Remember the LORD for it is he who gives you the ability to produce wealth and so confirms his covenant... Deut. 8:18

Monday, July 13, 2009

Making Money From the Market

John Henry is a professional futures and commodities trader. The son of a farmer, he started out trading corn and soybean contracts. He founded John W. Henry and Co. in 1982 to manage family money after his father died. He launched his flagship fund in 1984, named the Financial and Metals Portfolio. The fund gained 61% in the first two years. Then the crash of 1987 hit Wall Street. The stock market fell 23% in one day, but Henry's fund soared 252%.

By 1995, JWH was one of the largest asset-management firms in the world, with over $1 billion under management. By 2005, he controlled over $3.4 billion... In a recent Bloomberg magazine article, Henry states that he only makes money on 38%-40% of his trades. In other words, more than 60% of his trades lose money. Even though most of his trades are losers, Henry is still able to make a fortune from the market.

According to this article, John Henry's Financial and Metals Portfolio has returned 22% annually over the last 25 years... That's a better track record than Warren Buffett, the world's most famous investor. Buffett has returned 20% a year over the last 44 years.

Last year, while the S&P was plunging 38%, the Financial and Metals Portfolio rose 47%. There are two pillars to John Henry's trading style. First, he follows trends. He doesn't care about economic growth, budget deficits, or unemployment rates. When a stock rises, he buys it. When a stock is falling, he shorts it. It's as simple as that. As John Henry puts it, "We buy high and sell low."
Second, he lets his winners run and he cuts his losses quickly. This is why he has such a high percentage of losers. He takes many small losses. But when he finds a big trend, he rides it as far as he can.

Henry is proof that you can make millions in the market by taking lots of small losses... and holding onto huge winners that far exceed the little dings along the way. He's proof that "cut your losers and ride your winners" works day in and day out.

You can copy John Henry's trading style by looking for "breakouts." This is when a stock or commodity busts through to a new price level. It works in both up and down markets. Using breakouts to dictate your trading – even if you're paying attention to fundamental things like valuations and supply/demand – assures that you trade with the market, rather than against it (Daily Wealth's Tom Dyson).

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