Watch Your Beta | Podcast Episode #137

0:07
Hey, I’m Ryan Mallory, and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly to let those winners run wild.

0:25
You can succeed at the stock market and I’m ready to show you how. Hey, everybody, this is Ryan Mallory with Swing Trading the Stock Market. Got a good topic to talk to you guys about today. This comes from a listener. He sent me this email and it was not really a question that he sent, but there was a couple of things that he said into it.

0:43
I said, you know what, I feel like this is worth a podcast. I think it merits making a podcast out of it. And I think it’s more for his own good, and I think as listeners, you’ll be able to jump in on this too and really be able to benefit as well because what he says and doesn’t even realize he’s saying anything wrong, he’s proud of what he’s doing in his trading, and while he’s experiencing some success in the market, it may be short-lived because let me be honest with you, if you started trading this year, this is a much different year than what you would typically see in the market.

1:11
Every year is different in the stock market. No one year is the same, but this year has been very much off the charts different, and especially since the March bottom where the stock market went up, and you’ve seen a lot of stocks, particularly tech stocks go up in ways that we’ve never really seen before.

1:28
And so for this email, I’m gonna use the good name of Josey, right? Like the outlaw Josey Wales. We’re gonna go with Josey, not his real name, obviously, but that’s, that’s the good cowboy name I’m gonna give this guy today. Not really a Florida redneck name like I usually go with, but I kind of like it.

1:44
It’s kind of a boss name. Any case, he says, hello, Ryan, thank you so much for your podcast and advice. Ever since I started listening to you, my portfolio made a dramatic. Improvement. That’s great. That’s what I want to hear. I want to hear that you guys are doing good. Where it gets a little bit more interesting is in the sentences that follow.

1:59
He says, I’m in my 20s and I’ve gotten lucky in the past, like buying Tesla at $25 a share many, many years ago. And that’s awesome because I mean, the stock is trading almost at $700 a share now. This guy has done really well. If he’s still holding the stock still. Uh, he got in at 25 things trading at almost 700 as he’s like looking at a 28X return.

2:20
Incredible. So that’s awesome right there. And, and the Tesla stock is really an interesting stock too, because a lot of people have made a lot of big money off of it. I’ve made some money off of it. I’ve had a few trades where I didn’t make money off of it, but I’m not like one of those people that got in early and have just made incredible amounts of money off of it.

3:02
No, that’s not me, OK? I’m not really an investor. I do have investments in particular stocks, but in terms of being like a really good investor, that’s really not my calling. But my focus is more on swing trading, not investing. In any case, going from $25 to $700 is incredible and, and, and a lot of Tesla investors. really put a lot of faith in this company that Elon Musk was gonna pull it through.

3:20
I remember when he was putting tweets out there where, you know, 420 going private. That, that was some crazy stuff back then, and he has tweeted plenty of crazy stuff since then. We know the Joe Rogan experience where, you know, he was smoking weed on that show and he got in some trouble for that. But overall, he’s really done great.

3:38
I mean, I think it’s blowing everybody’s expectations out of the water of what the stock actually did end up doing. Now the circumstances have helped it too, because since March, everything has just gone through the roof and we’ve seen a level of buying because of the stimulus and because of unemployment checks and because of the money printer just going crazy.

3:55
We’ve seen a huge influx of money get put into the market and that was done simultaneously with commission-free trading that came about a year ago. So you have all this stuff playing out, and it’s making a huge impact on the stock market. It’s attracting a lot of new people to play it.

4:16
It’s like the casinos that you’re really not paying a fee to play, but it doesn’t mean you can’t lose your money. And so there’s like this addiction that it’s feeding for a lot of people. Now, with Tesla stock, it’s gone through the roof and a lot of people have bought into it and there’s been a lot of FOMO this year that’s benefited stocks like Tesla, that’s benefited stocks like Square and Apple.

4:35
Back in March, nobody was saying, hey, you know what, Apple’s gonna double from here. It’s just gonna go crazy. It’s gonna be a 2 point $1 trillion dollar company before the end of the year. Nobody was saying that. In March, it wasn’t even a $1 trillion dollar company. So there’s a huge difference in this market versus what we’ve seen in previous years.

