Harnessing the Tremendous Power of Greed

In the 1987 film Wall Street, Gordon Gecko, played by Michael Douglas, gave this speech: "Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms — Greed for life, for money, for love, knowledge — has marked the upward surge of mankind."

What Gordon Gecko doesn't acknowledge is that greed is extremely dangerous, and it can corrupt and destroy those who let it overwhelm and drive them. But the truth is that greed is also a tremendous motivating force, and if managed effectively, can lead to exceptional results. Greed isn't always good, but it can be a tremendous positive force.

Great traders and investors are always seeking ways to enhance their results. Although most people don't like to think of it in this way, they are greedy for more. They want to make more money and are looking for effective ways to do so. That is not a bad thing, and we can produce great results if we acknowledge and embrace our desire for more.

There are many ways to improve trading and investment returns. Our greed has to be controlled and directed in the correct way. Most importantly, we have to recognize when greed is pushing us to go too far in taking on excessive risk.

Channeling Your Greed

The two key areas where investors should channel their greed are better stock picking and more effective trade management. It boils down to being more aggressive at the things that are most consequential.

During my thirty years of trading, my biggest challenge has always been increasing my aggressiveness. It is fairly easy to produce positive results, but it is very difficult to produce exceptional returns consistently over the long run. How do you keep improving your results?

The dilemma is that trading and investing are always about balancing risk and return. If you want to significantly increase returns, then you have to increase the amount of risk that you take. 

There are two main ways to take more risks. First is to trade more volatile and faster-moving stocks, and the second is to increase position sizes and to have concentrated positions.

If you just did what has worked in the past wth greater aggressiveness, then your results would improve. The problem is that increased aggressiveness tends to change trading dynamics. To deal with this issue, it is necessary to contend with the stronger emotions that are created when you increase risk. In addition, a more aggressive size adds the problem of liquidity if you are trading smaller stocks.

My Approach

My method to increasing position size is to use an incremental approach where I make many partial buys and sells and try to have the biggest possible position at the right time. When you are constantly adjusting exposure with incremental moves, it becomes much easier to develop a feel for the stock and to really push position size at the right time.

One of the ironies of increasing aggressiveness is that it often means being more patient. We don't typically think about aggressiveness as being a form of inaction, but quite often, doing nothing is the most aggressive thing you can do.

Our biggest losses tend to come when we avoid making decisions, but we mess up our best trades when we fail to be patient. This battle really is the core of good trading, and we can work to improve it by making sure we have solid plans in place when we enter a trade. What tends to lead to the biggest mistakes is when we "wing it" rather than stick to a plan. Sure, we will need to adapt at times as conditions change, but without a plan in place, we are much more likely to act impulsively or to freeze up.

Our biggest losses tend to come when we avoid making decisions, but we mess up our best trades when we fail to be patient.

Most investors and traders need to work on being a bit more patient with stocks that are working. I typically like to take partial profits into strength, but momentum has a way of lasting longer and going much further than seems reasonable. I try to deal with that by using trailing stops, but it is hard to overcome the desire to nail the exact top. There has to be a greater tolerance for giving back some gains if you want to stick with and ride momentum.

Another area where increased aggressiveness can pay off is in finding a better supply of trading ideas. For me, the hunt for new ideas is one of the most enjoyable aspects of trading. It is very satisfying to dig deep and finally find a nugget of gold to trade. However, you can always improve on your supply of new ideas. I too often lose track of things that look good, and I need to work on managing my list of ideas so that I can act on them more effectively.

The hardest aspect of being greedy and becoming a more aggressive trader is managing emotions. If you aren't feeling any stress when you put on a trade, then you are very likely not taking a very high level of risk. You can't produce huge returns without feeling some doubt and uncertainty about what you are doing.

Greed can be good, but it comes with some significant challenges to your emotional well-being.

At the time of publication, Rev Shark had no positions in ay securities mentioned.