About 5 years ago, I had the pleasure of sitting down with one of the top 10 traders in the country. Any time I have the chance to learn from success, I jump on the opportunity. (Out of respect for his request, this portfolio manager asked to remain anonymous because he is a very private person).

From 2000-2009, his hedge fund had an average return of +14% per year. That performance is phenomenal, especially considering that the S&P 500 was down -24.1% during the same 10-year period. I told him his performance was very strong, however, I remember hearing stories that he produced triple-digit returns in his personal account and (because I’m an idiot) I thought he would have had greater returns.

He then enlightened me with something that has stuck with me EVERY DAY since.

He said: When it comes to your own money, you can put your entire account in 3 stocks if you want. If one of them blows up, you have no one to answer to. However, when it comes to managing other people’s money, you have to be much more conservative. Clients are giving you part of their nest egg and they are trusting you to protect it. It then reminded me of Warren Buffett’s 2 rules of managing money: 1) Don’t lose money for clients and 2) See Rule #1.

Here are the points of this story:

1) When someone discusses the market on Twitter, know their perspective! In other words, you should know if they are selling a service, investing for clients, trading for themselves, or even trading at all! For example, many of my tweets are sent with a defensive posture, but keep in mind that I am managing client assets. My number one priority is to protect their capital, period!

2) Even if you are only trading your own money, I still recommend maintaining a defensive posture. Don’t get me wrong, when the market is healthy I have no problem taking aggressive positions. However, the best traders I have studied or met ALL have the same number one rule: CUT YOUR LOSSES. You don’t want to be a boom and bust trader. Your goal should be longevity, consistency, and staying in the game.

I can be reached at: jfahmy@zorcapital.com.

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