It’s important to have a plan, remain disciplined in executing that plan, and pay attention to what is actually happening rather than what you expect to happen. We try to be as objective as possible in our analyses… It’s not always easy for people who are involved every day to stay with a plan when misfortune occurs for a time. You always encounter the unexpected and this can push discipline right out of the way in the name of prudence. But prudence almost always dictates staying with the approach that has made you successful. I see that as one of my primary roles. I often encourage everyone during difficult days to remain patient. I don’t blame people for the unexpected.
John W. Henry
CME Magazine, Premier Issue
Fish see the bait, but not the hook; men see the profit, but not the peril.
“Speculation is dealing with the uncertain conditions of the unknown future. Every human action is a speculation in that it is embedded in the flux of time.”—Ludwig von Mises
The people that I know who are the most successful at trading are passionate about it. They fulfill what I think is the first requirement: developing intuitions about something they care about deeply, in this case, trading. They are the people who study years of charts, or commodity annuals…They develop a deep knowledge of whatever form of analysis they use. Out of that passion and knowledge, their trading ideas, insights, and intuitions emerge.
The joy of winning and the pain of losing are right up there with the pain of winning and the joy of losing. Also to consider are the joy and pain of not participating. The relative strengths of these feelings tend to increase with the distance of the trader from his commitment to being a trader.
If you think education is expensive, try ignorance.
The perfect speculator must know when to get in; more important, he must know when to stay out; and most important, he must know when to get out once he’s in.
Whenever we get a period of poor performance, most investors conclude something must be fixed. They ask if the markets have changed. But trend following presupposes change.
John W. Henry
One of our basic philosophical tendencies is that change is constant, change is random, and trends will reappear if we go through a period of non-trending markets. It’s only a precursor to future trends and we feel if there is an extended period of nontrending markets, this really does set up a base for very dynamic trends
in the future.
Former Head of Research at John W. Henry
While a fundamental analyst may be able to properly evaluate the economics underlying a stock, I do not believe they can predict how the masses will process this same information. Ultimately, it is the dollar-weighted collective opinion of all market participants that determines whether a stock goes up or down.
This consensus is revealed by analyzing price.
Quantitative Capital Management, L.P.
Markets aren’t chaotic, just as the seasons follow a series of predictable trends, so does price action. Stocks are like everything else in the world: They move in trends, and trends tend to persist.
Capitalistpig Hedge Fund LLC
It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.
It is when the unimaginable occurs that the systematic trader remains calm, presciently knowing when to buy, sell, or adjust their exposure.
Quantitative Capital Management, L.P.
The trend is your friend except at the end when it bends.
I feel sorry for the traders who watch CNBC all day, every day. They hope to eek out some competitive advantage from the comments of some guy who has never traded an S&P contract in his life. Even if the media happened to have something relevant to say, the news is already reflected in the open, high, low, close, open interest and daily volume.
Defining a trend is like defining love. We know it when we see it, but we are rarely sure exactly what it is. Fung and Hsieh’s paper goes a long way to doing for trends what poets have been trying to do for love since time immemorial. They give us a working model that quantitatively defines their value for us. Traders will not be surprised to learn that trend following advisors performed best during extreme market moves, especially during bad months for equities.
Change is not merely necessary to life—it is life.
The people who excel in any field are people who realize that the moment is there to be seized—that there are opportunities at every turn. They are more alive to the moment.
The four most expensive words in the English language are “this time it’s different.”
Sir John Templeton
While conceding tacitly or explicitly that over the long run daily price movements are serially independent (move randomly) technical analysts focus on recurring short term patterns and trends. They are like surfboard riders, who study the movements of the waves, not in order to understand why they behave as they do, but simply in order to be on hand whenever they surge, to catch them at their crest, or as soon
thereafter as possible to ride them as far as they possible can, and to dissemble before they change direction.
Morton S. Baratz
[Trend following] is motivated by a very broad interpretation of the universe. The underlying belief is that economic systems adjust to changes in fundamentals gradually and over long periods of time, and that the consequent trends are evident everywhere in human history and commerce. Political, economic, and social regime changes trigger price adjustments in markets that don’t happen instantaneously. For example, the growth and decline of the Roman Empire took place, not in a day, but over hundreds of years. A major problem, of course, is that markets don’t move from one state to another in a straight line: There are periods of countertrend shock and volatility. We spend most of our time trying to find ways to deal with those unsettling but inevitable events. That being said, it is really not difficult to put together a simple trendfollowing system that can generate positive returns over a realistic holding period and there are many, many commercial systems that have been generating strong, albeit volatile, returns for a long time. So there are definitely firm grounds for believing in Santa Claus.
