The Rule: How I Beat the Odds in the Markets and in Life – and How You Can Too

By Review date: 05/21/2020October 12th, 2020| Investing & Strategy
By Larry Hite, Oct/2019 (256p.)

 

Last year this book was named a best seller by the Wall Street Journal and the LA Times, and the reviews on Amazon were great,  but I chose to ignore it then because of the cheesy title, even though I was impressed by the Larry Hite interview in Jack Schwager’s 1989 book, Market Wizards:  Interviews with Top Traders.  I also have a thing for autobiographies by people who succeeded in beating markets, so I convinced myself to give it a shot.  Many people would skip this book just because of the generation of low-quality books on momentum trading that guys like Larry Hite inspired by making it look easy.  There appears to be a thriving industry selling materials and training courses to people who want to learn how to make money quickly.  Larry himself has no qualms and makes no excuses for blindly (literally) chasing prices with a motive of making big profits, but I am not convinced that he is correct in saying that “you can too”.   Still, after learning more about his track record and his life story, I became convinced that Larry Hite is a rare breed.  What he has achieved should probably not be tried at home, but for those who do try – if they have even half the grit and focus of Larry Hite – they too might beat the odds.

What is most inspiring of all is that Larry has been practically blind since childhood.  He is also dyslexic – but he still managed to beat the odds in one of the world’s most competitive endeavors.  The way he struggled in school and how he was able to turn that into a strength, are all harsh reminders of what is possible with focus and want.  “Think about it,” he writes, “I was a skinny kid who became a fat kid, blind in the left eye and half-blind in the right eye, and that good eye was dyslexic. So whatever I did, I sucked at badly. At school and at sports and at life, this great insight bubbled up in my experience: When you trip over things, lots of things, and your friends call you Mr. Coordination, what you do is you get up and you keep going.”

Another passage I loved was when he shocked his Brooklyn high school classmates 57 years later for being recognized for his exceptional achievements and contributions to society:  “Larry Hite?,” he overheard a classmate protesting, “Are you kidding me? He used to walk into walls!”  In this short excerpt on an interview that Larry did with Trading Master, its not hard to notice that Larry has a hard time seeing and speaking.  He does know how to mint money though, which by itself is telling, given his handicaps.  He also claims in the book to have been pretty good at picking up girls.

Incidentally, the name of his hedge fund, which at one point in 1990 was considered the largest in the world, was Mint – which is the same name as the company that Intuit acquired in 2009.  That’s another great story!  When Mint’s founder, Aaron Patzer, approached Larry to acquire the URL rights to the name, Larry insisted that he would only sell the rights for equity:   “They resisted,“ he writes, “so I told them we didn’t need $100,000, so they can find another URL. Patzer relented and gave us 2 percent of the company, including anti-dilution rights so we would maintain our stake when the company expanded their capital. In 2009, Patzer sold the company to Intuit for $177 million. That made our share $4 million for an investment that was less than a few hundred dollars when Alex bought the domain name in the early 1990s. Michael and Alex also put in a little money and got a nice cut as well. I donated my share to one of the Hite charities. Now that was cool!

One of the more interesting insights in the book was his real-life analogy for trend following:  “Sometimes you meet a potential partner who seems so wonderful. The trend goes up and up and up, and for some reason, this freaks you out, and you cut and run. Ask yourself why you are jumping off of a good trend? Do you think life can’t be that good? Do you think you do not deserve for it be that good? … So many people stay in bad situations waiting it out despite all evidence that the trend is sinking. … We put ourselves at serious risk and cling to false realities.”

The book had other interesting insights, such as his 4 early career lessons:  (1) Profit is the residue of other people paying you for labor you didn’t do; (2) The key to understanding your opponent’s behavior is motive; (3) Where you lack cash, look for leverage; (4) Pay attention to who isn’t laughing when everyone else is. 

