Category: Trading 101

A few pieces of Paul Tudor Jones’ insights. First on school:

“In 1976 I started working on the floor as a clerk and then I became a broker for E.F. Hutton. In 1980 I went strictly on my own as what they called a local and did that for about two and a half years and had two and a half wonderfully profitable years, but I really got bored. I applied to Harvard Business School, got accepted and was about to go. I literally was packed up to go and then I thought, ‘this is crazy’, because for what I’m doing here, they’re not going to teach me anything. This skill set is not something that they teach in business school. So I didn’t go, I stayed, but I was really bored because there wasn’t the personal interaction that was something that I craved and having colleagues and being in a clean atmosphere and that was when I started my fund. All through growing up I’ve been involved in team sports and fraternities and in school I was involved in a whole variety of activities all of which were team oriented and when I was on my own I was printing money every month, but I wasn’t getting the psychic satisfaction from it.”

On the ups and downs:

“He was the toughest son of a bitch [Eli Tullis] I ever knew. He taught me that trading is very competitive and you have to be able to handle getting your butt kicked. No matter how you cut it, there are enormous emotional ups and downs involved.”

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An article from Futures Magazine dated 1986 (PDF) from Tom Willis’ web site. The article titled, “Do Trading Advisors Run Into A Dollar Trading Barrier?” shows some fears have been around for quite some time.

A good excerpt from Yahoo Finance:

The main rule for selling is to sell what you see, not what you think. This rather difficult concept is counterintuitive, because stocks often climax and fall off the cliff even while their fundamentals, earnings history and future look spectacular. Chipmaker Marvell Technology Group (NASDAQ:MRVL) breezed past Thomson First Call consensus estimates in each of the past 13 quarters, by 2% to 11%. Earnings bounded 50% or more and sales 31% and higher in the past eight quarters. Double-digit earnings and sales growth are expected through next year. Profit margins have also been strong, while cash flow has been growing. So why is the stock 52% below its all-time high?

You don’t need to know why it is 52% off its all-time high. You just need to know that it is.

I posted a quote the other day from Boone Pickens. Some more:

Be willing to make decisions. That’s the most important quality in a good leader. Don’t fall victim to what I call the ready-aim-aim-aim-aim syndrome. You must be willing to fire.
T. Boone Pickens

I’ve always believed that it’s important to show a new look periodically. Predictability can lead to failure.
T. Boone Pickens

Keep things informal. Talking is the natural way to do business. Writing is great for keeping records and putting down details, but talk generates ideas. Great things come from out luncheon meetings which consist of a sandwich, a cup of soup, and a good idea or two. No martinis.
T. Boone Pickens

Work eight hours and sleep eight hours and make sure that they are not the same hours.
T. Boone Pickens

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Read about the Michael Covel Hours of sleep patterns.

Last night on Nightline, T. Boone Pickens (made 1.4 billion in 2005) reminded the fawning reporter:

“I have been broke 3 or 4 times. But fortunately for me I’m not an MBA, so I didn’t know I was broke.”

Now that’s good stuff. Love it.

Orin Kramer is Chair of the State of New Jersey Investment Committee and a General Partner of Kramer Spellman, L.P. managing private investment partnerships concentrated in public equities. He spoke the other day at a Managed Funds Association event in Chicago I attended. Some of his stark comments (paraphrased):

“When we drop 100 million in Microsoft over the course of a day, 14 million an hour, no one views it as a big deal. People accept the up and down, the volatility. But if a hedge fund drops 2%, it is a big deal. That is irrational.”

On screening out volatility:

“We expect hedge funds to be non-volatile. It is irrational. By doing this you screen out all investment opportunities where there is volatility.”

On correlation:

“Many of the people in the public pension world still don’t get that adding a volatile hedge fund component (not positively correlated) to an existing portfolio reduces the portfolio risk.”

While he did not say it expressly, Kramer’s words for me point to why opportunities like trend following will continue to exist. With so many billions upon billions tied up in pension funds and with those funds often run by a ‘herd’ mentality (i.e. not necessarily the brightest bunch), chasing benchmarks and chasing reputation risk (i.e. afraid of doing something different than the other guy who is scared too) will keep those unpredictable trends coming.

An article titled Negatively Skewed Trading Strategies (PDF) by Glyn A. Holton is definitely worth reading. Well said. For those not following the logic here completely, take a read of Chapter 4 and 8 of Trend Following.

Some feedback on above report:

Michael: When I used to own an FCM, we had a saying for option premium sellers, “they ate like birds and shit like elephants”. And they scared the crap out of us. Regards, Jack Zaner.

Thanks, Jack. Sometimes the short and simple sentence best describes it all!