Larry Hite built a $100 million dollar empire with a simple stock trading strategy. Here's his best advice for today's trader.
- Larry Hite, the wildly successful former hedge fund manager at Mint Investment Management Co., thinks that learning to deal with failure is one of the most important characteristics a trader can acquire.
- He attributes his success to being a staunch proponent of trend following, risk mitigation, and quickly getting over losses.
- In today's market, Hite has his sights set on Amazon's stock.
- Hite's new book is called "The Rule: How I Beat the Odds in the Markets and in Life - and How You Can Too."
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To say that Larry Hite is anything less than an investing legend would be a disservice.
Hite's firm - Mint Investment Management Co. - was the first hedge fund to ever hit $1 billion in assets under management. What's more, from 1981 to 1988 he was able to garner 30% average annual compounded returns. Today, his net worth sits around $100 million.
Still, Hite wasn't an overnight success. He had to overcome an array of disadvantages before becoming the renowned trader that he is today.
"I was left back. I had a learning disability when I was kid," he said in an interview with Business Insider. "I was never a very good student and I'm blind in one eye. I had a lot of problems."
From an early age, Hite began to get acquainted with failure. But he never let his problems or shortcomings discourage him. He said he'd use them as the fodder to come back even more tenaciously. He thinks that today's trader needs to employ a similar strategy. Fail fast and often, cut your losses, and move on quickly.
"You're going to fail," he said. "You're going to have to learn to deal without getting upset about those tough times; they're part of the game."
He added: "The way that we're taught - in law and myth - is that heroes win. Not necessarily true."
Hite was able to garner his fortune through the act of trend following - a stock trading strategy that advocates for a systematic, quantitative, hopping-on-the-bandwagon approach to buys/sells.
Trend following takes the emotion and guesswork out of stock picking, and employs a purchase or short sale when a stock crosses a certain moving average, support/resistance line, or chart pattern's threshold. No magic, just a disciplined approach.
Protecting the downside
Hite says his ability to navigate failure is a key pillar of his success. He knew that a lot of his trades were going to be duds. It's inevitable. However, he kept his losses small and let his winners run into the stratosphere. He knew exactly how much we was willing to lose, and capped his risk through the usage of stop losses.
"I'm prepared to lose money, before I lose," he said. "And I think about it - how I'm going each step of the way - and how much I'm willing to risk, how much I'm not willing to risk. And I never get in a position - after years of trading - where I'm going to lose more than I want."
Hite thinks that traders are not focused enough on protecting their downside. He uses a simple analogy - where he likens trading to a boxing match - to bolster his view.
"Part of boxing is punching people in the nose," he said. "Before you get in the ring you figure out how you're going to protect yourself, but you know that he's going to punch you in the nose."
He continued: "That's what he's there for."
The point that Hite is demonstrating here is that protection and loss mitigation are key in trading. Markets are going to punch you in the nose - and you have to be prepared to take that punch. You wouldn't walk in a boxing ring blindfolded and with your hands down - and you shouldn't execute a trade without strictly defining risk parameters and having an exit strategy.
Hite's professional trading days ended in 1994 when he retired from Mint. But that doesn't stop him from seeking new opportunities in today's market. Currently, he has his sights set on Amazon (AMZN).
"Amazon, I think long-term is a very good business," he said. "They keep adding new things to sell, the profits keep going up, so I like them."