WALK INTO ANY

And while traders aren't gamblers per se, a similar thing happens in the market. In the real world, cash is a scarce and valuable commodity. But once the check is written and sent to Schwab, hard-earned money becomes, at least in our minds, a stack of chips, ready to be anted up at the nearest table.

And when a click or keystroke can mean thousands of dollars, a fully funded brokerage account feels like Harrah's on your hard drive. From the craps table to Comverse Technology, it's much easier to lose big money when you're not thinking about the money.

So no matter at what level you play the game, you've got to get in the habit of keeping it real. In my experience, the best traders aren't gun-slinging gamblers, but pragmatic realists. They're better at seeing the world the way it is rather then the way they'd like it to be.

The game is called absolute return and it has but one rule: Don't lose money. So amid the slew of research reports and pundit prognostications, we can't forget that we're playing with real dollars, not casino chips. Every trade has risk, and even so-called defensive stocks can get whacked. Good traders tell it straight. They are experts at distinguishing between what is possible and what is probable. They know themselves just as well as they know the markets. In the futures world, keeping it real means that accounts are marked to market. The value of your portfolio is settled in full each night. Losses are debited, gains credited. There is no such thing as a "paper loss." Although this is a foreign concept to equity investors conditioned to wait around for the long haul, this is exactly how you should approach your stock portfolio.

As much as it hurts to admit it, a paper loss is still a loss. What matters isn't what price you paid for Nortel Networks, but where it's trading now, how much of it you own, and what effect the position has on your overall portfolio. Don't kid yourself into thinking that a loss isn't a loss just because you haven't seen fit to take it yet. As a trader, you've got to assess your portfolio as it is today not as it was last week, last year or the last time Tom Galvin reminded us how bullish he was.

But keeping it real means not only determining what you have, but how much you are willing to lose.

In allocating a portfolio, financial professionals use the terms "volatility" and "risk tolerance." What the heck do those mean, anyway? After all, nobody minds volatility as long as it's on the way up, and everybody's risk tolerance is high so long as returns are. So instead of qualifying the possibility of losses, try quantifying them in your own account. When it comes to controlling risk, concentrating on your portfolio's drawdown lets you determine your pain threshold, right down to the dime.

Drawdown simply refers to the percentage decrease in your account. If your $100,000 shrinks to $70,000, you've experienced a 30% drawdown. Unlike the ambiguity of "risk tolerance," drawdown cuts right to the chase. You've just taken a 30% loss. At what point does that pain grow severe enough to warrant some changes?

So draw a line in the sand. Decide in advance how much of your account is in "chips" money you can stand to lose and how much is in "savings" money you can't bear to part with. So let's say you've got a $100,000 account and have determined that, no matter what, you don't want to see your equity drop by more than 20%. Then let's assume the worst: While you diversified and hedged as a means of reducing risk, the sky falls in for whatever reason and your self-imposed drawdown limit is reached. Now you've got $80,000.

Should you hope things improve and wait for the bounce back? Not in my book. Don't be an optimist, but a realist. Take some losses, reduce your level of exposure and call a retreat.

A final trick for keeping it real. Every couple of months, I get a hundred dollars in cash and treat myself to a few of my favorite trinkets. I buy a new CD. Or an art book. I'll buy insanely sugary cereal or a high priced bottle of wine. I find an affordable indulgence and pay for it in cash. Over the next few weeks, you should give it a try.

The point is to reacquaint yourself with money and its meaning. There are very few times when we must actually use the good old American greenback these days. Most of us rely on plastic, checks or account numbers to store the medium of money. Carrying cash is almost quaint; even the

takes credit cards now. And as a trader, chances are you don't request a check every time you pull the trigger on a winning trade.

So get a big wad of cash, preferably in singles, bring it home and play with it. Ruffle the bills. Count them "Price-is-Right" style on your desk. Fold them every which way. Smell the cash. Feel it. Hold it up to your face.

Unlike chips in a casino or numbers on the screen, cash exists in reality. Put it in your pocket and reacquaint yourself with the delightfully dangerous feeling of having money to burn. A hundred bucks in cash feels like real money, doesn't it? And yet most of us would drop 10 times that in an instant on the market and not even blink an eye.

That's what I mean about making it real. While money can't buy happiness, it's a wonderful feeling to know that, from gourmet coffee to a first run film, a whole lot of enjoyment can be squeezed out of a measly hundred bucks. Buying something with cash is an easy way to remind yourself just how good money can feel, and how much it matters. I want you to remember that feeling the next time you want to double down on some dog with fleas or bet half your portfolio on a single punt.

Next week: Options Away!

Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management, a Chicago-based hedge fund.