This rule will determine your success as a trader or investor⦠[RiskHedge Report] [Stephen McBride]
How to be on the right side of the wealth gap By Stephen McBride - RiskHedge Editorâs note: Today is a very special day at RiskHedge. Read to the end to find out why⦠STEPHEN: Justin, youâve been very quiet lately. Youâve shut down all your research services. Letâs tell RiskHedge readers whatâs going on. Justin: Sure. Letâs start by acknowledging the elephant in the room. STEPHEN: Which is? Justin: The âwealth gapâ in investing, and specifically in trading. The fact that a handful of traders succeed in growing wealthy⦠and everyone else who tries to trade stocks fails. STEPHEN: Iâd love to hear your thoughts on this, because youâve climbed the mountain, so to speak. You built your trading bankroll from scratch to a big enough size where you can trade independently. And youâve hit several big winners, without using options. Justin: So people get into trading for one of two reasons. The motivation of type 1 folks, to put it plainly, is usually to escape something they hate. They want to make a living out of trading. To escape their â9 to 5â⦠escape their boss⦠take control of their own schedule, whatever. Trading sounds like the answer. They imagine sitting alone at their computer, generating cash and answering to no one. My advice: Donât try that. Practically speaking, you need a bankroll for trading of at least $500,000 to hope to generate the kind of income you need to live on. And regardless of how much money youâre starting with, unless you are exceptionally disciplined and committed, it wonât go as expected. Iâm sure that sounds hypocritical coming from a guy who is a professional trader. But look... done right, trading is a job. I work a bare minimum of 60 hours a week. Fortunately, I love it. Lifestyle benefits aside, Iâd do it for free. Most people donât love trading full-time. They fall in love with the idea of trading and the kind of life it could give them. STEPHEN: Okayâwhatâs the other type of person? Justin: Type 2 wants to make some extra money. Maybe to ease financial pressures... or retire sooner than they would have... or to supplement their retirement income. Thatâs possible. And our industryâthe investment research industryâis supposed to help people do that. Weâve mostly failed, for one primary reason. STEPHEN: Which is? Justin: Failure to respect the â80/20 ruleâ and how it determines your success as a trader or investor⦠whether you realize it or not. STEPHEN: Ah, the âPareto Principle.â The inescapable fact that in most areas of life, 20% of the results come from 80% of the input. Justin: Exactly. Itâs true in the mundane aspects of lifeâmost people wear 20% of their wardrobe 80% of the time. And it holds true in matters of wealth. 20% of people make 80% of the money. 20% of stocks produce 80% of the profits. And professional tradersâthe ones who achieve lasting successâknow the 80/20 rule determines our results. STEPHEN: 20% of your trades produce 80% of your profits? Justin: Correct. Said differently, your biggest winners will come from a small slice of your overall number of trades. Trades that win big are great. Itâs fun to make money. The best trades tend to âworkâ right out of the gate. Take a trade like Fastly (FSLY). It jumped 45% in one day shortly after I recommended it. My readers ultimately closed it for a 330% profit. Those are the kinds of trades everyone dreams about. But theyâre the minority. Only one in five trades, at best, go this way. STEPHEN: So a handful of your trades result in easy money, but most do not. What do you do with the ones that donât? Justin: Cut them ruthlessly. If a trade does not go as I expect, I will usually cut it quickly with a small profit, or at breakeven, or with a small loss. There are over 5,000 stocks out there. In my way of trading, thereâs no reason to get married to any of them. Why waste time with a stagnant trade when I can be in a "20% tradeâ that truly moves the needle? STEPHEN: If 80/20 is so important in trading, why does no one ever talk about it? Justin: Great traders talk about it all the time. But the average guy rarely hears about it because itâs not marketable. Peter Brandt, of Market Wizards fame, is one of my biggest trading influences. Heâs on the short list of the greatest traders alive today. He talks about 80/20 every chance he gets. A direct quote from Brandt: If you want to trade, learn that 20% of your trades will produce 80% of your profits. STEPHEN: Doesnât get much clearer than that. So what does all this have to do with shutting down your newsletters? You had one of the longest-running RiskHedge advisories and many fans. Justin: Iâm not going anywhere. In short, the newsletter model restricted me. I couldnât share many of my best tradesâthose special 20% that are the real moneymakers. So we built something completely new and different that, for the first time, allows folks to fully benefit from my best trade ideas in real time. Stephen: Is it open to the public? Justin: No, part of the deal is we had to made it strictly private. But we are accepting a small number of RiskHedge readers to join as [beta testers](. Can we share a link? Stephen: Readers, [go here to discover Justinâs new project and see if you qualify to be a beta tester](. Stephen McBride
Chief Analyst, RiskHedge Suggested Reading... [3 investing
lessons I learned
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