5:10
And I think it’s gonna be different than what we see in the years going forward. And yes, like any stock, I think there’s always going to be a pullback at some point. Every stock has pullbacks. But what I’m kind of curious about is all these people who have made money in stocks like Tesla or Square or some of the other stocks that have just gone through the roof.

5:26
Are they going to give it all back? You take a stock like Overstock, which in March was trading like at $1 and it goes up to over $120 a share just a few months later, and then it pulls all the way back to $51. Are we going to see similar moves in a lot of other stocks that have had similar trajectories play out in similar stocks?

5:45
And then see a notable pullback in Tesla that could create a lot of back orders, especially people who got in late to the game. And by the way, the bourbon that I’m drinking, last episode I did 1910 Old Forester. This one is 1920 Old Forester, really good for bourbons.

6:04
I go to a place called Crush 11 and they have some great old fashions that they make. And uh they use 1920 Old Forester and then it’s really good. I, I like it a lot. Now, This one is prohibition style, it’s 57.5% alcohol, which makes it 115 proof.

6:30
So yes, you gotta be careful drinking this one. But it’s a solid bourbon, man. I really like it a lot. scale of 1 to 10, I get a 7.8. I think it’s really good. It comes in hot, but still gives you that subtle smoothness right there at the end. Now, continuing with the email, we talked about how he bought Tesla at $25 a share many years ago.

6:54
He’s doing fantastic with it now. He says he also back in March, got lucky by shorting the market right when the coronavirus pandemic hit. By getting into some put options. All right, so, so far so good. He’s doing OK. But what really starts to get me worried is when he starts to say this, he says, however, I have not been managing my risk well and although I doubled my portfolio in the beginning of the year, I have been stuck at about 125% growth this year.

7:16
Let me just first start by saying 125% growth in a single year. It is incredible. OK? It’s huge. It doesn’t mean that it’s bad to get 125% growth. It’s not. But sometimes, especially with new traders, what that means is that you’re taking a lot of risk, even if you’re using stop losses, even if you’re playing out the trades, you may be taking on a lot of risks that you may not want to be taking.

7:33
Because it doesn’t sound like even that he made 125% throughout the course of the year. If you actually listen to what he says, he says, I doubled my portfolio in the beginning of the year. That means he made a lot of money right out of the gate and then he’s been stuck at about 125% a year. If he made 100%, and he’s been stuck at 125% since, and he’s still experienced 25% growth, that’s actually good.

7:52
I wouldn’t consider that stuck, but this guy actually thinks he’s stuck at 125% when you’ve already made 100% in the beginning of the year when he doubled his portfolio. So what I think, for one, he’s trading with a ton of risk and he may not know it. Second thing is he may have a set of false expectations of what the market can do for him.

8:16
The third thing, I could be wrong on all this stuff, and he’s just simply trading with a small account, but he does talk about later not being disciplined in his trading and losing thousands of dollars. So for a retail trader losing thousands of dollars on a trade. It kind of is a big deal. So maybe that 125% includes Tesla, which has done some crazy stuff this year.

8:34
But if it doesn’t, and he’s made 125% off of multiple trades this year, he could be taking big risky trades, like maybe he’s taken into some dollar trades where maybe the downside is 50% and the upside’s 100%. Yes, I, I get that that’s a 2 to 1 return on the reward to risk ratio and that’s, that’s good, but You have to ask yourself, can you handle a 50% drawdown?

8:54
And then if you’re not right on the trade and you’re down 50%, are you really going to take that stop loss? Because the bigger the losses, the harder it is to follow your trading plan. If you’re OK with like losing 4 and 5% on the trade, it’s a lot easier to be disciplined on taking those losses when they’re small because it’s not.

9:11
Hurting you emotionally, but then when you start getting into 1520, 30, 40% losses, let me tell you, you’re starting to talk about some big money right there. And psychologically, you start thinking about the impact to your portfolio if you lose. And then when you get to that moment to where, OK, it’s hitting my stop loss 50% down, am I going to take that loss?

