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URL:  http://boards.fool.com/trading-speculating-investing-13818316.aspx

Subject:  Trading, Speculating & Investing Date:  12/1/2000  2:06 PM
Author:  TWA40 Number:  16580 of 64188

I just took part in an online trading challenge sponsored by the National Post and Eriksson:
http://www.investmentchallenge.com/traderschallenge-theindependentsplay/challenge_details.asp

The contest ran from 23 October until yesterday and I finished 11th out of about 5,800 entrants with a total return of 32.13% on an initial grubstake of $1 million. The winner had an unbelievable return of 79.5% in 38 days. I actually spent about 4 days in first place, but I sat on the sidelines for most of the last 2 weeks and got rolled over by the frontrunners. There were prizes for the top 15 finishers, and I won a RIM Blackberry pager, which I find very ironic given that I shorted RIM on 5 separate occasions and made $48,000 of my profit at RIM's expense (I also shorted it in real life during this period).

If you've followed my recent posts (and former posts as Semper and TWA38), you know I'm primarily a bearish value guy who tries to have a long-term perspective, so what the devil was I doing in a trading contest? Well, I was trying to practice some new tricks with a rigorous accountant to keep me in check.

For the record, my definition of investment, as borrowed from Ben Graham, is that which provides adequate return on capital and safety of principle (e.g. margin of safety). My definition of speculation is something that provides above average return on capital coupled with favorable odds. In other words, there's no guarantee that you won't lose money, but rational speculation occurs when the risk/reward spectrum is nevertheless tilted in your favor. Buying lottery tickets isn't speculation, it's gambling, because the odds are against you from the beginning. The time horizons can also be much different: investment = years to decades, speculation = weeks to months, trading = minutes to days.

A few things I learned:

1) You don't have to be right all the time to make money. I made money on 45 trades and I lost money on 30 trades, so I was only right 60% of the time. Admittedly, that's more than half, but it's a lot closer to coin-flipping than it is to perfection. You don't have to be right all the time provided you…

2) Cut your losses short. It's so easy to say, but so hard to do. It's certainly easier to take a small loss with virtual money, so in some respects this was good training. The contest didn't allow stop-loss orders, so I had to monitor positions a couple times a day and bail out if it was moving against me. In many cases, I bailed out at a loss only to have it turn around and move back my way, but you can't count on that happening. I only had 7 losses that exceeded $10,000 (1% of my original capital, or 5% of the maximum position size of $200,000), and in all cases these were situations that moved rapidly against me before I could take corrective action. With strict stop-loss orders in place, my major losses could have been reduced to 0. In contrast, I had 21 positions where I gained more than $10,000, bringing on the next rule…

3) Let your winners run. When you enter a profitable position, don't turn tail and run with piddly profits. Protect your profits with a stop-loss (or mental stop-loss in my case), and try to turn your profitable trades into killer trades. One of my problems during the competition was that I had to go on 4 separate cross-country business trips where I could