Speaking of leverage, like most commodities traders, Larry is a proponent of using financial leverage to boost results – but like any good momentum trader, he swears by his stop losses.  “If you buy nothing but new highs in whatever market, then you must have a stop. The important thing is the stop. The stop keeps you alive. That’s it.”  For those who struggle with taking losses, he offers this advice:  “I recommend you practice losing money. In the long run, that will help you win big.”  He also warns that:  “One of the worst things that can happen is for you to get lucky on a bad bet and win big.”

An interesting rule of thumb:  “Be prepared to lose roughly the size of your annual return. For example, a strategy with a 10 percent return over time should be expected to suffer at least double the annual return in a 20 percent drawdown—so a strategy with a 30 percent return over time should be expected to suffer a 60 percent drawdown.”

And here’s one that’s applicable to today’s environment:  “When a major event occurs in the middle of such a consensus, such as the Russian debt default of August 1998, the terrorist attacks of September 11, 2001, or the corporate accounting scandals of 2002 [and the 2008 equity market crash], it will often accelerate existing trends already in place.”

So in conclusion, while an unlikely catch (by title, at least), this was a great book that turned out to be a joy to read.  It was also educational, but above all, inspirational.  I admit to have shed some tears while reading it.  His concluding remark says it all, and after reading the book I believe it:  “My life is proof that a loser can win.”

Best,

Adriano


 

Highlighted Passages:

 

FOREWORD

You can’t stop the waves, but you can learn to surf.

It’s not the fastest, not the strongest, not even the most intelligent who survives, it’s the one who is most adaptable.

Cut short your losses, and let your profits run on.

INTRODUCTION: Get in the Game

Think about it: I was a skinny kid who became a fat kid, blind in the left eye and half-blind in the right eye, and that good eye was dyslexic. So whatever I did, I sucked at badly. At school and at sports and at life, this great insight bubbled up in my experience: When you trip over things, lots of things, and your friends call you Mr. Coordination, what you do is you get up and you keep going. 

Becoming wealthy and successful isn’t simply about being right all the time. It’s about how much you win when you are right as well as how much you lose when you are wrong.

But also, I learned to set up unique systems so I could make money while I slept. 

My approach to winning is about understanding our human fallibility and reading people’s behavior so you can make smart decisions based in the facts of now, not in the unknown world of the distant future, and take steps to aggressively limit your risk. I am a trend follower.

You can make a good living selling hype, but you can get rich by buying truth.

Cut your losses and stay with your winners. That is my credo for building wealth and achieving goals of all kinds. It’s my rule. How do we know when to cut losses and when to continue riding our wins? You must know yourself.

Remember, in life, time rather than money is the most important currency, and we all have only a finite amount of time (at least until they figure out life extension). You can win money, lose money, and earn it back again. But time is something that you can never get back, so making good decisions with the odds on your side is the best way we can give ourselves more time, or said another way—freedom.

Only you control how much of your limited supply of money you are willing to lose. When you adapt this principle, you find it easier to get in the game. You remove the fear! I get goose bumps writing that because it’s still so important to success, yet not understood by most.

PART I SHEEPSHEAD, PORK BELLIES, AND BLACKJACK

Solution? I engineered my actions so that a failure could not kill me. Got that? Let me repeat it in case you didn’t get it, because it is mission-critical important. I won because I always expected to lose. 

How on earth could be that be possible? This truth, this counterintuitive idea, goes back to my roots, my childhood.

Ultimately, imagination became a guiding force in my life and saved me from a darker depression that could have me wanting to end my life. Imagination enabled me to cope as a kid, but more important, it allowed me to see possibilities that others didn’t see—and now I mean intellectual vision, not just eyesight.

First, they wanted to have me assessed by an outside education expert who worked for the New York State Regents Exams. I visited him at his office, and this nice, young man gave me some written tests. As usual, I did poorly, but he must have seen something in me because he suddenly shifted gears and said, “Let’s try this another way.” He gave me an oral test instead, with multiple-choice questions, even in math. I had long ago figured out how to count and do math in my head (my practice to this day). We weren’t in a classroom, so the pressure was off. After we finished, he reviewed the data for a few minutes, then called my mother in.  My mother was thrilled, of course, that her intuition was right. We went in immediately to visit Mr. Shapiro, the principal of the high school. My mom had been advocating for me to get more academic attention in the wake of my poor grades. “Here are the scores,” she showed him in his office. “As you can see, he’s very smart.”

