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Key Quotes From Paul Tudor Jones in TRADER: The Documentary

Posted on September 22, 2011 by Coke| 10 Comments

Paul Tudor Jones is famous for correctly predicting Black Monday when the Dow Jones Industrial Average dropped by 22 percent in one day. I recently re-watched TRADER: The Documentary, one of the classics in investor education. Wikipedia describes it as:

In the 1987, PBS film “TRADER: The Documentary”. The film shows Mr. Jones as a young man predicting the 1987 crash, using methods similar to market forecaster Robert Prechter.

Although the video was shown on public television in November 1987, very few copies exist. Those that do are hoarded by traders who watch the hourlong movie in the hope of gleaning possible trading tips from Jones. On the Internet, bids for the video start at $295. According to Michael Glyn, the video’s director, Jones requested in the 1990s that the documentary be removed from circulation. The video surfaced briefly on YouTube at the end of July 2009, before being taken down due to alleged copyright violation.

For the past two years, the video has been available here at Tudou, but recently has only been limited to viewers in Asia due to copyright violation. I watched a copy that I had saved to my local hard drive recently with the purpose of transcribing certain portions that I found particularly enlightening.

One theme throughout the documentary is that Paul Tudor Jones and other individuals profiled thoroughly enjoy the act of analyzing financial markets and they are not primarily driven by greed. This is a defining characteristic of investment managers who have reached the top of their profession:

Well I originally decided to come here to be on vacation, getting away from everything. Then as it turned out, a number of the clients are here in Europe, so I’ve been doing an enormous amount of business. I’ve been in Paris, I’ve been in Geneva, so I can combine business with pleasure. I wish it had been more pleasure, but I still wouldn’t trade it for anything in the world. If life ever ceased to be an educational experience, I probably wouldn’t get out of bed.

After a while, the size means nothing. It gets back to the question of whether you’re making a 100 percent rate-of-return on $10,000 or $100 million. It doesn’t make any difference. If you complete 78 percent of your passes, it’d be nice if you were in the NFL, but if you’re in college or high school or even elementary school, I’m sure the thrill is just as great.

Paul Tudor Jones’s intensity and passion is quite apparent throughout as well. The film crew follows him over a course of several months, so viewers are able to see him on a down 5 percent day and an up 5 percent day. Paul Tudor Jones shares some insights on the qualities he values most as an investment manager:

The whole concept of the investment manager making these incredible intellectual decisions about which way the market is going to go — I don’t want that guy managing my money. If he can be that dispassionate, he doesn’t have the competitive nature which is necessary to be a winner in this game. I want the guy who is not giving to panic, who is not going to be overly emotionally involved, but who is going to hurt when he loses. When he wins, he’s going to have quiet confidence. But when he loses, he’s gotta hurt.

To do the job right requires such an enormous amount of concentration. It’s physically and emotionally mandatory that you find some time to relax. And you’ve got to be able to turn it off like that. There will be times though that I get so incredibly excited about a trade or even a project that I’ll wake up at 4 o’clock in the morning and there’s no way in hell that I’m going back to sleep. I’ll sit there in my dreams and trade for four hours.

The one piece of advice directly applicable to individual investors is found in the middle of the documentary and it is quite simple:

Where you want to be is always in control, never wishing, always trading, and always first and foremost protecting your ass. That’s why most people lose money as individual investors or traders because they’re not focusing on losing money. They need to focus on the money that they have at risk and how much capital is at risk in any single investment they have. If everyone spent 90 percent of their time on that, not 90 percent of the time on pie-in-the-sky ideas on how much money they’re going to make. Then they will be incredibly successful investors.

And finally, Paul Tudor Jones’s comments on predicting Black Monday are eerily accurate and insightful:

The accumulation and then the repayment of debt basically drives every economic cycle that there is. Right now we have probably explored the envelope with regard to mortgaging our future earnings. The next part of this cycle will be the repayment of what we’ve enjoyed now for the past four or five years.