CIO of Mulvaney Capital Management Ltd.
Ed Seykota is a genius and a great trader who has been phenomenally successful. When I first met Ed he had recently graduated from MIT and had developed some of the first computer programs for testing and trading technical systems…Ed provided an excellent role model. For example, one time, he was short silver and the market just kept eking down, a half penny a day. Everyone else seemed to be bullish, talking about why silver had to go up because it was so cheap, but Ed just stayed short. Ed said, “The trend is down, and I’m going to stay short until the trend changes.” I learned patience from him in the way he followed the trend.
The wisest trend follower I know has said that every 5 years some famous trader blows up and everyone declares trend following to be dead. Then, 5 years later, some famous trader blows up and everyone declares trend following to be dead. Then, 5 years later…well, was the problem trend following or the trader?
[Trend following] is similar to being long options because the stop loss creates a limited downside, and the continuation of the trend creates the large upside. This is why the phrase for this approach to trading is to “cut losses” and to “let profits run.” Of course, if trends continually fail to materialize, these limited losses can accumulate to large losses. This is also true for any option purchase strategy. For trend followers, the “option premium” is “paid” for after an unsuccessful trade is closed when a stop loss has been reached. The premium can also be “paid” after markets have moved a great deal, profits have been made, and a reversal causes a trailing stop to be hit, and some of the profits reversed.
Michael S. Rulle, President, Graham Capital Management
I began to realize that the big money must necessarily be in the big swing.
Many people would sooner die than think; in fact, they do so.
Among people who take the trouble to understand what the business is about instead of assuming it involves speculating on live cattle, it is readily understood.
Campbell and Co.
If you take emotion— would be, could be, should be—out of it, and look at what is, and quantify it, I think you have a big advantage over most human beings.
John W. Henry
A trend is a trend is a trend, Gertrude Stein would have said if she were a trader…Once you have a game plan, the differences are pretty idiosyncratic.
“Most of us don’t have the discipline to stay focused on a single goal for five, ten, or twenty years, giving up everything to bring it off, but that’s what’s necessary to become an Olympic champion, a world class surgeon, or a Kirov ballerina. Even then, of course, it may be all in vain. You may make a single mistake that wipes out all the work. It may ruin the sweet, lovable self you were at seventeen. That old adage is true: You can do anything in life; you just can’t do everything. That’s what Bacon meant when he said a wife and children were hostages to fortune. If you put them first, you probably won’t run the three-and-a-half-minute-mile, make your first $10 million, write the great American novel, or go around the world on a motorcycle. Such goals take complete dedication.”
Technical trading is not glamorous. It will rarely tell that you bought at the lows and sold at the highs. But trading should be a business, and a systematic program is a plan to profit over time, rather than from a single trade. High expectations are essential to success, but unrealistic ones just waste time. Computers do not tell the user how to make profits in the market; they can only verify our own ideas. We consider using a computer to develop trading programs to be a sensible, conservative approach.
When I first got into commodities, no one was interested in a diversified approach. There were cocoa men, cotton men, grain men—they were worlds apart. I was almost the first one who decided to look at all commodities together. Nobody before had looked at the whole picture and had taken a diversified position with the idea of cutting losses short and going with a trend.
The novice trader is at a disadvantage because the intuitions that he is going to have about the market are going to be the ones that are typical of beginners. The expert is someone who sees beyond those typical responses and has an understanding of the deeper workings of the market.
The beginning is the most important part of the work.
Confidence comes from success, to be sure, but it can also come from recognizing that a lot of carefully examined failures are themselves one path to success.
Profit targets imply a trader can predict the future. Profit targets are profit-limiting. Trend followers stay in the moment of now, avoid prognostication, and let markets run as far as they go.
Thomas Vician, Jr.
Student of Ed Seykota’s
Money management is the true survival key.
Men’s expectations manifest in trends.
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.
John W. Henry
How are we able to make money by following trends year in and year out? I think it’s 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.
John W. Henry
We have made our business managing risk. We are comfortable with risk and we get our reward from risk.
John W. Henry
Life is a school of probability.
We don’t predict the future, but we do know that the next five years will not look like the last five years. That just doesn’t happen. Markets change. And our results over the next three years will not replicate the last
three. They never do.
