A day trader from the 1970s whose achievements were never really that headline worthy - all he did was grow an account from $2200 to $6,90,00 in 14 years, without having a single negative month below -$2000.
Smith made systematic and consistent profits without taking on any insane levels of leverage. Shouldn't this be the goal of every professional day trader? Or is there no place for consistency in a profession in which you don't have any control over the sequence of returns?
Either ways, what he achieved was entirely different from what usually makes you popular in the trading world. Also, it didn't help that Gary was actually infamous for being a basher of snake oil vendors.
The Story
It took Gary Smith 19 years before he started making any real money through trading. 19 complete years before he started making money. He started in the 1960s and didn't have a breakthrough till the mid 80s.
Meanwhile, he never gave up, even as he was a 'breakeven' trader throughout this long period. This 19 year period likely compares to an equivalent 4-5 year run in present times - given how data/knowledge is more easily accessible and how barriers to entry have reduced drastically. But a rudimentary look at twitter/youtube/telegram will tell you that literally no one has the patience to wait 5 years before they either quit trading or start posting P&L screenshots as advertisements..
What changed for Smith?
In 1985 (after 19 years of being in the business), he finally took the decision to spend several weeks and over 100 hours poring over his trading statements - looking for recurring fundamental, technical, and psychological deficiencies in his trading approach.
"Once we understand the logic of the markets and our psychological strengths and weaknesses, we can begin to build a lasting trading strategy."
First he analyzed all his trades, then he discarded the things that weren't working and finally he developed a philosophy about the markets. All his subsequent trades were then in the context of this new philosophy.
The biggest change was that he completely stopped looking at charts and investor sentiment became his primary tool.
He coupled his sentiment analysis stuff with additional data points like put-call ratio, market breadth etc. in order to always position himself in a way which allowed to fade retail investors! He started thinking meta and his trading started working for him.
Lessons from Gary Smith
a) Identify issues specific to you
The pre-requisite for identifying issues specific to you is having a record. A living and breathing trading journal which can lead to insights (as opposed to a bureaucratic trade log). He, for example, found through his journal that he would often be stopped out early before the market went in his direction. This I presume would have required him to identify his MAE and track the market in retrospective, outside of his journal.
This analysis then lead to the following actionable insight for him - he simply decided he would not be afraid to jump back into a market if he was stopped out.
Getting back in after being stopped out is theoretically a vice, but for him it became a virtue. This may not work for another trader but it did for him - because it was derived from a ledger that was specific to him.
b) Rules
Even if you are a discretionary trader, there should be some no-go areas and some overriding rules. Most successful discretionary traders do follow a set of well defined rules/guidelines.
For Smith, he decided on an overarching rule for him - he would no longer buy long or sell short when the bullish consensus percentages were in the upper or lower ranges of their extremes.
c) Diversify
He started diversifying, infact he went to the other extreme. Smith started trading and timing mutual funds instead of individual stocks (despite their high transaction costs and everything).
d) Trade the market for what it is
He became a long only trader. He looked hard at the equity markets and saw it clearly - stonks have an upward bias. They actually only go up. It has been true for the last 100 years and probably will be for the next 100 years as well.
"True, it may not take a genius to make money in a bull market, but what does it take to make nothing in such a market? I rest my case."
e) Avoid get-rich mentality
Such a mentality by itself may not be that harmful but when it is coupled with a limited trading capital - that is when it leads to dangerous vices such as taking on excessive leverage, overtrading, fear of losing etc..
f) Avoid the fear of losing
He discovered that the fear of losing is what was causing his lack of discipline. To be able to let your system play out requires you to truly accept the risk inherent in your system.
"The review of my trading history showed there were several occasions when I was right there at the beginning of major bull and bear markets, but I always seemed to come away empty-handed. Because of my fear of losing trading capital, I would either grab the smallest of profits or get scared out by the slightest of reactions."
Knowing the game and knowing the risk is very different from actually taking the risk after accepting the risk. If you know you have a statistical and quantifiable edge - then it is your duty to let that edge play out by actually transacting in the market. The corollary of which also is that if you don't have an edge, then don't transact in the market.
Know more about Gary Smith
He wrote a book in 1999 journaling his trading experience called "How to trade for a living". The book hardly sold any copies and got him just $1000 in cumulative royalties. Its an old book which doesn't claim to teach you much but I would recommend it 10 on 10.
I don't think he is on twitter, the only place you can find the guy is here: https://www.elitetrader.com/et/members/007arb.21652/
In 2020, he is worth $2.7mn according to a post on elitetrader
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