It took the loss of a massive $300,000 during the bear market of 2001 to cause Robert Kreft to come to his senses.
Declaring that from experience he has learned that human nature will usually overlook the risks in favour of the rewards, he confesses that greed drove his second foray into trading in 1999.
He got burnt during the crash of 1987 during which he lost $17,000 and steered clear of the market for 12 years but was “sucked in” again by marketing, which pushed the potential of the great wins that could be made through trading options.
“I fell for it,” he says.
“I was trying to find an easy way out. I’d worked hard for years and thought, there’s got to be a better way.”
Initially enticed into trading in the mid-80s by a friend who offered him trading tips, Kreft, at that stage a young man in his early 20s, was seduced and borrowed $10,000 to fund his venture.
In under three months his $10,000 had increased to $27,000 thanks to Alan Bond’s successful enterprises, into which Kreft invested heavily courtesy of his mate’s advice. “He’d ring and say, buy. Then he’d call back and say, sell. It all seemed so simple,” he says.
Just days before the market crashed in October 1987 Kreft dreamt that he needed to repay the $10,000 loan. He sold on the Friday and the market crashed the following Monday.
Within a few months the remaining $17,000 had diminished to zero.
He walked away but retained a cursory interest and in 1999 began trading again prompted by the raging bull market, the technological advances and the knowledge that there was money to be made.
He began with fundamentals and in hindsight says it would have been hard to make a blunder. “It was almost a matter of throwing a dart and seeing where it landed,” he laughs.
His $300,000 loss, mainly on blue chip stocks in 1999 stgastated him and he concedes that facing up to his personality weaknesses – which he believes contributed largely to the predicament in which he found himself – was difficult.
Kreft adheres to the theory of US psychologist, Dr Van Tharp that trading is 60% psychology, 30% money management and 10% the system and scoffs at courses (of which he has done $100,000 worth) that claim that the system is the secret.
Today Kreft uses both fundamentals and technical analysis and disregards the notion that the two should not be combined.
He allocates 15% of his capital to trading in speculative stocks and has predetermined ‘stops’ based on the volatility of the share. “It’s called trading but I call it risk management,” he says.
Kreft uses an ATR (Average True Range), which ascertains the highs and lows of a stock.
He avoids treating any two stocks the same and believes that the volatility of a stock, which the ATR measures, is the essential character of each share. The volatility determines how many stocks he can buy.
His systems score a six out of ten for accuracy. “For anyone who always needs to be right this would drive them crazy,” he says. “But my wins are three times as big as my losses so I don’t have to be right all the time. It’s all a numbers game.
“One of my coaches made $1.5 million last year and his system only produces four right out of ten.”
Kreft uses a number of different systems – daily, weekly, speculative – and goes long and/or short depending on the climate. On his daily system he has a 10, 15 or 30-day moving average. A strict rule is not to buy and only short sell if a stock goes below a moving average. His best month over the past year raked in $30,000.
“If I was frugal I could probably live off my trading. But I like to spend money too much,” he chuckles.