John W. Henry
Let’s take a look at the type of markets we face around the world. There is a constant barrage of information, but often this information can be conflicting and, in some cases, does not come out with the frequency that we would like. For example, monetary policy can serve as a simple case. There are only a limited number of Fed meetings a year; however, this is supposed to help us infer the direction of interest rates and help us manage risk on a daily basis. How do you manage risk in markets that move 24 hours a day, when the fundamental inputs do not come frequently? In the grain markets, crop reports are fairly limited, and demand information comes with significant lags, if at all. How can this information be best incorporated in the daily price action? Under these types of conditions, simple approaches, such as following prices, may be better.
Mark S. Rzepczynski,
President & Chief Investment Officer,
John W. Henry & Co.
We can’t always take advantage of a particular period. But in an uncertain world, perhaps the investment philosophy that makes the most sense, if you study the implications carefully, is trend following. Trend following consists of buying high and selling low. For 19 years we have consistently bought high and sold low. If trends were not the underlying nature of markets, our type of trading would have very quickly put us out of business. It wouldn’t take 19 years or even 19 months of buying high and selling low ALL of the time to bankrupt you. But trends are an integral, underlying reality in life. How can someone buy high and sell low and be successful for two decades unless the underlying nature of markets is to trend? On the other hand, I’ve seen year-after-year, brilliant men buying low and selling high for a while successfully and then going broke because they thought they understood why a certain investment instrument had to perform in accordance with their personal logic.
John W. Henry
When people are in doubt, they tend to look to others to confirm their behavior. Some people would rather adopt others’ opinions rather than form their own.
Jon C. Sundt
1st Quarter 2004 Commentary
I always know what’s happening on the court. I see a situation occur, and I respond.
Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.
Fortune tellers live in the future. So do people who want to put things off. So do fundamentalists.
Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top.
If a gambler places bets on the input symbol to a communication channel and bets his money in the same proportion each time a particular symbol is received, his capital will grow (or shrink) exponentially. If the odds are consistent with the probabilities of occurrence of the transmitted symbols (i.e., equal to their
reciprocals), the maximum value of this exponential rate of growth will be equal to the rate of transmission of information. If the odds are not fair, i.e., not consistent with the transmitted symbol probabilities but consistent with some other set of probabilities, the maximum exponential rate of growth will be larger than it would have been with no channel by an amount equal to the rate of transmission of information.
J. L. Kelly, Jr
For a system trader, it’s way more important to have your trading size down than it is to fine tune your entry and exit points.
I’d say the most important benefit I attained from my time in the Incline Tribe was how I learned to incorporate my feelings around uncertainty into my trading. Ed and I worked on it until I finally got the Aha: that my need for uncertainty is a natural part of my emotional constitution. And if my clients don’t eventually get it, I may need new clients, or they may need T-Bills. Their moneydrama is not part of my system.
Student of Ed Seykota’s
The difference between a successful person and others is not a lack of strength, not a lack of knowledge, but rather a lack of will.
I cut my trading teeth during a year-long apprenticeship with Ed in 1994. The experience is invaluable to my subsequent trading success. Apprenticing with Ed is like getting a drink of water at a fire hydrant.
Thomas Vician, Jr.
Student of Ed Seykota’s
You’ve got to have a longer perspective and confidence in the veracity of the approach that you’re using.
Bruce Cleland, President and Chief
Executive Officer at Campbell & Co. in Towson, Md.
Measure what is measurable, and make measurable what is not so.
There was a time when a lot of people thought that the models or algorithms that we used were king— that everything else was ancillary to the mathematics. I think today as an industry, we have a much more realistic and a better balanced approach. The mathematics are very important, but it’s only one piece of the puzzle. The most important thing overall is the total investment process, of which the signal generator is an important part. Portfolio structuring, risk management, execution strategies, capital management, and leverage management may not be directly connected to the algorithm that generates the buy and sell signals, but they are all hugely important.
Bruce Cleland, President and
CEO,Campbell and Co.
Campbell and Company analyzes only technical market data, not any economic factors external to market prices.
Technical traders do not need to have a particular expertise in each market that they trade. They do not need to be an authority on meteorological phenomena, geopolitical occurrences or the economic impact of specific worldwide events on a particular market.
I participated in the Richard Dennis “Turtle Program.” The methods we were taught and the trading experience received were all a technical approach to trading the commodity markets. The most important experience that led me to utilize a technical approach was the amount of success that I experienced trading
I think the only cardinal evil on earth is that of placing your prime concern within other men. I’ve always demanded a certain quality in the people I liked. I’ve always recognized it at once—and it’s the only quality I respect in men. I chose my friends by that. Now I know what it is. A self-sufficient ego. Nothing else matters.