The last guy who buys a share of stock when the Dow is at 3,000 or whatever number it is, he’s buying it because he thinks it’s going to 6,000 because it’s been reinforced in his mind over the past however many number of months, years, or decades that stocks can’t go down.

The one thing that I’m certain about as a trader, and you’re talking to someone who is incredibly long the stock market, is that all of Wall Street and the investment community at large basically is geared towards a Dow somewhere in the 2,600 to 3,200 range. These are people who have track records that are impeccable. Let’s assume that they are 100 percent wrong. If nothing else, there will be a time unquestionably when the market turns down. The investment community almost at once will say “this was the top”, and you’re going to have all the people who are right now very comfortably investing, that are feeding off the hope that the market will go higher, try to get out at the same time. It’s just a question of how fast before we hit the bottom.

I highly recommend readers to watch this documentary. It has a very strong 80′s feel to it which is quite pleasant. Thorough searching through Google should yield a download link — if not, please contact me and I can try to help you obtain a copy.

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Curated Interview With Jim Rogers From Market Wizards

Posted on July 30, 2011 by Coke| Leave a comment

I previously wrote a post about Market Wizards: Interviews With Top Traders. This post is the eighth in a series of curated interview questions and responses from the notes that I took while reading the book.

Who is Jim Rogers?

Jim Rogers is perhaps the most well-known trader interviewed by Jack D. Schwager in Market Wizards. Rogers and George Soros founded the Quantum Fund in 1973, one of the longest-running and best-performing hedge funds in the world.

Jack D. Schwager was eager to interview Rogers “because of his stellar reputation as one of the shrewdest investors of our time” and Rogers is unique in the sense that he is one of the only traders interviewed in the book that considers himself a bad trader. Rogers says, “I am probably not the person you want to interview. I often hold positions for many years. Furthermore, I’m probably one of the world’s worst traders. I never get in at the right time.” Rogers humble response does not change the fact that he is widely considered as one of the most famous and successful traders of our generation.

The notes I took on this chapter are the longest, and I consider his interview to be the most helpful, most entertaining, and best interview in the book.

On a margin of safety:

Whenever I buy or sell something, I always try to make sure I’m not going to lose any money first. If there is very good value, then I’m probably not going to lose much money even if I’m wrong.

It sounds like you have a great deal of conviction when you put on a trade.

Yes, I usually do; otherwise, I don’t bother doing it. One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people – not that I’m better than most people – always have to be playing; they always have to be doing something. They make a big play and say, “Boy, am I smart, I just tripled my money.” Then they rush out and have to do something else with that money. They can’t just sit there and wait for something new to develop.

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Curated Interview With Marty Schwartz From Market Wizards

Posted on July 28, 2011 by Coke| 1 Comment

I previously wrote a post about Market Wizards: Interviews With Top Traders. This post is the seventh in a series of curated interview questions and responses from the notes that I took while reading the book.

Who is Marty Schwartz?

Marty Schwartz is best known for his repeated entries in the U.S. Trading Championships, a four-month trading championship where contestants begin with $400,000 in trading capital. In nine of the ten championships, his average return was 210 percent non-annualized, making more money than all the other contestants combined.

He is also the author of Pit Bull: Lessons from Wall Street’s Champion Day Trader, a semi-autobiographical account of his career as an independent trader.

Marty Schwartz’s responses in Market Wizards are unique because he is an individual trader and his advice is geared towards individual traders. Most of the other traders interviewed in Market Wizards are professional money managers, and while they are extremely successful traders, their experience and responses are best suited for people with backgrounds similar to theirs. Schwartz’s story should also encourage traders whose initial attempts at trading have not been successful since Schwartz himself was consistently unsuccessful over a 10-year period. It wasn’t until he found a trading style that matched his personality and changed his mindset that he became successful.

