Emma’s Note: Emma Walsh here, managing editor of the Diary.
Today, we’d like to introduce you to our colleague Larry Benedict. Larry is a master hedge fund trader, with over 35 years of experience, who made over $274 million in profits for his clients.
In that time, he went from a pit trader at the Chicago Board Options Exchange to managing his own hedge fund. That hedge fund went on to become a 1%-ranked hedge fund according to Barron’s, with high-profile clients like the Saudi Royal Family and the Central Bank of Canada.
Larry has a unique approach to trading the markets. He’s extremely risk-averse, for a start. Here, he explains to us why it’s so important for anyone starting out to “earn their risk”… and he tells us about the person responsible for teaching him this invaluable lesson… .
Imagine I strapped you into the driver’s seat of a Formula 1 car. The engine’s running, the crowd’s roaring, and you’re in the front row of the starting line.
Millions of dollars are on the line. You’re surrounded by the world’s best drivers. The odds of a crash are uncomfortably high. And your only experience racing is from a go-kart track.
Safe to say you’d be a little nervous. You don’t have the experience you need to succeed at such a high level.
In my experience, the same goes for trading…
You have to work your way up before you can hang with the world’s best traders. But you don’t have to – and shouldn’t – do it alone.
How to Get an Edge
Let’s revisit the same scenario from above. Same car, same crowd, same stakes.
Except this time, you’re wearing a headset with Michael Schumacher on the other end, one of the greatest Formula 1 drivers ever. He’s giving you turn-by-turn advice for each curve on the track. You’d feel a little more comfortable with such an experienced mentor.
Becoming a trader is like anything in life. If you want to be really good at it someday, you have to take that first step. You won’t have decades of experience to rely on right from the outset.
And if you want an edge, there’s no better place to start than by learning from someone who’s already paved the way.
In today’s essay, I’ll share the story of a trader who opened my eyes early in my career and put me on the path to where I am today. And I’ll share the specific advice he gave me, which turned my brokerage account around…
The Key Thing a Mentor Provides
A good mentor provides, first and foremost, a methodology to follow.
Most traders struggle because they have no real methodology. They take positions willy-nilly, with no real concern for position sizing or an exit strategy. It’s a make-money mentality… but with no firm plan.
To be a successful trader, you have to be able to deal with the finality of a loss on the downside… and know when to take profits on the upside.
Taking a loss is one of the hardest things in trading. But when you take that loss, you’ve now locked in that loss and have to make it back. If you don’t believe you can make that money back, you’ll never get out of a losing trade.
That’s a crucial piece of discipline that’s extremely difficult to just figure out on your own.
Having a mentor to show you how to execute trades, when to get in and when to get out, and control your emotions, will help you develop the ability to take a loss and move on.
I’ve had a few mentors throughout my career. But one sticks out… because he saved my career.
How I Found My Mentor
When I started out on the trading floor, it was common that most floor traders didn’t go to college. They just learned everything on the floor. So, while I spent four years in college, my colleagues had the advantage of four years on the floor over me.
I was practically blind coming in. I had no idea what was going on.
But as I continued to grow, I was drawn to the traders who were outliers… The one or two guys who were really good. They were able to consistently grow their positive P&L (profit and loss) and put on larger position sizes.
One of those guys was Larry LoVecchio. I worked under him at the firm Spear, Leeds & Kellogg. He was the best mentor I ever had, and a lot of it was due to his wisdom and age. I was just 27 or so at the time, and he was in his mid-30s.
He taught me discipline that I never had. I’d watch him and be in awe of not just his performance, but how calm, measured, and unemotional he was…
Meanwhile, I was like a wild stallion that was out of control. I had the “it” factor, aggressiveness, and the will to win… but I didn’t understand how to make it all work together.
LoVecchio was really aggressive, but also incredibly disciplined. He knew when to take risks, and how big a risk to take. He didn’t overleverage his trades, and never let his emotions get ahead of him.
That’s why I say he saved my career. Before I met LoVecchio, I was just throwing all my money into one trade, swinging for the fences… and usually missing.
It’s not easy to bounce back, time after time, after you’ve lost it all. And in my early days, I lost it all multiple times. I might’ve wound up quitting, had LoVecchio not pulled me under his wing.
Know Your Limitations
The critical thing he taught me was the importance of position sizing. Where, at first, I would throw too much money into trades, hold on to losers too long, and stagnate, I was taught to cut my losses early. Then, after booking some wins, I could size up to bigger and bigger levels comfortably (something I came to start calling “earning my risk”).
My advice for any new trader is to be eager to grow, but know your limitations. That’s the key to trading.
I didn’t start out doing 50-70 trades per day, like I do now. I started out with just one trade per day. My position sizes were extremely small, meaning I put a very small percentage of my overall capital into each trade.
Then, I started to get better. I started accumulating one small win after another, adding more trades each day, and sizing up my positions.
But of course, I had to watch someone else do it to learn that. I had no other experience to draw from.
I say all this to show you something important: you don’t have to go it alone when you’re learning to trade. Find someone whose performance you find impressive… whose ideas you agree with… and find a way to learn from them.
Then, find a way to execute those ideas in a way that’s uniquely yours.
That’s the difference between traders that quit when the process gets too hard early on and traders who stay in it for the long haul – and the big profits.
Editor, The Opportunistic Trader
P.S. This edge is what eventually allowed me to make over $274 million in profits for my clients back when I ran a hedge fund. Barron’s even ranked my fund among the top 1% in the world.
One of my secrets to that success has been trading during a rare phenomenon that occurs just four times a year. In the past, these events led me to generate $45 million in trading profits at my hedge fund.
But you don’t need to be a hedge fund manager to take advantage of this rare event…
In fact, next Wednesday, I’ll share everything I know about this profitable secret… including the ticker I always trade to ensure I come out of each event a winner.
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