Trading was even more teachable than I imagined. In a strange sort of way, it was almost humbling.
I agree with the metaphysics of technical analysis that the fundamentals are discounted. You don’t get any profits from fundamental analysis; you get profit from buying and selling. So why stick with the appearance when you can go right to the reality of price and analyze it better?
There’s nothing quite as good or bad as trading. They give you a number every day. That’s what’s good about it, and that’s what’s bad about it. That’s what makes it hard. That’s what makes it worth doing.
Whatever you use should be applied in some quantitative, rigorous fashion. You should use science to determine what works and quantify it. I’m still surprised today at how I can expect so strongly that a trading methodology will be profitable but, after running it though a simulation, I discover it’s a loser.
No trader can control volatility completely, but you can improve your odds.
Observation made by a student of Richard Dennis
I don’t think trading strategies are as vulnerable to not working if people know about them, as most traders believe. If what you are doing is right, it will work even if people have a general idea about it. I always say that you could publish trading rules in the newspaper and no one would follow them. A key is consistency and discipline.
I became a computer applicant of Dick’s [Donchian] ideas. He was one of the only people at the time who was doing simulation of any kind. He was generous with his ideas, making a point to share what he knew; it delighted him to get others to try systems. He inspired a great many people and spawned a whole generation of traders, providing courage and a road map.
We started our database using punch cards in 1968, and we collected commodity price data back to July 1959. We back-tested the 5 and 20 and the weekly rules for Dick. I think the weekly method was the best thing that anyone had ever done. Of all Dick’s contributions, the weekly rules helped identify the trend and helped you act on it. Dick is one of those people who today likes to beat the computer—only he did it by hand. He enjoyed the academics of the process, the excitement of exploring new ideas and running the numbers.
Dennis D. Dunn, Dunn & Hargitt
Losing an illusion makes you wiser than finding a truth.
Can one know absolutely when price will trend? No. Does one have to know absolutely in order to have a profitable business? No. In fact, a great number of businesses are based on the probability that a time-based series will trend. In fact, if you look at insurance, gambling, and other related businesses, you will come to the conclusion that even a small positive edge can mean great profits.
Chat Forum Post
We love volatility and days like the one in which the stock market took a big plunge, for being on the right side of moving markets is what makes us money. A stagnant market in any commodity, such as grain has experienced recently, means there’s no opportunity for us to make money.
Volatility is the tendency for prices to change unexpectedly.
Some people suggested a few years ago that trend following had been marginalized. The answer is we haven’t been marginalized— [trend following] has played a key role in helping protect a lot of people’s wealth this year.
Mark Rzepczynski, President and Chief Investment Officer (CIO) of John W. Henry & Co, 2003
Trading is a zero-sum game in an important accounting sense. In a zero-sum game, the total gains of the winners are exactly equal to the total losses of the losers.
Dunn Capital Management’s documents include a “summary of serious past losses.” The summary explains that the firm has suffered through seven difficult periods of losses of 25 percent or more. Every potential investor receives a copy. Dunn says the summary communicates that this is what happened before and it will happen again. “If the investor is not willing to live through this, they are not the right investor for the portfolio,” Dunn says.
Obviously you don’t want to overhaul a program in response to one year just because something didn’t work. That’s when you’re almost guaranteed that it would have worked the next year had you kept it in there.
James Klingler, Eclipse Capital, MAR, April 2002, Issue No. 278
The 25 or 50 biggest trend followers are essentially going to make money in the same places. What differentiates them from one another are portfolio and risk management.
We have not made any changes because of a drawdown. While we have made minor changes since the program started trading in 1974, over the course of the years the basic concepts have never changed. The majority of the trading parameters and the buy and sell signals largely have remained the same.
You have to keep trading the way you were before the drawdown and also be patient. There’s always part of a trader’s psyche that wants to make losses back tomorrow. But traders need to remember you lose it really fast, but you make it up slowly. You may think you can make it up fast, but it doesn’t work that way.
If you get people asking the wrong questions, you don’t have to worry about the answers.
Hunter S. Thompson
What objectivity and the study of philosophy requires is not an “open mind,” but an active mind—a mind able and eagerly willing to examine ideas, but to examine them critically.
