Warren Buffett famously commented that he didn’t have to be better at stock picking than others, he just had to be more disciplined.
Seems simple to say but look back at your own trading and you’ll see why it’s so insightful. How many times did you sell when you got scared or buy when you got greedy?
Clearly, Buffett is not immune to the swings of emotion either and so his famous comments germinated from doing the wrong things in the past.
Another trader who has internalized the importance of discipline is Mark Minervini, a two-time champion trader. Known for his remarkable ability to generate massive returns over short periods, Minervini has become a symbol of success for traders aspiring to crack the stock market. But what exactly makes him stand out? What’s behind his extraordinary track record?
How to Become a Champion Trader
Minervini has an unusual knack of combining technical analysis, risk management, psychological discipline, and fundamentals into a winning system.
He has got all sorts of important tips to help the average trader, such as to always figure out how to minimize the downside, but what doest that mean? Or he’ll comment that “I’m never really bullish or bearish; only by default. I simply buy stocks that meet my criteria and sell them when they don’t work”
But how exactly can you take advantage of his insights in a systematic way? We explore the ways to win.
The SEPA Strategy Is a Proven Method to Identify Winners
Minervini’s most significant contribution to trading is his SEPA, or Specific Entry Point Analysis, method.
SEPA is a refined trading strategy that focuses on finding stocks that may well be on the cusp of explosive growth. Think of SEPA as a momentum-based strategy that looks to spot companies with strong fundamentals that are also entering a period of price acceleration.
Minervini meticulously looks for stocks that exhibit a combination of rising earnings, sales growth, and institutional accumulation, much like Stan Druckenmiller in many respects. And Stan is famous for never having a losing year in 30 years of managing other people’s money – these days he runs a family office.
So how do you trade the SEPA strategy like Mark?
Minervini looks for chart patterns like volatility contractions and breakouts. He believes the stock’s price tells a story, and if the price action is strong, the fundamentals will likely follow. Generally, Wall Street’s view is that the fundamentals lead, and the chart follows but Minervini appears to have spotted an opportunity that repeats time and again with his insight.
Nevertheless, SEPA isn’t just about stock chart patterns and movements. Minervini insists that strong price action needs to be backed by stellar fundamentals, such as increasing earnings, revenue growth, and improving margins.
He is also a master at timing the market. His ability to get in just before a stock begins its major upward movement and exit before it collapses is what sets him apart from most traders.
Extremely Careful Risk Management Is Key
Perhaps as a nod to Buffett, Minervini, considers risk management the foundation of his trading philosophy. He doesn’t just focus on making money but rather he is absolutely obsessive about not losing it, a fact that is evident in many of his books.
What are the core tenets of his success? Minervini stresses the importance of keeping losses small and follows the rule of cutting them at 7-8% below his buy point. By protecting his capital, he knows he will always stay in the game. It’s the massive losses that wipe out some traders, forever.
He also carefully sizes his positions to make sure no single trade can significantly harm his portfolio and that usually limits risk to 1-2% of his total capital on any single trade.
Yet in spite of being so rigorous to buy he’s happy to sell in a flash. Minervini isn’t afraid to sell a stock early if it doesn’t perform as expected and lives by a philosophy of quick exits, meaning when a stock shows weakness take profits and exit.
In spite of the dedication to following rules of the market, Minervini also has a keen focus on psychology.
Mastering the Psychology of Trading
In his book, Trade Like a Stock Market Wizard, he emphasizes this point and highlights that trading is as much about psychology as it is about technical or fundamental analysis. In other words, you can know all the rules of trading and financial analysis but when the time comes time to pull the trigger and make the buy or sell decision, do you?
Mark really hammers the table on the importance of discipline, patience, as well as controlling emotions, especially when things go wrong.
Like most successful investors and traders, Minervini has clearly mastered the art of not letting greed or fear dictate his buying and selling decisions. He couldn’t have won two trading championships without sticking to his rules no matter what. That means not chasing after stocks or holding onto losing positions in the hope of a rebound.
You would think that Minervini, with all his rules, has a great track record picking stocks but he makes it clear that’s not the case and no trader is infallible. The key is not being right picking stocks from the outset but recognizing that losses are part of the process and that allows him to stay level-headed and avoid making emotionally driven mistakes.
In short, he knows he’ll be wrong from time to time, and accepts that reality, so it doesn’t prohibit him from making the right choices to exit or enter according to his very specific rules.
He Has The Charlie Munger Hunger For Learning
Perhaps one of the least discussed but most vital aspects of Mark Minervini’s success is his Charlie Munger-like hunger to learn and improve.
He doesn’t just rest on his laurels, even after decades of trading but consistently analyzes his trades, looks for areas to generate even better results, and refines his strategies. It’s that look-back approach to see, what did I do, how can I do better, where did I mess up and why, that is part of the formula for success.
His discipline in back-testing, studying market history, and keeping meticulous records of his trades allows him to constantly evolve when the market does.
Another Berkshire-style trait he has is to evolve.
Adapting to Changing Market Conditions
Just like Buffett evolved from buying good companies at great prices to great companies at fair prices, Minervini has adapted over the years too.
He knows that different strategies work in different market cycles and is flexible in adjusting his tactics based on whether the market is rising or falling.
One often overlooked aspect of his skills is his ability to spot sector rotation. He pays close attention to which sectors are outperforming the market and adjusts his positions accordingly, enabling him to ride trends in specific industries.
Is He Worth Listening To?
Perhaps the best evidence of Minervini’s skill as a trader is his track record that stems back to 1997 when he won the US Investing Championship with a return of over 155%.
Even more impressively, he was able to compound annual returns of 220% over a five-year period in his private account, transforming an initial capital of $100,000 into over $30 million.
These numbers alone place him firmly in an elite class of traders, yet it’s his consistency over decades that truly sets him apart.
If you want to follow him consider a stock like Apple that is heavily invested in by institutions and so tends to trend for periods, plateau, follow key trend lines and see if you can apply his rules to it in order to produce similar results.
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