Mark Minervini: How Risk Management And Discipline Improve Your Returns | IBD Live

[Applause] People look in hindsight. Well, you

know, why didn't you press it there? The

market went up or, you know, it had already bottomed. Well, that's all well

already bottomed. Well, that's all well in hindsight, but you have to manage risk in real time. And the thing you learn over time is that number one, risk has to be managed. If you the only way

to avoid a big loss is to take a smaller loss. Um, and it has to happen in real

loss. Um, and it has to happen in real time. So is you would and the thing that

time. So is you would and the thing that someone like myself has to guard against is becoming thinking you know something and thinking and I find that you know individuals that even just first get

started with this they have a good run and then they start thinking they know something and and you start forgetting about rules and you think you can hold the stock it's down you know the company oh it's Nvidia it's not going out of

business when you start saying things like well the company's not going to go out of business you're right there you're in trouble.

when you when those words start coming out of your mouth, you know, your trouble is is coming somewhere in the future. So yeah uh you know and so we're

future. So yeah uh you know and so we're bending you know with the market and we're a caboose you know the market's the engine and u you know someone even

like you know Bill O'Neal who had tremendous tremendous success was so when it came to the market and Bill wasn't exactly the most humble guy if you talk to him but when it came to the

market he's he was you know when it comes to the market we're we're we're pretty humble um and that's that's really the the key it seems like a lot of what you talk about all comes back to

having that discipline which you've learned over the different market cycles that you've participated in. So, how do you really avoid that fear of missing

out when you see high octane stocks that have doubled off their lows or recent IPOs that are just going bonkers and

really focus on what you do best? Yeah.

What could be because you have to stay in process, you know, you really have to have to stay in the process and when the stocks are meeting your criteria, you you're buying them and and you know, if

the market is so good, if the environment is so good, then your results from those initial buys should be should should be profitable and not having a lot of trouble. And you know, I

I call it the um uh the the reward to aggravation level. you know, I I want I

aggravation level. you know, I I want I the reward to aggravation ratio, you know, I'm looking I'm not I didn't get in the market to get an ulcer, you know, so and there are periods of time that

you could very easily get an ulcer if you're in there trading large and um you know, money can make you sick, you know, with the market has caused a lot of

problems for people even health-wise. Um

so, and this is why I never get myself into that situation because I'm I'm out.

The stock's moving against me. Um, but I stay in process and I only get big. I We

talk about this a lot. Mark Richie, my assistant came up with the slogan, earn your right to play larger. Earning your

right to play larger. Like we never play larger unless we earn our way to that.

Earning that means that our initial positions have to be showing progress and traction before we're ever going to get larger. So, because why would I add

get larger. So, because why would I add money if things aren't working? It just

not it's not even O'Neal used to say if you're not profitable at 25% why in the heck would you ever go to 50 or 75? It

just doesn't even make any logical sense. Um that's guessing that's

sense. Um that's guessing that's forecasting as opposed to responding.

We're in the we're in the respon response uh business. The only

difference I think between Mike and I and you know he and I'm really quite curious. I meant to ask him a while ago

curious. I meant to ask him a while ago because I saw some of these rules for the S&P and I love these rules. I call

it a lockout rally. You know, when the market is moving up into what he calls a power trend, I call it a lockout rally where the pullbacks are very small.

They're usually 1, two, 3%. It just

keeps moving higher and higher and higher and you keep feeling like you missed it and never pulls back. And even

when it does, maybe it's five or 6%. And

we can get into those markets, but stocks don't necessarily set up in the fashion that I would be willing to load the boat because the risk is still high on the individual stock level. The only

difference is that once stocks start meeting the criteria and let's just say I'm getting that traction and my my stock positions are working and they're breaking out of bases. If the if this S&P started getting a bunch of

distribution days and rolling over, if my stocks aren't getting hit or they're not showing the volatility, I usually stay with the positions. Um I'll I'll but I might tighten my stops. I I might

start taking some profits on extended names to offset maybe what looks like could be some volatility coming down the pike in the next few days because the index has started to get into trouble.

So, I will tighten up a bit, but I'll still defer to the stocks. I'm really

deferring to the individual stocks even around bottoms. The market's in a bare market even before we get a follow-through day. I'm looking for

follow-through day. I'm looking for stocks that maybe are already breaking out of bases right off the lows. So, I'm

always referring referring to the stocks. I'm very much bottoms up. So,

stocks. I'm very much bottoms up. So,

how did you develop that discipline, Mark? Is it just looking at charts and

Mark? Is it just looking at charts and getting your fanny whacked, you know, early on? One, you know, I I I tried

early on? One, you know, I I I tried every other way, you know, and there really isn't another way. You know,

O'Neal said that. I heard him say it many times where, you know, there isn't another the only way to avoid a large loss is to take a small loss. Um, you

know, and and if you start forecasting and trying to predict, you know, I realize that I'm just not that smart. As

long as I've been doing this, I'm still just not that smart. I don't know if anybody is, but um it just Yeah, it's not something that you could rely upon.

These are rules that I could rely upon.

You know, they keep me out of trouble.

And so, here's another important thing.

