Establishing positive momentum in the new year is not to be underestimated. And, so I thought to help you and other traders start the new year off right, I would repost this special in-depth interview I had with market wizard Mark Minervini late last year. If you follow the advice provided here, I’m confident it will help you start off the new year right!
As with many traders I interview, Mark requires no introduction as he is one of the most highly-respected independent traders of our generation. His blog in recent years has instantly become one of the “must reads” out there as he often shares market commentary and analysis which shows why the respect so many have for Mark is so well-deserved. Moreover, his experience and past history of savvy market calls is legendary. It is with little doubt that we can all learn a lot from him!
We hope you enjoy and find this focus interview helpful in your own journey toward more success in the markets.
Kirk: Hi, Mark. First of all, thank you for taking the time to answer our questions. I speak for many members who have a great deal of respect for you and we sincerely welcome you to this interview series.
Mark Minervini: You do a great job, Charles, and I’m honored to be a part of it.
Kirk: Please tell us a little bit about how you got interested and started in trading.
Mark Minervini: I dropped out of school in the eighth grade in pursuit of a career as a drummer. From the money I made working as musician, I bought my first stock in 1983, which was a few hundred shares of Allis Chalmer. Shortly after, I read Richard Love’s book, Superperformance Stocks: An Investment Strategy for the Individual Investor Based on the 4-Year Political Cycle. Everything I’ve created with regard to my trading approach since stems from Love’s initial impression on me, specifically from his writings in chapter 7.
Kirk: What was one of the most important lessons you learned early on?
Mark Minervini: That no one was going to do it for me; no one was going to make me rich except me. I learned that you must take responsibility for your results in the market and in life if you want to be exceptional. Secondly, I learned that in order to do well in the market you must be consistent; consistency is what separates the pro form the amateur. In order to have consistent success, risk must be managed in relation to potential reward as standard operating procedure. You’re not going to make just one trade, rather hundreds or even thousands of trades; it’s all about how much you make on average versus how much you lose on average over time. Lastly, I realized that I simply had to get to the bottom of what actually worked in the marketplace and ignore all the opinions and theories.
Kirk: Was there anyone out there who helped you greatly during your initial learning curve? If so, what did you learn most from them?
Mark Minervini: My Mother and my Father. I learned it was ok to do what I love; to go after my dream. I also learned it was ok to be unconventional. I was given the room to be creative. My parents trusted me. I always knew I was supported emotionally. Financially, we were poor but my parents supported my dreams.
Kirk: Indeed, it is so important to have a strong support structure in place. In a nutshell how do you currently approach the market and what is your primary trading strategy?
Mark Minervini: I approach the market from a risk first approach. My trading strategy is called Specific Entry Point Analysis or SEPA. We look to enter trades at low risk entry points relative to potential reward. Primary focus is not to lose money. Secondary focus is not to lose money. And, the final focus is to make more on average than I lose.
Kirk: You remind me of Buffett who said he had only two rules: 1) Never lose money and 2) see rule number 1! What do you see as the primary benefits from employing a strategy that focuses on both fundamentals and technicals?
Mark Minervini: The benefits are having all the pertinent information that is consistent with big winning stocks. We know what to look for both fundamentally and technically. I have seen stocks bought on pure technicals and the guy buying the stock doesn’t even know that there was a cash offer or a proposed merger right at the price he paid. Refusing to look at fundamentals or any information that gives you an edge is usually because the individual just doesn’t know how to use the info, or has some bias based on personal opinion or tradition.
Kirk: Why is this kind of trading best for you and, more importantly, why do you think it works so well?
Mark Minervini: My strategy works well because it’s my strategy. I know the strengths and, more importantly, the weaknesses of what it is I do. It also works well because I allow it to work and stick with it even when it runs into difficult times. Nothing works well if you keep changing your approach. To be a master you must be a specialist, not a jack of all trades.
Kirk: What do you trade mostly? Equities, options, futures, ETFs, currencies, etc.?
