The Van Tharp Institute

October 25, 2006 — Issue #294

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In this Issue:

Feature Article

Resistance to Issues, by Van Tharp

Workshops

$700 Discount Expires TODAY  on Peak Performance 101 Workshop

Trading Tip

Value Investing with Steve Sjuggerud, by D. R. Barton, Jr.

Trading Education

Peak Performance Trading

Listening In...

The Myth of Stock Selection, from SmartTraderBlog.com

View this newsletter on-line, or read back issues

Feature

Resistance to Issues

By Van K. Tharp, Ph.D.

When Jack Schwager visited Ed Seykota to interview him for his book Market Wizards, Jack found that he was the person being interviewed, not Ed.  Jack would start to say things and Ed would indicate how the assumptions behind Jack’s questions revealed his psychological issues.  As a result, Jack returned to New York with no interview.  Instead, he mailed a set of questions to Ed to answer. Again, Ed turned the questions around into Jack’s issues.  However, once they’d done this process about five times, the result was one of the best interviews in Market Wizards.

Ed’s approach is full of danger as a teaching tool.  Socrates, who was well known for turning questions back on people, which is called the Socratic method of teaching, was poisoned.  And Socrates didn’t usually enter into the most dangerous of areas—asking questions about the psychological assumptions behind what people do.  Most people don’t want to know their issues.  Indeed, they interpret anything designed to get you to look inward as a real threat.

Let me give you an example.

How do I develop a system in which I can be right at least 60% of the time?

Van:  You seem to have a fascination with being right?

What do you mean?  I just asked a reasonable question can’t you answer it.

Van:  What if you could make money being right 40% of the time?  Would that be acceptable?

You’re not answering my question.  I want to know how to develop a system that’s designed to be right 60% of the time.  But I will answer the last question—no I want to be right 60% of the time or better.

Van:  I was looking at the assumption under your question.  You seem to have a strong need to be right.  You’d probably be a much better trader if you didn’t have that need.  What would happen if you were wrong?  How would you feel if you were wrong?

How can I learn anything?  Why are you asking all of these silly questions?  I’m not interested in being wrong, I’m interested in being right.  Understood?  You want to turn everything into a psychological issue.  Not everything is psychological.  It’s really hard to learn anything from you when you are always throwing out all of this psychological stuff.  Can’t you just answer a simple question?

That’s an example of resistance to the issue.  Neither of us gets anywhere.  But what if the conversation went a little differently?

How do I develop a system in which I can be right at least 60% of the time?

Van:  You seem to have a fascination with being right?

Well, I do like to be right, naturally, doesn’t everybody?

Van: Why do you want to be right?

Well, I’ve always worked to do a good job, to get good grades, and be successful.  To accomplish that, you have to be right.

Van:  Do you?  What if you could be right 20% of the time and make huge profits – just because you cut your losses short and let your profits run?  If you had eight 1R losses and two 10 R wins, you’d only be right 20% of the time, but you’d be ahead by 12R…that’s pretty good.

I never thought about it that way.

Van: So what if you just accepted losses when you got them, allowing them to be small losses and let your profits run when you have a good trade?  Don’t you think that might be a good idea?  And you’ll have trouble doing that if you want to be right all the time. For example, if you had nine 1-R gains and one 10R loss, you’d be right 90% of the time and still lose money.

Again, I never thought about it that way.

Van:  So why don’t you just play around with the idea that you can be wrong and still be successful.  Being right or wrong is a meaningless invention of your mind.  Instead, what if you just developed a good system and practiced following it?  A loss has nothing to do with being wrong.  Instead, a loss has everything to do with following your system and not making a mistake.  Doesn’t that put losses in a different framework?

When you start looking at yourself, you’ll find that there are lots of things that come up for you.  You’ll start noticing the patterns that you repeat over and over again.  And that’s one of the most valuable lessons you could ever learn.

So, let me ask you a simple question: How do you respond when someone turns what you say into a question about your psychological assumptions?

More Examples:

Q: What do you consider good performance in a system? How does my system compare?

Response: Why haven’t you set objectives? Do you have a need to be the best?

Q: I am considering purchasing a system. Does anyone have a recommendation for one that works that allows you to see code?

Response: What you really mean is that you don’t feel comfortable developing your own system. Why not?

Q: Here’s my strategy. What do you think of it?

Response: You appear to need other people’s approval to determine if your strategy is any good. Why? How about testing it to see if meets your objectives?

About Van Tharp: Trading coach, and author Dr. Van K. Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com.

Workshop

$700 Discount on Peak Performance 101 Expires TODAY

Seven money-making benefits  
Awaiting you at the Upcoming Peak Performance 101 Workshop.

November 3-5, Raleigh, NC

1. Learn the three ingredients of success. You’ll thoroughly understand how these three key ingredients can control your life. Most of all, you’ll know how you can control them.

2. Understand the components of a low-risk idea. You must understand what makes up a low-risk idea. It’s not what you think.

3. Understanding why position sizing is so critical to your bottom line results!  Think how calm you could be, knowing that your risk is always the same.

4. Learn 15 ways to develop rock-solid discipline in your trading. Real winners maintain discipline that allows them to charge ahead of others in the field. 

5. Learn Dr. Tharp’s Ten-Task model for successful trading and investing.  You’ll have tools at your disposal that the average investor or trader never even thought about.

6. Learn how to act quickly with sureness and confidence. You’ll learn how to develop the kind of confidence only the best traders and investors have.

7. Learn how to develop a plan for trading that will set you way above the crowd. Gain an edge over amateur investors. Dr. Tharp understands these disciplines. He is an expert at coaching others to use them.

