The Buy and Hold method bankrupted my father and nearly bankrupted me. So I created a methodology that anticipated market volatility rather than assuming stocks would always go up. In this article, you’ll learn the five principles of my Hit and Run Methodology.
How the Buy and Hold Strategy Ruined my Family
In the late 1950’s, my father could have been the poster child for the American Dream. He was 42 years old, had sold this textile business for millions, and was retired. In order to keep himself busy, he invested in the stock market.
After my dad invested all this cash, the brokerage firm introduced him to a new investment technique: margin.
Here's what they told him:
“You could buy twice the amount of companies by using the stocks in your portfolio as margin. You’ll make double the amount of money when stocks go up. Remember, stocks always go up if you hold them long enough.”
This made sense to my dad, and he went along with the strategy.
In May of 1962, my dad went bankrupt.
On the day my mother was being operated on for cancer, the brokerage who told my father that “stocks always go up if you hold them long enough” was mass liquidating his portfolio to meet margin calls.
My family's net worth was not only wiped out, but we owed the brokerage house money.
This was my first experience with the buy and hold strategy that has once again become so popular with Wall Street.
How the Buy and Hold Strategy Nearly Ruined Me
By the early 1980’s, I'd started and sold a small business and found myself gravitating toward Wall Street.
After a stint at Drexel Burnham, I went off on my own and attempted to replicate my dad's success. And lo and behold, by 1987 I had become a big picture Buy and Hold investor as well.
I was making great money until October 1987, when the Buy and Hold curse hit another member of the Cooper family.
Fortunately, I did not go bankrupt, but I did get hurt.
I learned the same bitter lesson my father had 20 years earlier.
So, I set out on a quest to create a methodology to beat the stock market. My fear of the markets forced me to hone my timing and stock picking with precision.
In markets, it takes fear to induce respect.
In markets, it takes fear to induce respect - @jeffcooperlive
In my experience, in this game only the humble survive. I learned you don't play “macho man” with the market, and to respect risk.
The Hit and Run Methodology
My breakthrough came in the early 1990’s after struggling after the 1987 crash. I was fortunate enough to meet someone who had amassed a fortune short-term trading, but he had no rules he could explain to me.
That was the beginning of my quest to create a rules based strategy, what I called “Hit and Run Methodology”.
It's based on the idea that risk has to be measured, not just by how much percentage lost you are willing to assume on a position, but by how much time they're exposed to risk.
It is designed around PE; not price to earnings, not price to earnings ratios, but pinpoint entries.
If you can time your entry to coincide with when the stock is going to pivot, it does a lot to instill emotional capital as well as financial capital, getting into the business.
I used to think the key to success was trend following.
However, Buy and Hold is just another way of saying “followed the trend”. Buy and Holders don't have a way to determine when the trend bends. So they continue to buy and hold.
If you're not in your twenties and are saving for retirement, this can be a disaster. Because history shows that sometimes it takes 25 years for the market to come back to old highs after a bear market.
It's not been the experience this century, when we've only had 2 to 3 year bear markets before the market came back to make new highs.
Are you Prepared for Market Volatility?
I believe the markets are returning to its normal state. That is a state of volatility.
If you have pinpoint entries and timing and adhere to the discipline of stops and have an uncle point for when you don't adhere to your stops, it's going to be your kind of market.
It's going to be a trader's market.
With a set of principles that treat speculation like a business rather than a fascination, every person can beat the market every year. That's what I'm here to tell you.
Most don't believe it.
Principles of the Hit and Run Method
Trading is the Art of Capitalizing on Mass Emotions
Fear is what holds every person back from realizing their true potential.
Fear of failure, fear of regret, embarrassment, the unknown, you name it.
In this three-dimensional chess game, you have to be thinking about the next several moves your opponent may make - not just the way the chess board looks right now.
As legendary trader, Bernard Baruch said, “Successful speculation is about anticipating the anticipatory.”
There's a great little movie called The Suicide Kings Starring Christopher Walken (one of my favorite actors). He plays a mafia Don who gets kidnapped by some stuff College students for ransom. Tied up, Christopher Walken says to them, “Gentlemen, the cards you are holding are merely dumb luck.”
Your success depends on your ability to read your opponent - that’s the market.