I believe the answer lies in coming to terms with what Heisenberg’s research uncovered in the field of physics: that we cannot expect to accurately predict the future given this present environment. There are quite simply too many mixed signals, and too much uncertainty. In my view, we just cannot expect to understand the present situation with any exactness. Perhaps a more reasonable approach would be to embrace the uncertainty. Once we embrace the uncertainty, we may be able to use it to our advantage.
Jon C. Sundt. President, Altegris Investments,
2nd Quarter 2004 Commentary
It’s all a matter of perspective. What some consider a catastrophic flood, others deem a cleansing bath.
Gregory J. Millman
If all it took to beat the markets was a Ph.D. in mathematics, there’d be a hell of a lot of rich mathematicians out there.
It often seems that trends create events more than events create trends. The event itself is usually a reflection of everyone “getting it” as Ed [Seykota] calls it, “an aha.”’ By this time, the trend followers usually have well-established positions.
One reason for this paucity of early information is suggested by the following part of the term trend following. The implication is one of passivity, of reaction, rather than of bold, assertive action—and human nature shows a distinct preference for the latter. Also, trend following appears to be too simple an idea to be taken seriously. Indeed, simple ideas can take a very long time to be accepted; think of the concept of a negative number, or of zero: simple to us, but problematic to our ancestors.
Original Turtle Stig Ostgaard
But the other level of trend following is something else entirely. This is the meta-level, which sits above the tableau of material and psychological cause and effect, allowing participants to observe the behavior of the markets as a whole and to design intelligent, premeditated responses to market action. This is the level of trend following from which we as traders should—and usually do— operate.
Original Turtle Stig Ostgaard
It may surprise many to know that in my method of trading, when I see by my records that an upward trend is in progress, I become a buyer as soon as a stock makes a new high on its movement, after having had a normal reaction. The same applies whenever I take the short side. Why? Because I am following the trend at the time. My records signal me to go ahead!
Jesse Livermore (1940)
This evidence of structure in stock prices suggests alluring possibilities in the way of forecasting. In fact, many professional speculators, including in particular exponents of the so-called Dow Theory widely publicized by popular financial journals, have adopted systems based in the main on the principle that it is advantageous to swim with the tide.
Alfred Cowles (1937)
We think that forecasting should be thought of in the light of measuring the direction of today’s trend and then turning to the Law of Inertia (momentum) for assurance that probabilities favor the continuation of that trend for an unknown period of time into the future. This is trend following, and it does not require us to don the garment of the mystic and look into the crystal balls of the future.
William Dunnigan (1954)
Conventional capital market theory is based on a linear view of the world, one in which investors have rational expectations; they adjust immediately to information about the markets and behave as if they know precisely how the structure of the economy works. Markets are highly efficient, but not perfectly so. Inefficiencies are inherent in the economy or in the structure of markets themselves…We believe
inefficiencies in markets can be exploited through a combination of trend detection and risk management.
John W. Henry & Company, Inc.
• World knowable
• Stable world
• Short volatility
• World uncertain
• Unstable world
• Long volatility
• Trend Following
Mark S. Rzepczynski
Don’t be fooled by the calm. That’s always the time to change course, not when you’re just about to get hit by the typhoon. The way to avoid being caught in such a storm is to identify the confluence of factors and to change course even though right now the sky is blue, the winds are gentle, and the water seems calm…After all look how calm and sunny it is outside.
Thomas Friedman, The World is Flat
Q: Why didn’t Wall Street realize that Enron was a fraud? A: Because Wall Street relies on stock analysts. These are people who do research on companies and then, no matter what they find, even if the company has burned to the ground, enthusiastically recommend that investors buy the stock.
Dave Barry, humor columnist
They say patience is a virtue. For me patience is synonymous with discipline. You must have the discipline to know that markets change and poor periods are followed by good period. Longevity in this business—I have seen it again and again— is measured by discipline.
John W. Henry
[A]ll the intensive research these firms performed did not protect them, or their investors, from massive losses. It is particularly noteworthy [that] Janus, whose commercials tout their superior research efforts and skills, [held] over 16 million shares. On April 30, 2001, the last time it reported individual fund holdings, 11 Janus funds collectively owned more than 5 percent of Enron. As of Sept. 30, Janus still owned more than 5 percent of Enron. Another touter of their superior stock-picking skills is the Fidelity family of funds. As of September 30, 2001, together they owned 154 million shares. So much for the value or research [of Janus and Fidelity].
Larry Swedroe, Buckingham Asset Management
We don’t see things as they are. We see things as we are.
