Stock Market Wizard, U.S. Investing Champion Mark Minervini Shares Ideas and Wisdom Here FREE!
April 21, 2016
How did you become interested in the stock market and what was your very first trade?
I was always fascinated with probabilities and games like poker. I used to read the stock tables when I was a young kid and I didn’t even know what I was looking at; I guess I just liked the mystique of all those numbers.
The concept of speculation was always interesting to me because of the challenge; every day you’re faced with the thrill of victory or the agony of defeat. In 1984, I opened up a brokerage account with a few thousand dollars and started trading my personal portfolio. The first stock I bought was Allis Chalmer, the maker of fork lifts and lawn mowers. Ironically, I bought those shares based on the exact opposite characteristics that I trade from now. I then read the book, Superperformance Stocks by Richard Love and learned that I was doing it all wrong.
In a nutshell, I grew up poor and wanted to be rich. Or, more accurately, I wanted the freedom that came with being financially wealthy. The stock market was a place where I knew the rewards were virtually unlimited and there was no special degree or pedigree needed, except from the school of hard knocks, and I was willing to put in the time to gain the necessary knowledge. Over many years of study I found my calling, stock trading. The rest is history.
You started out with very limited capital. Can a trader today start small?
Yes, you can start small. In fact, I think everyone should start relatively small until you understand how to trade and have some success first. I started with only a few thousand dollars and ran my account up to become a multi-millionaire. Although, I didn’t start out trading big; it took time to build my bankroll. Once I started making some real progress and got confidence in my abilities, I then ramped up my trading size.
You are indeed one of the world’s most successful stock investors, what do you think separates you from most as a trader?
Well, now after 30 years trading stocks, I have experience of course. But early on I would say my main strength was my willingness to put in the time and do the work necessary to acquire the correct knowledge; I had unconditional patience. I knew success was not going to happen overnight and I knew I had to take full responsibility for my results. This is where many go wrong; they go in with unrealistic objectives thinking trading is going to be easy, and when the going gets tough they quit and change their strategy, so they never really give themselves a fair chance to succeed.
Do you think a really successful trader is born with any special talent or gift?
No! Great traders are not born; they are developed over time. Some people have genetic advantages like athleticism in sports and some individuals are smarter than others, but how many times have you seen someone with big potential fail and someone else that starts out completely disadvantaged succeed?
The most important ingredient for success in anything isdesire, passion, the correct knowledge, and the will to persist. I’m extremely disciplined and I never give up, that’s my real strength. Not giving up is a trait I think I was born with, but the disciplined part, that took years to develop.
There’s a price everyone must pay to achieve greatness in any field. High intellect or even god given talent won’t necessarily make you a champion any more than picking up a 5-iron will make you Tiger Woods. Every one of us knows plenty of hard working people who started off talented or naturally gifted that never achieved their true potential. It takes passion and persistence; if you have those qualities, then consider that the gift.
How would you define your trading system?
I would define my strategy as a conservative aggressive approach to stock trading. I look to make big gains, but only by taking relatively small risks. To some this may sound too good to be true, but it’s not. It entails very careful risk management in relation to reward. Most people think you have to take huge risks to achieve big returns. Not true! I’m extremely risk adverse. That’s why I dedicated two chapters of my book to risk management.
How do you accomplish high reward results at low risk?
I focus on companies that have the potential for significant price appreciation, but only trade them at low risk entry points. By putting my capital in stocks with big potential at relatively low risk, I achieve a high reward to risk ratio. So, I’m making more on my winners than I lose when I’m wrong. With that approach I build failure into the system; I can be wrong as many times as I’m correct and still make a nice profit.
What type of stocks do you buy?
I generally buy growth stocks. Optimally, I want to own companies that deliver strong earnings and sales with the stock price in a long term uptrend. I’m looking for something going on that translates into sustainable bottom line results and I want some evidence that institutional investors are seeing what I’m seeing, and more importantly, buying.
Example: Facebook (FB) was a highly anticipated IPO, but until earnings started improving in mid-2013 the stock price fell dramatically. Once the earnings took off, the stock price really got going to the upside.
How do you actually determine what to buy and what to sell? Is this based on technical patterns or something else?
It’s based on a combination of fundamentals and technical price and volume data. Both are useful. But, it’s important to understand that a great company is not always a great stock. Timing is everything. With growth stocks or what is often referred to as momentum investing, you must learn how to determine where a company is within its own earnings and price cycle, and then position yourself in the strongest part of the cycle.
What is your primary focus when entering a stock trade?
A low risk entry point is my primary focus when I enter a stock trade. The first and most important rule for trading stocks is to avoid losing money. That may sound obvious, but most traders don’t approach trading from this perspective, they look at the reward instead of the risk. I want to lose the least amount possible when I’m wrong. If you can get real good at that (mitigating risk), you’re way ahead of most traders. If you buy stocks with big upside potential and lose relatively little when you’re wrong, you should be able to do very well.
How do you determine what moves a stock?
For the past 30 years I have been studying what big winning stocks have in common before they make big and fast price moves, and that forms the basis for my stock selection; studying the best to find the best. For me, this concept originated from Richard Love, Author of Superperformance Stocks. While many try to interpret what strategy is going to work from one day to the next, I focus on timeless principles; what has worked over time and what will keep working. Big winning stocks move from institutional buying. I know what attracts that buying. It hasn’t changed in 100 years, and it’s not likely to change going forward.
Are the any repeatable patterns that stocks exhibit?
Yes, there definitely are repeatable patterns that occur; I detail many of them in my book Trade Like A Stock Market Wizard; How to Achieve Superperformance in Any Market. The main concept one should learn is how stocks come under accumulation and how the line of least resistance is established.