Successful traders are Fearful because they Respect the Game
The second part of my principle is “only the humble survive” in the markets because they have a healthy respect for the game. The humble know markets can turn on a dime.
You may need a healthy ego to suit up and go into battle in markets every day. But the trick of the trade is not letting your ego get in the way of making money.
To some, admitting they are wrong is more upsetting than losing money. They want validation, and their need to be right is greater than their need to make money until they inevitably blow up.
Do not look to the market for validation. It has no idea if you are winning or losing.
Do not look to the market for validation. It has no idea if you are winning or losing. - @jeffcooperlive
I always like to pat myself on the back when I take a loss because I adhered to my stop rather than waiting to see what might happen.
It's human nature to do this, but we have to follow a process and become like a winning machine.
I also always pat myself on the back when I get back into a stock after being stopped out, if the setup is revalidated. Because revalidating a setup is the most bullish thing a stock can do.
As I always like to say, the second mouse gets the cheese.
The More you Try to See, the Less You’ll See
The third principle is the most important: you've got to focus.
The more you try to see in this game, the less you see.
You've got to narrow your field of vision and focus to be successful at trading. There's just too much, too many stocks, too much noise, and too much to be overwhelmed by.
You have to have a watch list so you can glean stocks’ personalities throughout the day and watch their behavior day-over-day. They're saying something.
Trying to see too much and do too much is just a function of greed
Wait for the Right Pitch
Sometimes the hardest thing to do as a trader is nothing. But patience pays.
It pays to wait for the right pitch rather than swing at everything that moves. I know, I used to do that back in the eighties.
Get Strategies that Cover all Potential Trading Scenarios
Finally, you must have a quiver of strategies that map various contingencies and patterns.
My methodology has strategies to identify buying and selling climaxes, reversals, pullbacks, continuation setups and trend days, and breakouts over key levels.
In short, my methodology is designed to be opportunistic.
People will say to me, “if your methods are so good, why teach them?”
Honestly? Writing my books and teaching my strategies every day is the most selfish endeavor I've ever undertaken.
It has forced me to continue to learn. By analyzing setups every day, it has forced me to stay on my feet and keeps my feet to the fire. It keeps me sharp.
These are some of the strategies:
1 2, 3 Pull Back: Gets you in a strong stock when it’s on a breather.
The Holy Grail Buy Setup: helps you step in front of institutions before they buy a momentum stock.
Narrow Range 7 Day Buy: a strategy to help you profit from an expansion in range.
These are some of the continuation setups that we use every day.
Prepare for Market Volatility
There's been an extraordinary absence of volatility in the last seven years. Not coincidentally, since the Fed initiated its last round of monetary ease, called QE three.
This perpetuated a manufactured market, in my opinion, an abnormal market, a calm market, one where volatility was subdued.
But now the fed is on the march of QE or quantitative tightening.
Volatility is actually the normal state of the market.
We’ve gotten a taste of the market reverting to its normal self.
Opportunities on both sides of the market are going to increase along with volatility.
Historically, low interest rates that push market participants to search for a yield perpetuated the short volatility trade. Low interest rates also backstopped corporate buybacks, with corporations borrowing at next and nothing to buy back their stock.
This also underpinned the one-way volatility trade, and the one-way ETF Lazy River Trade, that we've seen for the last 70 years.
However, many market luminaries, such as Paul Tudor Jones, Ray Dalio, and Bill Gross bleed opportunity, and a reversion to this inherent, natural and normal installed historic volatility in the markets.
It's coming back.
Even if you believe the economy is on a growth trajectory, then excess corporate cash will go into capital expenditure and not buybacks, this will increase short-term opportunities on both sides of the market as volatility increases.
If you don't think the economy is going to remain strong and that a bear market may be on the table, then volatility is going to increase in a bear market also, offering greater opportunity on both sides of the market than we've seen in recent years.
This is because some of the sharpest rallies actually occur within bear markets.
My methodology is based on pattern analysis, largely.
If you want to make money, trade patterns and price.
If you want to make money, trade patterns and price - @jeffcooperlive
The quickest way to lose money is to listen to opinions.
Speculation is observation, pure, and experiential. Thinking isn't really necessary, and often just gets in the way.
My methodology can help you avoid the fate of my father and I. It allows you to avoid the disastrous situations associated with Buy and Hold and will give you a set of tools to use to profit from the stock market for the rest of your life.