Lessons from Hedge Fund Market Wizards: Steve Clark

Photo via marshfieldrodandgunclub.com

"Remarkable performance consistency". 

These are the words Jack Schwager uses at the outset to describe the track record of Steve Clark's Omni Global Fund. 

In his opening notes on Clark's event-driven hedge fund, Schwager points out that Omni Global has been profitable every year since its inception in 2001. This, of course, includes the panic year of 2008, during which Clark handily outperformed the Hedge Fund Research index of funds sharing this strategy. 

The combination of strong gains and moderate equity drawdowns and losing periods gave Omni Global an "extremely high Gain to Pain ratio", a return/risk measure favored by Hedge Fund Market Wizards author, Jack Schwager. In other words, he is very, very good. 

On to the interview lessons... 

1. Steve Clark was "brutally honest" in his interview with Schwager. In the opening, Clark describes his background; raised in a council house on the outskirts of London, no father in sight, no university degree, and no initial trading experience. Clark was installing stereo systems when a friend told him about trading jobs in the City.  Sometimes interest and motivation are more important than "pedigree".

2. He worked a series of back-office jobs and assistant roles before getting a shot at running a market-making book. He got his first chance to trade the book while filling in for a trader on holiday...during the week of the October 1987 crash. Trial by fire situation.

3. Steve learned a valuable lesson making prices on October 19, 1987: the price is where anyone is prepared to deal, and it can be anything. Steve found he had to quote prices so low until sell orders dried up. He still lost several million pounds on his book that day.

4. Eventually he became the most profitable trader in his group. Steve credits this shift to his ability to cut positions that were down or "wrong". He also traded around news to orientate himself on "the right side of the market". Plus, he was inexperienced and didn't have the fear that cripples people who've been in the business for a long time.

5. Traded on order flow info and screened for stocks making moves on big volume. He also used charts to see what happened when stocks reached certain levels in prior periods. Clark cautions that he is not a big believer in predictive chart analysis.

6. Clark left his market-making job at top-rated Warburg for a better salary offer from Lehman Brothers. He soon found that he couldn't make money at his new firm, having left behind an environment that was rich in order flow information. It was a shock to his ego and caused him to doubt his ability as a trader. It happens to the best of us.

7. Eventually he bounced back and over time developed contacts with trusted brokers. He used their order flow info to gauge near-term market sentiment on news events. If he was not aligned with momentum he would cut his position. Steve believes in buying on the way up.

8. Steve gives traders one key piece of advice: do more of what works and less of what doesn't. Dissect your P + L and see what works for you (types of trades, timing, etc.) and what doesn't.

9. Price is irrelevant, it's size that kills you. If you are too big in an illiquid position, there is no way out.

10. Clark discusses a period of professional ups and downs that begins after the initial seed money for his first hedge fund fell through. After seeding a small fund on a shoestring using his own money, he wound up closing shop and went back to work for others. Thus began a hard road which led to some contentious litigation and Clark's disillusionment with The City. 

11. Set up his own fund in 2001 after a successful career move to First New York Securities. Despite his trading success, Clark says he is still waiting to find out "what I want to do when I grow up". A revealing section of the interview follows, in which Clark feels he has nothing to show for his trading career except money. "What have I accomplished?",  he asks.

It may be worthwhile to reflect on this issue. What are we in this for? Your values and your assessments of the pros and cons of a trading career may vary. 

12. Back to trading. It's the size of your position rather than the price at which you put it on that determines your ability to keep the position. Trade within your emotional capacity. Don't take on a bigger position than you can handle. If you wake up thinking about a position, it's too big.

13. When everything lines up, you need to swing for the fences. However, if the position starts acting in a way you don't understand, you need to cut it because that is a sign you don't know what is going on. 

14. Your job as a trader is to make the line [your equity curve] go from bottom left to top right. That's it. Don't get hung up on other supposed "mandates". Protect your capital and the direction of that equity line.

. . . .

That's it for this latest edition in our interview series. We'll have some new "Lessons from Hedge Fund Market Wizards" posts for you over the next few weeks. In the meantime, do pick up a copy of Hedge Fund Market Wizards to get the full color and detail of all these great trader interviews.

You can revisit the earlier posts in our Hedge Fund Wizards series (it's like a Cliff's Notes of investing) here:

a) Jack Schwager's insights from Hedge Fund Market Wizards. 

b) Lessons from HF Market Wizards: Colm O'Shea.

c) Lessons from HF Market Wizards: Ray Dalio.

d) Lessons from HF Market Wizards: Scott Ramsey.  

We have some more great stuff in the works, so stay tuned to the Finance Trends blog feed and our Twitter updates for the latest on upcoming posts. Thanks for reading!

Nassim Taleb on Antifragile at Google

 

Authors @ Google presents Nassim Taleb, discussing the concepts from his latest book, Antifragile: Things that Gain from Disorder. 

Here, Taleb offers his view that the opposite of fragility is not "robustness", as commonly supposed, but anti-fragility. Whereas things that are fragile need to be handled with care and kept in a state of tranquility, things that are anti-fragile benefit from volatility. 

