It's a great, great pleasure to be here, guys. It's like playing a home game. I've been in London now for the last couple of years. My background is Chequered. I've got a degree in engineering.
I've got an MSc in metallurgy. I've got a PhD in mathematics. all of which I assure you is largely useless in taking money out of markets regularly and consistently and what I want to try and get across in a few minutes as how to go about putting together the mental framework to be able to take money out of markets consistently and get yourself to a point where you can rely on that income in the same way as you can rely on your salary or the income that you draw from your business.
That's the objective. Now, when I do the seminar at the banks, and I've done it for all the local banks here, and I've done it for most of the banks in London, it takes three days, and I'm going to try and do it in the next 40 minutes. Okay, I've got a lot of slides. I probably won't get through all of the slides, but I'm sure that the guys at Funport will send you the presentation if you wish.
My association with the company is that the founder, Vusi, I don't know where he is, but the founder of Vusi and I have been doing business together since he was 30 minutes old. It doesn't seem that long since he was shouting at me when I was actually going to my office in Rivonia. he used to shout at me and said Kit Kat because he wanted me to bring a Kit Kat home that evening and so any of the fun poor people listening if you want to bribe the boss just buy him a Kit Kat so the thing that stood me in best stead in markets is that in my youth I was an officer in the Royal Marines and that's given me a level of confidence and discipline and that I've drawn upon for a very long time.
And 42 years later, I can still fit into the uniform. Because anybody who feels like having a go can have a go, I assume. I've only got one regret in life. And that one regret is that if I was 35 years younger, I'd be a professional rugby player today. Because I came to South Africa to play rugby.
That's why I came here in the first place. And I got an injury from it. But I think if I was 35 years younger, I'd be a professional rugby player. So I'm not... not that good with contraptions, so I'll do my best to make the slides work.
Yes, so, Barry talked about an edge. I'm going to try and talk about an edge. My edge is very similar to what these gentlemen have just presented. I like to put the fundamentals and the technicals together in the stock market. My definition of fundamental analysis is the search for the true value of a share.
My definition of technical analysis is the study of trends and turning points. And, ladies and gentlemen, I want to try and find a share that... that's undervalued, a share that's growing its earnings aggressively, reasonably safely, that's rising, that's in the throes of a strong trend, and ladies and gentlemen, I want to buy that when the general market is rising.
And that's what I've been doing for a very long time. I do my best to stick to that. Those of you that have been trading for a while will know that sticking to a simple set of trading rules is an awful lot easier. to talk about than to do.
Am I correct? Okay. And as if there's little devils on your shoulder shouting at you to do the wrong thing.
So, to make some money in markets, folks, we need some form of a method. Yes? We need to manage our money really well. And we need to manage ourselves really well.
The three M's. So, I'm going to talk about a methodology. So, I'm going to ask you a question. Did they put that chart in? There we go.
There's the Aussie 40 I think I asked them to put in. And my question to you, that's a Mac... I know the guy who put the MacD together, a good friend of mine, a guy called Jerry Appel, and he said that when he designed the MacD, an axiom of investment education is the more complicated it sounds, the more you...
can sell it for and he thought that MACD was suitably complicated that's why it's called the moving average converging divergent Jerry Appel and his two sons have got more money under management than Indesitc just the three of them and a little room in a place called Derry, Maine Stephen King writes his books just across the road is the JSC going to go up or down on Monday my question is Question to you. What do you think? Down? Young man says down. Any other?
Bradley, what do you think? You're the expert. Up? Well, folks, in my pocket, I have the secret. I can find it.
I have the secret. It's a five round coin. Now, on one side, there's a furry little animal. You see that?
And on the other side, we've got a coat of arms. Clearly, the coat of arms is going up, and the furry little animal is going down. Let's see if I can get this right. You were right. The head, it's going up.
Okay? Would you tread like that? No, okay, but I assure you most of you are trading like that already. There's a great deal of randomness out there, I assure you.
But I wouldn't like to trade like that either. So, my next question to you, let's play and think about a special game. So, here's the game.
If you can successfully predict heads or tails, and you're correct. If you bet five rand, and you're correct, I'll give you ten back. Clearly, if you're incorrect in your prognosis, I'm going to take the five. Now, you've already said that you wouldn't trade with the coin, but would you play that game?
Ladies and gentlemen, that's my question to you. Would you play that game? Yes or no?
Yes. Well folks, I haven't got a lot of time to play this out. It's a cracking game to play. And it's the basis of how you can become consistent and take money from somebody else.