I shocked my high school classmates once again some 57 years later, when I returned to the scene of my crimes at James Madison High School. Our alma mater, located in the Flatbush section of Brooklyn, has long been famed for its nationally prominent alumni, including Supreme Court Justice Ruth Bader Ginsberg, singer-songwriter Carol King, actor Martin Landau, Senator Chuck Schumer, and presidential candidate Senator Bernie Sanders (who was in my grade though I didn’t know him). … “Larry Hite? Are you kidding me? He used to walk into walls!”

This led me to define a good bet as when you can make multiples of what you’re risking, and a bad bet when you are losing more than what you can possibly make. 

Developing goals and writing them down forces us to stop watching Netflix or playing with the newest iPhone. 

Find your desire and wants. Focus on them as if your life depended on it—because it actually does.

The market doesn’t give a damn about you. But in return, and this is a golden truth, you can get rich and owe the market nothing. I love investing because it is about the truth and I found a place where I could be myself. And it’s turned out OK. I wanted to be rich and I became rich. But I also have had a good life and a lot of fun along the way.

 Early career lessons from a trader who never went to business school:

  •     Profit is the residue of other people paying you for labor you didn’t do.
  •     The key to understanding your opponent’s behavior is motive.
  •     Where you lack cash, look for leverage.
  •     Pay attention to who isn’t laughing when everyone else is.

In Hamlet, the character Polonius tells his son “Neither a borrower nor a lender be.” Shakespeare may have been a genius, but I knew this was bad adviceBusinesspeople should borrowWhy? Because then you have the money, and you can use this leverage to your advantage. Yes, I understand that the word leverage scares people—especially in trading, because if you were to lose your shirt, then they’d come and collect everything you owe with the dreaded two words: margin call. But what if you could play the game as you wanted to play it and risk only what you could afford to lose? And what if you minimized your risk by making 20 small bets instead of placing everything on one or two? What were the chances of all 20 bets going down at once? Pretty small. And what if you cut your losses quickly once values started to drop, so you wouldn’t risk more than you wanted? These ideas would eventually form the foundation of the investment approach that earned me millions. But at this time, I was only just beginning to figure the game out. 

I would soon come to know that efficient markets don’t exist and never will as long as humans are playing the game with greed and fear in a tug of war. 

I counted up all his trades and found that he made about 20 percent a year. He had a lot of losing trades, but they were only small losses. And his winners were few, but they were big-time gains. Sometimes only one or two trades accounted for the majority of his profit that year. Lightbulb moment!

That really hit home to me. I proved to myself that losing is sometimes inevitable even if you do everything right—that’s because you always assume the risk of losing is there. I began to think hard about this. How could I prepare for the inevitable?

Most people think there are two kinds of bets: good bets and bad bets. Through my early experiences and other research I began to see there are actually four kinds of betsgood bets, bad bets, winning bets, and losing bets. Most people would assume that if you lose it’s because you made a bad bet and if you win it’s because you made a good bet. But that’s wrong. Good and bad bets refer to the odds. Winning and losing bets refer to the outcome. You can’t completely control outcomes. But you can control two things for sure. The odds of the bet you take, and the risk you take. … A good bet is defined as having a high probability of making more money than you are risking, A bad bet is when you risk a lot for small or limited gains. As a speculator you should be in the good bet business.

Because you stand to make 100 percent on your money. And you can lose only a dollar. You can afford to lose a dollar, right? Can you risk 10 dollars to earn a potential 20 dollars? Perhaps, but what about a one-million-dollar bet at fifty-fifty odds? For most people, much bigger numbers make it a bad bet and not worth the risk. For Jeff Bezos, it’s fine to risk a million dollars because he is worth $150 billion. This is how you think about bets and odds. Now what if I put a plank across the floor and tell you I’ll give you a million dollars if you walk across it? That’s an unbelievably great bet. But what if I put this plank on the 50th floor between two buildings on a windy Manhattan day? Need I say any more?

