Mark Minervini loves to talk stocks. After more than 34 years as a professional trader, he’s achieved a reputation as one of the world’s best.

Part of his secret has been to stick to a strategy of swing trading growth stocks. In essence he looks for the biggest moves in some of the market’s most exciting and fastest growing companies. But there’s much more to it than just reaping big profits from trading in and out of the market.

Mark credits his success to his methodology, discipline and mental strategy. In fact, in his new book, Think & Trade Like a Champion, he goes deep on the psychological pressures faced by traders and investors, and how to overcome them. His message is that focus and risk management are just as important as good stock picking when it comes to being successful in the stock market.

When I first interviewed Mark back in early 2017, he was just finishing Think & Trade Like a Champion. It’s a follow up to Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market, where he sets out his trading strategy in depth. Mark says his new book is essentially volume 2 with much of the material being the information he couldn’t fit in his first book.

When we caught up again we picked up on some of the big trading questions that he covers in his new book and discussed some of the finer points of his strategy.

Mark, right at the end of Think & Trade Like a Champion there’s a discussion between you and Jairek Robbins about what you see as the most important features in the mindset of a successful trader. Why do you think the right ‘behaviour’ is so important in trading?

Well, I have a long history of attending workshops run by Jairek’s father, Tony Robbins. Jairek himself is like an encyclopedia of mental training techniques, he’s really amazing. So, it was an incredible honor and pleasure to work with him at my workshop and collaborating for that chapter in my book.

When it comes to behavior and mental control, the bottom line is that if you think you can’t do something, then you are right, you won’t be able to. The real key is that humans can only perform up to the level of their self-image or identity. So, the general rule of thumb is, regardless of your skill or ability, you’re not going to outperform your self-image.

Whether you’re aiming to become an Olympic skier or a stock trader, you’re going to have to learn how to perform under pressure. You may do well in practice, but when it comes to performing under pressure you’ll only be able to go as far as your level of confidence. If you don’t feel that it’s “like you” to win, if you don’t feel that you can be a great trader, if you don’t believe that’s your identity, it doesn’t matter how much ability you have, you’re going to cap-out at your self-image. That’s what people ignore, because it’s buried in your subconscious and you may not even be aware of it. The key is to build your self-image to a level that is at least equal to your ability. I’m currently writing another book about how to do precisely that and build the mindset of a winner. Ultimately, I think it’s the most important aspect of achievement in any endeavor.

When things are calm and you have time to think, you are operating from your conscious mind. But when the pressure is on and you have to operate very quickly, you revert to your subconscious, or your intuitive mind. Your conscious mind makes decisions slower and can only focus on one thing at a time. But when you let your subconscious mind takeover, you operate intuitively and the self-image is the gas pedal - and that’s what guides how well you perform from that point. It’s not magic, it’s simply the science of how we operate as humans.

What is it about ill-prepared traders that causes them to fail in the market? What do they get wrong and why?

When you’re not properly prepared you operate under false representations. People think practice makes perfect, but I know individuals who have been trading for 30 years and they still have miserable results. They just keep doing the same thing over and over. Just doing things over and over won’t make you good, in fact it will make you horrible if you are practicing wrongly. Practice doesn’t make perfect, practice makes habitual, so you’re just ingraining bad habits. You have to be careful. If you’re practicing the wrong things you’re just perfecting mistakes.

The only way practice makes perfect is when you learn to practice correctly; perfect practice. That may require a performance coach if you want to do it quickly. If you want to do it the way I did, you can spend three decades figuring it out - and that’s fine too. By the time I worked with performance coaches, I didn’t need them. But it took many years of trial and error.

In Think & Trade Like a Champion you cover a lot of new ground around risk management, including subjects like staggered stop losses. Have your views about managing risk changed over the years?

Not at all. Nothing major has changed in the stock market and nothing is going to change meaningfully. Certainly nothing has changed when it comes to risk. You simply must manage risk because it doesn’t manage itself. I always say that trading without a stop loss is like driving a car without brakes. How long do you think you can drive around before crashing?

Staggered stops simply break down a stop into multiple stops at different price levels without risking any more than you would with one stop price. If a stock or the market is volatile, you enter a trade and set an eight percent stop, you can maintain the same level of risk by setting a stop on half the position at six percent and then putting the other half at 10 percent. What will happen is that you’ll choke off two percent on the front half but you’ll give it two percent more on the back half and maybe give yourself a better chance of staying in a portion of the trade.

