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I was sitting in a restaurant back in the early 1970's and in the
booth next to me there was a salesman. He was talking to his friend
and it was clear that he was troubled. He was looking for new sales
job. He knew what he did best and what he did best was to sell a
dream. All he had to do was to believe in the dream himself and he
could sell anything. "I don't care what it is. I can sell
anything, just as long as I believe in what I am selling", he
told his friend. He was looking for something to believe in so he
could earn a living, for himself and perhaps for his family, if he
was married. I hope he found what it was that he was searching for.
Believing in a dream is an admirable quality for a salesman. It is a
quality that the pianist has when she spends hours and hours at the
piano while her peers are at the swimming pool, or at the school
dance, or just hanging around the local drive-in. It is the same
quality that keeps a student studying, a machinist working in order
to own his own machine shop, a waitress saving money to pay for her
daughter's dance lessons. It is a wonderful thing to believe in a
dream and most people who have succeeded in life have had a dream
they believed in. In life, if you have a dream and if you believe in
it, you can do almost anything. But having a dream won't work for you
in futures or options trading or even in stock investing. Futures and
options trading and stock investing are about making money. If you
are trying to make money on a dream in futures or in options, most
likely you will not succeed.
Let's talk about drought. It may be that a drought will
occur in the Midwest this year and that the crops will not be as
bountiful as they have been in previous years. There may be a
shortage of corn or soybeans or wheat or numerous other commodities
for which there are no futures markets. This may well happen. And
then again, it may not. The rain may come, the drought may end, the
crops will grow and the harvest will be sufficient to meet the
demand; the harvest may even exceed the demand. When you buy or
sell based on that happening which has not yet happened
(which is, after all what a dream really is) you have to be
very careful.
If you are long soybeans based on your belief that the drought will
come, and the market moves 20 cents against your position before it
runs in your favor, you are risking $1,000 per contract that the
event which has not yet happened will happen and that when it does
happen it will make you a profit. If the market moves 40 cents
against you before it moves in your favor, you are risking $2,000 per
contract on an event that has not yet moved the market in your favor.
If the market moves 80 cents against you before it moves in your
favor, I won't even tell you how much you are risking by betting on a
dream. Whenever you buy a "dream or a story" in commodities
or options or even stocks, be very careful that the story does not
overtake your common sense. Be from Missouri. Believe it when
you see it.
There were two investors in an office, one said; "I am long ten
contracts of soybeans because I am sure there will be a drought and
prices will rise". The other said, "I am from Missouri, I
look at what might not happen as well as what might happen and while
it looks like the drought may come, I hate to invest a lot of money
buying dreams. I am long one contract, if the market closes $200
against me today, I am gone". Which trader would you bet
has the best chance of becoming rich in the short run? If
anyone is going to become rich in the short term, it will be the
trader with the ten contracts. Which trader would you bet has the
best chance of becoming not rich in the short term? Once again, it is
the trader with the ten contracts.
It is said that when one wades across a river, he or she never steps
in the same water twice. When a foot is lifted and moved forward, the
old water flows downstream and the water that you now step in is
brand new. It is the same with futures and options and stock
investing. The fact that you were successful on a previous occasion
when riding a market through a $2,000 per contract decline against
your position does not mean that the market will bail you out again.
In fact, your very survival the first time may actually work against
you the second time. You may adopt the philosophy; "Oh, I rode
the market out last time and I came out okay, so this time I am going
to ride it out again and everything will be fine." This
philosophy may be the short story of your short career as a futures,
options or stock market investor. When you buy a dream, or a
story, or an event that has not yet happened, the very fact that the
dream came true the last time you believed in it does not mean that
it will come true for you this time. You are not a salesman who can
sell anything he or she believes in. You are an investor. There are
two important things in every investor's life. The first is not to
lose your money. The second is to make a profit. Looking at these two
events, the former is far more important to you than the latter. You
may be able to invest tomorrow if you do not make a profit today. You
may not be able to invest tomorrow if you lose most of your money today.
