Three Questions Every Investor and Trader Should Ask

By Justice Clark Litle

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Editor’s Note: So you’ve made your first big gain in the markets. Congratulations! Now what? TradeSmith’s Chief Research Officer, Justice Clark Litle, is here to answer that question. We think you’ll find his ideas useful in your own trading and investing. Keith will be back on Monday with more market insights.

There is a persistent myth that plagues financial markets. New investors are commonly prone to it — though experienced investors can fall prey to it as well.

The myth goes something like this: “If only I could make one big score, one big killing, I would be set.”

The belief behind the myth, assumed if not spoken, is that a single large windfall can make all the difference. This view is akin to seeing markets like a gold mine hunt, and believing that if you find just one gold mine, you are set for life.

Nope. It doesn’t actually work like that. Relative to what comes next, making a big score is actually the easy part.

Every investor who has made a big killing in the market should ask themselves three questions:

  • Can you keep the money?
  • Can you do it again?
  • Can you do it elsewhere?
These are hard questions to answer in the affirmative. That’s what makes them so important. If you can’t answer “yes” to all three, there is work to be done.

Let’s look at each question in turn.

Can You Keep the Money?

Old-hand traders have sayings like the following:

Keeping the money is harder than making it.

New traders don’t book profits — they rent them.

If you’re going to bet the farm, have two farms.

These sayings stick around because they contain real wisdom.

In a bull market, for example, it is often easier to make money — at least at first — than it is to keep it (hence another old saying, “don’t confuse genius with a bull market”).

It doesn’t take skill, discipline, or experience to make a killing in a bull market. It just takes conviction around an idea and a willingness to make a large bet.

If an investor has conviction in relation to an asset that can move in price by a good amount — like, say, Apple, Tesla, or Bitcoin, or a super-speculative crypto asset or high-flying tech name — and if the asset behaves the right way, the investor can find themselves sitting on a big pile of gains very quickly.

(And big, by the way, can sometimes mean very, very big. For example, TradeSmith Decoder’s highest-conviction stock pick for 2020 — which we pounded the table for, and recommended a hefty-sized position in — delivered more than 2,600% gains in less than a year.)

Here is the challenge, though (or one of the challenges): Having conviction doesn’t help you keep the money. If anything, it can be a problem, because an investor who becomes a “true believer” in whatever they are invested in can easily hang on too long and see all their profits evaporate.

It happens so often, experienced traders and investors just shake their heads and smile.

It is almost a rite of passage for new investors and traders to fritter away their gains, and to wind up flat or even down when the bull market cools off and the cycle turns.

That is because keeping the money requires a skill set that has to be learned and practiced. To hang on to profits, and to balance conviction with risk management, requires knowing how to manage a portfolio, how to position size and set risk points, when to walk away, and so on.

In some ways, Kenny Rogers said it all:

You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
Know when to run…

Knowing those things is a skill set. Keeping the money depends on it.

Can You Do it Again?

The second question, “can you do it again,” relates to having and deploying a repeatable process.

An investor who makes a big bet because they had a big idea out of the blue — on a stock, a cryptocurrency, a market hunch, or something of that nature — may find themselves adrift after their first big score, because they don’t know how to recreate the magic.

Every investor and trader needs some type of rule-based methodology — a repeatable process — that creates a framework for participating in markets and extracting value from opportunities.

There are many paths up the mountain, and all kinds of potential approaches, from mechanical trend following to long-term value investing to medium-term swing trading or even short-term options trading.

The key thing, though, is having that repeatable process so that gains can be targeted and extracted again and again.

If the extent of one’s method is having a hunch, or acting on a rare tip-off, or simply getting lucky, it might be better to leave the market entirely after making a big score — and to come back when a repeatable process is in place.

Can You Do it Elsewhere?

The question “can you do it elsewhere” relates to the fact that, over the course of a market cycle, the best opportunities will shift from one sector to another or even one asset class to another.

For instance, at a given point in time, the big opportunities might be in crypto or electric vehicle (EV) stocks. But then the character of markets might change, and crypto and EV stocks might go limp, with the opportunity migrating into energy stocks or precious metals or some such thing.

It’s also possible the entire stock market could reverse course from bullish to bearish, creating opportunities on the short side. Or stocks on the whole could flatline, with big opportunities manifesting in commodities or currencies instead.

The fact that opportunity migrates from one place to another is a problem for any investor with a narrow market approach — someone who is, say, only focused on crypto, or only focused on tech stocks.

If you want to have longevity in markets, and compound your capital over extended periods of time, you need the flexibility to follow the opportunities when they migrate, like a globetrotting surfer following the waves from beach to beach.

Saying Yes Requires a Full Tool Kit

To wrap up, let’s revisit the three questions again:

  • Can you keep the money?
  • Can you do it again?
  • Can you do it elsewhere?
If you can honestly answer “yes” to each question, congratulations. Chances are good your market approach is sound, or at least well on its way to becoming robust.

This is because each question addresses a different investing and trading skill set, and all three are required for long-term success.

  • “Keeping the money” is about risk management and navigating challenging market conditions.
  • “Doing it again” is about having a repeatable process that consistently targets opportunities.
  • “Doing it elsewhere” is about having the flexibility and breadth to move from one area of the market to another as conditions warrant.
If you can’t answer “yes” to all three questions, consider it a challenge — like an opportunity quest — to figure out how to change that. And if you are sitting on large gains acquired in a bull market, consider the quest urgent.

(You don’t want to be caught without skills when the bull market ends — as it inevitably will.)

In this quest to pass the three-question test, the process of filling in gaps you identify should ideally make you a better investor or trader (or both) and increase your odds of finishing with a mountainous pile of gains — the compound returns from many big scores, not just one — at the end of a long market journey.