Win By Not Losing: A Disciplined Approach to Building and Protecting Your Wealth in the Stock Market by Managing Your Risk (PROFESSIONAL FINANCE & INVESTM) - Hardcover

ATKESON

Hardcover

ISBN 10: 0071812903 ISBN 13: 9780071812900

Publisher: McGraw Hill, 2013

Synopsis

A DISCIPLINED STRATEGY FOR AVOIDING MAJOR DOWN MARKETS AND PARTICIPATING IN BULLISH MARKETS

Your financial advisor's strategy to buy-and-hold a diversified equity portfolio sounded good. Diversification promised to protect your wealth. Now, however, more than a decade of hard data shows it didn't work. And, more than likely after a decade of multiple financial shocks and crashes, your account balance is not what you hoped it would be when you started saving years ago. Much of your investment life has been spent just trying to make back what was lost.

Win By Not Losing reveals how you can make smarter, more profi table investments by first protecting your capital from major bear equity markets. It also shows you how to identify major bullish equity market trends and guides you on how best to participate. By avoiding the major downs and catching the ups, your portfolio compounds gains and allows you to achieve your financial goals.Chasing returns leads to the poorhouse.

With this book's disciplined system for knowing when to buy, what to buy, and when to sell, you can build and protect your portfolio through active management techniques. It walks you step-by-step through growing yourportfolio in bull and bear market cycles. You will master a concrete investing method that lets you trade with emotionless confidence and precision. Packed with links to online resources and personal tips from successful,high-profile traders, Win By Not Losing gives you everything you need to:

• Identify the market metrics that are important to building wealth
• Detect and measure the market signals foreshadowing major moves
• Build a portfolio with strong downside protection, full transparency, immediate liquidity, low fees, and incredible risk-adjusted returns

Your portfolio returns will continue to be disappointing unless you act. It's time to make up for lost profits by taking an active, professional, and nonemotional portfolio management approach to avoid majorlosses and capture gains. Win By Not Losing provides everything you need to build wealth in today's stock market.

Stop watching your money rise and fall without signifi cant net gain with a "buy-and-hold" strategy and optimize your positions as market sentiment changes. In anonappreciating market, investors must actively manage equities to acquire gains. Win By Not Losing presents an active approach that uses rigorous risk-management techniques to preserve your wealth and generate high returns in all equity market environments.

Prominent authors and lecturers Nick Atkeson and Andrew Houghton have culled the best of their work to help you revitalize your trading habits, protect your capital, and beat the market. Through real-world stories demonstrating fi nancial theory in action and how-to instructions for executing their strategic investment approach, these expert authors enable you to:

• Achieve sizable returns through an investment strategyequally focused on when to invest and when to sell
• Avoid major down markets and fully benefit from major up markets
• Access unique financial information to help you staycurrent, think ahead, and build and protect your wealth

Whether you're an independent investor or a professional financial advisor, this refreshing look at investing will change the way you see the markets. Forget what you know about modern portfolio theory and trade to make money in today's markets with Win By Not Losing.

"Anyone with some experience in the stock market, especially the person who wants to move beyond a buy and hold strategy, can find useful tidbits in this book.”
ReadingTheMarkets.com

About this title

About the Author

NICK ATKESON and ANDREW HOUGHTON are founding partners of Delta Investment Management, a registered investment advisory firm based in San Francisco. Delta Investment Management is a provider of premier tactical investment strategies to individuals and institutions. Atkeson and Houghton are also editors and advisors for several financial newsletter publications.

Excerpt. © Reprinted by permission. All rights reserved.

Win By Not Losing

A Disciplined Approach to Building and Protecting Your Wealth in the Stock Market by Managing Your Risk

By NICHOLAS ATKESON, ANDREW HOUGHTON

McGraw-Hill Education

Copyright © 2014 Nicholas Atkeson and Andrew Houghton
All rights reserved.