If there is any one commonality or Holy Grail that I follow and practice regularly, it is the concept of volatility contraction. This is a key distinction that I look for in almost every trade. A common characteristic of virtually all constructive price structures (those under accumulation) is a contraction of volatility accompanied by specific areas in the base structure where volume contracts significantly.
I use the volatility contraction pattern (VCP) as an entry mechanism. The main role that VCP plays is establishing a precise entry point at the line of least resistance. In virtually all the chart patterns I rely on, I’m looking for volatility to contract from left to right. I want to see the stock move from greater volatility on the left side of the price base to lesser volatility on the right side.
Example: I first bought Netflix (NFLX) in 2009 when it emerged from a well-defined Volatility Contraction Pattern (VCP). The stock advanced more than 500% from that point.
How do you define the fundamental traits of big winners?
The majority of exceptional winning stocks had several things in common, but the biggest correlation had to do with earnings improvement. This is nothing new. If a company has a hot selling product and they’re earning lots of money, the stock price will likely appreciate, providing the growth is significant and sustainable.
Example: Home Depot’s (HD) stock price performed best when earnings were strong and accelerating during the 1990s. Once the earnings decelerated, the stock price fell.
What would you say is the number one rule to winning as a stock trader?
I’ll give you my top three rules.
1. Keep losses small
2. Avoid big losses
3. Don’t lose too much money
Have I made myself clear? Here’s one sentence that essentially sums up my trading: I buy stocks that are going up and sell stocks that are going down.
So then, when do you sell a winning stock?
I sell a stock when the upside potential no longer outweighs the downside risk. If the stock moves against me, I sell when the price hits my stop loss, which is relatively small in relation to what I generally gain on my winners.
The main thing is to make a decent profit and to do it consistently. Once I reach a decent gain in relation to what I risked, I generally move my stop up. I may even back stop my position to protect a certain level of profit. This way, as long as the stock moves higher I stay with it, but I protect the majority of my winnings.
Example: After emerging from a Volatility Contraction Pattern (VCP) in April 2001, Fair Isaac (FICO) came under heavy selling in late July. This was a clear indication to nail down profits and exit the stock.
How much attention do you pay to the economy, with regards to Fed Policy, economic conditions, and other top-down indicators?
Most top down indicators lag. In my experience, leading stocks are better for determining the health of the general market. Of course, you have to know what to look for. But the stock market discounts the future. If you pay close attention to the market itself and the leading stocks – you won’t get too far off track.
What do you see as the biggest changes in trading from when you started?
Trading is faster because information moves faster and everyone has access to similar tools and data feeds. Faster trading is also a result of much lower commissions, which enables shorter term trading. Other than that, it’s basically the same. People like to think things have changed. I have not found that to be true. Stock charts, earnings and valuation do not move stock prices, people do, and people don’t change much.
How can you tell if a stock is acting healthy (as you call it, a tennis ball) or poorly (an egg) after the breakout?
After a stock emerges from a proper VCP pattern, it should not pullback too much and it should rally back to new highs within a number of days up to a few weeks. If your timing is correct, the stock price should definitely not break down sharply and fail to rally back. When I buy a stock I expect it to move pretty quickly and pullback for no more than a few weeks. Then the stock price should resume its uptrend. That’s tennis ball action.
Why do most traders fail? Do you have some secrets to maintaining stellar results?
There are no “secrets.” For most traders, the biggest challenge is sticking to a strategy and maintaining discipline. Most traders would fail even if you gave them a successful strategy because they can’t commit to the learning curve and make it through the difficult times. They lose confidence in the strategy and they lose confidence in their own abilities.
The following are some of the top reasons traders fail to attain big performance in the stock market:
· Poor selection criteria
· Don’t cut losses – #1 mistake
· Add to losing positions – #1 reason traders blow up
· Don’t protect profits – let decent gains turn into losses (very common mistake)
· Don’t know the truth about their trading – they fail to conduct periodic post-analysis
· Don’t commit to a strategy – they experience what we call style drift
· Breakdown in discipline – even if they have rules, eventually they break them
What would you recommend to someone just starting out trading? How should they get started, where should they focus their energy?
To get good at something you must gain experience, however, that does not mean that you will get good at trading if you just practice over and over. You must be practicing correctly. You don’t want to engrain bad habits. First, get a good role model, someone who has already accomplished the goals you’re aspiring to. The main thing is to get involved and take action.
Don’t get discouraged if you don’t perform well right out of the gate, and don’t get complacent if you do. You’re going to make many mistakes; the key is to learn from those mistakes. But you have to get started to gain some experience. Come up with a plan and take action. Any plan is better than no plan. You must be willing to put in the work and own your failures. Then, you can own your success.
Ultimately, it comes down to discipline, persistence and objectivity. It’s going to take time to get really good at trading and there will be many set-backs along the way. You need to know that going in.
In your book Trade Like A Stock Market Wizard, you describe how to find the best stocks before they make big price gains. What advice would you give to someone reading this interview?
Find a strategy that makes sense to you and make a real commitment to the learning process and stick with it. Don’t try to be a jack of all trades only learning a little about many things. Specialize and learn all you can about a specific approach. Whether it’s my approach or some other strategy, make a commitment and realize that it’s not going to happen overnight. No one ever became a major league baseball player overnight, dedication to the learning process, proper practice and a sound game plan is the starting point.
What are your hobbies? How is your routine? What are the things you do to relax?
My wife and I love to cook together. I played the drums all my life. I still play poker and I love photography.
Thank you very much for your time. You are one of America's most successful stock traders and very popular among investors professional and amateur. Your trading style and philosophy serves as a great model to emulate and we are fortunate that you teaching your approach in books and at your workshop. We wish you all the best and continued success.
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