I was having breakfast on New Year's Day in Seattle when a waitress
asked her favorite customer, "Well, Jack, and was last year a
good year for you"? And Jack replied, "When you reach my
age, any year you make it through is a good year". The important
thing for Jack was making it through the year. The important
thing for you, as an investor, is not to lose your money. To
keep from losing your money, you must remember that if you buy a
dream and the dream works out, that is wonderful. But you will not be
able to build a long-term investment program based on buying dreams.
You have to build an investment program based on cold, hard reality. You
have to have a plan. You have to be able to use your plan in
years when there is a drought and in years when there is rain. You
have to be able to use your plan in markets where a drought is not a
factor, such as trading silver. You have to be able to use your plan
in wintertime or in spring or in summer or in the fall. You have to
have a plan that you can understand. Your plan has to make sense, at
least to you if no one else.
Suppose you were lucky enough to have a spare $10,000 and decided to
turn it over to person (A) or to person (B) to invest on your behalf.
Since it was your money, you would most likely interview both (A) and
(B). Person (A) told you she was sure that the drought would come and
that she planned to buy ten contracts of soybeans for you Monday
morning on the open. Person (B) told you she had no idea if the
drought would come, but what she was going to do for you was this:
She would buy one contract of soybeans for you Monday morning on the
open and enter a stop/loss order $200 below your entry price. If you
were not stopped out and if the market closed in your favor, she
would buy a second contract for you on the close. After the close,
she would enter a stop/loss order for you $200 below each position.
If the market opened higher on Tuesday, she would raise your
stop/loss orders for both positions to the break-even point while at
the same time entering a profit/exit order for you 40 cents above
your average purchase price. These would be OCO orders (one cancels
the other), whichever filled first, the break-even stop/loss order or
the profit/exit order, the order which would no longer be needed
would be cancelled by her for you. If the market did not close in
your favor on Monday, she would liquidate your one contract at the
market on the close and re-examine the market when it opened on Tuesday.
Now this proposal of person (B) might not be something that anyone
would actually do. It might be too complicated or it might be too
simple or it might not involve enough contracts for you. It might be
a lot of things; there is one thing it certainly is. It is a
plan and it is a low-risk plan. The proposal of person (A) to
buy ten contracts for you Monday morning on the open is not a
plan, it is an event and it is a high-risk event. If soybeans
open sharply higher on Monday, say up 20 cents on the fear of a
drought, and you buy ten contracts "on the open" 20 cents
higher than Friday's close, and the market then subsequently declines
to the same price it closed at on Friday, you have a paper loss of 20
cents per contract, or $1,000. Since you only had only $10,000 to
invest and since you bought ten contracts, you have a paper loss of
10 times $1,000 or $10,000 or 100% of the money that you turned over
to person (A) to invest for you. It is quite possible that this could
actually happen within a few minutes or a few hours of a single
trading day. It is possible to lose 100% of your capital before one
day is over. It is possible when you buy a dream, a story, a tale, a
drought, or a flood, or one catastrophe or another to suffer a
substantial loss of your capital within a single day. Buying ten
contracts of soybeans "at the market on the open" because
you believe a drought may occur is not a plan; it is an event.
It is also a high-risk event. This high-risk event may
make you rich if you are lucky. If you are not lucky, it may make you
the opposite of rich.
Believing in what one sells works very well for salesmen and this
belief helps salesmen earn a living. Even if a salesman believes in
something that is, in fact, no good the salesman's belief alone may
be enough to make him money. Believing that there will be a drought
in the Midwest, however, will not make you money. Belief in a drought
requires more than a belief, it requires an actual drought. And the
drought may never come. Remember Jack's rule. "Make
it through the year". It is more important for your
success that you have a plan than it is that you have a belief. Your
plan doesn't even have to be a good one, initially. For your
long-term success, even a bad plan that you can test one contract at
a time is better than the best belief. Plans you can work on,
you can improve them, they can be modified, thrown away, adapted,
adjusted, readjusted, brought back to life until one day you may
actually have a plan that will work. Beliefs are very good for
salesmen. Plans are very good for investors. In lesson
number 12, I am going to teach you how to build yourself a plan.
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