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Jeff Saut: Do You Sincerely Want to Be Rich?


The one thing you need to know.


Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

In 1992, Robert Prechter wrote in The Elliott Wave Theorist:

"Do you have the mental fortitude to accept huge gains?

"This comment usually gets a hearty laugh, which merely goes to show how little most people have determined it actually to be a problem. But consider how many times has the following sequence of events occurred? For a full year, you trade futures contracts, making $1,000 here, losing $1,500 there, making $3,000 here and losing $2,000 there. Once again, you enter a trade because your (trading) method told you to do so. Within a week, you're up $4000. Your friend/partner/acquaintance/broker/advisor calls you and, looking out only for your welfare, tell you to take your profit. You have guts, though, and you wait. The following week, your position is up $8,000, the best gain you have ever experienced. 'Get out!' says your friend. You sweat, still hoping for further gains. The next Monday, your contract opens limit (down) against you. Your friend calls and says, 'I told you so. You got greedy. But hey, you're still way up on the trade. Get out tomorrow.' The next day, on the opening, you exit the trade, taking a $5,000 profit. It's your biggest profit of the year, and you click your heels, smiling gratefully, proud of yourself. Then, day after day for the next six months, you watch the market continue to go in the direction of your original trade. You try to find another entry point and continue to miss. At the end of six months, your method finally, quietly, calmly says, 'Get out.' You check the figures and realize that your initial entry, if held, would have netted $450,000.

"So what was your problem? Simply that you had allowed yourself, unconsciously, to define your 'normal' range of profit and loss. When the big trade finally came along, you lacked the self esteem to take all it promised . . . who were you to shoot for such huge gains? Why should you deserve more than your best trade of the year? Then you abandoned both (trading) method and discipline. To win the game, make sure that you understand why you're in it. The big moves in markets only come once or twice a year. Those are the ones which will pay you for all the work, fear, sweat and aggravation of the previous years. Don't miss them for reasons other than those required by your objectively defined method. The IRS categorizes capital gains as 'unearned income' that's baloney. It's hard to make money in the market. Every time you make, you richly deserve. Don't ever forget that."

Do you sincerely want to be rich?

I was studying the history of buying panics over the weekend. My firm's records go all the way back to the 1960s. When I came to the January 1987 stampede, I rediscovered the aforementioned quote from Robert Prechter. It's an excellent quip. Virtually everybody can identify with it. On the surface the question does seem kind of laughable: Who can't accept huge gains! But you know in order to set yourself up for such gains you have to possess the courage to take an oversize position, maybe even leverage it. That kind of risk takes stomach, fortitude. Many times I've waited for the right moment, the big move, and decided against it. Maybe it was because I chickened out. While I often rationalized the hesitation away, the real reason I didn't act was the emotional strain.

Yet, I know myself. And, I've learned that emotional actions are failures most of the time. What people have to be able to do is step outside of themselves in an objective fashion. When you do that, it's kind of like seeing things in slow motion. You're calm, objective, and can see ahead, perceiving the proper sequence of events. You just know you're right and you act. I admit it's kind of eerie; and, it's hard to explain to anyone who hasn't had the experience. Years ago, I had the same kind of experience in golf. Now it happens occasionally in my writing, trading, and investing. You just feel it, see ahead, and you get the "rhythm."

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