Mark Minervini: Only equities.
Kirk: In an average week how many trades do you make? What is your average hold time and how many positions do you have open at any given time?
Mark Minervini: During an average year I may make 400-500 trades. About half of that turnover is a result of taking small losses, which I’m out of pretty quickly.
Kirk: What would you say are your primary strengths and weaknesses as a trader?
Mark Minervini: Discipline is my primary strength. And the willingness to admit when I’m wrong and move on. My weakness is I usually sell early and often leave money on the table. But I don’t really view that as a weakness, just something that could be improved upon. When you move in size you have to get out when the getting is good.
Kirk: In my experience it is often better to sell too early than too late Mark! How have you learned to mitigate your weaknesses and focus more on your strengths?
Mark Minervini: By not focusing too much on my strengths. If you’re good at buying and bad at selling I would focus on selling; if you improve your selling you will have a complete game. Focus on making your weaknesses strengths and then you will have no weaknesses. Exploit your strengths and improve your weaknesses.
Kirk: What have been some of the most challenging lessons you have learned?
Mark Minervini: That you can’t be everything. You must commit to a strategy and sacrifice other strategies. The problem with the market is its like playing poker however; you always get to see the next cards even though the hand is over. You always see what would have happened. This is very difficult to deal with for many people. To be successful, you have to understand that trading is NOT about picking highs and lows, it’s about making money.
Kirk: Very good. What are some of the key rules that you consider before selecting any potential trading opportunity?
Mark Minervini: How much am I risking is the very first concern. Also, does the stock meet all the necessary criteria? If the risk is acceptable and all the entry criteria are met, I enter the trade.
Kirk: What would you say is your average win : loss ratio for your trades?
Mark Minervini: I average 2 to 1.
Kirk: How has your overall performance been recently, as well as over the past few years?
Mark Minervini: It’s been about the same as always. I’m a consistent 2:1 trader.
Kirk: What would you say are your favorite kinds of technical and fundamental set-ups?
Mark Minervini: The ideal set-up is a stock emerging from a constructive consolidation with strong accelerating earnings and sales.
Kirk: Can you give us a recent example of a set-up you found to be very attractive and worked well in this market?
Mark Minervini: CML. Bought it on 11/24. Sold it on 12/7 for a quick profit.
Kirk: Have you noticed any trading set-ups more prone to failure than they have been in the past?
Mark Minervini: No. Not much has changed. Contrary to what many believe, it’s not different this time. LOL
Kirk: To help us understand your trading approach, can you talk about a recent successful trade from start to finish?
Mark Minervini: LULU. Supported by excellent fundamentals, the stock emerged from a double bottom pattern that formed from 4/15 – 11/04. I bought the stock on 11/05 the day the market topped just before a pullback of about 5% in the major averages. The stock was held through that market pullback because it acted normal and held above our stop. This gave me the conviction to add to the position as it emerged through its next buy point in November. I sold the stock (most likely too early) on 12/09 when they reported earnings up about +50% from the initial purchase from about a month earlier.
Kirk: Now please tell us about a recent unsuccessful trade.
Mark Minervini: Shorted GMCR; shorted the rally in October and November after the big break on SEC news. Stock rallied and stopped us out
Kirk: One of the things I most appreciate about you is how much you stress proper risk management. If we can, let’s talk a little bit about position sizing. Can you provide an example of a recent trade and explain your method for determining the size relative to your own trading portfolio?
Mark Minervini: I want to own as much as I can but generally no more than 25% of my portfolio (as liquidity permits). You are not going to make huge returns being too diversified. However, I only risk what I can get out of safely based on liquidity.
Kirk: That’s interesting. I think many would be surprised at the idea of having any position anywhere near 25% of an entire portfolio. Besides over diversification and liquidity concerns, what common mistakes do you think many traders make concerning position sizing?
Mark Minervini: They don’t know what an optimal position size should be based on their own risk/reward and risk tolerance. For instance, if you’re a 2:1 trader, your optimal position size is 25%.
