In his 1987 letter to shareholders, the masterfully quotable Warren Buffett said: “If you’ve been in the [poker] game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
In the same letter, he said: “If you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game.”
Four Grades of Sucker
The equally masterful quote-smith, Jesse Livermore, categorized four grades of sucker:
The Beginning Sucker: has read little and knows little.
The Semi-Sucker: has read books about trading – usually written by higher-grade suckers. He can recite wise stock market sayings. He does not realize that reading books is not the same as trading experience. He loses money more slowly than the beginning sucker because he has learned some basic trading rules.
The Wall Street Fool: knows enough to make a profit if he sticks faithfully to his trading rules. The excitement of the market overpowers the fool; he trades more often than he should and loses his advantage over the market.
The Higher Grade Sucker: makes his money from selling trading books because he can’t make money in the markets.
Although Buffett and Livermore are at opposite ends of the financial spectrum in terms of buy and sell criteria, they wholeheartedly agree that if you don’t have some advantage over average market participants, you’ll lose money.
There are a lot of intelligent players in the markets and plenty of fools too. Unfortunately, too many stock market books try to persuade their readers that fools predominate, lulling the semi-sucker into a false sense of security. If only you will do what it says in the book (often with too little detail to put together a truly effective trading strategy) you’ll be successful.
Before you trade, you should have some idea of where your advantage is coming from. You should paper trade to verify your advantage.
Then you need to trade for real – this is hardest of all because once you have your own money in the markets, your emotional involvement increases. The emotions – greed and fear start kicking in – cause difficulties for many traders. Some find the advantage they thought they had evaporates.
So, do you call yourself a beginning sucker, a semi-sucker, a Wall Street fool, a higher-grade sucker or a successful trader? The best test is the direction of your trading account balance over several years. As an alternative, though, you could try passing the Stock Market Sucker Test.