ISBN: 978-0-07-181290-0

Contents

Foreword by Charles Githler
Our Offer to You
Introduction
Authors' Note
Part One: Streaks and Investing
CHAPTER ONE The Story of Sonny
CHAPTER TWO The Nature of Streaks
CHAPTER THREE Why Should We Invest?
CHAPTER FOUR The Story of Mr. M
CHAPTER FIVE Building Blocks
CHAPTER SIX The Story of Modern Finance Theory
CHAPTER SEVEN The Story of Mike
CHAPTER EIGHT Style
CHAPTER NINE Your Brain on Stocks
CHAPTER TEN Observations from the Trading Floor of an Investment Bank
CHAPTER ELEVEN Risk
CHAPTER TWELVE A History of Mutual Funds and the Story of Jeffrey Vinik
CHAPTER THIRTEEN Paradigm Shift
CHAPTER FOURTEEN The Story of Neil Peplinski and Good Harbor
CHAPTER FIFTEEN What Is Tactical Investing?
CHAPTER SIXTEEN The Story of Vinay Munikoti
Part Two: Applying a Tactical Trading Discipline to Profit from Investable 
Equity Market Trends
CHAPTER SEVENTEEN Capturing the Ups and Missing the Downs: Five Steps
CHAPTER EIGHTEEN Do Enough to Make a Difference
CHAPTER NINETEEN Knowing If It Works: Attribution Analysis
CHAPTER TWENTY Seeing the Forest for the Fees
CHAPTER TWENTY-ONE Parting Shot
Sources
Index

CHAPTER 1

The Story of Sonny

Some stories start with "I know a guy who knows a guy who knows a guy." In thiscase, we actually do know the guy. Not only do we know him, we sat next to himon a trading desk for years. The guy is named Sonny.

We start our story with Sonny because he rode one of the hottest of hot streaksthat we are aware of. It was not like amassing a fortune on a single major idealike Bill Gates starting Microsoft or Mark Zuckerberg founding Facebook; it wasa streak involving an amazing series of wins. It was a streak based oninvestment discipline in a part of the world in which the odds and expectationssay you can't win.

Sonny was born in the city of San Francisco. He lived near Golden Gate Park. Thepark taught Sonny how to know a streak when he saw one and how to make the mostof it.

In his early teens, Sonny spent a lot of time in the park. The park had 22tennis courts and attracted many world-class tennis players. Guys would comefrom all over the world to play tennis there. Sonny spent a lot of time on thosecourts on his way to becoming a world-ranked tennis player.

Sonny was a self-made player. He honed his technical tennis skills by watchingothers play. Sonny's specialty was street ball; he could hook with the best ofthem. He played the mind game and never backed down when challenged. He was alsophysically gifted in a way that suited the demands of tennis well.

Within sight of the tennis courts were the old guys playing backgammon. Like thecourts, the park attracted many outstanding backgammon players. Thus, in onespot, you had many of the world's best tennis and backgammon players. As a 13-year-old,Sonny could not resist the temptation to wander from the courts andinto the world of backgammon. He would play backgammon for hours and hoursagainst the older guys. At any one time, there would be six games going at once.Players would pair off according to ability and move up and down the line ofboards on the basis of their winnings. Gambling was always part of the game andsharpened Sonny's concentration.

As good a tennis player as Sonny was, he became an even better backgammonplayer. Like all the best players, he knew exactly what to do on every singleroll of the dice. Six hours a day of backgammon on the weekends and in thesummers can do that to a person. The odds favored Sonny against anyone who didnot understand the underlying probabilities and subtleties of the gameperfectly. Sonny was a street-smart kid who was a natural when it came tointuitively understanding odds and risk management. Sonny's combination of amathematical brain, street savvy, and not flinching or backing down whenchallenged emerged as a powerful combination of skills that served him well inlarger venues such as Wall Street and Las Vegas.

Sonny began betting before investing. In sports, there was always gambling withSonny. Betting on sports migrated into the more disciplined betting associatedwith world-class backgammon. Backgammon was interrupted by occasional trips toReno and Tahoe. Everyone Sonny knew gambled. Although it might seem like a lotof money to most, Sonny felt he started small with an average bet at theblackjack table of about $500 to $1,000 per hand.

