"Bulls make money, bears make money, but pigs get slaughtered" is an old Wall Street saying that often is used to warn against excessive greed. Like most of these aphorisms it is unquestionably true, but it often misapplied and can do great damage to market players who don't apply it correctly.
For many if not the majority of market players, the problem is exactly the opposite. They don't act like pigs when they should. Instead of taking advantage of their good predictions and positive results, they squander them by thinking they are being too greedy after they have seen a good gain.
Human nature is to play it safe and to not press our bets when we have had a good run. This is particularly so in the stock market, where the inclination is to take profits quickly after we had a number of losing trades. Market players often fall into the trap of taking gains too fast because it feels so good to proclaim a victory in a difficult market.
There is no question that taking bigger positions and being more concentrated increases risk and is uncomfortable. There is no way around that feeling. The easy thing to do is to make small buys and never really run the risk of a substantial loss. We are taught that we need to be diversified so that no one position has too much influence on our results. That thinking has been taken to such an extreme that there are now trillions in index funds. There is no worry about being too concentrated or having too much risk when you hold the entire market.
Indexing has its place, but if you believe there is value in stock picking and you want to produce superior returns the best way to do it is to be a pig. You must hold concentrated positions and press your bets when you have a winner.
Stanley Druckenmiller, who worked for George Soros before becoming an independent fund manager, says that the best lesson he learned from Soros was to increase his position size. It is this willingness to hold large, concentrated positions that has allowed Druckenmiller to product exceptional returns.
I know many successful individual traders who produce positive returns over many years, but what holds them back from moving to the next level is that they have never learned to scale up their trading. This has been one of my biggest deficiencies as well.
When I first started trading with a small amount of capital, I had very concentrated positions and was heavily long most of the time. As my capital grew I didn't increase my trading size at the same pace. I was comfortable with my approach, but it was sub-optimal if it was not modified to reflect the change in my capital.
Many market players fail to be properly piggish because they are far too intent on timing. Rather than press their bets and ride momentum, they constantly are looking to predict the exact moment when the market tops.
When you try to predict exact turning points you always will be early. There is no way to predict a top after the fact. You must do it in advance, which means you always will be selling early in hopes that you finally make the correct prediction.
This constant anticipation of turning points is one of the easiest ways to be shaken out of an aggressive trade. Typically, traders will justify their premature sell by claiming they don't want to be greedy. The truth is that they are fearful and aren't comfortable riding a trend, and that leads to poor decision making.
If you want to produce superior returns and make the big bucks, you must be a pig at times. When you have an edge, you must have the courage of your convictions and press your bet. It will cause you more stress and you will have some big losers, but there is nothing that will have a greater impact on your returns than trading bigger and more concentrated.
Bulls make money, bears make money, but pigs get fat and happy.
(20min delay)