How to be a Trading Genius: What are you doing with your money today? by Van K. Tharp, Ph.D.

One of the key exercises I have my Super Traders do is a full life review. The essence of the exercise is to write down as many memories as you can for each year of your life. Furthermore, you also look at the beliefs you formed in each year of your life. When confronted with this exercise, most people might say something like, “Well I can’t possibly remember what I did or what happened in 1986.” Also, I don’t believe people who want to use the excuse, “I’m old and I can’t remember anything” because I can do the exercise at 70 years old. While there are some obvious tricks to help you with the task of remembering what happened when (not the topic of this article), one of my recommendations is that you write down significant data points for each year. These might include such things as the value of wages, the prices for a house, a car, and a few other things for each year of your life. A good source for this information is the website www.thepeoplehistory.com.
Even though I have done a life review before, I’m currently repeating the exercise (before I forget everything, lol) and I’m finding it very revealing. As I have been working on my life history, I became interested in the price of things per decade so I composed the following table. The table starts with the year I was born and then goes through the start of each decade until the present. While I’m sure about the price of a postage stamp and the level of the S&P 500, I’m not as sure of the other prices — but I think they are all generally accurate.
One could make some interesting conclusions from the table. First, I looked at the percent of annual income it took to make major purchases. The price of a house ranges from 2.4 times to 4.7 times the median family income. The larger numbers have occurred more recently but houses have also been getting much larger. Furthermore, the price of a car has ranged from about 40% of a family’s median yearly income to as much as 61% recently.
I then decided to look at the gross increase of prices over the last 70 years. Median family income has gone up 2,331%. The price of gas and the price of a postage stamp have not increased as much — both being about 1,600% even though a postage stamp really stands out to me as being expensive today. The data, however, show that higher gas prices (and this doesn’t count when gas was over $4/gal recently), have actually not been that much of a comparative economic burden on us.
Car prices are interesting because they have gone up slightly more than wages, however, perhaps that has something to do with some of the really high-priced cars available today. For example, my Tesla costs about four times the median price of a car in 2017.
And then let’s look at the two things on the list that might be considered ways to build wealth — your family home and the stock market. First, the average price of a house has gone up over 4,000%. That increase has far outpaced wages and that’s despite little change in home prices in the decade periods from 1990 to 2000 and from 2010 to 2017. Still, if you bought a house in 1946 for $5,600 and put down say 20% ($1,020), then you would have watched the house go up to $8,450 in just four years. That really means that you made a $2,850 profit on your $1,020 investment — not a bad deal. Had you invested in the S&P 500 during that time, you would have lost money.
Look at the next 10 years, however, when the price of a house went up about 50% and the S&P 500 went up 244%. Yes, there were some bad decades for the S&P 500 such as 2000 to 2010 but in most decades the S&P 500 goes up. Finally, the average price of a house went up 42 times over the last 70 years, but the value of the S&P 500 went up over 132 times in the same period.
Today we are in a strong bull market that could last a while (not a prediction) and that could make everyone look like a genius. As a result, here are a few Tharp Think beliefs that could make you become that genius:
  1. Before you enter into a trade, always know your initial risk point which tells you when you are wrong. Have a stop order on that initial risk (which I call R for short).
  2. In a bull quiet market, assume that it could last a while and you want your rewards, if possible, to be several times the size of your risk. So be patient and let the trend make your profits. In a bull market like we have today, you can’t know where it will go but I’ve have stocks in my portfolio that have gone up 10% — 40% in just the last month.
  3. Buy what’s going up. It’s pretty simple.
  4. If you make an average of say 2R per positon over the next year, you’ll be up 50%. And that will probably outperform most people.
If trading is really that easy, then why aren’t most people market geniuses? Let’s look at two more Tharp Think beliefs for an explanation.
  1. A trading mistake is when you don’t follow your rules. Let’s say you make 2 mistakes each month and that each mistake costs you 2R. If you are up 50R at the end of the year, but have 24 mistakes at 2R each, then your net result will be only +2R at the end of the year. You will have lost 96% of your potential profit to your mistakes. Some people repeat the same mistake over and over and I call that self-sabotage.
  2. Finally, there are at least six market types that each have a direction component and a volatility component. The market directions are: up, sideways, and down while the volatility conditions are either quiet or volatile. If you apply the full set of Tharp Think beliefs to any one particular market type, it becomes quite easy to design a great trading system. Expecting that one trading system works well in all market types, however, is insane. Thus, you need a different way to apply the beliefs in the context of different market types.
That being said, what is the easiest market type for anyone to make money investing? Obviously, it’s a bull quiet market like we have today. That’s where buy and hold comes into play. And my version of buy and hold is 1) buy what’s going up and 2) trail with a 25% sell stop. Then minimize your risk by risking only about 1% on each trade which means that you can be fully invested with about 25 different positions. There is only one other rule and that’s stay fully invested until the market turns to bear with at least normal volatility. Watch volatility first and then as it picks up be wary of the bear. It’s easy to monitor market type because we give it to you in the first newsletter each month.
So why am I saying this? Right now, we have a very strong, bull quiet market — the easiest market type in which to make money. In addition, there are several other reasons to consider being in the market.
  • First, since 2010, the S&P 500 is up over 100% but the decade isn’t finished.
  • We have had decades when the market is up over 300%.
  • Interest rates are very low so people will pick stocks over bonds.
  • And with our high debt, we cannot afford allowing interest rates to go much higher so your stock positions have a huge edge right now.
  • Furthermore, most investors have been staying on the sidelines so far in this market, hence the low volatility.
These are the kinds of market in which the average person can look like a market genius just by buying what’s going up with a 25% trailing stop. Hold positions until the stop is hit or until the market type changes. Don’t risk more than 1% per position which means you will have up to 25 different positions.
And with all the money you start to make, start investing in yourself so that you are ready when the market type changes, be that a month from now or a decade from now.
This is not a prediction. I don’t know when the market type will change (and it will) but I know how strong the market is now. I’m not recommending anyone buy anything specifically either. Find 25 different stocks that are all going up and stick with major names of solid companies. Most of them are doing quite well.

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