Reflecting on his history of consistent losses in the stock market:

In 1976, I met my wife-to-be and she had a profound effect on me. She made me realize that my life was not a dress rehearsal; it was the real thing and I had been screwing it up. Although I had steadily earned good salaries, I was still almost broke because I consistently lost money in the market. By mid-1978, I had been a security analyst for eight years and it had become intolerable. I knew I had to go something different. I always knew I wanted to work for myself, have no clients, and answer to no one. That, to me, was the ultimate goal. I had been brooding for years, “Why wasn’t I doing well when I was groomed to be successful?” I decided it was now time to be successful.

On analyzing market sentiment:

I talked to my friend Bob Zoellner several times a day, and he taught me how to analyze market action. For example, when the market gets good news and goes down, it means the market is very weak; when it gets bad news and goes up, it means the market is healthy.

When did you turn from a loser to a winner?

When I was able to spate my ego needs from making money. When I was able to accept being wrong. Before, admitting I was wrong was more upsetting than losing the money. I used to try to will things to happen. I figured it out, therefore it can’t be wrong. When I became a winner, I said, “I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.” By living the philosophy that my winner are always in front of me, it is not so painful to take a loss. If I make a mistake, so what!

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Curated Interview With Michael Steinhardt From Market Wizards

Posted on July 26, 2011 by Coke| Leave a comment

I previously wrote a post about Market Wizards: Interviews With Top Traders. This post is the sixth in a series of curated interview questions and responses from the notes that I took while reading the book.

Who is Michael Steinhardt?

Michael Steinhardt began his career on Wall Street as a research assistant and later found positions as a financial journalist and research analyst. After a successful career as an analyst, he founded one of the earliest hedge funds, Steinhardt, Fine and Berkowitz at the age of 26. He is considered a legend in the hedge fund industry not only because he was one of the earliest hedge fund managers, but also because of his remarkable investment performance. At the time Market Wizards was written, Steinhardt’s firm had achieved a compounded annual growth rate of over 30 percent in the 21-years since its inception. This far outperformed the S&P 500 which only achieved an 8.9 percent return over the same time period.

I thought that Steinhardt’s responses in highlight the importance of having a contrarian mindset (which he refers to as “variant perception”) and remaining flexible. This chapter is also one of the more interesting chapters in Market Wizards and another interview that I highly recommend.

How would you define your philosophy of trading?

My particular style is a bit different from that of most people. Concept number one is variant perception. I try to develop perceptions that I believe are at variance with the general market view. I will play those variant perceptions until I feel they are no longer so.

Could you give me an example of variant perception in the current marketplace?

We have been short Genentech for a year and a half. There was a period of months and months when we lost a lot of money in that position. But I stayed short because I continued to have a variant perception about the future of their drug, TPA. [TPA can be injected intravenously to dissolve blood clots.] It is our perception that, in a year or two, TPA will be a minor drug that will be supplanted by more effective drugs that also cost substantially less. The thrust of the entire company has been based on this one drug. If our perception is correct, this company will be earning 20 or 30 cents per share and selling for under $10. The stock is currently at $27 [June 1988], down from a high of $65. [By late November, Genentech had fallen below $15 and Steinhardt was still short.] But I think the general perception is still that Genentech is a first class biotechnology company that will produce many products that are going to revolutionize the industry. As long as my view is a variant perception, I will stay short.

My attitude has always been that to make money in the markets, you have to be willing to get in the way of danger. I have always tended to short stocks that were favorites and backed by a great deal of institutional enthusiasm. Generally speaking, I have tended to short too early and, therefore, have usually started off with losses in my short positions. If I short a stock and it goes up a lot, it may skew my exposure a bit, but as long as my variant perception is unchanged, I’ll stay short. If I’m wrong, I’m wrong.

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Curated Interview With Ed Seykota From Market Wizards

Posted on July 23, 2011 by Coke| 1 Comment

I previously wrote a post about Market Wizards: Interviews With Top Traders. This post is the fifth in a series of curated interview questions and responses from the notes that I took while reading the book.

Who is Ed Seykota?