Last month [August 1998], during one of the most stressful points in market performance, our largest portfolio, Financial and Metals, was up [an estimated] 17.7 percent. Of the $2.4 billion that we manage, I think just slightly over half of it is in the Financial and Metals Portfolio. This was not a direct result of the decline in the U.S. market—as I said we don’t trade in the S&P 500—but rather an example of the typical predictable investor behavior in the face of trouble. In reverting to rules of thumb, in this case, the flight to quality, global bonds rose, global stock markets plunged, and a shift in foreign exchange rates occurred.
However, the magnitude of the moves was the only real surprise for us. The trends which were demonstrated during late August had been in place for weeks or months beforehand.
John W. Henry
“There are two kinds of people who lose money: those who know nothing and those who know everything.” With two Nobel prize winners in the house, Long-Term Capital clearly fits the second case.
…[O]ne of the former top executives of LTCM [gave] a lecture in which he defended the gamble that the fund had made. What he said was, “Look, when I drive home every night in the fall, I see all these leaves scattered around the base of the trees…There is a statistical distribution that governs the way they fall, and I can be pretty accurate in figuring out what that distribution is going to be. But one day, I came home and the leaves were in little piles. Does that falsify my theory that there are statistical rules governing how leaves fall? No. It was a man-made event.” In other words, the Russians, by defaulting on their bonds, did something that they were not supposed to do, a once-in-a-lifetime, rulebreaking event…[this] is just the point: In the markets, unlike in the physical universe, the rules of the game can be changed. Central banks can decide to default on government-backed securities.
We make a lot more money trading at the level we do. The trade-off is volatility, but if it doesn’t cause you to perish, then you’re better off in the long run.
I felt there were very definite economic trends that were established from knowledge and the ability to know what events meant. I was looking for a way to participate in [those] major trends when they occurred, even though they were unexpected.
[Victor Niederhoffer] looked at markets as a casino where people act as gamblers and where their behavior can be understood by studying gamblers. He regularly made small amounts of money trading on that theory. There was a flaw in his approach, however. If there is a…tide…he can be seriously hurt because he doesn’t have a proper fail-safe mechanism.
Most important, Niederhoffer is an inveterate contrarian. He feeds off panic, making short-term bets when prices get frothy. He condemns the common strategy of trend following, which helped make his buddy George Soros super-rich. “A delusion,’’ he declares.
There is no profit taking per se. We only exit on stop-losses, because profit taking would interfere with the unlimited upside potential we have, in theory, on every position. Our stop-loss policy is an actuarial model that analyzes the probability and consequences of hitting stops placed at various prices relative to the current market level. This allows us to estimate the expected loss associated with each possible exit point and hence to construct an optimal liquidation schedule.
Paul Mulvaney, CIO of Mulvaney Capital Management, Ltd.
Success demands singleness of purpose.
A speculative mania is a wonderful thing for our program. We do as much of that as possible. Unfortunately, in saying that, I sound a little bit anti-common man, man on the street. What’s bad for the general public is
very good for our program.
Toby Crabel, Crabel Capital,
The Greenwich Roundtable,
November 20, 2003
Blaming derivatives for financial losses is akin to blaming cars for drunk driving fatalities.
Christopher L. Culp
When the mind is in a state of uncertainty the smallest impulse directs it to either side. [Lat., Dum in dubio est animus, paulo momento huc illuc impellitur.]
Terence (Publius Terentius Afer),
Source: Andria (I, 5, 32)
Life is too dynamic to remain static.
John W. Henry
Even before he trained with commodities legend Richard Dennis, Jim DiMaria had learned an important trading principle in the less lucrative arena of baseball statistics: The players who score the most runs are home run hitters, not those with consistent batting records. “It’s the same with trading,” the 28- year-old DiMaria says. “Consistency is something to strive for, but it’s not always optimal. Trading is a waiting game. You sit and wait and make a lot of money all at once. The profits tend to come in bunches. The secret is to go sideways between the home runs, not lose too much between them.”
And if you step back from American society and ask “What kind of people are getting rich these days?” the answer is increasingly “People like John W. Henry.” That is, people on the nerdly end of the spectrum, who have a comfort with both statistical analysis and decision making in an uncertain environment. And these people, increasingly, will demand that their teams be run along rational lines.
When John W. Henry purchased the Boston Red Sox, he understood that a combination of good management and hard science was the most efficient way to run a major league baseball team. As a trend follower, Henry had been exploiting market inefficiencies for decades.
When I started writing I thought if I proved X was a stupid thing to do that people would stop doing X. I was wrong.