9:28
And oftentimes because we’re infallible as human beings. Yes, even if we’re a good trader or anything else, we’re still infallible as human beings and we’re susceptible to making bad decisions and breaking our own rules. And so the more of an emotional state you put yourself in with your trades.

9:51
The more likely it is you’re going to break your own rules. I’ve been stopped out of a lot of trades, right? And I can tell you right now, if I had wider stop losses of like 30 or 40%, and it was to get down to those levels, it would be very difficult. I don’t care if the reward the risk of my trade is double or triple what I’m risking.

10:10
When you’re actually wrong on a trade, you start getting that big of losses, it’s gonna be very hard to actually take those losses. It’s gonna be hard to just put the stop losses and knowing that there’s a possibility of you being stopped out. I bring this up is because We talk about so much about having a system of trading and being unemotional and people talk about how you can’t trade with emotions.

10:27
Well, I’m here to tell you, as long as you’re human, you’re going to have emotion. You just are. I’m in a trade right now. I got in at like 1448, trading at like 1420. You wanna know how I feel about that trade? I don’t like it. I don’t like it at all. Now maybe it recovers tomorrow, you know what, my whole perspective on the trade will probably be a little bit better in terms of how I feel about it.

10:42
But I also know too that my stop loss, which is at $1352 if it’s the hit, I’ll be able to take that stop loss. I’m not gonna worry about it. But let’s say that instead of having an entry of 1,448 and a stop loss of $1,352 which is a very manageable trade, let’s say that my stop loss was down at $8 a share.

10:58
And let’s say it gets down to like $8.30 a share. You know what, I’m gonna be petrified. That this thing gets stopped out because then I’m gonna be worried that it’s gonna have this behemoth like bounce in the trade, and I’m gonna be sitting there losing big time.

11:17
And I don’t want that. So what happens is I’m gonna be more susceptible to ignore my stop offs and say, well, I’ll just see if it comes back. I’m just gonna ride this one out. I’m gonna make this one a long-term investment and you can’t do that because then you become undisciplined. So, going back to Joezy’s email here, right? He says, I’m up 125%.

11:34
How is he getting? gains. Very good chances he’s taken some very big risks, even if he’s using stop losses. Good chance he’s taking on some very big risks. And if he’s losing thousands of dollars, there’s a very good chance he’s becoming very emotional about it when he’s down. And let me say this too, one of the things that I try to do with this podcast is to help you stay out of your own way.

12:09
And you may be thinking, Ryan, you’re getting on to a guy that’s up 125%. He’s probably up more than you are, and he is. Doesn’t make him a better trader, doesn’t make him a smarter trader. Sometimes you’re Best traders are the ones that are consistently making money year after year after year after year, not trying to go for the 10. Look, if I make 100% doing what I’m doing, that’s fine.

12:24
But that’s not necessarily the goal that I have to make every year. Now, one of the things that really helps a lot of people, and I’ve been getting a lot of feedback on it is swingtradingthestockmarket.com. That’s my website that’s associated with this podcast here. With it, you’re getting all of my market research each and every day from S&P 500 and NASDAQ and the Russell updates multiple times each week to my watch lists multiple times each week, daily setups, daily charts, updates on the fanged stocks like Facebook, Apple, Amazon, Netflix, Google, Microsoft, and Tesla each week, and so much more.

12:48
So check that out, swingtradingthestockmarket.com. Take you to my Patreon account and you can check it out there. I know that was a little bit of a plug there for my service, but hey, that’s part of the podcast, I gotta stick these things in there, right? Because I offer it as a Service to you guys, but I really think it’s something that you guys can really benefit off of.

13:06
Now I also think it’s something that Josey would benefit off of because I think it would show him more of what trade setups look like when you’re using tight risk and letting your winners run. But any case, he says, I only started listening to your podcast on Spotify about two weeks ago and it has been awesome. You have really helped me understand the importance of minimizing losses, risk, and I realized that I haven’t been using stop loss orders consistently enough, which is why I got stuck in these.

