You Cant Be Afraid of Risk

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Risk control should not be confused with fear of risk. A willingness to accept risk is probably an essential personality trait for a trader. As Watson states, "You have to be willing to accept a certain level of risk, or else you will never pull the trigger." When asked what he looks for when he hires new traders, Cohen replies, "I'm looking for people who are not afraid to take risks."

17. Limiting the Downside by Focusing on Undervalued Stocks A number of the traders interviewed restrict their stock selection to the universe of undervalued securities. Watson focuses on the stocks with relatively low price/earnings ratios (8 to 12). Lauer will look for stocks that have witnessed market-adjusted declines of at least 50 percent. Okumus buys stocks that have declined 60 percent or more off their highs and are trading at price/earnings ratios under 12. He also prefers to buy stocks with prices as close as possible to book value.

One reason all these traders focus on buying stocks that meet their definition of value is that by doing so they limit the downside. As Lauer explains when talking about using a large price decline as a selection screen, "Right now, I'm only focusing on the question of how I make I don't lose money. I'm not talking about making money yet." Another advantage of buying stocks that are trading at depressed levels is that the stocks in this group that do turn around will often have tremendous upside potential.

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