DENNIS GARTMAN ON THE PROFITABILITY OF BEING WRONG

I had the pleasure of attending a recent meeting of the CFA Society of NC with my friend Derek Hernquist.  Dennis Gartman, well known trader and publisher of the well respected Gartman Letter, was the sponsored guest and speaker.  Mr Gartman gave what I consider to be one of the best discussions about the importance of admitting when you are wrong.  Beginning traders especially have a hard time admitting when a trading decision is the wrong one.  Yet, as you will soon find out-if you have not done so already-admitting you are wrong and closing out a losing trade quickly and with a small loss is one of the most important and profitable decisions a trader can make, just ask Dennis Gartman.

Mr Gartman granted me permission to record his 45 minute speech and now that it has been transcribed I pass it along to you.  What follows is a general summary of his speech on being wrong.  In another post, I will share his thoughts on the economy and what he believes are some wonderful investing opportunities in the months and years ahead (with, of course, an understanding that he could be wrong).

THE SPEECH

“If I’ve learned one thing in 35 years of doing this. I’ve learned this and I’ve learned it the hardest of all ways. Because I made the decision one time to do the wrong thing. I learned this. Whatever you do don’t ever, ever, ever, not never, not ever, under any circumstance, any time ever. Am I clear? Add to a losing trade. Never, ever, ever. Why would you ever add to a losing trade? The market, which is the sum total of the wisdom, and perhaps the stupidly, but predominately the wisdom the sum total of the wisdom of the market is telling you are wrong. How dare you argue with the market? How dare you stand up? What sense of hubris must that take on your part to tell the rest of the world that you’re wrong and I’m right. Because that’s what you’re doing when you’re adding to a losing position. Don’t do that. I will tell you. I did that one time. I lost my wife [first wife]to a margin call. I did, in fact, that did happen…November 11, 1983.”  Wives get very upset “when you come home and say, ‘Sweetheart, I lost the house today’”.

“I will tell you I am good at trading. I am good at investing. I am good at making decisions. I am good at admitting mistakes and that’s my best trait. I am really, really good at admitting mistakes. And that’s to me the most important attribute that an investor, that a trader, that somebody who’s trying to make a living matching wits in the market can have is the ability to admit that they are wrong. That trumps all other concerns. Education doesn’t seem to have that much viability to me. It’s the ability to say I’m wrong.”

“The great ones, the really great traders, I’m sorry, don’t average down. They average up on winning positions. They average up on winning long side trades. Why? Because the market is telling you that you are right. Why would you not do more of something when the market is telling you that you are right? Why do most of us constantly do the opposite? Why do most of us try to understand some fundamental about some stock that we like, some industry that we like, some corporation that we like and you understand the fundamentals of it and you like the underlying fundamentals of the industry that it’s in. You like the long term fundamentals of the US economy and you buy some of it at 25 and it immediately goes to 20. It’s not a better buy at 20. It’s a worst buy at 20 because somebody knows something that you don’t know. That’s the hardest thing for all of us to learn. I’m good at trading and I’m wrong most of the time.”

“I’m good at trading and I’m wrong alot according to my wife. When we got married, we sat down the first year and she said you know this is really very sad. You had a good year at trading. You made us a very nice living this year but Dennis you were wrong 53% of the time this year. I thought this was terribly harsh. You couldn’t even beat a coin toss. I got out of it by saying, Sweetheart I’m so in love with you that it’s colored my ability to think. She bought it. I got another year. We sat down the second year. She said, my wife the accountant, one plus two equals three. She said this is really very sad. You made more money trading this year then you made the previous year. But this year you were wrong 57% of the time. And people pay you for your ideas. And I’m standing by the notion last year that I told you. You can’t even beat a coin toss. You need to do better. Sweetheart I’m trying.  Third year we sat down. My wife, the accountant, one plus two equals three. She said this is sad. You made more money than you made the previous two years. That’s lovely. I want to stay with you. But Dennis, you were wrong 68% of the time this year. Almost 7 out of 10 of your trades lost money. You have got to do better. I told her Laura I’m trying. I’m gonna try. Fourth year we sat down. My wife, the accountant, one plus two equals three. She said, you know, I get it now. You had the best year you ever had. Made more money this year then you made the previous three years. That’s lovely. This year you were wrong 81% of the time. I think if you can just be wrong 95% of the time. We’re gonna get stinkin’ rich. I think I can do it. I think I have it in my grasp to be wrong.”

