Short-Term Trading: A Moneymaking Path Few Dare to Tread

The way I make money in the markets is a path few dare to tread. But it’s brought me more success than I ever could’ve imagined.

I’m a trader. That means I focus solely on the short term. While most people think about a stock market decision in terms of years or decades … I’m looking at days, hours, even minutes.

It’s not an easy path, and I didn’t choose it lightly. But I can attest that it’s a profitable one.

You see, when I first began my investing career, I was the kind of investor you probably see yourself as. I bought stocks that I thought could beat the market.

I sat and waited … waited … waited for them to bear fruit. And I did … OK.

Don’t get me wrong, I was a good investor. I just wasn’t rich enough at the start for that to matter.

Without hundreds of thousands of dollars to start with, the returns from being a good investor would never buy the lifestyle I wanted — especially not while living off an Air Force pension.

I know what you’re thinking… “Investing is a long-term game. It’s not about making money right now. You invest today so you can pay your bills in the long run when you retire.”

The great economist John Maynard Keynes has a great counter to that idea. He said: “In the long run, we are all dead.”

I don’t need money where we’re all eventually going. I want money now … so I can enjoy my time while I have it.

You’re probably finding it hard to believe that short-term trading can be a viable way of building wealth. Every financial adviser you’ve ever heard of has likely told you to focus on the long haul, and that trading is too dangerous.

Today, in my first dispatch from The Banyan Edge, I’ll prove to you that trading is not only a viable way of building wealth … it may in fact be the best way for most people.

You’re Not Buffett, and You Shouldn’t Try to Be

I first set out on my path toward short-term trading while looking at the Forbes 400 — an annual list of the richest Americans.

Warren Buffett is always near the top. But you might be surprised to know there are usually more traders than investors on the list. This year, for example, 23 are traders while 20 are investors.

That sounds close, but most of these 20 originally earned their fortunes another way — typically building their own business — then moved on to investing in other companies. Very few of them made the list through buy-and-hold investing alone.

Then there’s Warren Buffett. There’s no doubt he’s a great investor. But to think anyone can invest like he does is a grave error.

No individual will acquire a $100 billion fortune just by reading financial statements. And the dirty secret is … neither did Buffett. To amass wealth as he did, you’ll need something much harder to attain: connections.

I don’t know about you, but Goldman Sachs didn’t call me when they needed $5 billion in the 2008 financial crisis. CEOs don’t come to us with deals. We can’t ring up the C-suite at Coca Cola and get an idea of where the business is at.

By now, you may be thinking: “But Warren Buffett says the key is to find great companies and buy them. They always beat the market.”

There again, investors have made an error: Great companies are not always the same thing as great stocks. Companies can and have languished for years, even decades, despite maintaining strong revenues and earnings.

Take IBM, for example. IBM has had just six quarters of poor earnings results since the 2009 bottom. It has all the makings of a “great company.”

But do you know its return from the 2009 bottom? 120%. Sounds solid … until you look at the S&P 500, with its 400% return in the same time frame.

How about Gilead Sciences (GILD)? That’s the company that cured hepatitis, influenza, and provided lifesaving treatments for HIV and AIDS.

You might feel great investing in GILD, but your brokerage account doesn’t. The stock has gone nowhere in the past eight years.

You know Ford (F), the household name brand that sells the No. 1 vehicle in America? It’s risen a mere 70% in, get this … 30 years.

Great companies … bad stocks.

So how do you avoid buying bad stocks?

It’s the key to everything I do as a trader: momentum…

If It Don’t Go Up, Don’t Buy It

The idea of momentum can be summed up with a quote from American actor Will Rogers: “If it don’t go up, don’t buy it.”

Rogers was making a joke when he first said this in the 1930s. But on Wall Street at that time, traders were using that idea to make money.

There’s only one reason stocks go up — a lot of people are buying them. When more money flows into a stock than out of it, the price goes up. It’s Economics 101, the laws of supply and demand.

