Investing isn’t just about betting. It’s about how big of a bet you make.
Size, here, does matter.
Investing $100 versus $100,000 makes a huge difference in the outcome. The former will make you some money, even if it’s a huge winner, or, by betting the latter, it can change your lifestyle.
I traded futures
One day I decided to short the market, which means I bet the market would go down. It was during a time when I was trading—a lot. I was making intraday positions and had some success in it. (It’s not how I approach the market anymore, really; that’s for another post.)
I traded the futures market. There are all kinds that you can trade. My favorite was the S&P 500 E-Mini (symbol ES). It tracks the S&P 500 and is traded almost 24 hours a day and is very liquid, meaning you can easily buy and sell your position. It’s also a simple way to bet on the market going up, or down.
Before I shorted on that particular day, I had been going long, thinking that the market would continue to go up. But I kept on losing money. After several attempts, I thought maybe the market wants to go down since, at that point, it was at or close to an all time high. So, instead of going long, I took a small short position.
Taking a winning position
The market slumped. And my position was winning. Then, I added to it. And it kept on winning. So I shorted more, adding to my growing short position in ES. Then the market fall accelerated in the last hour of regular trading as panic ensued. And I was shocked by how much money my trade made. By the time I closed my trade, after regular trading hours, I had made well over $100,000. That was in one day.
For me, it was incredible.
To make that, I had to take a large position. By the end of the day I had accumulated over $1MM worth of a short position in ES.
It was scary.
Winning can be scary
No one is saying that taking that big of a position isn’t frightening. I wanted to put on some man-diapers because I almost crapped my pants at least a few times that day—and, I was making money. It might sound so strange to hear that I was terrified when I was winning. But all I could think about was, What if I was on the other side of that trade. That haunted me even as I closed my position and took home my winnings.
And there’s a reason for that fear. It’s this: Taking large positions is terrifying, no matter what side you’re on. That’s because of the risk you are assuming when you take a larger position.
That’s why it’s important to gain conviction.
You need conviction
That means you get a sense that a stock or market or whatever will take a certain direction, and you have a strong sense you are right. You won’t be certain because that doesn’t exist in life; it certainly doesn’t in investing. But, you can form a strong belief. One of the best ways to gain that is by reading and researching. You’ve read about the market, weighed the various voices and opinions, including your own, and you formulate a conclusion. That is conviction. It’s a process. It can be done quickly, or it can take years. But to make your best bets, I think a conviction must be formed.
When I took that short position it was because I had been in the market and could sense that I wasn’t going to win going long. And then I started to see that I needed to do something different. Reading Market Wizards (affiliate), a book about trading helped me do that because I noticed that many of the traders I read about in the book would react to losing and quickly pivoted and go the opposite way. So I did the same.
One last thing about forming convictions, it takes time to hone. Conviction isn’t the same as intuition. You know, that’s the “feeling” someone gets when they think something is going to happen. It’s almost like voodoo magic. I’m not going to downplay intuition. It is a thing that works. But, I don’t think you can consistently win with just that. It plays a part of conviction but isn’t all of it. “Feelings” and facts are needed. Intuition is a feeling you might be right. A conviction takes that feeling and confirms it with research and reading and reflection—or they contradict that intuition. People who have an intuitive sense that is reliable are the ones who have been scouring the research and news and have had their pulse in the market and know their sector well. They are practicing the gathering of knowledge and learning. They even unlearn. If you practice all of that, you will train your senses to sniff out the best convictions.
Then you bet.
And you don’t need to take a big position at first. It can be small. Once you gain more confidence, you can grow it.
Your position size can be grown. It can be accumulated. That means you can take a smaller position at first, then add to it over time as you gather confidence. So you don’t need to plunge into a stock or a futures position, no. You can just dip a foot in, then add your leg, and once you see it’s right, dive into the pool.
That’s what I did on that day I shorted.
And this isn’t for everyone. It is risky.
Learn how you best risk
You need to account for risks.
One key variable you need to consider when you do that is yourself. What type of risks do you do better in? Are you a day-trader or are you more long-term? Should you trade in bonds or stocks or futures? Not everyone thrives under every situation where there is financial risk.
For me, I didn’t like trading futures as much as I liked investing more long term in stocks. That’s why I stopped trading and started buying tech stocks and holding them. It suited me better. Taking larger intraday positions was too terrifying for me. So I switched to buying positions into companies that I believe in. I found that I could do that more effectively and could take larger positions there with less fear.
Find what best fits you, and you’ll see that sizing up may be more natural than you realized.
But whatever you do, you need to know that you can lose money. You probably will. No one always wins. Not. Even. Buffett. Yes, Warren Buffett loses; check out his losses on the airlines.
Reap the rewards
Look, there are no rewards without risk.
Not everyone should be taking huge risks. Some people can make millions in a day. Many won’t.
To get greater rewards, you need to know yourself better.
The most important thing is that you are growing in your risk-taking and learning to become a better investor.
If you do that, you can’t help but win.
And you’ll be rewarded.
Disclosure: None of this is investment advice or the like. It’s just one investor sharing his learnings and stories. Consult a professional advisor if you want help in investing.