Because that's what you're doing. Because in 10 chucks of a coin, would you agree that you should be right 50% of the time? Yeah? Now, when you're right, I'm going to pay you twice as much as when you're wrong. So on ten throws of the coin, when you're right, I'm going to pay you five times two, which is ten.
Yes? And when you're wrong, I'm going to remove... five times one which is five, thus you make ten, you make five profit.
If you bet a rand on every time you chuck the coin in the air, on average you're going to make 50 cents. You have now designed a positive expectancy system. So if you can find somebody to underwrite that, then Barry, that's your edge. Okay.
And that is the objective folks. Now with the Finport guys, with GT, you should be able to get your hit rate above 50%. But if you can be right 50% of the time, and you can make twice as much when you're right as you lose when you're wrong, then you've got a method of making money for the rest of your days.
And that is the challenge. To learn how to play the game over and over and over again without fear or hesitation. Okay, so it's a cracking game to play. Would you play the game?
No? In trading, the number of times that you're right is called the hit rate. And Lord only knows we're all paranoid about the hit rate.
We want to be right at all costs. There are four trading fears. One is being wrong. Two is losing money.
Three is missing out. And four is leaving money on the table. Those of you that are under 50 are probably in a safe place because I know for a fact that most men over 50 are more scared of being wrong and losing money than they are of death. Okay.
Am I correct? We've got the death thing all sorted out. Well, it's not the end of the world, okay.
But to be wrong or lose money is an issue. So that other thing that's important in trading is the rest of the world. ratio.
So the money that you make is a function of both the hit rate and the risk to reward and most of us just think about the hit rate. Three things. Now, if you do a search on the internet, and that's a margin call, don't take it, okay? Don't take it. Just ignore it completely.
A margin call is what happens, folks, when you run out of loot. And the lads from GT are going to phone you here and say... more money or we close the whole bloody lot ok so if you get a call just don't take it so if you do a search on the internet you're going to find lots and lots of systems with where the vendor says, Biddy, you're right, 92% of the time. And they all sound wonderful.
But the problem with those systems is that they've got to open up their stop losses so wide in relation to their targets that they don't make any money. And this was brought home to me a few weeks ago, and this is a chap in London who was advertising a forex system, somebody spoke about forex, and he said he's right 90% of the time. Sounds wonderful, doesn't it? but when he was right in his own literature he said this when he was right he makes 10 ticks and when he's wrong he loses 90 what's the expectancy of that system 9 times 10 when he's right minus 1 times 90 when is wrong and that means the system is wrong system actually loses money.
Sounds wonderful 90% of the time, but he loses money. So folks, just remember that that edge, that edge is a mixture of three things. It's a mixture of one, the hit rate, it's a mixture of the risk to reward and the commissions. And there's no doubt that if you're trying to scalp a one minute chart, you need to be really, really good because those commissions manged up.
Every time you press the wee button there's three or four ticks to be paid. So, and that's hit rate, risk reward and commissions. So folks, somebody mentioned the forex market. If you buy the pound against the dollar.
With a 50 point stop and the target's 100 points, if you can get that right, 50% of the time you've got it made. And the only thing remaining is to learn how to play the game. And it is a game that we play with ourselves. And playing the game is the tough bit.
Now... I want you to use your wonderful imagination because in this vessel we have a hundred one-ran coins yeah? You see them? Right? Now on every decision, on every trade there's two decisions.
One, is the damn thing going to go up or is the damn thing going to go down? Now Barry alluded to the concept of going short, which might be new to some of you, but you can take a bet that the market's going to fall. And if it does fall, you're going to make some money. That's the first decision.
So, the man in the green, heads or tails? Tails. Tails. The market's going to fall. The bear in the green.
We've got a hundred coins. The second decision, ladies and gentlemen. is how much do you want to bet?
You can bet one coin, you can bet five coins, or in the parlance of the commodity futures market, you can bet the farm, the whole bloody lot. Farmers love betting the farm. So the man in the green says the market's going to fall. Tails. How many would you like to bet, madam?
1, 5, 20, 75, 20. Okay, so let's trade. What we're doing is we're simulating a trading system that's right 50% of the time, that makes us twice as much when it's right as it loses when it's wrong. I assure you that if you were a day... in the forex market you would sell your granny for that system okay your granny because most intraday systems will risk 30 to make 50 and if that vendor is honest it's not right that much more than 50% of the time so the man in the green are you feeling lucky like okay don't take it too personally that's not a great throw A pound coin is much easier. Sorry mate.
