I’ve read numerous books on investing and trading, but if I had to choose one book that has had the greatest positive impact on my results it would be “How I Trade for a Living” by Gary Smith (Note: the author is not Gary B. Smith “The Chartman” who used to appear on Fox News).
I was fortunate to discover this book while browsing the “new books” section in a library while I was on vacation in 1999. I couldn’t put the book down, and soon purchased my own copy. At that point in time, I was more of a traditional “buy and hold” investor that re-balanced his portfolio every so often. This traditional approach worked OK during most of the 1990’s, but emerging markets funds took a very big hit in Aug. 1998 and many value stocks (like BRKA) were languishing in late 1999. I was also getting nervous about the overall valuation levels in the US markets and was looking for ways to make consistent gains in any kind of market.
I met Gary (via e-mail) about five years ago when he was looking for help in computing a five year compounded annualized return for some of his IRA accounts, given the individual annual returns for each year. If I recall, Gary achieved over a 50% annualized return for the five year period in question. We became e-mail “buddies” and still exchange e-mails several times a month. I also look for Gary’s posts on stock market sentiment at the http://www.traders-talk.com forum.
Gary’s book taught me a lot and it is filled with common sense advice. Here is a brief rundown:
Chapters One thru Six- Gary describes how he struggled in the early years, but then turned into a highly consistent trader. He was a break-even futures trader for many years, which put him way ahead of the average trader (90% of futures traders consistently lose money), but he finally turned the corner in 1985. He gave up charting entirely and decided to put his main focus on the stock market with mutual funds as one of his main trading vehicle. Gary rarely sells short, since it bucks the overall long term 200 year upward bias in the stock market, yet he has still managed to earn good returns, even in bear market years.
Chapter Seven- Great discussion of the “psychology” of trading. Gary is not a big fan of paper trading, simulated trading or trading contests, since the all important psychological aspects of trading are missing. Gary warns about trading gurus (many of whom he knows personally) who make money from seminars or newsletters and not from their own trading. Some of them have had terrible results in their personal accounts.
Chapters Eight thru Ten- Gary describes some of his favorite trading indicators which he uses as “perceptual trading filters” to reinforce price action. He describes a list of sentiment and technical indicators that have proven useful over the years, but some of the detailed interpretation may need to be updated if you want to use them now.
Chapter 11- Monthly Seasonality- I found this chapter very useful for my 401K mutual fund accounts. Again, some of the details in this chapter will need to be validated with up to date data, but the basic concepts are still useful.
Chapter 12- Nitty Gritty- This is probably the best chapter in the book, as Gary describes his real-life trading during the 1998-1999 time period when Gary was highly successful.
Chapter 13- Money Management- Gary is not a big fan of leverage, and prefers to trade securities that are less volatile. His basic money management principle is to maximize his winning trades by scaling up, but to cut his losses right away.
Chapters 14 & 15- Trading Mutual Funds and Junk Bond Funds- These chapters were very useful in managing my 401K plan. Many of the ideas are still valid, but some of the strategies are no longer feasible or are less effective because most mutual funds now have exit redemption fees and/or trading restrictions.
Chapter 16- Trading Stock Index Futures- I have not used the systems described in this chapter, because they do not fit my personality. But knowing Gary, I would imagine that some of these systems work better than most other systems you would read about.
In the Appendix, Gary presents a great list of some of his favorite trading books in different categories, along with other informational resources- newspapers, magazines, newsletters and internet sites.
You can buy Gary’s book here: