4 Trading Legends. 4 Mistakes.

I specifically chose these people because I believe we learn more from our mistakes than our successes and these people are evidence that everyone makes mistakes.

If you’re learning to trade, I highly recommend you read through these mistakes, understand how they were made, and take notes on how these folks would have done it differently the second time around.

Let’s dive in:

1. Stanley Druckenmiller - On October 16, 1987, I made a tragic mistake.

Stanley Freeman Druckenmiller is an American investor, hedge fund manager, and philanthropist. He founded Duquesne Capital in 1981 and closed the fund in 2010. At the time of closing, Duquesne Capital had over $12 billion dollars in assets.

Stanley Druckenmiller - Wikipedia

Biggest mistake:

By October 16, 1987, the Dow had come down to near the 2,200 level, after having topped over 2,700. I had more than recouped my earlier losses on the short position and was back on track with a very profitable year. That’s when I made one of the most tragic mistakes of my entire trading career.

I went from net short to 130 percent long. A percentage greater than 100 percent implies the use of leverage. (This was just before the market crash in 1987)

The New Market Wizards (pp. 197-198). HarperCollins e-books. Kindle Edition.

How he learned it was a mistake:

That Friday afternoon after the close, I happened to speak to George Soros. He said that he had a study done by Paul Tudor Jones that he wanted to show me. I went over to his office, and he pulled out this analysis that Paul had done about a month or two earlier. The study demonstrated the historical tendency for the stock market to accelerate on the downside whenever an upward-sloping parabolic curve had been broken—as had recently occurred. The analysis also illustrated the extremely close correlation in the price action between the 1987 stock market and the 1929 stock market, with the implicit conclusion that we were now on the brink of a collapse.

I was sick to my stomach when I went home that evening. I realized that I had blown it and that the market was about to crash.

As it turned out, the market opened over 200 points lower. I knew I had to get out. Fortunately, there was a brief bounce shortly after the opening, and I was able to sell my entire long position and actually go net short.

The New Market Wizards (pp. 197-198). HarperCollins e-books. Kindle Edition.

Takeaway:

When you're wrong admit it fast and be prepared to reverse your position.

2. Victor Sperandeo - This situation cost me over $1M in 1984

Victor Sperandeo known as “Trader Vic”, is a US trader, index developer, and financial commentator. He serves as the President and CEO of Alpha Financial Technologies, LLC (AFT), is a founding partner of EAM Partners L.P., and serves as the President and CEO of its general partner, EAM Corporation.

Sperandeo traded in commodities, particularly in the energy and metals sectors. He is renowned for having 'predicted' the stock market crash of 1987 during an extensive interview in the September 21 issue of Barron's; on October 16, one trading session prior to Black Monday, Sperandeo shorted the Dow and made 300% during a day the DJIA fell by over 20%.

Victor Sperandeo - Wikipedia

Huge Mistake:

At the time, the Fed was easing, and I was convinced that we were in a bull market. Congress was considering a change in the tax code and the newspapers said it would be neutral.

I decided to go long.I was long the world—two legal-size pages of positions. My smallest position was one hundred options and my biggest position—I’m not exaggerating—was two thousand options.

What I failed to realize was that, even though the proposed change in the tax code was revenue neutral, the plan called for taking money from corporations and giving it to individuals. When you’re long stocks, you don’t want any plan that takes money away from corporations [he laughs].

When the market went down four days in a row, I knew I was wrong. I wanted to be out. The market just kept on falling. On the sixth straight down day, I got out. If I had sold after the fourth down day, my loss would have been only half as large.

My rule would have had me out on the fourth day.

The New Market Wizards (p. 262). HarperCollins e-books. Kindle Edition.

What he learned from the mistake:

Whenever there’s a tax proposal or some other major legislative uncertainty, I now get flat immediately. The market will always run to the sidelines until it knows what will happen.

The New Market Wizards (p. 263). HarperCollins e-books. Kindle Edition.

Takeaway:

Realize that you are human and humans always make mistakes. Try to make them less, recognize them faster, and correct them immediately.
 

3. Linda Bradford Raschke - The pioneers are the ones with the arrows in their backs.

Raschke began her professional trading career in 1981 as a market maker in equity options as a member of two exchanges. She began her trading career on the Pacific Coast Stock Exchange and later moved to the Philadelphia Stock Exchange. She became a registered CTA (Commodity Trading Advisor) in 1992. Since then, she has been the principal trader for several funds and started her own hedge fund in 2002 for which she was the CPO (Commodity Pool Operator).

Raschke has been a full-time professional trader for over 40 years

Linda Bradford Raschke - Wikipedia

Mistakes I've Made:

My own particular weakness has always been being a bit premature on entering positions. As the saying goes, “The pioneers are the ones with the arrows in their backs.”

Another mistake I’ve frequently made is participating in too many markets at one time, which leads to sloppy trading.

The New Market Wizards (p. 304). HarperCollins e-books. Kindle Edition.

What she learned from her mistakes:

I’ve learned to think to myself, “Patience, patience, patience.” I try to wait until things are set up just right before I take a trade. It’s better to have the wrong idea and good timing than the right idea and bad timing.

I’ve also found that it’s my smallest positions that cause my biggest losses because they tend to be neglected. It’s natural to be cautious and attentive to big positions. With the small positions, it’s easy to fall into the trap of being complacent. My awareness of this pitfall has made me more careful with such positions.

The New Market Wizards (p. 304). HarperCollins e-books. Kindle Edition.

4. Randy McKay - I took an 1800-point loss in one day.

Randy, a floor trader, started trading in 1972 when the CME launched the International Monetary Market (IMM). He decided to borrow a seat on the exchange from his brother and begin trading. He turned $2,000 into $72,000 in the first year. Of course, he went on to make millions in the markets and had many successful years in trading.

Ugly mistake:

In November 1978 the Carter dollar rescue plan, which was announced over a weekend, caused a huge overnight price break in foreign currencies.

I was extremely long foreign currencies, but I had liquidated over half my position a week earlier.

The up move was decelerating instead of accelerating. It’s possible to see market weakness even when prices are still going up and setting new all-time highs. I had been long both the Deutsche mark and the British pound. I sold my Deutsche mark position and kept the British pound.

On the Monday after the announcement, I knew the market was going to open sharply lower well before the opening. I was very lucky in being able to get a couple of hundred contracts sold in the futures markets, which was locked limit-down.

I liquidated the rest of the position in the bank market, which was down about 1,800 points [equivalent to approximately three limit-down moves in futures].

He lost about $1.5M ($4.3M in today's money) on that break.

The New Market Wizards (p. 89). HarperCollins e-books. Kindle Edition.

Lesson learned:

There’s a principle I follow that never allows me to even make that decision. When I get hurt in the market, I get the hell out. It doesn’t matter at all where the market is trading.

I just get out, because I believe that once you’re hurt in the market, your decisions are going to be far less objective than they are when you’re doing well.

And if the market had rallied 1,800 points that day to close higher, I couldn’t have cared less. If you stick around when the market is severely against you, sooner or later they’re going to carry you out.

The New Market Wizards (p. 90). HarperCollins e-books. Kindle Edition.