On one of Sonny's first trips to Las Vegas, he won 20 blackjack hands in a row.His average bet was $1,000. His winnings reached $20,000. He stopped. Sonny knewthe odds were stacked against him in the casino. Without emotion, he understoodthat one of his few protections was to just stop playing. Rather than lettingthe excitement and emotions of a big win overwhelm his thinking, Sonny remainedcool and firmly grounded in probabilistic math. Whereas most first-time Vegaswinners give it all back by feeling good and getting careless, Sonny just walkedaway. His early years playing some of the best in backgammon, often withmeaningful bets at stake, prepared him for seeing this streak as just anotherday at the office.

Sonny came to Wall Street during the time of Michael Milken's fall from graceand the junk bond market collapse in the late 1980s. Government-backed bonds,including municipal bonds, were selling for pennies on the dollar. Sonny's firmwould put a sizable markup on the bonds and sell them to individual investors.Whereas Sonny's profit from the markup was significant, his client base made outlike bandits as almost all the distressed bonds purchased ended up paying out at100 cents on the dollar.

Two years later, Sonny was sitting on the trading desk of one of the fastest-growinginvestment banks in the world, selling growth stocks to investors duringone of the greatest boom cycles ever experienced in the financial markets. Hisclients loved him for his tenacity in protecting their interests on tradeexecutions and deal allocations. From a base of $40,000 per year, Sonny was soontaking home seven figures and enjoying a hot streak of epic proportions.

While the stock market raged, Sonny found time to continue his regular trips toLas Vegas. His average hand had grown from roughly $1,000 to $50,000. Yellowchips ($1,000) were being replaced with brown ($5,000), orange ($25,000), andwhite chips ($100,000). With one, two, or three hands of blackjack goingsimultaneously, Sonny would play an average of 400 hands per hour, seven timesthe amount of most Vegas gamblers. At $50,000 per hand and 400 hands per hour,Sonny was moving roughly $20 million an hour.

With splits and doubles, Sonny would have as much as $300,000 out on the tableon a single hand. Having been tempered by years of making calculated bets, Sonnydid not flinch or change his discipline when the stakes became stratospheric. Nomatter how high the stakes went, Sonny kept his emotions out of the equation.

Casinos would spend as much as $200,000 to have Sonny visit. Private jets,including Boeing 727s with gold-plated everything, were sent to bring Sonny tothe casino with a group of his friends. Sonny's hotel room would often be 10,000square feet with a private pool and golf area, about five times larger than theaverage American detached home. A few hours with Sonny at the poolside cabanacould cost the casino $15,000.

One evening, while visiting Sonny in a Vegas casino that subsequently shut downits "whale" gambling group because of him, we asked Sonny if he could think ofanything the casino would not provide him if he asked. After carefulconsideration, Sonny said no. Private jet flights to Paris, three personalassistants, any amount of extravagant gifts, and so on, made it clear that thecasinos meant business.

In 2001, Super Bowl XXXV was held in Tampa, Florida. A casino called Sonny andsaid it would send Hall of Fame quarterbacks John Elway and Jim Kelly out to hishouse to pick him up in a limo and escort him to the game in a private jet.Sonny's tickets were in the same section as the players' families, and he wouldbe brought to the game from his hotel with a police escort surrounding his limo.Sonny told the casino to send the jet but said he would replace the quarterbackswith eight of his friends and he wanted to stop in New Orleans on the way out.

In New Orleans, Sonny was the show. The casino was not used to dealing with$50,000 hands and had only $100 chips readily available. The dealer was sonervous that he could not stop shaking and sweating. As usual, Sonny was movingfast, and the dealer was really struggling with the math of managing so manychips. On one hand, the dealer made a $60,000 payout mistake in Sonny's favor.Sonny ended up winning $260,000. He then placed bets on the Super Bowl coin tossand winner for good measure. Needless to say, Sonny won the flip and the Ravenspaid out nicely.

