Gary's Greatest Hits on Trading

Editor's Note: Gary B. Smith will be back with his regular column on Tuesday morning. Today and Monday, he'll revisit past columns that strike to the core of his trading style. This column originally ran on RealMoney Jan. 27, 2001.

Two weeks ago, I had the pleasure of speaking to Georgetown MBA students about technical analysis and trading. They seemed to enjoy it, and I know I had a great time. (Even better was the fact that a number of them took me out for a drink or two afterward. It has been a long time since this guy had the company of a pitcher of beer, and a population composed solidly of folks in their 20s!)

In any event, during my two hours of rambling, I believe I made a few good points I'd like to share with you. Consider them the "greatest hits" of any seminar I'd give. They're the essence of how and why I trade like I do. You've been exposed to many of these thoughts before. Nevertheless, here's a quick review to whet your appetite:

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1. The most efficient way to turn a small amount of money into a large amount is through constant compounding. Even small percentage gains per day add up to big gains over time. I asked one of the students if he started with $5,000 and every trading day increased it only 0.5%, how much he'd have after five years. He guessed about $50,000. The answer is $3 million.

2. Fundamental analysis is fine, but the problem is threefold: One, you are never going to be on a level playing field with insiders and fund managers. No, you'll always be getting information third- or fourth-hand. Two, even if you are an insider, the link between knowledge and future prices is suspect at best. I often tell the story of my wife, who has been at or near the top at both IBM (IBM) and Digex (DIGX).

She is as smart as they come about business, but consistently clueless about future stock prices. So my thinking is that if she doesn't know where Digex will be a few days or even months from now, what chance do you think the person off the street will have?