I N V E S T O R S D I G E S T

INVESTING 101EXPANDING YOUR INVESTMENT KNOWLEDGE

112 / March 29, 2013 Issue 6 / 13

Reprinted with permission

Idont know about you, but theday I decide to try my hand atsomething new, its all I canthink about.

Its like the smell of a new car.Were not really sure where itcomes from or why it affects us. Weonly know that it does.

In our imagination, makingmoney in the markets looks fareasier than eking out a living at ourboring day jobs.

This, during the last phase of abull market, may be true for a lot ofpeople. But sooner or later wemust leave the world of imagina-tion and enter the world of reality.

Yet, the reality is that in a bullmarket, valuations of the assets be they stocks, gold or tulips be-come fictional regarding their fun-damentals.

Action must be swift

Moreover, the window of op-portunity to recognize that theimaginary world can no longer besustained is not only very short, butrequires swift action.

No one puts his money in themarket with the intention of losingit. Not one person.

Like many people in 2000, I lostthe shirt off my back. When thedust settled and I looked around, Irealized that most of the loserswere just like me.

Twelve years and a lot of timeand dedication later, I see that thelandscape is littered with a lot ofthe same people, still in denialabout their lost time and money.

They may not be playing themarkets equivalent of high-stakesTexas Hold em, that is small-capgrowth and exploration stocks.

They may be putting nickels inpachinko machines, in otherwords, in broad market bond andequity funds.

But the outcome is the same:They arent being adequately re-warded for their time and capitalrelative to their needs.

It became my lifes goal to stopbeing a fish in the markets. Even ifI couldnt be a shark, at least Iwanted to know what the sharksknew so I could anticipate theirmoves and minimize my risk.

To do this, I had to become anexpert in trading. In my case, thismeant braving Canadas bitterwinter to hit the library and get my

hands on the latest books. It alsomeant finding a new place to live ata time when I had little money.

When I finished university, I re-alized the career path I had pre-pared for was not what I wanted,which meant that I had no formaltraining or support in my newlychosen field: trading.

I knew in my heart that I want-ed to live by my wits, investing inthe capital markets.

My parents, on the other hand,didnt understand and, to put itmildly disagreed with my majorlife decision.

They were and remain tra-ditional. And its endemic to Asiancultures to seek a stable, re-spectable lifestyle. Security is high-ly valued. And my new plan wasthe exact opposite of secure.

The culture clash with personaldesire eventually reached a break-ing point. And I had to find otherliving arrangements while I fo-cused on another year of intensiveself-education about the markets.

I moved in with my friend An-drew, effectively living on hiscouch while I spent almost all mytime studying.

If you saw the speech Steve Jobsgave at Stanford Universitys 2005graduation ceremony, youll recallhim saying that his lifes first bigturning point was when he decid-ed to drop out of college.

In a way, I did something simi-lar. I turned my back on a lot ofwhat Id learned, along with myparents expectations.

Capital comes in many forms,one of which is human capital. Andmy friendship with Andrew turnedout to be more important than mymonetary savings.

Without his support I wouldnthave had the chance to leveragemy money for my future career intrading.

Anyone whos spent time trad-ing will know that there are asmany approaches to it as there arepeople in the market.

Patterns exist

Although were all unique,there are behavioral patterns thatemerge within markets that can beanalyzed to allow on to make bet-ter educated guesses about wherethe price of an asset will go.

I often wonder why the sameperson who will spend weeksstudying and shopping for a new

car will meekly hand over his mon-ey to an investment adviser or fundmanager without much thought.

We all have our area of exper-tise. So, its natural to assume thatthe financial planner is profession-ally qualified.

But those of us whove workedas sell-side analysts know we haveto question that assumption. Andyou should as well.

The fact is that both the cardealer and the financial consultantare salespeople; both are there toclose a deal. Financial products areno different than cars; there aregood ones and there are lemons.

The Big Trade

By Peter Pham

John Wiley & SonsCopyright 2013

$35.95, 192 pages

And just as there are hardwork-ing, insightful financial consul-tants, there are also lazy ones.

There are those who spendtheir days building their knowl-edge base, along with their ownsystems, to distinguish themselvesfrom their peers. And there arethose who simply regurgitatesomeone elses work.