13:23
Trapped with thousands of dollars in loss, shall we just wait months to recover. Now, go back a few podcasts I talk about opportunity costs when you’re having to sit there and hold it back. Even if it comes back up, there’s huge opportunity costs there. He says now that I consistently use stop loss orders and just move them up with the growth of stock, I am maximizing profits and minimizing losses.

13:39
It’s really incredible. Thanks to you, I am now up 165% growth this year, so I have increased about 40% in just the last two weeks. If you’re increasing over 40% in 2 weeks. I don’t know what he’s doing to do that. He doesn’t detail his trades, but it scares me a lot, and I’m not beating up on Josey here.

13:56
I’m very happy for him, but I just want to make sure that what he’s doing is sustainable going forward because in a market like this, it can give you a false impression that this is what the stock market’s about, and it can make you feel more confident in your abilities than what you should be. But 40% in the last two weeks, I mean, that’s like striking gold.

14:13
It’s really incredible. He tells me that I’m an incredible man. and I’m just so thankful for your advice. Please keep it up. You are making a positive impact on people’s lives, and that means so much. I, I read that to my girlfriend. I read that to my family. It meant a lot to me to hear that because I really do want you guys to succeed as traitors.

14:28
But I’m also gonna get nervous too when I’m reading about 40% in 2 weeks and stuff like that. I don’t make 40% in 2 weeks, OK. One, there’s a lot to lose if I start swinging for those kinds of fences. I’m not going to do that. But there’s also the belief that Let’s say he made 40% in the aggregate.

14:43
What was the risk in the aggregate? Was it 20%? That is, man, that’s, that’s a huge hole to dig yourself into if you weren’t going to be right overall in the aggregate. So it scares me that in 2 weeks that he could have lost 20%, even if he had like a 3 or a 4% return.

15:05
Let’s say it was a 4 to 1 return for reward to risk. Still 10% in 2 weeks, that’s a lot of money, man, on your overall portfolio, very scary. I can’t imagine. be more than a 4 to 1 reward to risk. So even if it’s 4 to 1 or 2 to 1, it’s still some really large risks that he’s taking.

15:22
I would also probably say it’s a good chance that these are stocks that are trading under $5 or $10 a share. High beta stocks, if you don’t know what beta is, beta is basically how much does the stock move relative to the S&P $500. If the stock moves 5% and the S&P 500 moves 1% on a given day, for that particular day, it had a beta of 5.

15:39
Now, if it has a beta of 5, the entire calendar year, you’re getting into a very volatile stock, one that’s very difficult to manage the risk on probably has a lot of overnight gaps on. If it’s more like a 1.5 beta or a 2 beta, that’s, that’s kind of a sweet spot right there.

16:00
Anything over 1’s good. Under 1 means that if the S&P 500. Returns 1% and you have a beta of 0.5, that means you got like a 0.5% on average. So above one is where I like to be. I like to be somewhere between like 1 and 2. I sometimes go a little bit higher than that, but not too much higher.

16:19
But you’re getting 40% in two weeks, you’re risking a lot. You’re dealing with some very high beta stocks, and that’s not necessarily a good thing. And I’m worried a little bit about expectations if he feels like he’s being stuck at a 125% growth, because there’s gonna be a lot of times when you’re trading throughout the calendar year where you are stuck because as of the time of this podcast, it’s the month of December.

16:36
It’s the last week of December. So we’re finishing up on 2020 here and I can tell you, I told people on the trading block, I said, listen, guys, my trades in late December, not always the best. It’s not because I’m coming up with bad picks or I have some juju that just is indescribable. It’s not. The market is very difficult in the last two weeks of the trading year, just in general.

16:52
People talk about the Santa Claus rally, I’m not buying it. There is very difficult because you could have the market rally, but less than a majority of stocks rally with it. There’s a lot of weird movements in the stock market because people are getting out of stocks before the calendar year for tax purposes, etc. It’s just a very difficult time.