Ed Seykota is one of the pioneers of computerized trading systems and has been extraordinarily successful with a combination of technical analysis and trend following techniques. Jack D. Schwager writes that Seykota is “one of the best traders of our time”. Seykota claims that one account that he managed in 1972 started with $5,000 and over the course of 16 years has achieved a return of over 250,000 percent on a cash-on-cash basis and several million percent after adjusting for withdrawals. His interview is worth the read for traders interested in implementing a systematic trading system.

Without divulging trade secrets, how have you been able to so spectacularly outperform standard trend-following systems?

The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. There are old traders and there are bold traders, but there are very few old, bold traders.

Witty and true, but the question remains, albeit in translated form: There are many trend-following systems with money management rules; why have you done so much better?

I seem to have a gift. I think it is related to my overall philosophy, which has a lot to do with loving the market sand maintaining and optimistic attitude. Also, as I keep trading and learning, my system (that is the mechanical computer version of what I do) keeps evolving. I would add that I consider myself and how I do things as a kind of system which, by definition, I always follow. Sometimes I trade entirely off the mechanical part, sometimes I override the signals based on strong feelings, and sometimes I just quit altogether. The immediate trading result of this jumping around is probably breakeven to somewhat negative. However, if I didn’t allow myself the freedom to discharge my creative side, it might build up to some kind of blowout. Striking a workable ecology seems to promote trading longevity, which is one key to success. Continue reading →

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Curated Interview With Paul Tudor Jones From Market Wizards

Posted on July 23, 2011 by Coke| Leave a comment

I previously wrote a post about Market Wizards: Interviews With Top Traders. This post is the fourth in a series of curated interview questions and responses from the notes that I took while reading the book.

Who is Paul Tudor Jones?

Paul Tudor Jones is the founder of Tudor Investment Corporation, an umbrella corporation for various hedge funds that are so successful that he is able to charge more than the standard 2/20 fee structure that most “normal” hedge funds are able to charge (2% of the assets under management as the management fee and 20% of the profits). Tudor Investment Corp. charges a 4% management fee and keeps 23% of the profits.

Some of his other achievements include registering a 62% return in the month of October 1987, the same month as Black Tuesday, one of the most devastating market crashes in history. He also has achieved returns over 100% for five consecutive years and has thus far suffered only one down year in his professional investing career.

He is also profiled by PBS in Trader: The Documentary which features an inside look at Jones and Tudor Investment Corporation in the months prior to October 1987.

Jones is one of the more well known traders interviewed in Market Wizards, and I personally thought that his interview responses were extremely informative and helpful to me. I strongly recommend absorbing the wisdom contained in the following curated interview questions and responses.

On changing one’s position quickly and decisively:

There was insufficient time to complete the interview at our first meeting. I returned about two weeks later. Two things were notable about this second meeting. First, whereas he had been strongly bearish and heavily short the stock market at the time of our first conversation, jones’ short-term opinion on the stock market had shifted to bullish in the interim. The failure of the stock market to follow through on the downside at the price and time he had anticipated convinced him that the market was headed higher for the short term.

“This market is sold out,” he emphasized at our second meeting. This 180-degree shift in opinion within a short time span exemplified the extreme flexibility that underlies Jones’ trading success. He not only quickly abandoned his original position, but was willing to join the other side once the evidence indicated his initial projection was wrong.

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Curated Interview With Richard Dennis From Market Wizards

Posted on July 18, 2011 by Coke| Leave a comment

I previously wrote a post about Market Wizards: Interviews With Top Traders. This post is the third in a series of curated interview questions and responses from the notes that I took while reading the book.

Who is Richard Dennis?

Richard Dennis is another trader with an excellent reputation but surprisingly little is known about his personal life and background. It seems that he prefers to keep a low profile, similar to Bruce Kovner who I wrote about here. Nevertheless, Jack D. Schwager felt that he was an “essential name” to include when drawing up a list of interview candidates for his book and other traders interviewed in his book remarked “I’m not in his league,” when they learned about Richard Dennis’ involvement.

