Bruce Kovner is one of the most reputable trader and hedge fund manager over the past few decades.
He founded Caxton Associates in 1983 and ran the hedge fund for 28 years before retiring in 2011.
During that period, Caxton Associates grew to become one of the largest and most successful macro hedge fund in the world,
At its peak, the fund had $12 billion in assets, and generated an average net annual return of over 21%.
However, what really made Bruce Kovner famous in the world of trading was the interview he did with Jack Schwager in his must-read book “Market Wizards: Interviews with Top Traders”.
If you are already a proficient trader who has accumulated years of trading experiences and your fair share of trading mistakes, you will be able to understand his quotes with ease.
But if you are a novice trader who has yet to go through the trading rites of passage, how many of his great trading quotes could you truly relate to?
So in this blog post, I decided to share 3 of my favorite trading quotes by Bruce Kovner and attempt to share my understanding of those quotes with you.
I hope this can help you understand and relate to them for your learnings whether you have been through it or not.
After all, why make those terrible mistakes yourself when you can afford to learn from other people’s mistakes, right?
Alright, here we go!
Bruce Kovner Trading Quote 1: Trading Too Big
“My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.”
– Bruce Kovnar
This is a very common mistake made by a typical budding trader because he doesn’t even know how important this guideline is!
In my opinion, this is one of the most under-emphasized piece of trading knowledge out there.
Out of the ten novice traders that I speak to, probably eight to nine of them would have been exposed to all kinds of trading strategies out there.
However, few of them actually has any knowledge how they should size their trade or know how much to risk on their arsenal of trading strategies.
So why then do novice traders trade three to five times too big?
I think the biggest problem lies with unrealistic expectations that a novice trader has because he could be misled by the unrealistic claims of trading gurus.
Very often, we see trading gurus proudly announcing how they “made 30% on a stock in just 3 days”.
Did this guru make 30% profit based on his entry price or did he make 30% return on his total equity base?
How much risk did he take to achieve that 30% profit? How often does he make a 30% return on a single trade?
All these questions are never or seldom addressed by the gurus because it does not matter to him.
What matters is that he has now managed to capture the attention of ignorant newbie traders because of his “made 30% on a stock in just 3 days” claims.
This highly unrealistic and unsubstantiated 30% return (on what??) gives newbie traders the wrong perception and unrealistic expectation to aim for a 30% return on total capital in a single trade.
So assuming they expect a 1:3 risk to reward ratio and aim for a 30% return on total capital on one single trade, what will they do?
They will bet with a risk of 10% of their entire capital base on one single trade, right?
But imagine this. What happens when they are hit with five consecutive losing trades?
Yes, half of their total trading capital will be wiped out.
And guess what? They will have to make a 100% gain just to break even again.
So dear trader, please remember to read between the lines and ask more specific questions when you hear claims like that in the future.
Nevertheless, following Bruce Kovner’s advice not to risk more than 1-2 percent of your total equity on any one trade, is one of the best thing you can do for your trading business.
Bruce Kovner Trading Quote 2: Setting Stops Wrongly
“Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose.”
– Bruce Kovner
This is also a very seldom shared piece of trading wisdom.
If you already understand the importance of setting a stop loss for every single trade, that’s really a great start.
However, one thing that you might not know is how to set a proper stop loss.
One common wrong way that novice traders decide their stop loss level is by setting the maximum dollar amount he is willing to lose.
For example, when a trader buys a stock at $5, he might simply decide that “I am willing to lose only $1 in this trade, so my stop-loss should be at $4.”
Another common ignorant stop loss strategy by a trader who buys a stock at $5 is this: “I am willing to lose only 20% in this trade, so my stop loss should be at $4.”
Both these methods totally ignore the best practices of a stop loss methodology.
If your view of a stock going higher from here is correct, then the price should not drop beyond a certain level.
That certain level is where your stop loss should be placed.
That level could be at $4.50 or $3.50, it could also be at 30% of 50% lower than your entry level.
If you size your trade correctly, you should be risking just 1-2% of your total capital whether the stop loss level is 30% or 50% below your entry level.
Bruce Kovner Trading Quote 3: Don’t Be The Crowd
“The Heisenberg principle – If something is closely observed, the odds are it is going to be altered in the process. The more a price pattern is observed by speculators the more prone you have false signals; the more the market is a product of nonspeculative activity, the greater the significance of technical breakout.”
– Bruce Kovner
This is very much in line with whatever that happens around our life as well, and not just in trading.
Imagine this, if the profit of selling apples is good and everyone starts to buy and sell apples, do you think the profit will still remain high for all these new apple sellers?
If every trader out there thinks that this very moment is the best time to buy this stock, do you think there is going to be alot of profits to be made?
To make the biggest profit on any trade or even business venture, you have to take risk on the best available opportunity with an edge that few people knows about or is speculating in.
If everyone knows about this opportunity and is trading it in the same way as you are at the same time, then there is no more profits to be made.
A top trader usually has a mind of his own and do not run with the crowd.
If you want to become a truly proficient trader, you have to start doing this also.
By the way, this is also the reason why I personally don’t think that new strategies like social trading or copy trading actually delivers value to the followers in the long run.
This is because a trading idea by a successful social trading influencer or a popular copy trading guru will become that crowd idea as well.
When more and more people starts following him or starts to copy his trade, his idea will become one of those speculative crowd move.
Good luck in trying to squeeze the maximum profits out from that crowd followed idea.
I hope the above top three quotes by Bruce Kovner were able to provide you some insights on what are the mistakes to avoid and what are the best trading best practices to follow.
To me, the above quotes are the true holy grail of trading, rather than the many fanciful and sexy trading strategies that you hear from the many trading gurus out there.
Still, don’t simply take Bruce Kovner’s words or my words for it.
Go and do your own research and judge for yourself whether the above quotes do really make sense to you or not.
Good luck and talk to you again!