David Druz: Trend Following Trader

Consider an excerpt:

“Dr. David Druz has been hooked on the futures markets since the moment he saw a fellow medical student turn $2000 into $500,000 in the great bean move of 1970. For the next 20 years Druz pursued a dual career, studying medicine in term time and carrying out research work for a brokerage company during vacations, and then, in 1981, setting up his first futures fund while practicing as an emergency doctor in Fairbanks, Alaska. Two years ago Druz retired from medicine and moved from Alaska to the Hawaiian island of Oahu, in order to devote more time to his twin passions of windsurfing and futures trading. The goal of his company, Tactical Investment Management (TIM), is, he says: “To be good not big. We optimize for robustness because we want to be around for ever.”

Druz has been a trend following trader for more than three decades. He, like many trend followers, did not start with millions, and when he and I talked he made sure that I understood one of his biggest insights, perhaps the single biggest reason he made his fortune: Life is not fair, and everyone doesn’t win. In fact, markets are typically structured with a winner and loser.

Druz believes the evidence shows overwhelmingly that somebody has to lose for you to win. That might sound hardcore, but hold your judgment. There is more. Imagine you have a friend named Charlie, a fraternity brother a couple years ahead of you in college. You are attending the University of Illinois at Urbana-Champaign in the 1970s. Your buddy Charlie starts trading with $2,000 and a year later has run that up to around $500,000. Oh sure, Charlie appears to be brilliant in his trading and absolutely fearless, but how is he doing it? After graduation Charlie comes back to school on weekends to visit his girlfriend. He always has wads of bills in his pockets. Many guys in the frat love it because Charlie buys rounds and rounds at the college bars. But wasn’t there at least one guy who wanted to know how Charlie did it, instead of how much he could spend on bad keg beer?

David Druz was that one guy. He pestered Charlie and ultimately landed his first job through him. Druz ended up working at the Chicago Board of Trade (now the CME Group) during summer vacations. This was tedious work in the research department of a brokerage house. Lots of paperwork and not exactly real close to the moneymaking action on the floor.

Druz took computer programming in college and had been given leeway at the brokerage firm to play around with his programming ideas. He had a knack for testing trading ideas meaning: What happens if you always buy here and sell there?

He soon started working on his first trend following mockups (what he would call systems) during those summer breaks. He was in his own world, happy to not know anything about anything. Do you ever feel that way? All he knew was colloquial stock market wisdom that had been circulating among all Chicago traders. At the time the buzz was all about the big cycle.

People were talking about four-week cycles and six-month cycles and so on. Amazingly, there are people today nearly 40 years later promoting the exact same drivel on CNBC and across Internet chat rooms. Druz soon determined there were no cycles and that daily news guys and prediction prognosticators were full of baloney. Although he had figured out that there were no persistent cycles, Druz still didn’t assume anything going forward.

He would hear people declare this or that, and he would respond, “I’m going to test that. Im going to see if its true.” That’s how he got his feet wet testing trading systems. Once again, testing a trading system means having a rule to buy here and a rule to sell there. Once you have established a rule, you take marketprices; Apple, silver, oil, or gold (who cares, the market!), and you test it to see if your buy and sell rules work for making money.

Even though he loved his job in the markets, Druz soon entered medical school to hedge his bets. Yet he still took his vacations at the brokerage firm working. Medicine was interesting to him, but he was 100 percent fascinated with the markets.

Did he have lots of money? No. The only money he had was $5,000 in stock that his father had given him. Druz cashed that out and put it into his account. At that same time the brokerage firm offered him a job, a fulltime job to quit medical school and go work for them. They offered Druz $50,000 to start. That was really good money in the 1970s. A slightly drunk friend told him, “Dave, don’t take that job. You can be a really good trader, but if you take that job, you’ll never be a great trader. You’ve got to get a nest egg for security. You don’t want to trade with scared money. Finish medical school, be a doctor, and then you’ll be a great trader.

Does that make sense to you? Maybe not at first blush, but it was the wisest piece of information anyone ever told Druz. He has since seen many people over the years trading with scared money, meaning they would make decisions on the value of the money to them (read: emotional decisions about a new car, suit, or wife), and not follow the exact rules of their trading plan.

Don’t quit your day job is another critical success lesson– write it down and tape it over your desk.

Druz took his $5,000 and started to trade. He wasn’t very good at first, and his account dropped down to around $1,500. At that point he had hit rock bottom and trading success was beginning to move out of sight. He then received a message from his brokerage firm, “You got a fill on your trade.” Druz said, “I don’t have any orders in. Im out of business.” The brokerage replied, “No, you had a Good Til Cancelled order (GTC) in and it is limit up.” Druz was back in business! The universe apparently would not allow him to quit, and he truly believed that.

You too might think sometimes, “If I only had one more chance, but when the next opportunity or chance does come around again you have to be willing to get in the game and play again without thinking about your negative first experience. Second chances are telling you something. Heed their advice.

Don’t Let A Degree Stop You

You don’t have to have a thousand PhDs in your organization to trade trend-trading rules. Don’t give up, and don’t think just because you don’t have the so-called right background or degree, or that you don’t have a huge staff, that you cant be a trader making big money. The Druz experience is all about getting the little guy to see himself making money. The little guy can win. Druz is proof. Your goal is to be around forever making money at this game. The best way you can go about that is by making it hard to be knocked out.

Working With Ed Seykota

Q. You have worked with legendary trader Ed Seykota [of Market Wizards fame]. What was it like trading alongside a master?
A. It was one of the most incredible experiences of my life. He is the smartest trader I have ever seen. I don’t think anybody comes close. He has the greatest insights into how markets work and how people operate. It’s almost scary being in his presence. I worked with him as an apprentice for about five or six months in 1991/92. It was tough surviving working with him because of the mental gymnastics involved. If you have a personality weakness, he finds it – fast. But it’s a positive thing because successful traders must understand themselves and their psychological weaknesses.

Click for Correlation chart on Druz. Correlation coefficients gauge how closely a CTA’s performance resembles another CTA. Values exceeding 0.66 may be viewed as having significant positive performance correlation. And consequently, values exceeding -0.66 may be viewed as having significant negative performance correlation.