It’s a trade off, but when there’s a situation when the market is volatile or I want to make sure I’m in a ‘key leader’ - especially at the beginning of a new bull market - I don’t want to get knocked out of an important stock. I’d rather have a half position in an important stock than no position at all. So, I’ll give it a little more room on half by breaking the stop up. And you can break it up into three or four stops if you want. The important thing is to bracket those stops around the percentage number that you want to end up at, so that it averages the risk you are willing to take.

Another new topic in the book is the question of when stocks should be sold. Why do you think this is such a big challenge for many traders?

Taking a profit is a harder decision than buying because buying is more mechanical and selling is more subjective. You get into all these kinds of emotions around anticipation, regret and worry about where the price is going to go. But the bottom line is that most traders have the wrong idea of what trading is actually about. Speculation is about selling higher than you buy and doing it as many times as you can. You always have to keep your eye on the ball. Most traders get caught up in highs and lows and Monday morning quarterbacking.  If you lose focus on what the goal is – to make a decent profit and do it again - then you’ll get yourself very frustrated and confused.

Some investors will say: “I should have held because it kept going up. Obviously, I sold it wrong because it went higher.”

Or they’ll say: “I should have sold because it went down.”

That may or may not be correct.

Sometimes you’ll make a good decision and lose money and make a bad decision and make money. You should never conduct post analysis and judge something right or wrong necessarily by the result. The result doesn’t always justify the means. Just because you took a risky trade and made money, that doesn’t mean it was a good decision. You have to go in with a plan and then judge your trade on the quality of the plan and how well you stuck to your plan.

It’s a very systematic way of thinking. Do you think there are certain characteristics needed to be successful in trading and investing that only exist in very few?

No. The traits needed to be a stock trader can be learned. No-one is a “natural” speculator at birth. I think anybody could do it. It requires a roadmap, sound principles, discipline and then experience. Oh, and you need to learn how to keep your ego in check.

It doesn’t matter whether you want to become a basketball player, an Olympic athlete, attorney, doctor or a stock trader. The reason only a few reach the top in any of these fields is not because of special talent or pedigree, it’s because most people simply don’t believe they can perform at a high level. Like I said before, you can only perform up to the level of your self- image. It’s the confidence in your own ability that’s really important.

Most people spend their time and effort trying to learn how someone like myself trades, when in fact they should be trying to learn how I think. Ultimately, it boils down to how you think; what you believe you are capable of and what you feel you deserve. It’s more important than the actual techniques. There are lots of ways to trade the market and there are lots of ways to get rich, but the most important thing is to believe in yourself.

You said “keep your ego in check”, do you think humility is an important trait for a good trader?

There is a fine line between confidence and cockiness. But there’s a saying that’s been on Wall Street for a very long time: there are old traders and there are bold traders, but there aren’t many old, bold traders.

The market has a way of humbling traders with big egos. I’m a pretty confident guy, but when it comes to the market, I’m as humble as they come. The market is bigger than you’ll ever be, so you have to take a back seat and that’s really tough for people. They have a hard time being the caboose and letting the market be the engine.

Do you view yourself as a trader or an investor and what do you think the difference is?

My definition of an investor is someone who holds for long term capital gains; one year or more rather than weeks or months.  My longer-term trades tend to last two or three quarters, while my short-term trades could be days to weeks. It depends on the situation.

When I first started trading, I was more of an investor because back then commissions and spreads were huge; you couldn’t move in and out quickly. It was much more cumbersome to place trades. So, you held stocks for bigger gains. When commissions came down, spreads narrowed and quick online access became available, that’s when people started trading short term. I switched over to a shorter time-frame because I could compound my money faster and trade around positions. I would classify myself as a short to intermediate term swing trader.

Do you think your approach can successfully be copied?

I don’t think it can be copied, I know it can! Many of our Minervini Private Access members and Master Trader Program workshop attendees are successfully executing my strategy every year here in the U.S. and also around the world. In fact, it probably works better in some foreign markets where there are many more inefficiently priced securities. Absolutely it can be duplicated.

Are you still trading as much as you used to?

I still trade every day, but I‘m not as aggressive or as active as I was in the beginning of my career. Fortunately, I don’t have to be. I’m older now and enjoy family life, hobbies and passing the torch to others. But I still love it and it’s my passion. I also realized that I’m passionate about mentoring. It’s a great feeling to see someone succeed and to know that you inspired them to dream and achieve.

We’ve had some volatility in the market recently. What is your reading of the market and how it’s likely to perform over 2018?