Although the gifts and privileges extended to Sonny may seem extravagant, theyare part of a calculated bet. Casinos have what is known as a "theoretical," or"Theo," that they apply to their high-roller customers. It is the theoreticalwin percentage formula the casino uses to calculate what its win percentageshould be over time. Essentially, the Theo is a calculation of the expectedprofits to the casino by multiplying the player's time played by the dollaramount played by the winning percentage. Every hand played by Sonny is trackedby the casino. They could tell him exactly what cards were played and how he betthrough his entire history with the casino. Solely on the basis of the numbers,Sonny looked like a good customer.

Although a casino has the underlying odds of blackjack on its side, it attemptsto tilt the game further in its favor by bringing emotions to the forefront.Players who fly in private jets, stay in big hotel rooms, and are treated likeroyalty often become addicted to the lifestyle. They can't stop because theywant the gratification of the special attention. Time is working against them.They are no longer the disciplined gamblers they once were but addicts to thehigh life. These players also can feel indebted in a subtle way to the casino.Losing becomes not a loss but just an indirect way of paying for the lifestyle.Casinos will do all they can to make gamblers feel bad about losing. Theemotional reaction can make gamblers not want to walk away until they arewinners again. Once again, the casino has extended the time of play and theprobability of capturing its Theo.

Sonny never forgot who he was and where he came from. Before going to Las Vegas,he would spend up to two days making sure that the game was arranged inaccordance with his rules. Sonny does not gamble unless the game meets hisrules. Big-time gamblers negotiate a "discount" on lost dollars. In this case,Sonny would not play the game unless the discount was set at a minimum of atleast 25 percent. In other words, if Sonny lost $100,000, the real loss wasreduced by 25 percent to $75,000. Sonny would play on the "rim." A rim isessentially a line of credit. The difference between playing on the rim andtaking a mark is that rim credit does not slow the speed of play. When Sonnyhits a streak, the first thing the casino wants to do is slow the speed of oreven stop play. On the rim, this is not possible.

The other aspect of playing on the rim is that it makes the credit drawdownhighly visible. Two pit bosses stand behind the dealer and make sure that theaccounting of the credit line that is shown on the table is kept current. ForSonny, this forces a certain discipline by which he never confuses the moneystack as his until the rim is paid off. In any event, Sonny sets his loss limitswell before the game begins. He walks away when his preordained loss limit isreached without exception.

In addition to setting the discount and establishing the rim, Sonny would oftenrequire that the casino provide him with two dedicated tables. At this level ofblackjack, no other gamblers are at Sonny's tables and usually no other gamblersare in the room. It is somewhat akin to an old-style western gunfight in whichthe street is cleared and the two gunfighters square off at 20 paces. In thiscase, the stage is cleared for the casino and Sonny to go at it one on one. Whenwe watched this first hand, our palms were sweaty and it was mind-blowing howfast the money and chips were moving. His ability to stay disciplined andnonemotional seemed almost inhuman.

The lengthy preparation did not affect Sonny's playing discipline and hisability to quit the game when he was ahead. During one visit, he played foreight minutes and walked away with roughly three times the annual income of theaverage annual American household. The casino spent the money to bring Sonny andhis entourage to Vegas, prepare the gaming room in accordance with Sonny'srequirements, pay the staff, and take care of Sonny for the remainder of theweekend. Sonny's group arrived in Vegas fresh with excitement for the big game.With eight minutes of elapsed time from start to end, the crowd clearly felt letdown. None of this affected Sonny's discipline. He achieved his win target andquit on the win. Done. Eight minutes. Money in the bank.

When the casino later attempted to have Sonny pay for some of the expenses ofhis trip, including the $15,000 poolside cabana bill, he flatly refused. Sonnyand the casino both understood the Theo and both knew that Sonny's primarysafety mechanism was to stop playing. Sonny never lost sight of the math behindthe game.