You know, there are a core of institutional investment managers, primarily in Europe, who manage billions of dollars for clients, who have waited for me to fail for more than 20 years. They have an inherent bias against the notion that data or mechanical formulas can lead to success over time in markets. They have personally watched my success now for more than 20 years. Yet, if anything, they are now no more convinced than they were 20 years ago that I am going to be successful in the future using data over analysis. I am not legendary (on Wall Street or off). Bill [James] is, and I assume the inherent bias against him within baseball will increase now that he has taken sides.
John W. Henry
Usually when making investments, it is implicit that investors believe they have some degree of knowledge about the future. So Wall Street has more fortune tellers than any other industry. I feel I’ve had an advantage over the years because I am clear about a couple of things: 1) it is part of the nature of life itself
(and markets are simply manifestations of people’s expectations) to trend, and 2) I will never have a complete or full understanding of anything. Therefore, all investment decisions should be based on what can be measured rather than what might be predicted or felt.
John W. Henry
It’s like any field. There’s a vested interest in maintaining the status quo so you don’t have to learn anything new.
Robert Neyer, ESPN
“For me, intuition comes from experience. After years of experience, a person will have, if they have been paying attention and revising their thinking and behavior, intuitions about their area of experience.”
“[W]e are not really interested in people who are experts at the French stock market or German bond markets [due to the technical nature of the trading]…it does not take a huge monster infrastructure: [neither] Harvard MBAs [nor] people from Goldman Sachs…I would hate it if the success of Chesapeake was based on my being some great genius. It’s the system that wins. Fundamental economics are nice but useless in trading. True fundamentals are always unknown. Our system allows for no intellectual capability.”
We understand the distinction between simple and easy. Simple, robust solutions are easier to find than robust people or firms willing to apply them.
Knowing others is wisdom; Knowing the self is enlightenment.
Mastering others requires force; Mastering self needs strength.
If there is one trait that virtually all effective leaders have, it is motivation. They are driven to achieve beyond expectations—their own and everyone else’s. The key word here is achieve. Plenty of people are motivated by external factors such as a big salary or the status that comes from having an impressive title or being
part of a prestigious company. By contrast, those with leadership potential are motivated by a deeply embedded desire to achieve for the sake of achievement.
1. Know what you want. Know who you are, not who you think you should be. Self-awareness gives you the power to pursue what really feeds your soul and the belief that you deserve it.
2. Know the cost of getting what you want. Realize the trade-offs of every choice. People often think if they are clever they can make choices without experiencing any downside. Any road you choose means there is a road you won’t experience.
3. Be willing to pay the cost. People often try to negotiate to win a choice without cost. Every choice involves a price; we get to decide what cost we want to pay.
It may readily be conceived that if men passionately bent upon physical gratifications desire greatly, they are also easily discouraged; as their ultimate object is to enjoy, the means to reach that object must be prompt and easy or the trouble of acquiring the gratification would be greater than the gratification itself. Their prevailing frame of mind, then, is at once ardent and relaxed, violent and enervated. Death is often less dreaded by them than perseverance in continuous efforts to one end.
Alexis de Tocqueville
You see, Dr. Stadler, people don’t want to think. And the deeper they get into trouble, the less they want to think. But by some sort of instinct, they feel that they ought to and it makes them feel guilty. So they’ll bless and follow anyone who gives them a justification for not thinking.
Over-familiarization with something—an idea, say or a method, or an object—is a trap… Creativity requires something new, a different interpretation, a break from the twin opiates of habit and cliché.
When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once.
Gustave Le Bon
What feels good is often the wrong thing to do.
When the market is moving and money is flying, it’s easy to forget that it’s the basics that ultimately produce success. Even after trading everything from exotic over-the-counter options to plain vanilla Dow stocks, I still need to constantly and obsessively evaluate every single trade, every single day.
Jonathan Hoenig, Portfolio Manager,
Capitalistpig Hedge Fund LLC
The illiterate of the twenty-first century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn.
Human beings never think for themselves, they find it too uncomfortable. For the most part, members of our species simply repeat what they are told—and become upset if they are exposed to any different view. The characteristic human trait is not awareness but conformity…Other animals fight for territory or food; but, uniquely in the animal kingdom, human beings fight for their ‘beliefs’…The reason is that beliefs guide behavior, which has evolutionary importance among human beings. But at a time when our behavior may well lead us to extinction, I see no reason to assume we have any awareness at all. We are stubborn, self-destructive conformists. Any other view of our species is just a self-congratulatory delusion.