It's going up. You lost. No, he bet. He bet it was going to go down. So, 20 gone.
And we've got 80 left. The man in the red, heads or tails? You, sir. You'll never wear that red pullover again. Heads or tails?
Pardon? Heads! We've got 80 coins left.
The man with the cold head with the cap on. Remember John Wayne's last movie? He said to a guy coming in, he said, is your head cold?
We've got 80 coins left. How many would you like to bet? Pardon?
40 he says. Okay. This trade is totally independent of any other trade that you're ever going to take in your life. This is the first of the 10,000 trades that you're going to take between now and death.
You said heads, eh man? Let's see if I can get this right. That's an awful throw. A pound is much easier. That's better.
Heads is correct! So we get 80! 80 and 80 is 160. We're ahead of the game. Now folks, the man in the red was lucky unfortunately. What's the probability of a bad one?
A half. Now, what's the probability of two bad ones in a row? A quarter.
Half times a half, which is a quarter. Now, in a 50% system, unfortunately, you get two bad ones every four trains. Ladies and gentlemen, if you were to bet 50% of your coins on any one trade, you'd go bankrupt every four. Do you understand that? Gets worse.
What's the probability of three bad ones in a row win a 50% game? Half times a half times a half, which is one over eight. That means throw a few coins when you get home.
That means that in eight throws of the coin, or eight trades in a 50% system, you have a cluster of three bad ones in a row. That means, ladies and gentlemen, that if you were to bet a third of your coins on any one trade, you go bankrupt every eight! Okay, and most people go bankrupt because they bet far too much on any one single trade.
Now, the bet size is the difference between your entry point and your stop loss. Right? So if you buy a share at 10 Rand...
you've got a stop loss at 850 if it falls from 10 to 850 that's the bet size okay am I correct GT gentlemen I think I am so Unfortunately there's a massive paradox here because you do the fundamental analysis, you do the technical analysis, and you're sure the damn thing's going to go up, yeah? That's why you're putting the trade on in the first place. So if you're sure it's going to go up, Why not have a big bet?
Let's accelerate the process of wealth accumulation. So you decide to trade far, far too big. And then, all of a sudden, you get a run of these. Bad ones. Now, if you don't believe me, here's what I want you to do tonight.
Go to Monte Casino. Who goes to Monte Casino? Anybody? Alright, you get to the casino tonight, lads.
You go to the roulette wheel. It's a 50% game. Equal number of blacks and reds.
And there's a little white ball, which is GT's cut. That's the house age. Okay.
And you look at the scoreboard down at the end, and you're going to see long runs of red and long runs of black. Those clusters are real. And it's this clustering effect that makes playing the game so difficult. Because you get long runs of good trades where you think you're God, and long runs, unfortunately, of bad ones, where you feel like something that's under your shoe. Okay, now the first objective, ladies and gentlemen, is to live through the clusters arithmetically, that you don't go broke in them.
Okay? Because you can quite easily have a cluster of five bad trades. Am I correct?
Sure. Five bad trades happen on a 50% system every 32. Alright? So if you were to bet 20% of your loot on any one particular trade, you go bankrupt every five. And there is a big problem here. So there's a chap called Ralph Vince, and he's written a long series of...
books called effective portfolio manager for traders thick thick thick thick books they've got them in an estate they've got them at ABSA but not bedtime reading I assure you the gist of all of this is that you should not risk any more than one to two percent of your kitty on any one trade so if you've got a hundred thousand grand in your account And you're new to this. You should not bet. You should not risk any more than 1-2% of that on any one trade. So the maximum loss, ladies and gentlemen, that you ever have on any one trade should never be more than 2000 Rand.
And that will keep you alive. Okay. That will keep you alive, but there's a big problem because we have runs of good ones and runs of bad ones. Now between your ears there's a thing called the pituitary gland. And that pituitary gland pumps out mooty, when I'm in England I have to tell them what mooty means, but that pumps out all sorts of hormones into your bloodstream.
And those hormones are actually responsible for the function of your bloodstream. for every emotional state that you have. So, when you fell in love with that young lady of yours, those hormones were just pumping around your system.
All right? leave the gym folks I'm no longer 63 I'm 17 again and back in the Royal Marines and as I say can be quite stroppy when I leave the gym okay now similarly when you have one good trade two good trades three good trades the pituitary gland is hard at work okay and it's pumping this moody into your bloodstream and you change completely I know people that after one good trade they're a different person. Okay? Certainly after two, after three winning trades they're in the bar buying drinks and the soles have never bought a round in their life.