Sonny has won millions in Vegas over two decades. He has been one of the largestsuccessful gamblers in the world. On one trip, Sonny tipped his casino host ahouse. Only two casinos have any current interest in having Sonny play. The onlyreason those casinos invite Sonny back is that there is high management turnoverin these publicly traded companies and every new manager makes the same mistakeof looking at Sonny's Theo and thinking this will be the time that he gives itback.

Sonny's secret is streaks and discipline. He plays high-velocity blackjackbecause the streaks occur at a higher frequency than they do in games such aspoker and craps. Sonny would prefer not to wait too long for the next streak.

Before the streak comes, Sonny is patient. When the streak comes, he ramps uphis investment exposure fast. As soon as the streak starts to end, Sonny walksaway. He is not worried about walking away in six minutes if the streak comesfast. The time of play is inconsequential. As the winnings accumulate, he willoften require the casino to cash him out. Once he is cashed out, the casinohouse rules do not allow Sonny to recash the check. If his money is in chips, hewill often place the chips in a remote safe. Sonny does this to make sure thathe avoids a major loss.

Sonny is not trying to win every penny. It is impossible to know if a streak hasbegun until it has shown some momentum and impossible to know it has ended untillosses occur. Somewhat as in the stock market, he is not trying to bottom- ortop-tick the trend; rather, he is trying to catch the bulk of the up move whileavoiding most of the down move. As a whale customer in the casino playing hisown tables, Sonny can ask the dealer to reshuffle the cards at any time as a wayto interrupt downward momentum and can speed play and increase the size of thehands on upward momentum.

Having seen 20 winning hands in a row at the blackjack table, Sonny knows thatstreaks can have a powerful compounding effect on wealth. At $50,000 per hand,Sonny works with enough money to make the positive effects of catching a winningstreak last. He knows that it is critical to bet enough to make a difference.

It is not about luck with Sonny. He spent years working in probabilistic bettingenvironments with steadily increasing stakes to develop a keen sense for streaksand how to use a disciplined approach to capitalize on them. No matter whatemotional temptations are presented to Sonny, he does not stray from hisdiscipline. The few times Sonny did stray served as an expensive reminder tostick to his plan. Sonny only plays games that he knows inside and out and inwhich the rules are set the way he likes them. He does not play where he isunfamiliar and the risks are not known. Sonny is acutely concerned with notgiving the money back and avoiding the big loss. He uses a variety of riskcontrol measures, including walking away at any time to make sure he remains onthe plus side. He is willing to be patient and wait for a positive streak toemerge before betting big. A series of small losses are made irrelevant by astring of large winning bets. It is not about the frequency of wins but aboutthe magnitude.

Although the odds say the casinos should be more than happy to welcome whalebusiness, many of the major casinos are moving away from this part of themarket. The margins are too thin. By bringing in lots of average gamblers whomake small bets, a casino expects to achieve a 20 percent profit margin. Theyhave yet to make money on Sonny after 22 years. What is scary is that Sonnybelieves he is becoming more disciplined and efficient with time.

The reason why we started this book with the story of Sonny is that hisexperience and discipline go a long way toward explaining his "luck." Sonny'sapproach to blackjack holds important lessons for successful stock marketinvesting. Know the game you are joining. Play the game according to your terms.Set out your plan before you play and stick to it. Be patient and wait for theright times to make your money. Do not worry about small losses as you wait tocapture big wins. When a trend comes, recognize it and invest enough to make amaterial difference in your overall portfolio. When the trend fades, stopinvesting. Do not hesitate to walk away when the market is not conducive tomaking money. Have a plan for holding on to your winnings. Keep your emotionsout of the investment process.

(Continues...)

Excerpted from Win By Not Losing by NICHOLAS ATKESON, ANDREW HOUGHTON. Copyright © 2014 Nicholas Atkeson and Andrew Houghton. Excerpted by permission of McGraw-Hill Education.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: McGraw Hill
• Publication date: 2013
• Language: English
• ISBN 10: 0071812903
• ISBN 13: 9780071812900
• Binding: Hardcover
• Number of pages: 288