17:09
So I don’t hold it against the market. I don’t hold it against myself. It’s just usually a stagnant time. Once the new year starts, it’s usually grand and glorious going forward. So just because you might be stuck in your trading over a period of time, maybe it’s a couple of months. That’s not the worst thing in the world. That’s gonna happen. You’re gonna have losing months from time to time.

17:22
So I’m worried a little bit about Joey’s expectations that he just thinks he should be, you know, multiplying his account or doubling his account all the time, and that’s not a good expectation to have. But I like so much about what Josey says here. I think he’s got a lot going for him. First of all, he’s listening to the podcast, and I feel like this is one of the few podcasts based on the feedback that I get from you guys that really is looking after you guys, trying to give you the, the real talk on the stock market in a language is that everyday person can, can understand.

17:40
That’s what I’m really here for, to help you out, to, to shed light on the realities of the stock market, that it’s not just like some kind of like spin the wheel and see what kind of prize you win. It’s not like that. It’s hard and it’s difficult and it’s gonna try your emotions and it’s gonna try your self-confidence so much.

17:59
And one of the things that scares me too about Josy here is that when the stock market started crashing in late February and end of March, those stocks were not anywhere near as overvalued as they are right now. The markets like 2X, 3X overvalued than what it was back in February and March of 2020.

18:20
So, with that said, when you have stocks like Square and stocks like Apple, and, and you’re having these major rallies and trash stocks like Overstock, and you’re seeing semiconductors just go through the roof, if this market crashes again, or even just has something minor happen, that’s even less than what the overall impact of what COVID has been to the economy.

18:36
You’re gonna see an epic pullback in the market. Now, that, that’s not me saying that, hey, we’re at a market top here, everything’s gonna crash from here on out. I’m not saying that. Maybe it does happen, but what I’m just trying to say is that a pullback at these levels that the market’s at right now, it’s gonna take somebody who’s 125% on the year and some high beta stocks or 165% of the year in high beta stocks, and it’s gonna crush that portfolio.

18:43
It’s gonna make it look like those gains never even existed. And so you gotta make sure, and he’s doing a lot of good things too. He’s raising the stop losses and, and you’ve got to make sure you’re doing that. But stop losses are only as good as what the stock opens up at, meaning sometimes you can have a stop loss, let’s say you buy a stock at $100 and you put your stop loss at $95.

19:03
Well, bad news comes out or the market crashes. Maybe the stock’s opening up at $90 and all of a sudden that stop loss, while it’s right to use stop losses and have them in place, isn’t gonna get you out at $95. It’s gonna get you out at $90. So, make sure you’re not overly impacted by high beta stocks.

19:20
If you’re seeing some massive profits right now, ask yourself, how am I making these profits? Am I risking too much? Am I putting my emotions at too much risk, my self-confidence at too much risk? And if you are, scale back. It’s not worth the profits. If you enjoy this episode, I’d encourage you to leave a review.

19:35
I love those 5 star reviews. You guys keep them coming in. I love it. It encourages me to keep going forward with this podcast. I love doing this podcast and your support means the world to me. Make sure to check out swingtradingthestockmarket.com. Whatever platform you’re listening to Spotify, Apple, make sure to subscribe so you can get notified when I do more of these podcasts going into 2021, my goal is to do two a week.

19:56
If necessary, I’ll do 3. Thank you guys. Make sure to keep sending me your emails, ryan@shareplanner.com. I read them all. I put them in a file that to to do podcast episodes on. I love them. I’m gonna keep doing them. You guys are my motivation for doing this podcast and I’ll make sure to keep doing it in the future.

20:13
Thanks for listening to my podcast, Swing Trading the stock market. I’d like to encourage you to join me in the Share Planner trading block where I navigate the stock market each day with traders from around the world. With your membership, you will get a 7 day trial and access to my trading room, including alerts via text, email, and WhatsApp.

20:31
So go ahead, sign up by going to shareplanner.com/tradingblock. That’s www.shareplanner.com/trading-block, and follow me on SharePlanner’s Twitter, Instagram, and Facebook where I provide unique market and trading information every day. If you have any questions, please feel free to email me at ryan@shareplanner.com.

20:51
All the best to you and I look forward to trading with you soon.