I’m smart enough to know, that I’m not smart enough to predict very far out, so I would never bet on a prediction. The market is the engine and I’m just the caboose. I watch where the train goes and I follow along. But I’ll tell you what to look out for, which could signify a major change in the market.

Until just recently we’ve had some of the lowest volatility we’ve ever seen and the market has been making very steady progress. That was happening because we have a moderate growth environment with very low inflation in the U.S. All around the world, the reigniting of growth hasn’t really been strong enough to cause inflation, but world economies are growing.

Now if you look back prior to the 1980s, the boom and bust cycles were much wider. There were huge swings from deep recessions to big expansions. That volatility in the economic cycle led to volatility in stocks and the market went sideways for decades.

What’s going to change will be whether we sink into a recession and the growth slows, or if inflation starts taking off and the economy gets too strong meaning that the Fed would have to jack rates more aggressively to engineer a recession. You have to look for a break-out in either direction from this stable moderate growth environment.

What do you do to control your risk in different market conditions - and do you change your strategy depending on whether the market is beginning to rise or fall?

I’m mainly watching the individual stocks. If there are stocks that meet my criteria then I buy them. If not, then I go to cash. If there are a lot of stocks that are showing short set-ups and there are no long set-ups, then I might entertain the short side. But I’m never just jumping in 100 percent right from cash. I use what I call progressive exposure, which just means testing the water with some pilot positions before you jump in with both feet.

So, maybe you go 25 percent invested, or even 50 percent invested, but you move in incrementally and you don’t step it up until you’ve got some traction with those initial positions. If you’re profitable, those profits can be used to finance additional risk or more aggressive positions and it’ll cushion you a bit. You might miss a few weeks of market action before you’re fully invested, but that’s not going to make a big difference. The bottom line is: there’s no sense in moving your exposure to 75 or 100 percent - or on margin - if you’re not profitable at 25 percent or 50%, etc..

You won’t get in too much trouble if you use progressive exposure and trade stock by stock as they emerge. I don’t really need to look at anything but the stocks themselves. As a matter of fact, I would strongly encourage traders to take the indexes off their screens and try to operate just looking at stocks. I call it the Minervini “vacuum pack” challenge. See if you can go one year without looking at the indexes during the trading day. Most people can’t go a few weeks or even a few days. But if you do, you will likely improve your results.

Do you consider whether a company has an attractive long-term future before making a trade?

That’s a good question. One thing you have to remember about high growth stocks is that you can only see so far out with any degree of accuracy. Generally, that’s only a few quarters. Even the best analysts are only going to be able to look forward a few quarters. Even the company’s CEO has no idea for sure what will happen a year or two down the road. Business conditions could change, the economy can change and all types of things can happen - but that’s the whole reason why there is opportunity. Not everything can be priced into a stock. If you could figure out what will happen a few years down the road, everything would be priced in. There would be no inefficient pricing and no opportunity.

That’s why companies with huge growth - and you should always look for companies with huge growth potential - go higher and higher and defy gravity for years and years and can make huge multi-year moves. No analyst can put a correct multiple on a company growing earnings by 100 percent per quarter. And, there’s no telling how long that will last. It could stop in three quarters or it could be a Cisco and go for 16 quarters and the stock goes up 70,000 percent.

Take Amazon, which is now ruling the retail world. When I was buying Amazon in 1997, not only was there no visibility and no-one really understood their vision, Wall Street hated it. Analyst said Amazon (and some included the Internet as a whole) would never make money and it was the same for names like Yahoo and Microsoft. Believe it or not, these were relatively small cap names that few people knew. You want to go with the names that are smaller and unfamiliar to most people. That’s where the real opportunity is.

So, how do you adjust to changing fundamentals?

You just have to go day by day, quarter by quarter, and as things change you change. Stick with the stock while it’s reporting good earnings and the stock is acting right. Are the technicals confirming what’s happening with the fundamentals? At some point those prospects are going to dim and you move on to something else.

With growth stocks all you need to look at are earnings, sales and margins - and the chart. Make sure the chart is agreeing with the fundamentals. Never bet on your fundamental ideas without confirmation from the technicals. You should ask, if things are so good but the stock isn’t going up, why? There is almost always something going on you just don’t know yet.

A number of Stockopedia members are using your methods in small cap stocks. Can your technique of buying on pullbacks after rising on high volume get good results in stocks of this size?