Kirk: Ok. I think I understand what you mean, but please explain this position sizing formula more in detail so others can perhaps apply it in their own trading. Can you offer another example?
Mark Minervini: Ok. First, it’s important to understand that you are not going to achieve huge returns consistently being overly diversified or by relying on diversification for protection. You will only get a smoothing effect. When you own a bunch of stocks you end up with two problems: the first being that you just can’t watch and know all you need to know about each of them. The second problem is that you will have a difficult time getting fully invested quickly when opportunity presents itself and more importantly, getting liquid if you need to raise cash in a hurry. In addition, the math just doesn’t support it. Depending on the size and risk tolerance of your portfolio you should typically have between 4 or 8 stocks and for large portfolios maybe up to as many as 10 or 12 stocks. This would provide sufficient diversification but not too much. The Optimal-f formula can act as a starting place for you to understand optimal position sizing based on expectation. If Ken Heebner of CGM Funds can move around billions of dollars in just twenty names and still manage to beat the market, then a personal portfolio can surely manage sufficiently with 4-5 or 10-12 stocks. If you lose 5-6% on average and even if your position size is at 25% exposure, you’re still only be risking about 1.25% of your capital per trade. Of course, if you don’t have an edge, then you will lose no matter what your position sizing is.
Kirk: Good, that’s helpful. So, do you use and set stops, Mark? If so, what’s your stop loss method?
Mark Minervini: I always know where I’m going to get out of a trade before I get in. I aim to lose no more than 5-6% on average over time on my losers.
Kirk: Do you ever average down into a losing trade?
Mark Minervini: There’s a reason Paul Tudor Jones had a sign posted on his wall that read “Losers average losers,” and that reason is because it’s true. I almost always only add to a position if it proves itself and then I may add to my position at a higher price, not lower.
Kirk: Do you always scale up and into winning positions? If so, how do you know when to increase a position size relative to your overall portfolio?
Mark Minervini: Yes. I generally move money into the better performing names at subsequent pivot points or set-ups.
Kirk: All good traders dedicate a lot of time and effort to improvement and reducing mistakes. How has your trading method evolved and improved over the years?
Mark Minervini: It just becomes more and more crystallized because I continue to focus on the same timeless principles, which allows me to become more and more of a specialist. The power of a narrow focus is amazing. The key is to be a real pro at something. Know all you can about a style or a tactic. Then you can build on that foundation. Traders give up too easily and jump around too much when things get difficult. How good do you think Kobe Bryant would be if while he was developing his skills growing up every time he had a really tough game he changed to a different sport or played a different position?
Kirk: I couldn’t agree with you more Mark. I see this problem among many. Can you provide an example of something you thought was true when trading early in your career and now believe is just completely wrong?
Mark Minervini: Yeah, everything. But I learned very quickly sound principles. It just took me many years to master the application.
Kirk: Why do you think most traders fail?
Mark Minervini: Here are 6 reasons:
Poor selection criteria; usually based on personal opinion, theory or tips and bad advice
They don’t stick to and commit to an approach; style drift
Don’t cut losses (#1 mistake made by virtually all investors)
Don’t know the truth about their trading – they fail to conduct in-depth post analysis
Treat trading as a hobby not a business
Want too much too fast; learning a skill takes time
Kirk: Please describe a typical trading day for you. How do you organize and dedicate your time?
Mark Minervini: Most of my work is done the night before. I already know what I’m going to trade before the open. I watch the market all day long, never leaving my desk for more than a few minutes during trading hours.
Kirk: How much time and attention do you pay to others’ opinions about the market and/or stocks you are trading?
Mark Minervini: Zero. I avoid outside opinions like the plague!
Kirk: Are there any tricks of the trade that you use to help maintain a consistent successful approach over a long period of time?
Mark Minervini: Yeah, long hours, hard work, a sound approach and discipline. There are no tricks or big secrets. Again, is there a secret to having a good basketball shot? It starts with a good coach, proper practice, plenty of hard work, discipline and sacrifice.