As a trader who follows momentum, I don’t have to worry about why the stock is going up. And I know that I’ll sell when it starts going down.

So, the reason for the rally doesn’t matter. I’m trading the stock, not the company. Honestly, sometimes I don’t even look at what the company does. If it’s going up, I have all the information I need.

That might sound overly simplistic. But I literally wrote the book on that idea, titled it Smarter Investing in Any Economy and released it in 2008. It was the first-ever book to tell individual investors how to apply relative strength — my most trusted momentum trading strategy — in their portfolios.

I started working on the book when I retired from the Air Force in 2005. And the idea came from a place you probably don’t expect.

I learned how to program in the military, and used those skills to code nuclear missile paths. I noticed that the ideal stock to trade looked like the upward trajectory of a missile. So, I spent time understanding how to spot which stocks were shooting up, and when they would switch to shooting down.

Market professionals liked my book. So much, in fact, that after doing a presentation on it one night, an audience member offered me a job. That’s what led me to manage money in the years following the 2008 financial crisis.

Just like I laid out in my book, I applied a relative strength strategy to exchange-traded funds (ETFs). It was the first money management strategy of its kind, and it worked well — earning 39% for our investors while the S&P 500 only returned 23%.

But despite my success, I didn’t last long managing money. Because I came to hate it.

It was right after we hit $100 million in assets under management — a huge milestone. I called our team to meet for a celebration dinner over the weekend. Our compliance lawyer accepted. She also said she would use the time to talk about the SEC 13F filing we needed to complete the next week.

She told us, because of our milestone, we’d have to pay just as much to prepare and file the same form Warren Buffett does — despite his $267 billion under management at the time. This was supposedly to ensure there was a “level playing field” in the markets. (She also had found a way to turn the dinner into billable time.)

I realized I wasn’t managing money. I was always meeting with potential investors … or managing the company … or dealing with compliance lawyers.

I get my joy out of trading and writing, not being stuck in meetings. So I started working on a transition plan.

Not long after, I was walking through the door of Banyan Hill Publishing, where I’ve remained ever since.

But I haven’t changed a thing about what I do. The only difference is, these days, I help everyday investors trade the markets instead of the already rich.

The Second Half of Success

That insight, buying stocks that are going up, is half of my formula for success. The other half is how I was able to start out with little and grow it into a lot: leverage.

When I started investing, I didn’t have a lot of money. I had $10,000.

I made over 20% for three years straight, while adding a little more capital to my account. After those three years, I had … $20,000.

Looking at that, I grew frustrated. I was never going to have enough money to send my kids to college and enjoy financial security — despite outstanding investment returns.

This is when I noticed all the traders in the Forbes 400. I instantly understood how they became wealthy.

They were making great returns. But they were making big money because they all used leverage. With leverage, an investor with $1 billion in assets could trade amounts 20 times that.

Let’s say you have $3,000 and think stock prices are going up. You put it all in the S&P 500 ETF (SPY). If you’re right and it rises 1%, you make $30.

Now think about a hedge fund manager. He can buy a futures contract equivalent to $100,000 in S&P 500. His broker requires a $3,000 deposit. For him, that 1% gain is a $1,000 win.

I liked that math. So I started looking for the best way I could use leverage. Eventually, I found options, which I’ve traded ever since.

Options give me exposure to 100 shares of a stock or ETF for a very small amount of money, often just $200 or $300. If the stock goes up $1, I could make a 50% return on my trade. And I could do this quickly, sometimes in just one day.

There would be losing days. But the winning days more than offset the losses.

With leverage and momentum, I saw the path to trading for a living.

Now, I have studied markets for 35 years. Based on all that research, I know what works for me.

But really, my approach works for almost everyone — even if few will try it.

Most investors avoid my style because they don’t study markets. They accept popular ideas, and my ideas aren’t popular.

Some buy-and-hold investors will tell me I’m wrong. That’s OK. I don’t need their approval. I had enough money to send my kids to college and enjoy financial security, which is worth much more to me.