Having an education is one thing, being educated is another.
Lee Kuan Yew
When teaching children, a good chess teacher devises ways to get students through the pain of losing, since they lose a lot when first learning the game. One teacher describes how there is a “hot corner.” Students sit with the teacher at the board and talk chess. They cannot move the pieces physically, but instead must tell the teacher their moves. They must play the game in their heads. In the beginning, the students hate a visit to the “hot corner.” However, gradually they discover that they can, in fact, play a game of chess in their head. More important, what seems like difficult mental work requiring deep concentration and focus becomes intuition after a while. By learning how to handle defeat, the young students can learn how to win.
Anyone with average intelligence can learn to trade. This is not rocket science.
Never call on intuition. It calls on you.
A top CEO recently spoke before a Harvard MBA class. After his presentation, the students asked questions. One of the questions was, “What should we do?” The CEO replied, “Take the rest of the money you have not spent on tuition and do something else.” This isn’t to say that people with advanced degrees cannot be successful trend followers, but it does say that relying solely on your degree for success in the markets, or in life, for that matter, is not a wise strategy.
We sometimes delude ourselves that we proceed in a rational manner and weight all of the pros and
cons of various alternatives. But this is seldom the actual case. Quite often ‘I decided in favor of X’ is no more than ‘I liked X’…We buy the cars we ‘like,’ choose the jobs and houses we find ‘attractive,’ and then justify these choices by various reasons.
Consider some very simple trading “do nots” from Amos Hostetter, the wise sage of famed trend following incubator Commodities Corporation:
• Don’t sacrifice your position for fluctuations.
• Don’t expect the market to end in a blaze of glory. Look out for warnings.
• Don’t expect the tape to be a lecturer. It’s enough to see that something is wrong.
• Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally.
• Don’t imagine that a market that has once sold at 150 must be cheap at 130.
• Don’t buck the market trend.
• Don’t look for the breaks. Look out for warnings.
• Don’t try to make an average from a losing game.
• Never keep goods that show a loss, and sell those that show a profit. Get out with the least loss, and sit tight for greater profits.
Hostetter also saw the dangers in trading caused by human nature:
• Fearful of profit and one acts too soon.
• Hope for a change in the forces against one.
• Lack of confidence in one’s own judgment.
• Never cease to do your own thinking.
• A man must not swear eternal allegiance to either the bear or bull side.
• An individual fails to stick to facts!
• People believe what it pleases them to believe.
The strategies of human reason probably did not develop, in either evolution or any single individual, without the guiding force of the mechanisms of biological regulation, of which emotion and feeling are notable expressions. Moreover, even after reasoning strategies become established in the formative years, their effective deployment probably depends, to a considerable extent, on the continued ability to experience feelings.
We know of “traders” whose public image “looks pristine,” but their personal lives, mental health, and balance are in such dire straights— they are not capable of any type of real success or achievement. They might get “the numbers,” but their problematic mental health keeps them back. Bottom line—theynever get to where they want to go. Life becomes one big rationalization (or excuse) for them.
If you try to impose a rigid discipline while teaching a child or a chimp, you are working against the boundless curiosity and need for relaxed play that make learning possible in the first place…learning cannot be controlled; it is out of control by design. Learning emerges spontaneously, it proceeds in an individualistic and unpredictable way, and it achieves its goal in its own good time. Once triggered, learning will not stop—unless it is hijacked by conditioning.
Any individual decisions can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because the recognized possibility of failure in fact occurs. But over time, more thoughtful decision-making will lead to better overall results, and more thoughtful decision-making
can be encouraged by evaluating decisions on how well they were made rather than on outcome.
People who make decisions for a living are coming to realize that in complex or chaotic situations—a battlefield, a trading floor, or today’s brutally competitive business environment— intuition usually beats rational analysis. And as science looks closer, it is coming to see that intuition is not a gift but a skill.
Nature operates in the shortest way possible.
I’m increasingly impressed with the kind of innovation and knowledge that doesn’t come from preplanned effort, or from working towards a fixed goal, but from a kind of concentration on what one is doing. That seems very, very important to me. It’s the actual process, the functioning, the going ahead with it.
J. Kirk T. Varanedoe,
Director of Painting and Sculpture,
Museum of Modern Art, New York City,
MacArthur Award Recipient
Heart, guts, attitude, and the ability to tolerate uncertainty are core to long-term winning.
To be uncertain is to be uncomfortable, but to be certain is to be ridiculous.
There are lots of misperceptions that influence how people think about and play chess. