisis. Unknown to many, there is a great connection between successfully trading and successfully playing poker. The winning traders and the winning poker players both think in terms of odds.
At all times when you are betting your hard-earned money, you need to think of the odds. You always want to put the odds on your side. What do I mean? Look at the lottery. People have no chance to win. The odds are stacked against them, but they still play. Larry Hite is famous for putting the odds on his side as a trend following trader for over three decades. That means betting big money when you have a chance to win big, and not betting big when you’re guaranteed to lose.
Hite is one of my favorite traders and favorite people. What makes me like him so much? More importantly, how can his experience help translate to increasing your net worth? Lets start back in the day. Hite joked about growing up. He said that he failed at blocks in kindergarten. Out of the gate, that should put his views on formal education into context. Like many rags to riches success stories, Hite grew up in the prototypical middle-class, New York-area apartment. His father owned a small business, but there were no silver spoons for his kids.
Hite was blessed with learning disabilities, vision problems, and, by his own account, a short attention span. With a big smile and a touch of sarcasm, he proudly stated that those problems were the secret to his success. They made him a great trader. Well, those issues really didn’t cause his success, but knowing that Hite overcame many negatives is where your inspiration can start.
So how can you become a trend following winner like Hite? Be curious! Hite first read an article about commodity trading in Playboy. That spurred him to go see the local winner who was working as a commodities broker in the neighborhood. This broker explained that if Hite put down $2,000, he could make $1,000 a day. Hasn’t everyone heard some version of that scam? (The other day some guy e-mailed me that Mark Zuckerberg would be willing to sell me shares in Facebook right now today before their IPO.) These kinds of guys don’t know anything about pork bellies, gold, or stocks.
Even if you, like Hite in the early days, are naive when it comes to pork bellies, you immediately know that a $2,000 investment will not make you $1,000 a day, or at least you should know that. Hite saw another obvious contradiction. Since he was in jeans, dressing exactly how he wanted, and sleeping as late as he wanted, how could a broker who had to show up promptly at nine o’clock to work for the man make him rich?
Take another funny example of worthless talk that Hite was able to learn from: Its another day at the grind and you are listening to a financial adviser pitch you on investment ideas. One broker gets up and tells you that he can be your money savior. His reasoning? When he goes to a company to talk with management he can tell you what color the CEOs eyes are. Hite looked at that real life broker, a true story, and thought, Geez, he’s one of the stupidest people I’ve ever met in my life. The color of the CEOs eyes does not matter. There’s no data that blue-eyed guys are better than brown-eyed guys.
You have to stay supremely focused on exactly what is relevant. What information is verifiable? What can you actually know that’s not just someone’s opinion? Then if its verifiable, is it relevant? And if you have the right verified and relevant information, what follows? You cant just take information. You have to process it and you have to think that most of the information available, like most opinion, is suspect. You don’t swing at every pitch. You can wait for your perfect pitch.