“The important notion here being – when you’re wrong, admit it. I try to tell to tell people that in the business of handling money, whether it’s in the business of playing poker, whether it’s in the business of trading, whether it’s in the business of investing, you have two types of capital with which you get to deploy: that which is in your account and mental capital. And I don’t have must mental capital. I’ve lost most of mine. You lose mental capital when you are holding on to losing trades and worst when you’re adding to losing trades. The fact that you are losing money is inconsequential what’s really worst is you are hemorrhaging mental capital. You’re there defending that losing trade. You’re hanging onto that losing position and you’re not going out and deploying what should be excellent mental capital.  You should be using that mental capital to go find other positions. To go put on other trades. To go make other investments. It’s a wonderful experience when you take off that losing trade and get rid of it. It’s liberating. I get liberated 20 times a day. It’s a lovely thing. It’s astonishing how many mistakes I make. So the most important thing I want to get across today, tonight, and for your future and what separates the really great investors from the mediocre and the mediocre from the losers is that the losers always go out in exactly the same way…badly.”

The worst degree a trader can have is in economics and the best one is a liberal arts degree preferably “in psychology” or even religion because  “at any one time, down on the floor the background that seemed to have the most viability was religion. Because there would be 50 people saying ‘Oh good God just let this thing come back and I will never do that again.’ The problem is we are all sinners in the hands of an angry God with a very large margin account and more often than not he’s trying to wreak havoc upon you.”

Gartman’s corollary to “markets can remain irrational longer than you can remain solvent” is “the markets will return to rationality the moment you have been rendered insolvent.”

On Shakespeare:  “You’ll be better trained to deal with the uncertainties that exist in the market and to understand why Hamlet waited so long after finding out that it was his father-in-law that had killed his own father. He had the proof, he knew it was there. And yet the entire play of Hamlet is Hamlet delaying, and delaying and delaying and not acting. That’s what Hamlet is all about. It’s about the inability to make a decision. That’s what trading is all about. It is about the ability to make a decision. Hamlet would have been a terrible trader. Or why did Lear split his kingdom into three parts? What was he thinking? He would have made a terrible trader.”

Here is what the markets are all about:  “The study of human begins dealing with the rational and the irrational. Dealing with rational numbers in an irrational environment. Dealing with irrational numbers in a rational environment. Dealing with irrational numbers in an irrational environment. And trying to make sense out of the chaos. Trying to bring order to the chaos.”

11 Responses to DENNIS GARTMAN ON THE PROFITABILITY OF BEING WRONG
  1. Ken
    October 25, 2010 | 9:57 pm

    It’s amazing how powerful such a simple concept is and it’s amazing that most traders never understand it. Get rid of losers quickly and add to winning positions. Simple, straightforward, and profound. My goal is to always follow that advise. Thanks for a great post David!

  2. Fernando
    October 26, 2010 | 6:59 am

    I am very grateful for you taking your time to bring us such a wonderfull interview.

  3. Ricky
    October 26, 2010 | 7:51 am

    As always Dennis you speak so eloquently and explain things in such lay-mens terms. Just wondering if the 85% wrong year really was profitable or for story purposes.

  4. jack
    October 26, 2010 | 8:03 pm

    Bravo, Mr. Gartman!

    Concise, humorous, to the point, and oh, so true.

    As a trader, it took me about 5 years to learn the lesson. But the years since then have been great.

    Thanks for your insight…

  5. Richard Holloman
    October 26, 2010 | 9:26 pm

    David great post thanks for sharing it. This is a post to live by. We should all print it and place on the wall beside our trading screen.

    Dennis is so practical and easy to understand. Now the real question is can we follow his advice 100% of the time. 100% is my mission. SMALL LOSSES!!!

  6. Paul S
    October 26, 2010 | 10:21 pm

    I learned the hard way too…HUMILITY is the secret to successful trading. Its so simple. The biggest obstacle to this is being smart or brilliant. I st my limit before I make the trade. I pull out when Im wron regardless of anything else.

    IT WORKS…and always puts a smile on my face. I always feel like a winner when I pull out of a loosing position. I have won over my emotions, and my head is clear and I look for the next high probability trade !!

  7. Aziz
    October 26, 2010 | 10:36 pm

    Mr. Gartman, your humourfull speech is enlightening actually superb. Listening to the brain than feelings can save a lot of frustration. Thank you.

  8. Pretorian
    October 27, 2010 | 10:08 am

    George Soros always says: “it is not important how many times you are wrong, but how much money you lose when you are wrong and how much you make when you are right” Paul Tudor Jones had post in his wall saying “losers average losers”. I am yet to find a great trader who adds to losers or who has more a winning percentage above 50%.

  9. PAMP Silver
    October 27, 2010 | 10:47 am

    Excellent!! Thank you for this article – these are words to live by.

  10. jose franza
    October 27, 2010 | 11:42 am

    Mr. Gartman

    Your profound and yet very concise concepts are worth millions. Like you put in but in other words NEVER THROW GOOD MONEY INTO BAD MONEY.
    It will help me a lot. Thanks.

  11. yoigkeung
    December 14, 2010 | 12:55 pm

    Yes, indeed, full of wisdom.

    I guess “my” battle is to know when I’m wrong.
    Is it when i’m down 1/2%, 1/3% or 2% of equity? I’m not expecting an answer to this, as I understand everyone must have their own trade plan.

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