By Silvia Ascarelli, MarketWatch
Larry Hite is a long-time successful hedge-fund manager who doesn’t believe he — or really anyone — can predict what the stock market (and other markets) will do next, or which seemingly successful companies will suddenly crash. (Just remember Enron, he says.)
Nor does he care much for Wall Street’s standard buy-and-hold advice for small investors.
Rather, the 78-year-old has become fabulously wealthy using computer programs to detect and follow price trends — and by following one simple rule: cutting his losses early. He founded Mint Investment Management Co., and the composite of funds achieved a compounded annual rate of return above 30% before fees during his 13-year run there. He now runs Hite Capital, a family wealth management firm.
“I love making money,” he says.
Hite expounded on his approach to investing in his new book, “ The Rule: How I Beat the Odds in the Markets and in Life―and How You Can Too .” He discussed his investment style, a current trade and some of his best and worst trades in an email interview with MarketWatch.
Question: Which of your current trades are you most excited about?
Answer: I’m interested in stocks that went from selling software to subscription models. Companies with a recurring subscription model like Apple /zigman2/quotes/202934861/composite AAPL +1.28% , Netflix /zigman2/quotes/202353025/composite NFLX +1.37% or Amazon /zigman2/quotes/210331248/composite AMZN +1.05% have not only a recurring revenue, but also a captive revenue.
Q.: Why did you make it? And when?
A.: Within the last few years because we are all electronically hooked up and companies like Apple are the amplifiers. Subscription models are a revolution in retail because the monthly or annual revenue generates a steady stream of cash.
Q.: What would make you get out of it?
A.: If the share price hits my stop-loss threshold of 2%. I’m always measuring the risk and move quickly. If it drops, I get out and preserve my capital and look forward to the next opportunity.
Q.: How many trades do you have on at a time, on average? And, on average, how many others are you monitoring for an entry point?
A.: We are technical traders and the number of trades we have could have at any given time is driven by numbers: price, volume, averages, etc. As for monitoring for trades, that is driven by the methodology we trade on and the universe of stock and commodities that we have defined. Currently in our systems we are monitoring 600 stocks, and we could have a maximum of 30 in active trades.
Q.: On average, how long are you in a trade?
A.: I go trade by trade and really focus on the price and the trend. I watch the markets and ride the momentum. To quote David Ricardo who had three golden rules ‘’Never refuse an option when you can get it; cut short your losses and let your profits run on.”
Q.: What’s been your best trade ever, and why did you make it? And you got out because..?
A.: In the mid 70’s, the coffee market’s prices were extremely low; there was a glut of supply and farmers were getting hurt. I researched 50 years of weather patterns and supply/demand data and saw that coffee consumption had been rising for a long time but prices hadn’t yet responded. I bought calls on coffee options futures betting their value would rise and I rode the trend from 60 cents to $3.10. My initial $500,000 investment went up to $15 million. When the trend reversed and went down, I got out with $12 million.