Be forewarned that one of the worst things that can happen is for you to get lucky on a bad bet and win big.

And if you love what you do, it isn’t work. I was lucky to find my way to trading. To me, figuring out how to create things that would make me money while I slept was great fun; I enjoyed it so much I would have done it for free.

… getting to the next step was a challenge. I didn’t have a big name, and I didn’t have big connections, so getting big money under management was tough. Even proving I could double people’s money wasn’t enough. And when I mentioned the word futures, people would think only maniacs do that. Plus, I was betting across commodities markets, and people felt that was even riskier, no matter how well I made the case that it in fact was less risky mathematically than the stock market, because it was diversified.

[On legal documents]  It took so long not only because of dyslexia but because of the way law is written—everything refers to something else.

Remember that most people don’t have the time or expertise to know how to invest, but if you’ve done your homework and have a well-thought-out idea with good odds in your favor, you can convince people to take a chance on you and get your first investment capital.

Money ain’t that hard, but happiness? That’s a whole different story.

So by now, I hope I’ve made it clear that making room for losing and respecting risk are cardinal rules. But here’s something just as important. You have to always be on the lookout for bets that have a huge payoff without huge risk (we call this asymmetrical). Remember, if you’re always winning but winning only small amounts, then you aren’t really winning anything. … Here’s why: Playing a small game all the time is not safe. If you have only small gains, you won’t provide for the many small losses you are going to have. See, I make my money in chunks. The average person, not yet aware how the game really works, always goes for steady small money because it seems like a safe bet. The problem is that this is not as safe as it seems, because if you don’t have a lot of money, you’re not protected from those losses that inevitably come—whether it’s a bad trade or a sudden health problem or whatever. What if you get cancer and a drug that is a guaranteed cure costs a quarter-million dollars? If you don’t have that money, you did not play it safe at all.  …  To make big money, you have to always bet on something that has a potentially large payoff.

But I rode the trend from 60 cents to $3.10 and my initial $500,000 went up to $15 million. When the trend reversed and went down I got out with $12 million. Emotionally, it was a major moment. I was 35 years old, and I had $12 million dollars. No one in my family had ever had $12 million. This was a life-changing breakthrough for me. …  So I figured that considering I had hit the lottery in the first place, and then made a giant leap to living in a mansion thanks to this huge coffee trade, I’d gotten as lucky as I could hope for. So I laid a little bit low for a couple of years. I bought a nice house for my family. I did my normal trading, which was very satisfactory and made me a living.  …  I was prepared to bet $500,000 because I was willing to lose it, and I had some idea that I could make $3 or $4 million dollars on the $500,000, but it turned out to be much more. Now it would be a while before I’d really learned to accept this, but sometimes, you get more than you thought in life.

When you talk to refugees who escape from their home country horrors, understanding the role of luck becomes very clear. If you were born in Syria and your house is bombed to shambles, it’s hard to have a dream. I recently visited Cambodia and saw the killing fields where Pol Pot slaughtered up to three million people.

In the next chapter I will share more on how my approach to trading also works for love and marriage. For now, suffice it to say that I made a great bet on Sybil.

I once went to a horseracing track with a guy who was supposedly “can’t miss” in playing the ponies. His father was a bigwig at Saratoga, and to keep from getting bored I started to bet too. I looked at the sheet and did nothing but spread a whole bunch of small bets across all the horses with the longest odds of winning and therefore the highest payouts. I didn’t care about the individual horses (I knew nothing about them). I was indifferent to the outcome of each bet. At the end of the day—literally—I had pocketed quite a good sum of money—much more than my friend who knew a hundred times more about the horses, the racetrack, and the conditions than I did. In that case, my nearly complete lack of knowledge worked in my favor. Think of my horseracing experience as the loser’s guide to winning. I spaced out the bets and made them small enough so even all together, if I lost every one, the outcome couldn’t kill me. I played to survive.

It was an issue of technique. It was about a rule. This is why when bets are placed correctly, enormous life gains are possible.

