John W. Henry: Trend Following Trading Legend

John W. Henry is an astonishingly successful self-made man who started without formal association to Wall Street. He developed trend trading systems in the 1970s that literally made billions and has captured some of the great trends of our generation. For example, by all available evidence Henry was on the other side of the Barings Bank blowout. In that zero-sum game he won what Barings Bank lost. Today, Henry is retired from managing money for clients. With his billionaire status solid he now runs two professional sports teams including the Boston Red Sox. While Henry may have exited the client business after 30 years–hold your breath if you think his now retirement casts a negative light on trend following. Far from it. In fact, Henry is an inspiration to all would be trend followers.

An excerpt from The New Investment Superstars sums Henry’s trading philosophy up perfectly:

“If one theme summarizes Henrys philosophy, it is the knowledge that one cannot predict anything. Henry is a long-term follower. His philosophy is based on the premise that market prices, rather than market fundamentals, are the key aggregation of information needed to make investment decisions. He says, The markets are peoples expectations, and these expectations manifest themselves as price trends. We live in an uncertain world. One cannot predict the future of anything. In an uncertain world, identifying and following trends may be the only reasonable investment approach over the long term. Henry feels that a mechanical approach has more value since no scientific approach or solid testing can be applied to discretionary trading. Henry says that when he first researched the markets in the 1970s, he was looking for a methodology that would work through many market conditions. His research showed that long-term approaches work best over decades. There is an overwhelming desire to act in the face of adverse market moves. Usually it is termed avoiding volatility with the assumption that volatility is bad. However, I found avoiding volatility really inhibits the ability to stay with the long-term trend. The desire to have close stops to preserve open trade equity has tremendous costs over decades. Long-term systems do not avoid volatility, they patiently sit through it. This reduces the occurrence of being forced out of a position that is in the middle of a long-term major move.”

The Beginning

John W. Henry was born in Quincy, Illinois to a successful farming family. For a Midwestern farm boy in the 50s, there was nothing in the world like baseball, and from the time nine-year-old Henry went to his first major league game, he was hooked. In the summer, he would listen in rapt attention to the great St. Louis Cardinals broadcaster Harry Caray night after night. Henry described himself as having average intelligence, but a knack for numbers, and like many young baseball fans, he crunched batting averages in his head. Henry attended community colleges and took numerous night courses, but never received his college degree. It wasn’t for lack of interest, however. When he was attending a class taught by Harvey Brody at UCLA, they collaborated on and published a strategy for beating the odds at blackjack.

When his father died, Henry took over the family farms, teaching himself hedging techniques. He began speculating in corn, wheat, and soybeans. And it wasn’t long before he was trading for clients. In 1981, he founded John W. Henry and Company, Inc., in Newport Beach, California.

Getting Started Q&A

Q. How did you get started in money management, and what advice could you give to someone who would be interested in following in your footsteps?
A. How did I get started? I washedging crops for farmland that I owned in a couple of states. I just seemed to do fairly well trading by the seat of my pants. It was a broker at Reynolds Securities in those days that asked me if I would manage money for farmers, because I seemed to do so well in the grain markets. That is sort of how it all started. I said no to hedging for farmers. I spent five years working on some ideas I had for trading, and one thing led to another. I came up with a [trend following] philosophy.

Career Insights From John W. Henry

“There is no Holy Grail. There is no perfect way to capture that move from $100/ounce to $800/ounce in gold.” “How are we able to make money by following trends year in and year out? I think its because markets react to news, but ultimately major change takes place over time. Trends develop because there’s an accumulating consensus on future prices, consequently there’s an evolution to the believed true price value over time. Because investors are human and they make mistakes, they’re never 100 percent sure of their vision and whether or not their view is correct. So price adjustments take time as they fluctuate and a new consensus is formed in the face of changing market conditions and new facts. For some changes, this consensus is easy to reach, but there are other events that take time to formulate a market view. It’s those events that take time that form the basis of our profits.” “I don’t believe that I am the only person who cannot predict future prices. No one consistently can predict anything, especially investors. Prices, not investors, predict the future. Despite this, investors hope or believe that they can predict the future, or someone else can. A lot of them look to you to predict what the next macroeconomic cycle will be. We rely on the fact that other investors are convinced that they can predict the future, and I believe that’s where our profits come from. I believe it’s that simple.” “…when I was designing what turned out to be a trend following system…[that] approach a mechanical and mathematical system – has not really changed at all. Yet the system continues to be successful today, even though there has been virtually no change to it over the last 18 years.”

Although now retired from trading–there are tremendous lessons to be learned from Henry.