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I grew up in a household with parents who have a combined 80 years on Wall Street. Both worked at Merrill Lynch (which later became Bank of America), where my father was a commodities trader and my mother an equities trader.

As a child, I had an early interest in markets. From the flashing lights of the quotes on TV, the fast-moving pace, and the uniqueness of each trading session, my interest was piqued. While other kids dreamed of being professional athletes, I wanted to be an investor. Luckily, I had two role models and mentors in the business who passed down much of their wisdom and answered all my questions.

On Wall Street, theoretical knowledge and formal education can certainly provide a foundation for understanding financial markets and strategies. However, the dynamic and unpredictable nature of the financial world often necessitates real-world experience for a comprehensive grasp of its complexities. The practical application of concepts learned in classrooms is where individuals encounter the nuances of market dynamics, risk management, and decision-making under pressure.

That said, it’s one thing to swing at a fastball from a minor league pitcher, and a totally different feeling when you’re in the batter’s box versus a major league pitcher throwing 90-mile-per-hour fastballs. Market conditions, investor sentiment, and economic factors are constantly evolving, and navigating these intricacies requires the adaptability and intuition that can only be honed through firsthand experience that refines these tools into effective instruments for success on Wall Street. Furthermore, many Wall Street adages are misleading, while others are spot on.

Below are timeless, real-world lessons I have learned that transcend trading strategies that all investors should understand.

Markets Can Remain Irrational Longer than You Can Remain Solvent

The “efficient market hypothesis” suggests that financial markets incorporate and reflect all relevant information into price. However, the quote “markets can remain irrational longer than you can remain solvent” underscores the unpredictability and persistence of irrational behavior in financial markets. You don’t have to look very hard to find proof.

In January 2021, GameStop (GME) soared more than 1,600% for no fundamental reason. Instead, a group of retail investors on Reddit orchestrated a short squeeze. Clearly, the market was irrational. However, the consequences were real.

“Black Swan” Events Occur Every Handful of Years

A black swan event refers to an unexpected and highly improbable occurrence that has a profound impact, often deviating from conventional wisdom or historical norms. These events are characterized by their rarity, extreme consequences, and the challenge they pose to predictability. While such events do not occur annually, they do occur more than most investors anticipate due to the cyclical nature of the market and economy.

For example, in 2022, we had the brutal tech bear market spurred on by 40-year highs in inflation, where the Nasdaq shed more than 30%. Just two years prior, the COVID-19-induced crash occurred in equities. Before that, it was the 2008 Global Financial Crisis. While it is an uncomfortable truth, in a complex and global economy, something is bound to break every five to ten years.

Valuations Are Not a Timing Device 

Investors often look at any stock or asset class rising dramatically and think of a bubble. In my experience, bubble is not a four-letter word, and more often than not, it represents an asset class that said investors missed out on.

Warren Buffett is perhaps the most famous value investor. However, Buffett is not known for his market timing, but rather his holding period of “forever.” It’s crucial that investors don’t fall into the trap of believing that valuations are a precise timing device for market entry or exit.

Remember, in 1999, Yahoo! started the big part of its run with an “overvalued” P/E ratio of 100x. By the end of its move, YHOO shares had a P/E north of 1,100x. Using valuations in a vacuum to time stocks would have meant missing out on the life-changing gains in the late 90's and several other periods -- something I am not willing to do.

Cut Your Losses, Run Your Winners

Legendary trader Ed Seykota once said, “There are old traders, and there are bold traders, but there are very few old, bold traders.” Unlike being a lawyer, accountant, or surgeon, on Wall Street, being a perfectionist works against you. That’s because even if you are the most brilliant investor in the world, you will be wrong occasionally. The market has a funny way of humbling even the most brilliant minds. In the long run, investors who cut their losses and run their winners survive and thrive.

Personally, I became a profitable and consistent trader after reading billionaire Paul Tudor Jones’s advice: “5:1 risk/reward. Five to one means I’m risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose.”

Listen to What The Market is Telling You

Stanley Druckenmiller is known for having the most consistent track record on Wall Street – more than 30 years of money management without a single losing year. If you watch a Druckenmiller interview, he always seems to lean bearish from a macro perspective and jokes about how he has called “seven of the past two bear markets.”

Though Druckenmiller has a bias, ultimately, he is consistent because he listens to what the market is telling him rather than trying to force his bias on it.

Sometimes When You Pick Bottoms, All You End Up With is Stinky Fingers

“The trend is your friend until the end when it bends.” Trends on Wall Street tend to persist in both directions. What seems high often moves higher, and vice versa. While, in theory, it may be enticing for investors to try to pick bottoms, most would be better served to latch onto existing trends and ride them until the trend breaks.

Macro Should Take a Back Seat

If the market traded strictly off math and economics, math and economics professors would be the best investors in the world. While the macroeconomy can be interesting to try to dissect, it has one major issue – it is lagging. Stocks trade off liquidity (the Fed, dry powder, etc.) and are forward-looking.

The proof? In the past three major bear markets, stocks bottomed long before earnings did. In other words, if you were strictly focused on the macro, you were caught flat-footed.

Stick to Institutional Quality Stocks 

Institutional-quality stocks have several advantages over other stocks. First, they provide somewhat of a safety net. For example, if Fidelity Contrafund owns a stock, it means their 500+ person research team has done their due diligence on the company.

Second, they offer liquidity. If bad news hits a stock, the importance of liquidity becomes abundantly clear. Finally, institutions accumulate shares over months and years, not days. Meaning retail investors can “piggyback” onto these stocks for significant gains.

75% of Stocks Follow The Market Direction

The best thing investors can do is stay on the side of the market. When the S&P 500 is above the 200-day moving average, it’s in a bull market. When it's below, it’s a bear market. Because most stocks follow the market direction, investors must be aware of the overall market’s direction.

Journal Your Trades

Brand new investors want to be led to the next hot stock. Amateur investors study the market and stocks to make informed decisions. Professional investors learn the market, stocks, and most importantly themselves. My performance began to improve rapidly when I started journaling my trades.

At a minimum, investors should conduct a year-end post analysis where they do a deep dive into their 10 biggest winners and losers for the year. Plot on the chart where you bought, sold, and any other relevant information you can gather. While the process may be tedious, I can nearly guarantee you that it will pay immediate dividends.

Pay Yourself

Finally, after a big run in your account, you should “pay yourself.” Extract money from the market to pay your mortgage, rent, or put away in the bank. The best time to do this is when you feel smart. Never ever suffer from visions of grandeur.

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