In the 1990s, I was an adviser to some of the big hedge funds, as well as some smaller hedge funds that were in faraway places like Chile and Peru. These were places where there might have been only 50 or 100 stocks on the entire stock exchange. But what I found was the opposite of what most people would imagine. While you have to have enough trading to have a market in a stock, the smaller the stock, the smaller it trades and the less it’s followed, the more likely it is that it’s inefficiently priced. Therefore, all other things being equal, it has greater potential for a bigger gain.

If you’re trading Coca-Cola, which may be followed by 60 analysts, there is not much that can surprise. Plus, it’s so large that it’s very hard to move the stock. But if you’ve got some small company with five million shares in its float, and they suddenly they get a contract that will add a couple of dollars to their earnings, that can easily double the stock price. I love the smaller names that have smaller floats and trade lower volumes, as long it has a good chart and supporting fundamentals.

Do you find that you need to make adjustments to your rules - particularly with stop losses - when you are trading smaller companies?

It’s actually the larger-cap names than tend to cause the most trouble. They whip around and give you more of the back and forth action that’s likely to stop you out. The smaller names are the ones that will breakout and just go and get you a profit very quickly. So, it’s just the opposite. It turns out to be counter-intuitive for people because big names are seen as safe. If you are using a very tight stop and the stock is a “crowded trade” (lots of retail eyes on it), you could get knocked out a bunch of times. I want a stock that really is flatlining because not many people follow it, and then it explodes and gets me a profit right away. I don’t really have any kind of volume cut-off. If it’s a smaller name, I just adjust my position size accordingly.

As far as the stop is concerned, I generally feel that if you can’t be right within an 8 or 10 percent stop you probably have bigger problems with your selection criteria or your entry technique, because 10 percent is a pretty big stop. During my entire career, my average loss is about four or five percent and that’s with slippage and stocks gapping down on earnings included. Rarely do I take a large loss and I never adjust my stop for volatility. In both my books I explain how I attack volatility. My approach is just the opposite of what most do or what you might imagine.

Do you foresee a time when so many people are trying to trade your system that it stops working?

If there were hundreds of millions of people following me then maybe it could be a short-term risk. But I’m certainly not that popular. On top of that, it’s not the cause it’s the effect. Of all the people that are interested in what I’m doing, an even following me very closely, most don’t have the discipline to do it. Even if you have a system you still have to stick to it.

William O’Neil got pretty popular, he had his own newspaper and wrote a book that sold over a million copies and even had a TV show for a while. But it never did anything to make his strategy ineffective.

But let’s just say it did. Let’s just say it got so popular that it made it ineffective. Guess what? Everybody would stop using it and then it would work great all over again!

Here’s a perfect example… over the past few years people have been saying that breakouts don’t work anymore. When I heard “breakouts don’t work!” - that was music to my ears, Last year, what happened? Breakouts worked perfectly. I’ve never seen so many stocks break out and hold their stops.

This is why you have to be committed to a strategy, because sometimes you have to go through periods when it doesn’t work as well as it did before. Maybe you’ll have a year when your style is out of vogue. If you stick with it you’ll be there for when it comes back in vogue. But if you switch and try to do different things, you’ll never be good at any one thing, and it’s unlikely you will switch back at the right time.

What I do it timeless, that why I spent 34 years perfecting it. It’s a career, not a lottery ticket.

You’ve become really well known for the Master Trader Workshop that you hold every year. How is that event going?

We’ve been selling it out every year and we’ve had to think about whether to make it larger, but for now we cap it at around 100 people. I think last year we stretched it a bit and allowed 120. It has turned into an amazing, life-changing event for those who attend. I’ve never been so proud of a product I developed in my life. David Ryan and myself spend three days going over everything A-Z. On the third day we trade live and I spend part of the day working with everyone on mindset and psychology. These traders come from all around the world – representing more than 50 countries, it’s been incredible and the people I have met have all been really amazing!

Finally, if there was one thing that you’d like any individual to take from your books, what would it be?

Remember, records are made to be broken. Anything that somebody else does can not only be duplicated, but it can be exceeded because you have the benefit of starting where they left off. If you are fortunate to be able to do what you love, you should then teach it to others and pass the torch - and hope you inspire them to do it even better. That’s what life is about.

The main thing to come away with is to believe in your own abilities. That’s really the most important thing - you need to believe you can do it. Otherwise, all the training in the world isn’t going to make you hugely successful.  And, I’m telling you with 100% certainty that you can!

I believe in people more than they believe in themselves, because I made it starting with nothing. I know every single person is only operating at a fraction of their potential.

You can only achieve what you believe. So, believe in yourself, commit to a process, be persistent and never give up and you will get to the top.

Mark, thank you very much for your time.

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