Market Wizard Dr. Van K. Tharp


I have been looking forward to reading the Market Wizards interview with Dr. Van K. Tharp for quite some time. It is the only interview in the Trading Psychology section and I have always been interested in the psychology behind successful trading. It was fascinating to learn that Tharp doesn’t actually trade himself, despite his vast knowledge of what makes a successful trader. I thought the way he explained this to Schwager was wonderful in its simplicity. He basically said he loves what he does working with traders, so why do anything else.

Top Five Quotes From Market Wizard Dr. Van. K. Tharp:

“The composite profile of a losing trader would be someone who is highly stressed and has little protection from stress, has a negative outlook on life and expects the worst, has a lot of conflict in his/her personality, and blames others when things go wrong. Such a person would not have a set of rules to guide their behavior and would be more likely a crowd follower. In addition, losing traders tend to be disorganized and impatient.”

I’ll bet you know someone like this. I know a lot of people like this. Over time, I have learned that these types of people are toxic to my thought process and my trading. I do everything in my power to keep my distance from people who exhibit these traits. Thanks to the power of the internet, we now have the ability to construct our circles of influence in whatever way we see fit. Surround yourself with good traders.

I have done a fairly solid job of working these negative traits out of my system over the past few years. I never had an issue with conflict, and the positive outlook and taking responsibility for my results came pretty easily. I also was never much of a crowd follower, and I picked up a set of rules pretty early on.

My remaining issues are dealing with stress, impatience, and being disorganized. Organization is getting better, while patience and stress are things I continue to struggle with.

“The simple truth is that most people are risk-aversive in the realm of profits – they prefer a sure, smaller gain to a wise gamble for a larger gain – and risk-seeking in the realm of losses – they prefer an unwise gamble to a sure loss. As a result, most people tend to do the opposite of what is required for success. They cut their profits shots and let their losses run.”

This obviously goes against what is preached by everyone we have studied, which is to cut your losses short and let your profits run. Anyone who has traded even briefly can understand how much it goes against our nature to take a loss or hold a winner.

While I have no problem letting stocks hit my 7% stop-loss orders, I struggle constantly with whether or not to sell a losing position before the stop-loss is hit. I also struggle on the upside and constantly worry about locking in my profits. This is something that has improved with experience, so I am hopeful that even more experience will help even more.

“Most people approach trading to make a lot of money, and that is one of the primary reasons they lose.”

This continues Tharp’s thoughts about cutting losses and letting profits run. He states that when people are so focused on the importance of the money, they have a much harder time taking losses and letting profits run. He says that it is much easier for people who look at trading as game to be successful.

I have had numerous debates over the years regarding the importance of trading results. I generally argue that I don’t have any desire to be profitable this year. My desire is to learn how to win the game regularly for the next 40 years. If it takes me five more years of losing before I figure out how to have those 40 profitable years, I am fine with that. The money I make this year is irrelevant to my long term outlook.

“If you are really committed, then not only are you certain that you are doing the right thing, but somehow events just seem to occur to help you.”

This reminds me that Luck is when Preparation meets Opportunity. I believe that the more committed I am to studying the market, the more things tend to move in my favor, although it might not be very obvious. Not one single stock has gone in my favor in the last 10 months, however I have learned an enormous amount from the stocks that haven’t gone in my favor. That learning process is preparing me for the opportunity of the next major bull market where I intend to be very lucky.

“The realization that you are responsible for the results you get is the key to successful investing. Winners know they are responsible for their results; losers think they are not.”

I see this both in the investing world and everywhere else. Successful people tend to take responsibility for their actions, both good and bad. I constantly see people who don’t feel successful sitting at the bar blaming everyone but themselves for their situation.

I’ve dealt with this in my investing this year as well. It would be easy for my to just say it was a bad year for CANSLIM investors and that’s why I did so poorly. But, there were big CANSLIM winners this year that I didn’t own. Why did I miss them and what can I do to make sure it doesn’t happen again?