By the time youre done readingwhat Ive written, youll not only beable to make your own decisionsabout specific trading opportuni-ties, youll also be able to judge thequality of the person presentingthat opportunity. And you mightdecide not to use a financial pro-fessional at all.

Theres a difference betweenworking hard and working smart.Sometimes when you work hard,you also wind up working smart.

In becoming a trader, I chose a

path that in hindsight was proba-bly crazy. But the associated risk,not to mention the attendantstress, focused my attention on asingular goal. Anything less wouldhave meant not eating.

I didnt then realize Id put my-self in worse straits a few years lat-er; I thought I knew what I was will-ing to endure to achieve my goals.

System was key

All I had to do was figure out howI could consistently make profits bytaking advantage of the opportuni-ties the market seemed to present.

I needed to figure out how totrade for my dinner. If I could suc-cessfully trade for nickels, I couldmove up to dimes, until eventuallyId be trading for amounts of mon-ey that would make the time I in-vested worthwhile.

At the end of the day, the skillsneeded to make $20 are the samefor making $2,000 or $200,000.

The mechanisms by which oneenters or exits a trade are the same.The only difference is the size ofthe position, not the quality of thedecision youre making.

Still, my learning curve wassteep. Frankly, I was obsessed withthe markets. I needed to figure outhow to be not just good, but thevery best trader I could be.

For two years, almost every dol-lar I made went into books, cours-es and seminars on trading youname it. I absorbed it all, tried it alland failed with a lot of it.

If youre a technical trader whoswears by moving average conver-gence/divergence, dont think myrejection of MACD stems from nothaving used it myself.

Maybe it might work for you.But its been my experience that itsreliability is suspect and that it can

lead someone to make decisions oflower and lower quality over time.

After my first attempt to grabthe big trade, I spent way too manynights pacing back and forth, rack-ing my brain to find a better way.

If youve been there if youreone of those people who just cantlet the markets exist without you know youve found a kindred soul.

I pursued this life with a singu-lar focus. Indeed, I dont think sin-gular focus does me justice.

If youve seen the ChristopherNolan movie, The Prestige, thenyou have an inkling of what I putmyself through in those couple ofyears, obsessively devoting every-thing to becoming the best trader Icould possibly be.

Sleep was for the uncommitted.Food was a means to continueworking, not something to enjoy.

The two magicians in Nolansmovie pursued the absolute limitof their art, driving themselves tocatastrophic lengths in effect,the edge of insanity.

Knowledge is a trap

It was a great story. It not onlyresonated with me, but also servedas a warning that knowledge is it-self a form of trap that can easilylead you down paths that are nottrue sleights of mind, as it were.

Im not going to tell you I wasinsane or thats whats required todo this well. Im only saying thatthis is what I did.

Folks around me feared for myhealth, both mental and physical.They worried I was working myselftoo hard, but for me it didnt matter.

If you love something and arelucky enough to identify your pas-sion early in life and, more im-portant have the chance to pur-sue it, why wouldnt you?

Did I do so without cost? Ofcourse not. Theres a cost to every-thing. But its what I wanted to domore than anything else.

Having spent literally thou-sands of hours studying all aspectsof fundamental and technical anal-ysis, as well as using that knowl-edge to do trades, Im confidentIve now found a system that con-sistently works for me.

In Outliers: The Story of Success,Malcolm Gladwell argues that evento have a chance at being great,you must put in 10,000 hours ofwork and study into that activity.

And even thats no guarantee ofsuccess, but rather the precursorfor potential success. Dont put inthose 10,000 hours and yourchance of success drops.

Mr. Gladwells argument maynot be bulletproof, but its food forthought. Indeed, it may be anotherway of expressing a process calledimplicit learning, which playsheavily into my proposed tradingmethodology.

Im not saying I always executemy system perfectly. I am, after all,human and have some days thatare better than others. But its thegoal that matters.

Just because you know youcant achieve perfection, does thatmean you shouldnt strive for it?Of course not. Theres an infinitegulf between knowing the pathand walking it.

Want to succeedas a trader? Thengive it everything

youve gotWhen Peter Pham decided he wanted a career

where he would go toe to toe with themarkets, he spent almost every waking hour

learning all he could about trading stocks

Copyright 2013 by MPL Communications Inc., Reproduced by permission of Investor's Digest of Canada, 133 Richmond St. W., Toronto, ON M5H 3M8