Learn More About Van Tharp's Core Workshop

 

Trading Tip 

A Review of Market Models:
Value Investing with Steve Sjuggerud

by

D.R. Barton

Today, we’re continuing our look at the diverse world of value investing. I write this article with a smile on my face,  because the article is on one of the modern-day heroes of value investing – my friend, colleague and co-author, Dr. Steve Sjuggerud.

Steve writes (among many other things) one of the world’s biggest and best investing newsletter called True Wealth.  This newsletter stands out for many reasons, but first and foremost, it performs.  In the new edition of Trade Your Way to Financial Freedom (due in bookstores January 2007), Van evaluates the performance of many different newsletters and re-confirms what many people already know – that True Wealth just keeps turning out great picks.

One of the things that I love is that Steve’s methodology is so consistent.  He repeats the three tenets of every pick for anyone who will listen.  For Steve to recommend an investment, it has to pass these three tests:  It’s a great value. It’s in a hated (out of favor) asset class. It’s on its way up.  Let’s look at these ideas and how Steve applies them.

It’s a great value.  We’ve talked in our previous two value investing articles about the different ways to evaluate companies.  While Steve looks at all the classic fundamental criteria for evaluating companies, he has what seems like a sixth sense for uncovering little- known or thought of twists on what makes companies or investments valuable.  He’s sniffed out timber companies whose land value is worth much more than the timber being grown on it.  He found extra value in collector-quality gold coins long before the gold market started to heat up.  And he keeps on finding value in places where few look.

It’s in a hated (out of favor) asset class.  I always like to hear Steve describe sectors that have earned investor scorn.  I remember Steve’s gold investments and how he adamantly pounded the table about gold when a cannon could go off at a gold trade show and not hit anyone.  He’s also had a great nose for geographic regions that were out of favor including Israel, and South America.  His contrarian views have allowed him to pick up investments at severe discounts – and ride them for huge wins.

It’s on its way up.  Here’s one of the things that sets Steve apart.  Waiting for out-of-favor investments to show signs of improvement before jumping in makes Steve a value investor with an entry signal – and makes him a rare beast in the value investing world.  Too many value investors wind up trying to “catch a falling knife” on the way down by buying just on value.  Steve’s plan helps him avoid buying too soon, and this confirmation mechanism is one of his big “secret weapons.”

True Wealth is certainly one of the best values in the investing world (subscriptions are way south of $100 per year).  You can be sure that I read every issue cover-to-cover.  If you have any interest in value investing, I can easily recommend Steve Sjuggerud’s True Wealth as THE best place to start.  Click here to learn more about True Wealth.

Great Trading!

D. R. Barton, Jr. is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching, and teaching in the markets since 1986.  D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-edom and co-creator and contributing author on Fin-ancial Fre-edom Through  Electronic Day Trading.

D.R. presents the IITM Swing Trading Workshop and Professional Tactics for Day Traders Workshop. Each workshop is only held once each year. 

Trading Education

Van Tharp's Peak Performance Home Study Course

The Ultimate Home Study Course for Traders. 
  • How to Use Risk 
  • How to Control Stress 
  • How to Control Losing Attitudes 
  • How to Develop Discipline 
  • How to Make Sound Decisions

Contains the five books listed above, and four CDs. 

More Info...

“Your course is the most powerful material I have ever come across on trading. It is challenging and therapeutic for those who want to be better traders and less neurotic in their personalities.” —J.M. 

“A few months ago I purchased your ‘Peak Performance Course.’ I can honestly say it’s the best investment I have ever made towards my career and aspiration to trade my own money from home.” —E. M. 

 

Listening in...  

www.smarttraderblog.com


The Myth of Stock Selection
Since most people believe that stock selection is the key to making money, I'd like to share with you the source of that myth.

1) Mutual funds are by charter supposed to be fully invested. Furthermore, their job is NOT to make money but to outperform the market (which most of them cannot do).

2) If you must be fully invested, then you cannot really practice position sizing or proper risk control. And even asset allocation (which is really position sizing) seems like finding the right assets.

3) Mutual funds, by the way, don't get paid for performance, they get paid by the amount of assets they manage...they get paid if they keep your money.

4) When the market goes up, most funds make money and most people are happy to be a little richer...and the fund managers go on CNBC and talk about which stocks they like.

5) When the markets go down, most funds lose money. The funds that make money do so by stock selection. And what they do is find stocks that are selling for less than their assets are worth if they were liquidated. 

6) And when we have mutual fund crises (like the one recently when funds were selling to mutual funds when the public couldn't buy), it was all blamed on market timing. 

7) What most people don't understand is that the best traders get out of mutual funds and become hedge fund managers where they can really trade. And very little of what they do has to do with stock selection. It has to do with cutting losses short, letting profits run, and proper position sizing. 

So much for our little myth.

Welcome to the world of how money is really made in the market. 


Also join in the discussions on our

Trading Forum,  
a place for traders and investors to share ideas and learn from each other
. 

 

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Copyright 2006 the International Institute of Trading Mastery, Inc.

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Quote:

"What you resist, persists!"

~Unknown

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Free Trading Simulation Game

A computerized version of Van's famous "marble game." 

It is designed to teach you the important principles of proper position sizing. 

Download the 1st three levels of the game for free. Register now. 

 

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Tharp Concepts 
Explained...

Psychology of Trading 

System Development 

Risk and R-Multiples 

Money Management / Position Sizing 

Expectancy 

Business Planning 

Learn the concepts...

 

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Workshop Schedule

Oct 27-29

Raleigh NC

Mutual Funds & ETFs
Nov 3-5

Raleigh NC

Peak 101
Dec 1-3

Phoenix, AZ

Swing Trading

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