Richard Dennis is best known for conducting an experiment with fellow trader William Eckhardt to answer the question of whether trading could be taught. Richard Dennis believed that trading was a skill that could be defined by a set of rules while William Eckhardt believed otherwise, claiming that elite traders possessed an innate gift or instinct for trading. To settle this debate, Richard Dennis recruited 23 traders from a pool of over 1,000 applications. Richard Dennis taught them a basic trend following trading strategy along with probability and money management and allowed them to manage $100,000 of his own money. Richard Dennis’s experiment proved that his hypothesis was true — he claims that his recruits averaged 100 percent profit per year.

On the right psychological mindset:

For a lot of traders, it doesn’t matter so much whether their first big trade is successful or not, but whether their first big profit is on the long or short side. Those people tend to be perennial bulls or bears, and that is very bad. Both sides have to be equally OK. There can’t be anything psychologically more satisfying about one than the other. If there is, your trading is going to go askew.

On taking losses:

Since then, I have learned that when you have a destabilizing loss, get out, go home, take a nap, do something, but put a little time between that and your next decision. When you are getting beat to death, get your head out of the mixer. Looking back, I realized that if I had had a trading rule about losses, I wouldn’t have had that traumatic experience.

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Curated Interview With Bruce Kovner From Market Wizards

Posted on July 14, 2011 by Coke| 1 Comment

I previously wrote a post about Market Wizards: Interviews With Top Traders. This post is the second in a series of curated interview questions and responses from the notes that I took while reading the book.

Who is Bruce Kovner?

New York magazine refers to Bruce Kovner as the most powerful New Yorker you’ve never heard of. Jack D. Schwager writes in Market Wizards that Bruce Kovner may be the world’s largest trader in the interbank currency and future markets. He is the founder of Caxton Associates, a global macro hedge fund with an estimated $14 billion in assets under management – one of the world’s largest hedge funds.

Bruce Kovner struggled to find a direction in his career early in his life. After dropping out of his Ph.D program from Harvard, he took jobs as a political campaign manager, a pianist, and a cab driver before entering the world of commodities trading. He is also intensely secretive, shy, and humble. There is surprisingly little information about his personal life (the New York magazine’s piece contains the most detailed information that I found), but what little I found was extremely high praise for Bruce Kovner’s intellect. His interview in Market Wizards was one of the more insightful interviews in the book and is a must read for students of financial markets. The notes that I took on this section are longer than others.

On making mistakes:

October 19, 1987 – the week of the stock market crash. I closed out all my positions on October 19 and 20 because I felt there was something happening in the world that I didn’t understand. The first rule of trading – there are probably many first rules – is don’t get caught in a situation in which you can lose a great deal of money for reasons you don’t understand.

You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.

You are one of the most successful traders in the world. There are only a small number of traders of your caliber. What makes you different from the average guy?

I’m not sure one can really define why some traders make it, while others do not. For myself, I can think of two important elements. First, I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen. Second, I stay rational and disciplined under pressure.

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Curated Interview With Michael Marcus from Market Wizards

Posted on July 11, 2011 by Coke| 4 Comments

I previously wrote a post about Market Wizards: Interviews With Top Traders. This post is the first in a series of curated interview questions and responses from the notes that I took while reading the book.

Who is Michael Marcus?

Michael Marcus previously worked as a trader at Commodities Corporation, an investment management firm that was later acquired by Goldman Sachs. Reportedly, Michael Marcus was able to increase his account 2500-fold from $30,000 to $80 million over a span of 20 years.

Did the thought ever enter your mind that maybe trading was not for you?

No. I had always done well at school, so I figured it was just a question of getting the knack of it. My father, who died when I was fifteen, had left $3,000 in life insurance, which I decided to cash in , despite my mother’s objections.

On the secret to successful trading:

I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that the fundamentals suggest. Third, when news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news. If you can restrict your account activity to only those types of trades, you have to make money, in any market, under any circumstances.

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