INTERVIEW
Playing The Breakouts
Gary B. Smith Of TheStreet.com
by John Sweeney
Trader, author, and TV personality Gary B. Smith trades for a living and has done so since splitting with Sports Illustrated, where he covered pro golf. More prominently, Gary writes about his trading in unusually frank terms for TheStreet.com and appears on Fox News Channel as a market commentator. A prototypical retail trader, a pure technician, and articulate to boot, he was just the sort of person we were looking for in July 12, 2000, when we caught up with him in his trading room in his Maryland home.
ILLUSTRATION BY CARL GREEN
How did you get started trading?
Well, I started out as a fundamentalist.
I'd heard that.
That was maybe 15 years ago. Like a lot of people who make that switch [from fundamentals to technicals], I would see, just looking at any standard chart, generally when stocks were above the 50-day moving average, that was a better time to be long than when they broke below the 50-day moving average. You get interested in that, and that leads to something else, and then you see ads for software, and then you say, "Hey, this is a lot easier than what I've been doing!" The change from fundamentals to technicals just happened gradually.
So when you were using fundamentals, had you been trained in traditional finance theory?
Well, no. I had an MBA; I was working at IBM at the time. I knew a lot about different industries, because those were my customers. I knew a lot about the grocery industry, for example, because I had grocery customers. So I knew that Albertsons -- whatever it was 10 or 15 years ago -- was a great stock to buy. I knew that Wal-Mart was a great stock to buy, because I not only knew them as a customer, I knew their financials. But I did not have any clue as to appropriate entry and exit points. I thought that I was Warren Buffett. I thought I would buy Wal-Mart and hold it until I got sick of it.
What made you sick of it? If you were holding something and facing a loss, would you still hold it?
Yeah, I would. Maybe I would be up something like 70% over a couple of years, so I wouldn't mind if I was down 30% on something else. I just figured it all balanced out. I didn't know anything about using my equity as inventory, I didn't know anything about trading. I had read maybe a little Peter Lynch, and I had read about Buffett. I don't think any of the Buffett books were out yet, but that was my philosophy.
This was when?
This must have been early to mid-1980s.
When did you start making technical trades?
About five or six years into trading. I am sure it was very rudimentary at the beginning. If the stock broke above a 50-day moving average and I liked the fundamentals, that seemed to be a better time to buy than just making a random entry. Serious, pure technical analysis, which is what I do now, without any regard to the fundamentals, started maybe seven years ago.
So you migrated steadily from fundamentals to technicals.
Yes. Exactly.
Did you put in some study on technical analysis, or was it all hard-won experience?
Both. Do you ever stop learning? Right now, the things I constantly learn about are about trading versus technical analysis. Controlling your emotions, money management, things that really do not have a lot to do with entries and exits and breakouts.
You mentioned using your equity as inventory and turning it specifically. Do you have any targets along that line?
I have targets. It would be wonderful if I could turn my equity over every single day. I think the single biggest thing that most people just never, ever, get about trading is they adopt the mantra of, "I have to ride my winners and cut my losses." That sounds good. That sounds easy to repeat to other traders. And everyone nods.
Most people would say, "My gosh, if I could just ride that winner up 50%, that would be fantastic." It is fantastic, but people forget: How much, how long did that tie up your equity? If it took you six months to get a 50% gain, most people would say, "My gosh! That is fantastic!"
What would you prefer?
I would rather, in that six months, have 100 trades that each made a 2% gain, and be able to turn those around. It is like the old question of "Would you rather have $1 million at the end of the year, or would you rather have a penny a day compounded for a year?" The answer to that, of course, is a penny a day compounded. Because you may be behind for a time, but at the end of those 365 days, you'll have a lot more than $1 million. Whatever the calculation is.
That is how I think of my equity. If I can start with $1 million, I would rather have $1 million and then 1% of that the next day. I would rather have $1 million and $10,000, and then use that for more trades, rather than tie up money.
I always have shorted. People are always shocked when I tell them that. They think, "My God, you could lose everything!" Well, yes, if you are an idiot.-- Gary B. Smith
Excerpted from an article originally published in the October 2000 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2000, Technical Analysis, Inc.