The Most Important Thing I've Learned in 25 Years of Trading

When I first started investing and trading I believed that the secret to success was the ability to make 'great calls'. I thought if I could predict what the market would do next or discover a great stock that was about to make a big move then I would steadily produce huge profits.

I did make many great calls and timed the market pretty well, but it was often a matter of luck and there were plenty of bad calls as well. Over time, it became clear to me that the secret to market success wasn't predictions and great calls. The secret to success was aggressively managing my stocks and reacting aggressively when conditions changed. I needed to respond effectively to what was actually happening rather than just hope that my predictions about the future proved prescient.

The stock market industry is primarily built on the idea that money managers, strategists, and pundits are skilled at predicting what the stock market will do next or selecting stocks. Institutional Wall Street needs us to believe that we need their skills at predictions and forecasting. Dramatic predictions get attention and attention is what attracts new clients.

Gathering assets is how Wall Street makes their money. Making accurate predictions is just a secondary concern.

One of the problems with predictions and forecasts is that there is little appreciation of the role of luck. Everyone likes to believe that when things go their way it is because of their great skill but when things go wrong it is just bad luck.

The reality is that there is no one in the history of the stock market has been able to predict market moves with great accuracy and precision over a long period of times. Many people are lucky and get the timing right now and then, but every market professional has made absolutely terrible calls. Good luck occurs often enough that it is easily confused with extraordinary insight.

The common trait among great traders and investors is that they make big money by pressing their bets when they are right and cutting their losses quickly when they are wrong. I believe this comment from George Soros is the single most valuable advice for market participants to embrace and employ: "It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong."

That is a great insight, but the problem is that it isn't easy to do. The key to market success is to keep losses small and there will be a lot of them as you look for the big winners that will deliver the vast majority of your profits.

Predictions and forecasts are an obstacle to keeping losses small because they push you to ignore the action that is occurring currently. When you make a prediction, it gives you justification to excuse poor action. How many times have you held on to a stock that is acting poorly because you believe that the market is wrong?

The most important thing I've learned in my years of trading and investing is to focus less on predictions and forecasts and more on reacting to conditions as they change. Wall Street doesn't want you to do that and will try to convince you that you should listen to their advice instead. But if you deal with the things you can control daily, you are much more likely to have longer term success.

At the time of publication, James "Rev Shark" DePorre had no position in the securities mentioned.