Friday, January 23, 2009

Bruce Kovner: Risk and Personalization

What advice would you give the novice trader?

First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.

Besides overtrading, what other mistakes do novice traders typically make?

They personalize the market. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn't care whether you make money or not. Whenever a trader says, "I wish," or "I hope," he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.

- Interview of Bruce Kovner in The Market Wizards.


The College Economist said...

I agree to a lot of what Kovner says.

I think it is important to have goals though and a 'hope' to achieve those goals. Imagining possibilities can be dangerous because it takes your concentration away from the now.


Complacent Panda said...

I understand what you're saying, and success definitely requires looking into the future and thinking of the possibilities. Without goals you'll never get there.

I think what Kovner is talking about is hope or wishing that isn't accompanied by work and thought. For instance saying, "I hope RIMM will go back to $140" probably will never get you your money back. In other words, some hopes can really be denials that will prevent you from achieving your dreams (at least that's how I see it).

Thanks for the comment, definitely multiple meanings behind the words.