There may be one last thought on your mind: “If you’re so smart, why aren’t you in the Forbes 400?”

The answer is simple. I never wanted that to begin with.

I joined the Air Force after college. I got to understand the math behind nuclear missiles, radar systems and cryptography. I also got to see the world and work with great people.

After that time in my life, I wanted to write and show others how to make enough to live today, not in 30 years when they need assistance to get on and off the plane.

If I had it to do over again, I wouldn’t change a thing. I’d take exactly the same path.

And if you’re an investor who’s struggled to make meaningful gains … I suggest you consider the one I took.

Michael Carr
Editor, One Trade

P.S. One thing before I go…

If you want to know more about what and how I’m trading right now in this bear market, click here.

I’ve boiled down the most important action in the market down to one ticker, which I trade with my subscribers once per week, targeting 100% gains each time.

It’s the best trading system I know of, pulling in 78% gains this year overall even as the market fell. And anyone can get started with just a few hundred bucks. Click here for the full details.

The Worst Trade of Warren Buffett’s Career

By Charles Sizemore | Chief Editor, The Banyan Edge

Mike’s comments about Warren Buffett reminded me of an old story…

We like to think of Warren Buffett as the wise, elder statesman of the investment profession — a man far too savvy and with far too much self-control to let his emotions get the better of him.

But even Mr. Buffett was young once … and prone to making phenomenally stupid trading decisions.

When asked in an interview what the worst investment of his career was, Buffett answered without even having to think about it: It was Berkshire Hathaway!

Everyone sees the financial powerhouse Berkshire Hathaway is and assumes his decision to buy the company was a typical Buffett stroke of genius. Nothing could be further from the truth.

Berkshire Hathaway was not always a financial powerhouse. It was once a struggling textile mill.

Buffett had noticed a trading pattern in Berkshire’s stock; when the company would sell off an underperforming mill, it would use the proceeds to buy back stock, which would temporarily boost the stock price. Buffett’s strategy was to buy Berkshire stock each time it sold a mill and then sell the company its stock back in the share repurchase for a small, tidy profit.

But remember, this isn’t old and wise Buffett. This is young hothead Buffett, complete with outsized ego.

Buffett and Berkshire’s CEO reached a gentleman’s agreement over the phone on a tender offer price. But when the formal offer arrived in the mail, Buffett noticed that the CEO’s price was one-eighth of a point lower than they had agreed previously.

Taking the offer as a personal insult, Buffett bought a controlling interest in the company so that he could have the pleasure of firing its CEO. And though it might have given him satisfaction at the time, it was at best a pyrrhic victory.

Buffett “won,” but ended up owning a controlling interest in a failing textile mill at a time when textile production was moving to Asia. He later called the move a “$200 billion mistake.”

Why? Because Buffett wasted precious time and capital on a textile mill in terminal decline rather than allocate his funds in something more profitable — in his case, insurance.

By Buffett’s estimates, had he never invested a penny in Berkshire Hathaway and had instead used his funds to buy Geico, which was his next major purchase, his returns over the course of his career would have been doubled.

Berkshire will still go down in history as one of the greatest investment success stories in history, of course. But it was a terrible investment and a major distraction that cost Buffett dearly in terms of opportunity cost.

It begs an important question for every investor to consider: Do you want to “win,” or do you want to make money?

“Winning” cost Buffett hundreds of billions of dollars in lost profits.

Had he traded with his brain and not his ego, he’d have those billions of dollars and years of wasted time back.

This is why I like Mike Carr’s trading style. He works mechanically, trade by trade, and doesn’t get emotionally invested. Every trader I’ve ever worked with that was successful over the long-haul shared that quality.

Mike’s trading style can best be summed up in one three-letter ticker, which he trades once per week alongside his subscribers. Click here to see what it is.

Charles Sizemore
Chief Editor, The Banyan Edge