What happens is that after a series of winning trades we become euphoric. And if you look in the Oxford dictionary the definition of euphoria is invincible. So what happens is... that you say sort all that position sizing, let's have a big bet.
And risk managers in the City of London are actually taught these days by the FCA to in fact, that's the equivalent of the FSB here, to actually look... at the traders under their control and assess their susceptibility to euphoria now you're going to find that once you get the one or two percent into your head it's in fact not the runs of bad trades that cause you to go broke, it's a run of good trades because in a run of good trades you actually trade far far too big. So just be careful about euphoria. Now Our job is to find an edge in markets. Barry's analysis of...
All you need is one pattern. That's all. You just need one pattern to be successful.
The head and shoulders pattern could be your pattern. He put a chart up of lots and lots and lots of patterns. I love my wedges, falling wedges and rising wedges. Those of you who are trading forex, there's a textbook falling wedge in the Euro 1 daily chart at the moment. I also am very fond of my fib levels and harmonic patterns, which are my own personal edge.
in both the stock market and in the forex market but you need one little pattern you need to practice really really good money management and that just means not losing any more than one percent of your loot or at the very most 2% of your loot on any one trade. And then the third thing is to build the discipline to just do it over and over and over again. Many of you will see those ghastly adverts that Alan Gray put out.
Do you know those long, boring adverts? Alan Gray are great. They've got a process that Alan Gray was taught by old Templeton a lifetime ago, and they do the same thing over and over and over and over again. I went to one of their lectures the other night.
night in London where it's all of us across there where they actually put on a case very simple similar to your case where they justified fundamentally based on value that Honda was a much better buy than Tesla okay wonderful present but they've got a process and they stick to that over and over and over and over again and your process doesn't your trading edge does not have to be complicated at all Finding a share that's undervalued, that's growing earnings aggressively and safely, that's in the throes of a good trend. I like always for a share to be above an 89-day moving average. 89 works for me.
And then you need some middle... pattern to finesse the entry. Could be a triangle, could be an ascending triangle, there's a heap of them and a simple book and charting will get you most of the way. And then don't lose any more than one or two percent on any one trade and then you need to to build the discipline.
Now ladies and gentlemen, can discipline be built or is it God given? Of course it can. Why was an old man like me in the gym this morning at half past six? Why?
Twice a day. Okay. Did it take any discipline to get me to the gym this morning? None, none whatsoever.
The paradox is that when you've got it you don't need it. You okay? Alright.
That's the paradox. So, to build discipline folks, you're going to have to grit your teeth. and stick to the process. So the first step would be to sit down with one of these guys, sit down with Hussie, put together your trading plan, a simple mechanical plan.
The more mechanical, the better. And then my challenge to you folks is to follow that plan without deviation for a batch of somewhere between 20 and 30 trades. That's going to take quite a bit of doing.
It is a rite of passage. Now, I'm not a psychologist. I've had psychologists in my classes and they still don't know why this happens. But to build a habit, okay?
habit, you've got to grit your teeth and do it. And then all of a sudden you actually build this neural pathway between your ears by doing it. You're going to find that sticking to the rules for the first few trades is difficult, but I've done this with many, many people over the years when I used to do one-on-one mentoring.
I don't do it anymore. somewhere between 5 and 13 trades you build the pathway. And you'll find that the discipline to stick to the rules is no longer required. Because that's what you do.
So my challenge to you all... Is out of this, get busy, make a nuisance of yourself, get yourself to a point where you've got a written plan that's so huge it should not be more than one page. Think about position sizing.
There's a good book on it by a guy called Van Tharp. It's called Trade Your Way to Financial Freedom on Position Sizing. And then the real... exercise is to focus on perfect execution of that plan for somewhere between five and 20 trades. Now I personally build a habit very easily and many of you will say that's great but it also means that you can build a bad habit very easily.
So the one thing that I can say which which is positive that everybody in this room is 8 to 13 trades away from the trader you want to be. That's all. But very few people get there because they don't adhere to the one system until that neural pathway is built. So that's the process if you want to be...
successful folks sit down put together a fairly simple system adhere to one to two percent position sizing and then the real work starts of being able to follow that system through thick and thin and you're only about eight to thirteen trades away from being able to do that that's all thank you very much Any questions on that process? How am I for time, gentlemen? No, you still have 15 minutes.
I still have? 15. 15? Okay.
Any questions on that process? Yeah? So just one, when we're limiting trades to 1-2%, can you have more than one concurrently running?
