Welcome to Trading With Larry Benedict

If this is your first time reading Trading With Larry Benedict, thanks for joining us. You can catch up on all previous issues right here.

During this two-month series, you’ll hear from one of the world’s very best traders and hedge fund managers… Larry Benedict. He’ll detail everything from the trading methodology that’s made him a fortune over the years, to stories from the trading pit that you won’t hear anywhere else.

Any questions or feedback? Shoot us a note anytime at [email protected].

Daina’s note: Building up a strong, substantial base of capital is step one for becoming a successful trader. That was Larry’s message on Monday, when he outlined what it means to “earn your risk” as a trader. 

Larry also left readers wondering about his biggest fear during the 2008 financial crisis. As he put it on Monday, “It had nothing to do with trading…”

Below, Larry talks about his fears surrounding the ‘08 crisis… and how traders can actually use fear to their advantage…

Daina Schnese: Just to catch everyone up to speed… we left off our last conversation talking about your $108 million position in Bank of America. You locked in roughly a $3-$5 million profit, on the back of the 2008 financial crisis. And, you made it clear your fear had nothing to do with the trade itself. What was it that you were fearful of?

Larry Benedict: I was managing a hedge fund at the time. And our biggest fear in 2008-09 wasn’t about trading… it was about our money. Meaning, we just didn’t know where we were going to put it. 

We were literally moving money all around, trying to find a safe place where we wouldn’t lose all our capital. At the time, our prime broker was Goldman Sachs, and thankfully, it demutualized and became a bank. That means it was no longer solely an investment bank, but a commercial bank as well.

So we were actually secure there because our money was then covered by the FDIC [Federal Deposit Insurance Corporation] if the company folded. But had that not happened, our money wouldn’t have been covered nor secure. I’m not sure what we would have done, since a lot of people had issues losing all of their money. We sure got lucky.

But I didn’t fear trading because you can be a successful trader in any environment, if you know what you’re doing and you’re good at it. I knew how to play Bank of America. So, while it was a large position size… I wasn’t fearful. Not even of a financial crisis. From a “trading as a business” standpoint, it was just another day and just another trade. 

Daina: When people talk about the psychology of trading, fear and greed tend to come up. How would you say fear impacts trading?

Larry: Fear and greed are looked at as taboo in the trading world. That’s because, at the end of the day, trading is a business. You’re looking to hit a certain number, and to put a profit on the page. And fear and greed really don’t matter if you’re constantly improving your profits.

But, I’ve always traded with a little bit of a level of fear. And everyone will have some fear when trading. 

Daina: What are you fearful of when you trade? 

Larry: Well, I’m fearful that a position is going to go against me! Or that something bad is going to happen. But, I don’t let that level of fear impact me. People always ask me if I get stressed out when adding more positions. And I really don’t. I’ve always been able to sleep at night. 

It’s really because I knew that if I couldn’t sleep at night, because I was thinking that much about a “bad” position I may have put money towards, there was something wrong. So, you can channel that fear and use it for your benefit. It becomes almost like a sixth sense. 

But, you have to learn it. Just like a trader has to earn their risk through experience, they’ll also earn a trader’s intuition through experience. 

Daina: How can a new trader find their intuition?

Larry: Trading is like any skill… It takes time. I started paying attention to when I felt bad about a position, and for the most part, if I was stressing over a position, that position would end up being a loser. 

The more you trade, and the better you become at what you do, the more fine-tuned your trader’s intuition will become. You will begin to be able to trust that your gut is telling you “hey, maybe I should get out of this trade”… or “maybe I shouldn’t even enter that trade.” 

It’s okay to be fearful that something might go wrong, but you have to put on positions on that you feel comfortable with. If you have massive fear, that’s a giveaway that your position size is too big. You shouldn’t be fearful if you’re putting positions on that are conducive to the size of the account you have and what you’re reasonably looking to make on a trade. 

If you’re aware of how much money you will lose if the trade goes south, and you’re okay losing that, then you’re fine. My stress comes from always wanting to win. Of course, you don’t want to lose your money, but you will have some losers when you trade. 

Now, on the other hand, greed might become a factor that you have to reconcile. 

Daina: How does greed impact trading? 

Larry: One thing about this business is you will know in your heart of hearts whether your position is good or bad. Like I said, that’s your intuition that you gain through trading experience. It’s that sixth sense you develop over your career. Greed is really just the act of holding on to losers. 

For example, I’ll often call up friends and tell them I know a certain position doesn’t feel right, or they’ll call me and say the same thing to me. Greed is when you have that “this doesn’t feel right” feeling, and you stay in the position anyways. 

It really comes down to not letting go of losing trades because everyone wants that grandslam trade. That’s the second pitfall new traders fall into… they think they can get rich quick by going for the home run trade every time, instead of slowly building capital until they’ve earned their risk.

Daina: It sounds like learning to become a successful trader takes more time than most are willing to give. But, let’s come back to the second pitfall new traders fall into next time we sit down. Thanks Larry. 

Larry: Sounds great, talk to you soon. 

Daina’s note: During our next interview, Larry will give a more in-depth look into the second pitfall new traders fall into: swinging for the fences on every trade.

Plus, he’ll provide a special, timely outlook on the market you won’t want to miss. So, keep an eye on your inbox Monday morning for your next Trading With Larry Benedict issue.

About Larry Benedict…

Larry is a former hedge fund manager with over 30 years of investing experience. He’s also known as one of the world’s best traders… and for good reason.

From 1990 to 2010 – when he was actively running hedge funds – Larry never had a single losing year.

Larry’s market commentary is frequently featured in Bloomberg, Barron’s, and The Wall Street Journal, among other major news outlets.

That’s why we’re publishing this limited-edition interview series over the next couple months. When we saw what Larry could offer to everyday investors, we knew we had to share everything we could with you.

If you have any comments, questions, or suggestions about this free e-letter, please drop us a line at [email protected].

And if this interview series isn’t for you, simply click this link to opt out now.