Timing is an edge; use it to place your bets strategically. And the size of your bets plays a huge role. At the outset of each major move, ask yourself, “How much can I make?” Because the payoff has to be worth it, right?

Mr. Ricardo amassed his immense fortune by a scrupulous attention to what he called his three golden rules, the observance of which he used to press on his private friends. These were, “(1) Never refuse an option when you can get it; (2) cut short your losses and (3) Let your profits run on.”

I have now shared with you three of the cornerstones of my approach to trading and life: Get in the game. If you lose all your chips, you can’t bet. Know, and improve, the odds. But the fourth is the most important. It is Ricardo’s Rule, for which I have named this book: Cut your losses, and let your winnings run. Put simply: When something is not going well, stop doing it. When something is going well, continue.

Let me be clear: I did not invent trend following. There were trend followers before Ricardo, and trend followers after him. Richard Donchian, for example, is sometimes called the father of modern trend following. He was a trader who graduated from Yale and MIT and noticed that commodity prices often moved in trends, meaning that if something went up or down, it would likely continue in that direction for at least a little while. In the 1960s, he started writing a weekly newsletter called Commodity Trend Time, publicizing his “four-week rule,” strategy. He bought when prices reached a new four-week high and sold when they reached a new four-week low.

Trend following isn’t a strategy solely for commodity markets or futures; you can use it for stock trading as well. Recently, a friend told me he was buying a major chunk of Microsoft stock, and he was doing it from a trend following point of view. We discussed how Microsoft now leads the cloud server market with overall year-to-year growth of more than 50 percent. A recent fiscal year just ended showed 100 percent growth. As of my final review of these pages in late February 2019Microsoft is still trading near its 52-week high of 116 dollars per share. In 2018, the S&P 500 index as a whole lost 6.2 percent.  … But the underlying fundamentals of a company are not what motivate me, a trend followerA trend follower will buy Microsoft stock because the stock price is rising and has been rising long enough to establish that there is a trend in placeThe trend follower will not try to predict how long it will last. When the trend falls, he or she will get out. In other words, I don’t make money because I know anything. I only make money because I do what the market tells me to do. See, I prefer averages, kind of like a bookie, with my risk spread far and wide so that no single trade is too emotional. I like my workplace to be boring (screaming at a monitor was never something I wanted).  I don’t need a million charts or thousands of pieces of fundamental data to tell me that Microsoft’s cloud business is booming—the trend is telling me. It’s telling you too. 

Look, I respect the sheer intelligence and devotion of economists and historians who have attempted to understand global markets and develop a unifying theory of human behavior and market dynamics. But I don’t believe any such theory will hold up to scrutiny in the real world of money on the line. 

Interestingly, trend followers have tended to do well during times of crisis. Why? Because big sell-offs create dramatic trends across all markets.  …  For markets to move in tandem, there has to be a common perception or consensus about economic conditions that drives it. When a major event occurs in the middle of such a consensus, such as the Russian debt default of August 1998, the terrorist attacks of September 11, 2001, or the corporate accounting scandals of 2002 [and the 2008 equity market crash], it will often accelerate existing trends already in place . . . events do not happen in a vacuum. . . . This is the reason trend following rarely gets caught on the wrong side of an event.

…one must never forget that every action is embedded in the flux of time and therefore involves a speculation.

Sometimes you meet a potential partner who seems so wonderful. The trend goes up and up and up, and for some reason, this freaks you out, and you cut and run. Ask yourself why you are jumping off of a good trend? Do you think life can’t be that good? Do you think you do not deserve for it be that good? … So many people stay in bad situations waiting it out despite all evidence that the trend is sinking. People start a business and hang on for 5 or 10 years despite poor returns. … People find it so difficult to walk away from sunk costs. If you stay too focused too long on a bad bet, you are going to miss better opportunities. This can be said for the markets as well as in life. We want to avoid taking a loss, so we hang on and deceive ourselves that things will soon turn around. We put ourselves at serious risk and cling to false realities. 

If you’re running for US president and trailing badly in the primaries, don’t hang around to show you’re the real thing when you can’t possibly win and do stupid stuff that only makes the rest of your life miserable. Remember your goal: You want to be US president. Come back in four years with a better plan.