According to Taleb, fragility and anti-fragility can be measured, whereas risk cannot (in spite of what Ivy League academics with risk models may think). You'll hear why anti-fragile systems have benefits that outweigh their risks, and why some fragile systems are vulnerable to "prediction error" and hidden, intolerable risks which vastly outweigh any associated benefits.

Using the example of Seneca, a wealthy Stoic philosopher who often imagined himself to be poor, Taleb suggests we should always try to have more upside than downside from random events - "and then you're anti-fragile". 

So let's hear it for an anti-fragile world of "many highway exits and options". It sounds a lot better than a world centered around top-down planning by the supposed elites.

Related posts: 

1. Nassim Taleb on Antifragility at Princeton.

2. Econtalk interview with Nassim Taleb on Antifragility.

Lessons from Hedge Fund Market Wizards: Scott Ramsey

Today we continue our series, "Lessons from Hedge Fund Market Wizards", with a look at Jack Schwager's interview with Scott Ramsey of Denali Asset Management. 

Ramsey, a futures trader and CTA who works on the island of St. Croix, spoke to Schwager about his first foray into the markets, his evolution as a trader, and the process he stands by to protect and grow his clients' money.

1). Ramsey started trading in college. He was roped into the OTC metals market via a broker's ad in the Wall St. Journal. The broker charged customers a flat fee to buy and sell as much as they wanted in a particular market for six month. At the time, Scott was a novice and didn't know about futures, so he traded metals in this fashion through the inflationary run-up of the late 1970s.

2). Scott had to rethink his trading strategy after he bought silver at $50 an oz., only to watch it collapse to $26 following a long string of limit-down days. He sold as soon as the market resumed trading, but he lost all the money he had made plus some starting capital.

3). "Losing money was what got me hooked", says Scott. He knew that some 90% of futures traders lost money and he was determined to be in the 10% that profited. This motivated him to succeed. He was so engrossed in trading that he left college 9 credits shy of graduating, despite being an excellent engineering student.

4). Scott learned to trade first w/ his own money, then by advising clients as a broker. He leased a seat on the IMM and tried trading from the floor. Being on the floor turned out to be a big disadvantage compared to screen trading. Scott felt there was a lack of meaningful info in the pits and he lost his feel from watching other markets. He soon left the floor.

5). Ramsey continued to broker and screen trade, watching every market and updating chart books by hand. He made money in his own account almost every year, but not a lot. Why? Ramsey says it was because he focused only on TA, not fundamentals. Also, because he regularly pulled money out of his account. He stayed a 1-2 lot trader instead of pushing it and increasing his size.

6). "The evolution of a trader is when you start letting your money work for you and increasing your size."
 
7). Scott is one of those traders who has used his time as a broker to his learning advantage. By observing retail clients, he learned what not to do - everything from holding losers and taking small profits to emotional decision making and chasing market activity.

8). In order to make the big money, Scott realized he had to embrace fundamentals. The transition began when he started thinking about prevailing sentiment in the bond market and why prices were where they were. He thought about how people were positioned and the psychology behind prices. He then initiated a trade that was positioned against the prevailing sentiment, which turned out to be a very profitable move. "I began to look at the market from the perspective of other traders."

9). Discussing market action during the Euro crisis, Ramsey notes, "The market's repeated resilience in the face of negative news tells me it wants to go higher. Chaos creates opportunity. We learn so much about the markets when we have crisis events."

10). Rigorous risk control not only keeps losses small, it impacts profit potential. You must be in a position to seize opportunity. The only way to do that is w/ a clear mind. Don't expend mental energy by managing poor trades. Cut those that are not working.

11). When asked what trading advice he offers to friends, Ramsey tells them that it's not about being right - it's about making money. Taking losses is part of the process, so don't dwell on losing trades. Think about your next trade. Trading is a business. Treat it like one, keep records of your trades and journal your experience.

Once again, I highly recommend reading Hedge Fund Market Wizards to get the full detail and feeling of these interviews. Hope you enjoyed this latest post and we'll see you back here, with more to come, soon. 

Happy New Year to all our readers and friends across the globe!  

If you're enjoying these posts and would like to see more, please subscribe to our free RSS updates and follow Finance Trends in real-time on Twitter and StockTwits. You can also check out our related posts below for more market wisdom and trading insights. 

Related posts: 

1. First 3 posts from "Lessons from Hedge Fund Market Wizards" series.

2. Lessons from Hedge Fund Market Wizards: Ray Dalio.

Photo credit: Trend Capture Futures.

Heads up: new "Market Wizards" posts coming soon...

Hi gang, just wanted to let you know that we'll have a new "Lessons from Hedge Fund Market Wizards" post up soon. In the meantime, you may want to check out the most recent posts from this series. 

Dive in with this introductory post: key interviews and a trading webinar with Hedge Fund Market Wizards author, Jack Schwager. The videos found in this post contain some excellent insights and quotes from the traders and hedge fund managers interviewed in Schwager's latest Wizards book.

Ready to learn from some of the most astute traders around? Here you'll find some choice trading and investing lessons from global macro trader, Colm O'Shea and noted hedge fund manager, Ray Dalio. 

You'll find the first 3 posts in our "Lessons from Hedge Fund Market Wizards" series below.

