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Remember Jon Corzine? The one time CEO of Goldman and former Jersey Governor? As his last gig in finance he became CEO of a futures broker called MF Global. In 2011, in the midst of the Eurozone sovereign debt crisis, Corzine loaded MF Global trading books with Italian and Spanish bonds yielding 7%-9%.
You know where those bonds trading today? At yields of less than 1.5%.
So how come Corzine isn’t hailed in the media as the bond king extraordinaire that he once was? Why did he resign in disgrace after the MF went bankrupt and has spent the last few years fending off lawsuits?
Contrast his fate with that of Warren Buffett who was also buying distressed assets at the time, including BoA and many other financial stocks. Buffett is revered as an investment genius and is called “the Oracle of Omaha”.
But you know the only difference between Corzine and Buffett? Its not intelligence, it’s not courage, its not skill.
Its just money.
Corzine was overleveraged and ran out of capital before his trades could start to work. Buffett on the other hand never runs out of money and can afford to wait for as long as it takes to let his investments make money for him.
Now we may not own an insurance company to provide us with a ready source of funds any time we need it, and in all honesty no retail trader could ever replicate Buffett’s returns even if he shadowed him stock for stock (a topic for another column), but there is one lesson we can all take from Buffett that could greatly increase our chances of success.
Don’t run out of money.
The rule in trading is that money buys you time and time makes you money. This is true if you are long term investor or day trader like me. If you can wait out the adverse excursion of the market 9 times out of 10 you can turn a profit on your position. We do this all day long in my chat room.
Now of course that is not always true. Of course some ideas are never going to work and whether you trade or invest you will eventually have to let some positions go. But if your size is small enough even a total wipeout of an idea won’t take down your whole account.
Buffett may trade in billions of dollars but relative to his equity size he never overlevers his positions. He can afford to have any one trade idea go to zero and he will still be in business tomorrow.
That -- not strategy, not analysis, not market knowledge -- is the key to Buffett’s success. Money buys you time which as Warren Buffett knows is the most valuable asset in any market environment.