But the genius who goes to the best schools and achieves higher and higher status each year of life can face disadvantages in the market. For one thing, the market doesn’t care about how smart you are. It isn’t impressed by your grades or degrees. Remember, success in stocks, bonds, and commodities is not like figure skating where you get some points for executing difficult moves. In the markets only the final result counts, and it can be zero. That means you can be right most of the time, but still lose everything if you put too much on one wrong bet. The market won’t even say it’s sorry. I have observed that sometimes it’s the Ivy League people most of all who hang on to their losses to the point of self-destruction because they cannot comprehend that after all of their education they are just wrong. 

“How much can I lose?” should be your first question, not “How much can I win?” (Repeat this like a mantra.)

 In our mind hope is valued differently than losing. This is also why people in bad marriages stay, and based on my experience, this is how most fortunes are lost.

I recommend you practice losing money. In the long run, that will help you win big.

You spot a rising trend. Say, the 30-day average price for apartment buildings in a certain neighborhood has been going up for a year. You decide to buy an apartment building because you believe it will go up in value and you can make a killing. Soon, you fall in love with the building because it has a beautiful lobby designed by a famous architect. You tell yourself that a great lobby makes it more valuable. In fact, you’ve just lost your objectivity. You didn’t buy the building for the lobby, you bought it for the rent roll. You need to be looking at the condition of the building and whether rents are rising. Be objective and tear yourself away from that lobby love. 

“I’m going to get on a plane and walk into his office,” I explained. Simon was often surprised at the way I could call anybody up. I don’t know how to explain it, but I’ve always been able to do this. Maybe it is my comfort with failure. What’s the worst thing someone can do? Turn me away?

However, the way my brain works is to immediately look for survival. I was clearly up a tree and the tree was on fire, but I was looking for branches that were not yet in flames so I could climb down. I remember thinking that Simon’s law firm was totally screwed and so they’d have to help me get out of this.

I divide my life into goals. What I like doesn’t matter. What I have to do matters. I had to submerge my feelings.

Clearly I couldn’t trust humans. So I decided to pull myself up and start all over. Some people are born with this kind of persistence, and other people build it up through practice. Either way, if you are going to be investing or trying to do anything big in life, you have to be able to take a hit, get up, and stand strong again. If there is one thing that made me successful in life, it has been this persistence. But I must admit, this time was no doubt the most challenging of all. Somehow I knew I had to come back even bigger. I started creating a new plan. 

PART II THE MINT FUND, MARKET WIZARDS, AND LIVING THE RULE

All of these critical behind-the-scenes steps led to the founding of our company Mint Investment Management Company, which began trading in April 1981.

When the system kicked out its recommendations, we sent the trades to Man, who executed them in London.

This is why I say you need to know where you are playing the game. You need to understand the rules and perspectives of the other players in their culture. If you adapt yourself to the place, you improve your odds. Though I liked the people, I never liked the politics. If you are this way also, then pay especially close attention to the rules of engagement in the place where you are working. Using those rules to your advantage is your responsibility. 

By 1988, we registered an average annual compounded return of over 30 percent since our 1981 founding. During that time our best year was 60 percent growth (1987, the year of a stock market crash), and our worst year was plus 13 percent. We were by then receiving a lot of attention in the business media, including a 1986 “best of” award from Businessweek. Jack Schwager then profiled me in his 1989 book, Market Wizards.

By 1990, less than 10 years after we started, we were the biggest hedge fund in the world with a record-breaking $1 billion under management.

I went home and thought about what he said. I could see his point. I wondered, “How can I do this? How can I lure more investors to Mint?” This was 1985, and by now, I had two kids and a house. Man was getting 50 percent of all profits, and I was also sharing with my other partners. I was motivated to do better.

 With the guaranteed fund, we made investors wait five years. Time is an especially powerful form of leverage in growing money. With time, we could take advantage of bond maturity and a good long stretch of trading opportunity.Though five years was a relatively long time, investors were willing to give it to us because of what we offered in exchange—a dream combination of no-risk profit. 