Is that acceptable? You certainly can have more than one running. I would suggest in the stock market that you don't have any more than two from the one sector of the market.
Okay, and try and spread yourself across the market a little bit. I think that... Another thing which is quite useful is this probability matrix because These are the runs of bad trades that I talked about. There's a 50-50 system.
Now, if you're a pure trend follower with no fundamentals at all, just a pure trend follower, you're going to be right about 50% of the time. That's all. In fact, probably less.
And there is the run of... 4 bad trades in a row every 16. Now, by incorporating the fundamentals, folks, and pushing your head trade up so that you're right 2 times out of 3, that plus you only have to handle 4 every 81 trades. And if you can get to a point where you're right 80% of the time, you've only got to handle a cluster of 4 every 625 trades.
My advice to you is that when you're formulating your system, is that you do your best not to be trading all the time, but to be waiting to get three or four good trades in a month so that you eliminate the clusters. And you can do that, as these gentlemen say, by putting together the fundamentals and the technicals. I think that trading technically alone is very difficult indeed.
Not because you can't make an awful lot of money, but because these clusters are really difficult to handle emotionally. Okay? After you've been wrong five times in a row, how good do you think you're going to be at putting your trading system into practice without fear or hesitation? It's going to be difficult.
So by adding the technicals and the fundamentals together, you can certainly push your hit rate. rate up to this area where the clusters go away and largely that's going to mean that you trade less and for me as I say I want the share to be undervalued I want the share to be growing earnings and growing earnings strongly and safely That's rising and I don't like to buy into a share that's in fact under an 89 day moving average. Okay? And then I'm looking for a little pattern. Triangles are great.
Triangles are great, falling wedges are great, to finesse a good entry, and I want to be buying in when the general market is positive. That normally means that I like the general market to be above a 21 day moving average. Okay, then it's rising. And that's a very simple little edge that I've been using. for a very, very, very, very long time that gets my hit rate up to around this area.
I think that there's a book out there that you could be interested in, those of you that are new. It's a book by an old friend of mine. called William O'Neill, William James O'Neill.
It's called How to Make Money in Stocks. The book is 20, 25 years old. William O'Neill has got a history very similar to Vussi's here in that he started in the stock market as a junior in the New York stock market and he then started his own brokerage company and he's now got his own newspaper called Investors Business Daily.
You can buy it at any newsstand in the U.S. US. So I think that you would find that book very useful for formulating your age in markets.
It's called How to Make Money in Stocks by William James O'Neill. Willie John O'Neill. Like Phil O'Fallon.
He's about 90 now. So don't complicate it. Really good fundamentals and a trend. Lots and lots of people, in my view, the Alan Gray methodology of deep value is wonderful if you're you're Alan Gray and you're buying a massive amount of shares you've got no choice but to be buying in when the whole football stadium full of small people running away that generates the liquidity for you to get in but for most of us we can get in just by pressing the button okay so great fundamentals but the share must be going our way and then a simple one technical pattern such as the one some of the ones that Barry presented in that slide to try and get get you in at a good place so the market's going to go your way fairly quickly and I also want the general market to be positive indeed certainly for the last month it's not a time to be buying stocks when the general market is falling unless you want to short stocks it's not a time to be buying stocks when the general market is falling so try and get those good fundamentals a trend little pattern to finish your entry and then you want the general market to be going our way and the most important thing folks is don't risk don't lose any more than two percent of your kitty on any one trade that will keep you alive long enough to get good at this Focus on perfect execution of the system. If you focus on the process of trading, the cash will take care of itself.
You know, and think, you know that rich dentist that lives at the corner of your suburb? He's got an S500 and the wife's got a Porsche Cayenne, right? He's successful because he focuses on perfect execution of each and every red canal, each procedure.
If he focuses on perfect execution of each procedure, his waiting room... will be full and the cash will take care of itself. And similarly, your job folks is to have a plan and focus on the process of executing that plan over and over and over again.
focus on the process the LUT will take care of itself. The big and biggest hurdle that you have is to get over the first eight trades. If you can grit your teeth and stick to the process for eight treads, something mystical happens between your ears. I don't understand it, but you build that neural pathway.
And all of a sudden the discipline that you required is no longer required because that's just what you do. The same as I assure you that when I get back to Lone Hill this afternoon, the first thing I'm going to do is to dust off the soot and go back to the gym. I have no idea why. I hope that you enjoyed the talk, folks.
It's as close... I want everybody to be successful. I wish Finport all the very best of luck, and it's a great pleasure and honour to be here.
Thank you. APPLAUSE