Kirk: Amen. However, most traders I know have a set of rules that they have learned from past mistakes. What are a few of yours that you think most traders would benefit from?
Mark Minervini: Hard work alone won’t cut if you don’t have a sound approach and if you’re not doing the right things. You must be facing west if you’re looking for a sun set. Approach each trade from risk first; ask how much can I lose. Don’t risk more than you can expect to gain on average. Know the truth about your trading; study your results carefully. Never average down. Always cut your losses; keep your losses small. These are fundamental rules that should never be compromised.
Kirk: I suspect like all good traders you are working on improving your performance in some manner. Can you share what you’re specifically working on right now?
Mark Minervini: Sticking to the rules. Always making sure we stick to the rules. We have a great approach, I don’t like to get too tricky and over complicate something that requires a straight forward approach.
Kirk: You’ve been trading for some time now. What would you say are the biggest changes in the markets and trading in general you’ve seen during your career, both good and bad?
Mark Minervini: The order handling rule change in 1997 has changed the way stocks move short-term because Market Makers don’t really keep inventory anymore. It’s a topic that would require a lengthy discussion; maybe we could talk about it another time. Other than that, not much has changed except more information moves faster than before.
Kirk: What advice would you give a person just now beginning to trade the markets?
Mark Minervini: Find a good mentor. Commit to a strategy. Cut your losses. Tune out the media. Take full responsibility for your results.
Kirk: What do you think are the greatest misconceptions beginning traders have about trading the markets and about trading systems?
Mark Minervini: Way too many to mention. Just about everything a beginner thinks is a misconception.
Kirk: A number of people who read my website desire to trade for a living and I receive a lot of questions concerning capital requirements needed to start and how to make the transition to trade full-time. Do you have any words of wisdom or rules of thumb to share along these lines?
Mark Minervini: I started with a very small sum of money and turned it into a fortune. Capital is not the challenge. Mastering yourself is the challenge. Discipline is the challenge. Persistence is the challenge.
Kirk: Do you think trading for a living is getting more difficult or easier for the average individual investor? Why?
Mark Minervini: Much easier. Tools for pros and amateurs are virtually identical. The pro has no edge. The individual has the advantage. No real liquidity concerns for the small trader versus the big fund manager. It’s a fantastic time to be a stock trader!
Kirk: When all is said and done, in your experience, what is the best way to learn how to trade?
Mark Minervini: Trade. As Ralph Waldo Emerson said: “Do the thing and you shall have the power.” And then conduct post analysis. Learn to be objective. You could try and find a mentor. However, the chances of getting great advice are slim at best. Trading is just like any other profession, there are only a handful of really outstanding practitioners.
Kirk: Do you have any books, websites, etc. that you highly recommend beyond your own website?
Mark Minervini: The Kirk Report. Why is there anything else? LOL!!!
Kirk: You are too kind Mark. Although I know both of us share a love for the markets and trading, what are your long-term career plans and future for your website?
Mark Minervini: I honestly don’t know for sure. My long-term plans are too stay healthy and be a good father to my daughter. This past year I started a pilot training program. Also, we now offer my research to the individual investor not just exclusively to the institution anymore. It feels good to help others achieve their goals. I think I may continue to develop that. Why hog all the good trades for myself? LOL!
Kirk: What are some of your personal passions beyond the market?
Mark Minervini: I’ve been a drummer since I was 6 years old and I continue to play. I play tennis, train boxing and lift weights to stay in shape, and I play an occasional round of golf.
Kirk: Finally, if you had only one piece of advice to share with all traders, what would it be?
Mark Minervini: Believe in yourself and never give up. Persistence is more important than knowledge. Make an unconditional commitment to trading and you will not fail.
Kirk: Thank you so much Mark. I really enjoyed this interview and I’m sure others will find it helpful.
* For other in-depth interviews (and much more) you will find helpful, please consider becoming a member. Have a great 2011!