Your system, any system that you use, if it's really a good system, it'll do it'll do two things. it will

automatically force you to be trading your smallest when you're trading your worst and trade your largest when you're trading your best. There needs to be some mechanism because otherwise you're

going to be thinking, well, the market ran up too much, things are extended and you start selling stocks and now you just sold your stocks into a bull market or you the market's a pullback. Well,

it's a short-term pullback. Things still

look okay. Uh, this Nvidia, I'll double up here. And now you've just loaded up

up here. And now you've just loaded up into a bare market. So you my strategy and the way I approach things is that I'm just forced into the market when it's doing well and I'm forced out when

it's not doing well. And if it's whipping all over the place, that's the worst environment. That's the one that I

worst environment. That's the one that I avoid at all cost. Like a bare market, a market that's going down sharply. That's

the easiest one. You get knocked out of everything. Nothing's setting up.

everything. Nothing's setting up.

There's distribution in the market. It

it it's an easy call. You know, uh the opposite. everything's working and

opposite. everything's working and everything's breaking out and that's when everybody's happy, right? That's

easy call, too. It's when you get into a market like now and this is where like if you're managing money, this is the worst possible position when the indexes are going up and you're and you're in cash or you're losing money and then

they want everybody wants to fire you, you know, and so but that's the discipline and you have to, you know, you have to stick with the discipline.

So, it's just, you know, I 43 years of doing this. I learned my lessons in the

doing this. I learned my lessons in the first six years and for the first six years, I didn't make any money. I was

actually at a loss after six years. Um,

and then from that point forward, I only had three down years in 30 some odd years. So, and all single digits. So,

years. So, and all single digits. So,

that's those are the lessons I learned.

And then I made a change and applied them forward. And I have found that over

them forward. And I have found that over the years, you know, I don't really need to use big leverage. Maybe on rare occasion. Um, I don't need options. I I

occasion. Um, I don't need options. I I

don't need to um I don't need to pick the low in the market. I don't need to be invested right away as the market goes into a new bull market. I all these things I found to be unnecessary. They

were all concerns and worries that really didn't mean anything. You know,

so it's just if it's necessary, if you're a short-term trader and that's how you you know that's how like as Mike said, you find your own way, your own style. And if our style makes sense to

style. And if our style makes sense to you, great. Adopt it. Use as much as

you, great. Adopt it. Use as much as possible because why reinvent the wheel?

But you're certainly going to adopt, you know, some people are uh much shorter term oriented. I'm somebody I cannot

term oriented. I'm somebody I cannot hold losses. I just I'm my stomach just

hold losses. I just I'm my stomach just bleeds from from losing money. I don't

like to lose any money. Um so that's why I've come up with a very, you know, risk adverse and and on the on the on the shorter term, I always say, look, I don't I'm not against holding stocks.

I'm against holding losses. You know, if you once you're at a profit, you want to move your you move your stop to break even and put it away for eternity, that's fine. As long as it stays above

that's fine. As long as it stays above my stop, I'm fine with that. So, if

you're going to, you know, that's where, you know, short-term trade the losses, long-term trade uh uh or or long-term hold the winners. And then if you want to trade around positions, you know, fine. And and reduce your risk into

fine. And and reduce your risk into strength. Sometimes if things are really

strength. Sometimes if things are really too comfortable, they're they're that's not the right move is. Yeah. You have to learn to that's one of the things when you learn that you become a a competent

trader is in the beginning when you first start trading everything you think you should do you shouldn't and when you're scared to death you should be buying but then there's a crossover that happens like your gut actually starts to become right and you have to start

listening to it that's when you've achieved competence as a trader where now when you're scared you should be scared. It's it's a tough it's a tough

scared. It's it's a tough it's a tough thing because you know when does that happen and when do you when does that crossover that crossover doesn't usually happen for a while in the beginning you've got to do a lot of things that are very uncomfortable. This stuff is

not uncomfortable for me anymore. You

know it's uncomfortable for me to go against my rules but it's and it's uncomfortable for me to hold a stock that's down. I'm not worried about

that's down. I'm not worried about whether it's going to turn around and go up. And um I talk about this many times,

up. And um I talk about this many times, but the real fear the people reason why people don't cut losses is be there's the fear of being wrong twice. See, the

first time when the stock rolls over and you take a loss, you're emitting defeat.

You're taking no one wants to lose money, right? You built this big case

money, right? You built this big case and in two days, next thing you know, you got to sell it. So that's

uncomfortable. You don't want to lose money. But the real fear, the real

money. But the real fear, the real reason why people, and this is where the ego comes in and you got to get rid of it. The real fear is that the stock's

it. The real fear is that the stock's going to turn around. it's going to go back up and you're going to regret that and you're going to be like, "Damn, I knew I should have held it because you've seen so many do that and now

that's your real fear is that you're going to be a double dummy, right?" And

and so, but yes, that's going to happen.

But, but here's how you get around that.

You have to manage risk in real time.

You have to realize that that's only clear in hindsight. In real time, we don't know what the next card coming out of the deck's going to be. So we have to respect that and we have to bend with it

because risk has to be managed in real