Volatile markets and recessions are contagions that can fool any expert. When a market is really volatile, we would stop trading and simply get out. Remember the time horizon I wrote about earlier? A speculator’s advantage is choosing when to bet. Get out if the conditions are not right. Always put money on the winners. 

Don’t stay in bad marriages, bad jobs, or bad businesses that are failing year after year. Leave and instead seek out rising trends, then ride them for as long as they continue. Stay with the great spouse. Invest more in the business that is on the rise. Sounds great—and quite obvious when patterns are clear. But the world is full of ups and downs. How do we measure? 

It’s not difficult to identify stocks or commodities that are rising or falling in value. One of the most basic methods is to use “moving average,” which is the average of the price of a certain asset over a given period of your choice, typically ranging from 10 days to 200 days. This is how I identify stocks or commodities that are on the move.

You could say all this happened because I was a lucky sonovabitch. Perhaps. But I’d say it’s because I had the courage to bet. And the intelligence to make smart bets. I had a goal and a plan. I had a great imagination and the idea to build a trading model that told me when to get into the markets, when to get out of the markets, and when to add more money. But mostly, I enjoy making money in the markets. There are a set criteria of facts, and I get a kick out of figuring it out or finding someone who can execute my ideas. The money is confirmation that I’m right. 

Choose your clients as carefully as you choose your investments. I wanted a more stimulating and creative environment to foster new ideas. So I decided to recruit a team to help run the business—which turned out to be very smart.

[The Mint Brand Name  trade]  I contacted Patzer’s people and said we won’t sell it for money, only for equity. They resisted. Well, I told them we didn’t need $100,000, so they can find another URL. Patzer relented and gave us 2 percent of the company, including anti-dilution rights so we would maintain our stake when the company expanded their capital. In 2009, Patzer sold the company to Intuit for $177 million. That made our share $4 million for an investment that was less than a few hundred dollars when Alex bought the domain name in the early 1990s. Michael and Alex also put in a little money and got a nice cut as well. I donated my share to one of the Hite charities. Now that was cool!

In discussing his options, I explained that this kind of thing doesn’t happen very often. He quickly corrected me. He had done this very type of deal several times. He explained he had a simple formula for success. First, he kept to an industry he knew very well, which was bakeries, and he only partnered with men in their mid-30s. They were young enough to have energy and youth, but old enough to be tempered by experience.

As Alex will say, “ISAM was the most boring place in the world. Nobody yelled. Nobody panicked or screamed over their phones. You entered the trades, the money came out, and it got sent away.” Alex is chief scientist and one of the key players within the company.

Be prepared to lose roughly the size of your annual return. For example, a strategy with a 10 percent return over time should be expected to suffer at least double the annual return in a 20 percent drawdown—so a strategy with a 30 percent return over time should be expected to suffer a 60 percent drawdown. 

When the price makes a new high and you are there and can participate. When the market does something that shows me which direction it is going. If it jumps up over the six-month average, that is an indicator. That shows me which way the market is going. That’s the time. If you buy nothing but new highs in whatever market, then you must have a stop. The important thing is the stop. The stop keeps you alive. That’s it.

…when you go in and buy a stock, and it is winning, let your profits run. People get rich when they let their profits run.You just don’t know how far the run will go, so don’t get out early.

The biggest fundamental in the markets are people. That’s it. People. People have not changed in thousands of years.

…but I find the majority of people who do well are in large part trend followers.

Like most people, I was taught the value of hard work. But it quickly became clear to me that hard work is overrated.Smart work pays infinitely more. The business executive conducting a multimillion dollar deal at a restaurant is not working harder than the lowest-paid worker washing dishes in the kitchen. But the executive is wealthier. Naturally, these roles can be reversed if the dishwasher begins working smarter and training for a higher-paying job and the executive is fired for cheating on her expense reports.

Failure is merely a singular event. It doesn’t mean you are a failure as a person. If you fail, cut your losses and stop doing what is losing. Get out of there and find the next good bet as quickly and intelligently as you can.

My life is proof that a loser can win.