1. Jack Schwager shares insights from Hedge Fund Market Wizards.

2. Lessons from Hedge Fund Market Wizards: Colm O'Shea. 

3. Lessons from Hedge Fund Market Wizards: Ray Dalio.

Now if you'd like to keep up with our real-time updates and be alerted to our upcoming posts, please subscribe to the Finance Trends RSS feed or follow Finance Trends on Twitter (totally free). 

We'll see you next week with the latest in our "Market Wizards" series. Until then, thanks for reading and have a safe and happy holiday season!

Lessons from Hedge Fund Market Wizards: Ray Dalio

In our second installment of "Lessons from Hedge Fund Market Wizards", we'll offer up some trading and macroeconomic insights pulled from Jack Schwager's interview with Ray Dalio of Bridgewater Associates. 

You've probably heard of Ray Dalio if you have even a cursory knowledge of the hedge fund industry (or the Forbes billionaires list), so let's get right to it. These notes will fill in the rest of the story. 

1). Dalio is the founder and former CEO (now "mentor") of Bridgewater Associates, a fund that has returned more money ($50 billion) for investors than any hedge fund in history.  

2). Bridgewater still manages to achieve excellent returns on a huge base of capital and has done so over a long period of time. It is among the few hedge funds with a 20-year track record. 

3). Dalio believes that mistakes are a good thing, as they provide an opportunity for learning. If he could figure out what he (or someone else) was doing wrong, he could use that as a lesson and learn to be more effective.

4). His life's philosophy and management concepts are set down in a 111 page document called, Principles, which drives the firm's culture and daily operations. Identifying and learning from mistakes is a key theme. It also advocates "radical transparency" within the firm; meetings are taped and employees are encouraged to criticize each other openly.

5). "The type of thinking that is necessary to succeed in the markets is entirely different from the type of thinking required to succeed in school". Ray notes that school education emphasizes instructions, rote learning, and regurgitation. It also teaches students that "mistakes are bad", instead of teaching the importance of learning from mistakes. 

6). If you are involved in the markets, you must learn to deal with what you don't know. Anyone involved in markets knows you can never be absolutely confident. You can't approach trading by saying, "I know I'm right on this one." Dalio likes to put his ideas in front of other people so they can shoot them down and tell him where he may be wrong. 

7). "The markets teach you that you have to be an independent thinker. And any time you are an independent thinker, there is a reasonable chance you are going to be wrong."

8). Ray learned in his early working years that currency depreciation and money printing are good for stocks. He was surprised to see US stocks rise after Nixon closed the gold exchange window in 1971 (effectively ending the gold standard). The lesson was reinforced when the Fed eased massively in 1982 during the Latin American debt crisis. Stocks rallied, and of course, this marked the beginning of an 18-year bull market.

9). From these earlier experiences, Dalio learned not to trust what policy makers say. He has learned these lessons repeatedly over the years (much like our previous "Market Wizard", Colm O'Shea).  

10). Dalio vividly recalls a time when he was nearly ruined trading pork bellies in the early 1970s. He was long at a time when bellies were trading limit down every day. He didn't know when the losses would end, and every morning he'd hear the price board click down 200 points (the daily limit) and stay there. The experience taught him the importance of risk management - "I never wanted to experience that pain again".

11). "In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you're not going to make money, and if you are not defensive, you are not going to keep money.". 

12). Bridgewater views diversification and asset correlation differently than most. As Dalio puts it, "People think that a thing called correlation exists. That's wrong.". Instead, he describes a world in which assets behave a certain way in response to environmental determinants. Correlations between say, stocks and bonds, are not static, but are changing in response to "drivers" (catalysts) that can cause assets to move together or inversely.

13). By studying how asset prices move in response to certain drivers, Bridgewater looks to build portfolios of truly uncorrelated assets. By combining assets that have very slight correlations, they are able to diversify among 15 assets (instead of 100 or 1000 more closely linked assets). This helps them cut volatility and greatly improve their return/risk ratio. 

14). We are currently in the midst of a "broad global deleveraging" that is negative for growth. Since the United States can print its own money, it will do so to alleviate the pressures of deflation and depression. The effectiveness of quantitative easing will be limited, since owners of bonds purchased by the Fed will use the money to buy similar assets. Dalio elaborates on our future economic course and possible policy approaches to these problems throughout the interview.

There's a lot more in Schwager's chapter with Ray Dalio. These notes just scratch the surface on Bridgewater's process and their quest for the Holy Grail of investing. 

There is also an addendum to the chapter containing Dalio's big picture view of long-term economic cycles and a historical "stage analysis" of the economic rise and fall of nations.

Be sure to check out this latest Market Wizards book (a very worthwhile read) and look for our upcoming posts for more "Lessons from Hedge Fund Market Wizards". In the meantime, you'll find more lessons and interviews in our related posts below. 

If you're enjoying these posts and would like to see more, please subscribe to our free RSS updates and follow Finance Trends in real-time on Twitter and StockTwits. You can also check out our related posts below for more market wisdom and trading insights.  

Related posts:

1. Lessons from Hedge Fund Market Wizards: Colm O'Shea.

2. Jack Schwager interviews on Hedge Fund Market Wizards.

3. Ray Dalio in Barron's: "It's a D-Process". 

4. Ray Dalio's 'Principles'.

*Photo credit: Ray Dalio Blog.

Lessons from Hedge Fund Market Wizards: Colm O'Shea

In our first installment of "Lessons from Hedge Fund Market Wizards", we examine the lessons offered in Jack Schwager's interview with noted global macro trader and hedge fund manager, Colm O'Shea of COMAC Capital. 

Last week we brought you a brief overview of Hedge Fund Market Wizards, including several interviews with author Jack Schwager on the trading insights found within this new Market Wizards volume. 

We'll expand on those ideas throughout this series by zeroing in on our favorite interviews and highlighting some key lessons and quotes. Of course, our notes are just a sample of what readers will find in these interview chapters - we don't want to give away the store!  

Today, we'll look closely at some key insights offered in the book's opening chapter. Here are our notes on Schwager's interview with Colm O'Shea. 

1). Colm O'Shea began his career as a young economic forecaster. He was kept behind closed doors by his firm, who did not want clients to know their research reports and forecasts were written by a 19-year old who had landed the job before starting at university. 

2). Colm realized he did not want to continue publishing consensus-hugging forecasts, and he landed his first job as a trader at Citigroup after graduating from Cambridge. He went on to work for George Soros' Quantum Fund before founding his own firm, COMAC Capital.

3). O'Shea view his trading ideas as hypotheses. Moves counter to the expected direction are proof that his trade hypothesis is wrong. O'Shea is quick to liquidate these positions when they reach a pre-defined price (a level at which his trade hypothesis is invalidated). He risks a small percentage of his assets on each trade - position sizing. 

4). Received early lessons in trading and macro thinking by reading Edwin Lefevre's classic, Reminiscences of a Stock Operator. Colm points out that the character, Mr. Partridge teaches the protagonist (a thinly-veiled Jesse Livermore) to size up general conditions - "it's a bull market, you know!". 

5). Price movements take place in the context of a larger fundamental landscape. O'Shea believes one must pay attention to both the fundamentals and the technicals (price as seen through technical analysis) to make sense of the picture.
 
6). In his first week as a trader, the British pound was kicked out of the ERM (the famous Soros trade), much to his surprise. Recalls Colm, "I had absolutely no comprehension of the power of markets vs. politics. Policy makers [often] don't understand that they are not in control...it's the fundamentals that actually matter."

7). You can't be short just because you think something is fundamentally overpriced. In the example of the Nasdaq bubble, you should have been selling Nasdaq at 4,000 on the way down, not on the way up. Wait until the market turns over, or until you can see a turning point (a la George Soros shorting the pound).

8). Being short credit in 2006-2007 was the same as being short Nasdaq in 1999. Bubble pricing was evident and the problems were obvious. However, being short was a negative carry trade (in which one must pay a certain cost to maintain a speculative position through instruments such as credit default swaps) and credit spreads went lower (the trade went against you) before a turning point was reached. 

9). All markets look liquid in a bubble. It's liquidity afterwards that matters. Can you get out?

10). There does not have to be an identifiable reason for every trade. O'Shea cites the LTCM blowup in '98 as an example. At the start of the '98 crisis, there was no LTCM story in the press, but T-bond futures were limit up every day. "Once you realize something is happening, you can trade accordingly.". Trade hypothesis = something big is happening. I will participate, but do so in a way that I can get out quickly if wrong.

11). Most great trades are incredibly obvious to everyone after the fact. O'Shea points to his bearish turn at the start of the financial crisis in August 2007, when money markets seized up and LIBOR spiked. To this day, equity people wrongly point to March 2008 (Bear Stearns collapse) as the start of the crisis. The great trades don't require predictions, but you must see what other market participants won't.

12). Big price changes occur when people are forced to reevaluate their prejudices. Crisis (such as the inflationary threat from growing U.S. debt) may hit in the future when people notice and start to care. Bond yields will only signal there's a problem when it's too late. Fundamentals underlying the trade/event exist all along.

Hope you enjoyed the first in our series of "Lessons from Hedge Fund Market Wizards". Look for our next post, featuring hedge fund titan Ray Dalio, later in the week. 

If you're enjoying these posts and would like to see more, please subscribe to our free RSS updates and follow Finance Trends in real-time on Twitter and StockTwits. You can also check out our related posts below for more market wisdom and trading insights. 

Related posts:

1. Jack Schwager on Hedge Fund Market Wizards (interviews). 

2. Lessons from Hedge Fund Market Wizards: Ray Dalio.

Jack Schwager on Hedge Fund Market Wizards

If you're a fan of the Market Wizards books by Jack Schwager, then you've probably read (or are looking forward to reading) the latest in the series, Hedge Fund Market Wizards.

The review copy Wiley was kind enough to send me this summer. I've taken my sweet time re-reading it...

We'll be taking an in-depth look at this book and the insights of the "Hedge Fund Wizards" in an upcoming series of posts, but for now I'd like to share some key interviews and webinars with author Jack Schwager. 

These videos will give you a great inside look at Schwager's writing process, as well as offering some key lessons found in this new collection of interviews with leading traders and hedge fund managers. 

First, an Opelesque interview with Schwager in Manhattan: "15 Hedge Fund Market Wizard trading secrets and insights".



This discussion opens by noting that while markets have changed since the first Wizards books were published, the main principles behind the various traders' successes have not. Certain strategies and opportunities may have gone by the wayside, but successful traders have continued to hone in on what works for them as they strive for superior risk adjusted returns.  

Of supreme importance, Schwager finds, is the need to find a trading method that suits your personality. He cautions young traders from trying to emulate their trading heroes, since top traders may have an approach or strengths that differ from those of the would-be apprentice. You need to develop your own approach. 

If you enjoyed this interview and would like to dig further, check out Michael Martin's interview with Jack Schwager, as well as this Schwager Q&A webinar on the behaviors of Hedge Fund Market Wizards. 

One recurring theme that runs through these discussions is the quote, "There is no single true path". The Market Wizards profiled in this book, and throughout the series, have all found success by managing risk and pursuing the methods that suit their personalities and strengths. 

Join us next week, as we examine some key "Lessons from Hedge Fund Market Wizards" in our upcoming post series of the same name. See you then.         

If you're enjoying these posts and would like to see more, please subscribe to our free RSS updates and follow Finance Trends in real-time on Twitter and StockTwits.  

Cliff Asness of AQR: Bubble Logic

I'm reading a passage from Scott Patterson's book, The Quants, that looks back on the .com bubble. Let me share a few brief quotes from this section with you here.

Backdrop: "A few months before the dot-com IPO frenzy began, LTCM had collapsed. Greenspan and the Fed swept in organizing a bailout. Greenspan also slashed interest rates...the easy money added fuel to the smoldering internet fires...pushing the tech-laden Nasdaq to all-time highs on an almost daily basis." 

The .com boom proved disastrous for Cliff Asness' hedge fund, AQR, which invested in value stocks while "betting against companies his models deemed expensive". 

After agonizing over the fund's poor performance and the perceived boundless stupidity of market participants, Asness finally came to a realization about markets and crowds: investor irrationality does not stay within expected, "just right" modeled bounds. 

Surveying the scene near the peak of the internet bubble in 2000, Asness expanded on his views in an academic paper entitled, "Bubble Logic: Or, How to Stop Worrying and Love the Bull". 

Enjoy the historical market overview - maybe you'll find some lessons that apply to the markets of 2012 and beyond.

Self-education and the school of experience

You may find this next quote about self-education personally relevant, but then again, you may not. From Claude C. Hopkins' autobiography, My Life in Advertising... 

"...To poverty I owe the fact that I never went to college. I spent those four years in the school of experience instead of a school of theory.  I know nothing of value which an advertising man can be taught in college. I know of many things taught there which he will need to unlearn before he can steer any practical course."  

Having attended college (for a time), and from my own experiences and observations, I know that this passage rings true. You could substitute the words "advertising man" with the titles "artist", "writer", "economist", or "trader" and still get the same meaning.

You may have heard many entrepreneurs or autodidacts make similar remarks about the value of self-guided education and experience. You may also have heard many experienced, degreed professionals lamenting the need to unlearn much of what they were taught in universities. 

Someone mentioned Claude Hopkins in a book review I read today and I found my way to the aforementioned memoir from 1927. I thought I'd share it here with you. Hopefully, it will spur your thoughts on the value of formal education vs. "school of hard knocks".

Maybe we'll find some more chestnuts of wisdom inside. In fact, I'm sure we will, as the above passage came straight from chapter one! 

In the meantime, can you think of some important lessons (business, trading, creative, or otherwise) you've learned through self-guided education or your own passage through the school of hard knocks?   



Related posts: 

1. Marc Faber's advice to young people and the meaning of "success".

2. Michael Bigger: Starting Over.

Frederic Bastiat - The Law

"The law perverted! And the police powers of the state perverted along with it! 

The law, I say, not only turned from its proper purpose but made to follow an entirely contrary purpose! The law become the weapon of every kind of greed! Instead of checking crime, the law itself guilty of the evils it is supposed to punish!

If this is true, it is a serious fact, and moral duty requires me to call the attention of my fellow-citizens to it." - Frederic Bastiat, The Law (e-book, English translation).

Related articles and posts: 

1. Biography of Frederic Bastiat (1801-1850) - Mises.org.

2. The Law by Frederic Bastiat (audio book) - Free Audio. 

3. Works of Bastiat and web links - Bastiat.org.

Inner Voice of Trading: a lesson on ego and risk

Michael Martin was kind enough to recently send over a review copy (via the FT Press) of his new book, The Inner Voice of Trading. 

I've started reading through the book and have highlighted an important lesson on risk mgmt., ego, and the emotions we feel as humans who trade. 

Here are a few thoughts from chapter 2 of Michael's book, paraphrased or direct quotes, that address some of these issues: 

• Most traders drawn to risk management focus on the external "how to" aspect of trading, vs. the inner aspect of emotions and psychology. This is where trouble begins.

• Our American education system has ingrained in us the need for accuracy and regurgitation of info. We become conditioned to this accuracy model and the rewards of rote learning. The longer we remain in this reward model, the more it colors everything we do in life. 

• In the school model, one's self-esteem is tied to being right. Avoiding mistakes, especially public mistakes becomes paramount. But in trading, one can be wrong in most choices and experience regular "outlier" events in the course of trading the markets. Traders must somehow learn that they will miss out or be incorrect regularly and still have a shot at great success. 

• Traders need to have a survival plan. Know when you will get out of a trade before you get in.

• If you don't take the small loss today, your capital and trading career may not survive tomorrow.

• The most successful traders surrender their egos to not knowing the frequency or magnitude of any trend. They quiet their mind and follow their inner voice.

• Most of the world can't keep their losses small. Professional traders and investors who've been around for decades are usually those who play the best defense. 

I'll try to review the book in full after I've finished reading it. Till then, check out Michael's book along with this interview on The Inner Voice of Trading, and visit Martin Kronicle for more on trading from Michael and his interview guests.

Bruce Kovner retires: a Market Wizard's career

Bruce Kovner is stepping down as chairman and CEO of Caxton Associates, the hedge fund he founded in 1983. 

Bloomberg has the details on the transition that will see CIO Andrew Law take over at Caxton: 

"...“After 34 years in the trading business and more than 28 years leading Caxton, the time has come to hand the leadership of the company to a new generation,” Kovner, 66, wrote in the letter. “I do so knowing that I will miss the adrenalin rush of confronting markets every day but also confident that new leadership will carry on the traditions, style and substance of Caxton’s successful history.”...

...Kovner is attempting a rare handover of power in the $2 trillion hedge-fund industry, where some of the most successful managers, including Stanley Druckenmiller and George Soros, chose to transform their firms into family offices rather than put another trader in charge. A family office usually oversees money for a wealthy individual and their relatives." 

And a note on Kovner's successor Law, who offers up some interesting comments on lessons learned from Bruce Kovner and similarities in their trading styles:

"...Law’s trading style has always been similar to Kovner’s, he said in an interview in his office on Park Avenue in Manhattan. Yet the older man drove home some important lessons.

“I’ve learned to listen to the markets more,” said Law, meaning that he pays close attention to how markets move relative to one another, and how they react to events. He depends on these observations, rather than what he calls “abstract fundamental preconceptions,” to forecast future price movements.

Law also embraces Kovner’s practice of cutting risk when he doesn’t understand what’s going on in markets, something that Law did in May and June of this year. “Bruce has done this many times in his career,” he said."

Kovner is a true trading legend whose trading career really took off once he joined Commodities Corporation in late 1976. On his performance as a hedge fund manager, Financial Times sums up his 28 years thusly: "An investment of $1,000 in Caxton made when the firm began trading in 1983 would today be worth $168,000.".  

Kovner sat down for a rare interview with Jack Schwager in 1989. The resulting chapter on "Bruce Kovner - The World Trader" can be found on page 31 of this Market Wizards ebook. Check it out.

Schwager, Jack D. - Market Wizards 1989

Related articles and posts: 

1.  Bruce Kovner interview with AR magazine - Absolute Return.

J.J. Butler - Successful Stock Speculation (Scribd)

New to the Scribd trading books collection, John James Butler's, Successful Stock Speculation (1922). 

I was introduced to this short handbook on investing and speculation through Michael Bigger, who created an appended version of Butler's book with his own summary notes called, In Praise of Speculation. 

I'm just starting Butler's book, but I find his introductory notes quite useful in clearly defining the meaning and purpose of that now mistreated term (and misunderstood activity), "speculation". 

Butler defines the act of speculating as follows: 

"To speculate is to theorize about something that is uncertain. We can speculate about anything that is uncertain, but we use the word "speculation" in this book with particular reference to the buying and selling of stocks and bonds for the purpose of making a profit. 

When people buy stocks and bonds for the income they get from them and the amount of that income is fixed, they are said to invest and not to speculate. In nearly all investments there is also an element of speculation, because the market price of investments is subject to change. "Investment" also conveys the idea of holding for some time whatever you have purchased, while speculation conveys the idea of selling for a quick profit rather than holding for income.

To the minds of most people, the word "speculation" conveys the thought of risk, and many people think it means great risk. The dictionary gives for one of the meanings of speculation, "a risky investment for large profit," but speculation need not necessarily be risky at all. The author of this book once used the expression, "stock speculating with safety," and he was severely criticized by a certain financial magazine. Evidently the editor of that magazine thought that "speculating" and "safety" were contradictory terms, but the expression is perfectly correct. Stock speculating with safety is possible. " 

Enjoy the book and its classic insights.Successful Stock Speculation, By J. J. Butler The Project Gutenberg eBook

Trading lessons from Nicolas Darvas

Charles Kirk recently re-posted a very worthwhile rundown of trading lessons from Nicolas Darvas.

Here is an excerpt from that piece:

"Nicolas Darvas has inspired traders for many generations. His book, “How I Made 2,000,000 in the Stock Market” is one that you’ll find on many recommended reading lists including my very own. While some have argued that much of Darvas’ success had to do with lucky timing, his books are still widely read and for good reason.

A lot of traders can identify easily with Darvas because he went through the process of learning how to trade much like most people do today as he first began by searching for the “secret” to making money in the market. And, just like all of us have found, after finding no success from trading on the stock tips of others including brokers and expensive newsletters, Darvas figured out that he ultimately had to develop a trading system on his own..."

Check out Kirk's notes on Darvas' trading approach and the lessons gleamed from his famous book. This is a great rundown of the wisdom found in Darvas' personal approach to trading the stock market.

For those who'd like to read How I Made 2,000,000 in the Stock Market, you can find it at Amazon or read it online, here in the Scribd Trading Books collection.

Related posts:

1. What makes a great trader? Managing risk - Finance Trends.

2. Interviews with Nicolas Darvas - Maoxian.

Dana Galante on the value of auditing firms

Currently rereading Jack Schwager's Stock Market Wizards and I came across a very illuminating excerpt from an interview with short-seller, Dana Galante.

Had you read Galante's interview back in 2000, especially her comments on the value of auditing firms and the discretion banks and fund managers had in valuing illiquid investments, you might not have been surprised by subsequent events in our capital markets (read: Enron, Arthur Andersen, The Financial Crisis of 2007-2009, and so on).

Here's an excerpt from Schwager's chat with Galante in which she explains how a former boss was hiding trading losses from investors by marking up the value of illiquid private company investments in the fund's portfolio:

"JS: It almost sounds as if he was gambling with the portfolio.

DG: It sure appeared to be gambling. Looking back, it seemed that he tried to hide these losses by marking up the prices on privately held stock in his portfolio. He had complete discretion on pricing these positions.

How was he able to value these positions wherever he wanted to?

Because they were privately held companies; there was no publicly traded stock.

Is it legal to price privately held stocks with such broad discretion?

Yes. In respect to private companies, the general partner is given that discretion in the hedge fund disclosure document. The auditors also bought off on these numbers every year. He would tell them what he thought these companies were worth and why, and they would accept his valuations. They were these twenty-two-year-old auditors just out of college, and he was the hedge fund manager making $20 million a year; they weren't about to question him.

Another hedge fund manager I interviewed who also does a lot of short selling said that the value of audits on a scale of 0 to 100 was zero. Do you agree?

Yes.

Even if it's a leading accounting firm?

Oh yeah."

Now this type of exchange may not come as a surprise to readers in 2011, but I can assure you that plenty of people were shocked and caught unaware by these realities back in 2001-2003 and once again during the recent financial crisis.

So I guess the moral of the story is, do your own thinking and don't rely on the word of prestigious auditing firms and conflicted ratings agencies. Always do your own homework and try to understand how "business as usual" at the supposed safeguard firms can lead to disastrous results for those caught unaware.

Sebastian Mallaby interview: future of hedge funds

A few weeks ago on Twitter, we shared this interview with Sebastian Mallaby, who speaks to UC Berkeley about the future of the hedge fund industry for their "Conversations with History" series.

For those who may not know, Mallaby is the author of a recent book on hedge funds and the financial crisis called, More Money Than G-d: Hedge Funds and the Making of a New Elite. 

One point that really caught my interest early on in the interview is an anecdote Mallaby shares regarding Paul Tudor Jones and the factors he attributed to his own success as a trader and hedge fund manager.

As Mallaby tells it, PTJ's explanation for his success is not at all the real reason why he is successful, but it is part of a common theme of professionals misattributing causes to explain their colleagues' and their own successes.

Enjoy the discussion; it should prove especially interesting to those who are in the business or watching the hedge fund space closely.

Related articles and posts:

1. A.W. Jones and hedge fund history - Finance Trends.

2. Interview with Sebastian Mallaby: the history of hedge funds - Martin Kronicle.

Trader Vic and Market Wizards on Scribd

I've recently updated the Finance Trends "Classic Trading Books" collection on Scribd to include two personal favorites from Victor "Trader Vic" Sperandeo and Jack Schwager.

You'll now find Sperandeo's, Trader Vic: Methods of a Wall Street Master, along with the first volume of Schwager's classic interview series, Market Wizards in the collection.




You can find the scanned e-books and pdf downloadable versions by clicking on the titles in the Trading Books collection widget (RSS readers may need to visit our site to see the Scribd widget) or by visiting the collection shelf at the text link above.

You'll also find a widget embed code included, so feel free to grab it and paste it onto your site or your Facebook page. The widget will be updated automatically to show all newly added titles in the Trading Books collection.

For those of you who'd like a hard copy or Kindle version of these classic texts, visit Amazon (see title links above) to order Sperandeo and Schwager's books. Enjoy!

Classic quotes and timeless wisdom from, How They Succeeded

If you caught our last post on Wednesday, then you probably had a chance to glance through some of the 109-year-old wisdom found in Orison Swett Marden's collection of personal success stories from legendary businessmen and artists called, How They Succeeded.

Today, I thought I'd share a few key lessons and quotes from the book with you. Now, I've only read a few chapters of the book so far, so this is by no means a complete overview of greatest hits. The following are just a few choice ideas to whet your appetite for further reading. Here they are:



1. Marshall Field - Author Marden notes that the famed merchant's early career was off to an unremarkable start, until he decided to head West for Chicago. Field's climb was aided by, and linked with, the rapid growth of his adopted hometown.

"What were your equipments for success when you started as a clerk here in Chicago, in 1856?"

"Health and ambition, and I what I believe to be sound principles", answered Mr. Field. "And here I found that in a growing town, no one had to wait for promotion. Good business qualities were promptly discovered, and men were pushed forward rapidly".

Marshall Field stayed in Chicago, turning down an offer from his previous employer to return home and acquire a partnership stake in the older man's business. Check out Field's thoughts on the importance of doing business on a cash basis, perseverance, and weathering the Chicago Fire of 1871.

2. Darius Ogden Mills - If you get a chance to read more about D.O. Mills, do so (see his Wikipedia page or do a Google search on the Mills hotels for a start). Here are some interesting quotes from Mills' interview with Marden.

Responding to a question on the important traits of influential men: "[Men should form] a habit of thinking and acting for themselves. No end of people are ruined by taking the advice of others."

On familiarity with one's surroundings: "A knowledge of men is the prime secret of business success."

On the beneficient use of capital: "A man can, in the accumulation of a fortune, be just as great a benefactor to mankind as in the distribution of it. In organizing a great industry, one opens up fields of employment for a multitude of people...".

 

3. Thomas Edison - A man who needs no introduction. Marden's description of his initial meeting with the legendary inventor is an interesting and amusing one, so be sure to start at the beginning of this chapter.

Here's an interesting quote from Edison on the practical utility of his inventions:

"It is a good rule to give people something they want, and they will pay money to get it.".   

Hope you enjoyed these quotes and are eager to learn more. If nothing else, Marden's 1901 collection of personal success stories are an entertaining and historic look back at the past, so you're sure to have fun flipping through the e-book.

However, I think you're also likely to find a few valuable pieces of timeless wisdom here. Take a look inside and see which segments capture your imagination. You may find that some of these insights apply not only to business and entrepreneurial ventures, but to trading and investing as well.

Who will be the Horatio Alger of China?

While searching for a classic trading text on Scribd, I came across this 109-year-old tome on the success of 19th and early 20th century entrepreneurs called, How They Succeeded, in the related books sidebar.

Looking through the table of contents, one finds an interesting array of business, artist, and educator profiles and plucky little subchapter titles emphasizing the virtues of hard work, thrift, and foresight. Admirable traits to be sure, though the Horatio Alger-type bootsrapping tales of personal success and luck are usually mocked in the politically correct schoolrooms of today.

How They Succeeded

For those of us schooled in the cynical view of free enterprise and the dastardly deeds of the robber barons (and most of us who attended American schools in the last 40 years were purposely imprinted with that bias), it may seem a bit comical to look at a chapter on John D. Rockerfeller and find subheading titles such as "His Early Dream and Purpose", "There Was Money In a Refinery", "Hygiene", "Foresight", "Philanthropy", and so on.

Still, as I read through an early chapter on Marshall Field, one of the great merchants of my home town, Chicago, I'm attracted to the story of Mr. Field's rise in business and how his personal success coincided with the growth of our fair city.

There are sound business lessons here, and the themes of devotion to work and purposeful sacrifice with a clear goal in mind are a refreshing tonic at a time when an ever growing number of people are looking to game the system and enrich themselves off the work and savings of others.

Will we find a good deal of whitewashing of some of the economic and social injustices of the past, acts that helped a few of the industrialists profiled here along to great wealth and power? It's very possible, and we'll have to read and compare these optimistic tales with the views handed down to us by some economic historians.

However, as I think about the valuable lessons in some of these old tales of business success, I wonder if a similar tradition of rags-to-riches stories will take hold in that other rising economic power of the East. Who will be the Horatio Alger of China (or better yet, the Orison Swett Marden) and what stories will he or she tell?

Related articles and posts:

1. Classic quotes and timeless wisdom from, How They Succeeded - Finance Trends.

FSN interview w/ Adam Fergusson on the dangers of hyperinflation

Financial Sense Newshour recently interviewed When Money Dies author, Adam Fergusson to discuss the Weimar hyperinflation of the 1920s and the inflationary dangers facing us today.

There are so many key concepts on the nature of inflation and its societal impacts in this interview, that I won't attempt to repeat them all here. However, there is one comment Fergusson makes early on in the discussion that is highly relevant to our current situation, and it pertains to the high level of debt we see in the US and other developed nations. Here it is:

"Generally speaking, inflation is a hidden tax, and it is a way whereby a government repudiates its public debt".

Check out the full interview to hear why Fergusson's recently reprinted book is so relevant to the economic discussions of today. When you hear constant debate over the possible outcomes of quantitative easing (QE) and the problems of high unemployment and rising costs of living, you'll know it's a sound idea to study economic history and learn from the lessons of the past.

You can also find a great deal of insight on the nature of inflation and the lessons from the Weimar hyperinflation in the related posts linked below.

Related articles and posts:

1. When Money Dies by Adam Fergusson: read it online - Prudent Investor.

2. Dying of Money: FSN 4 part series on inflation - Finance Trends.

3. FT interviews Adam Fergusson: When Money Dies - FT.com.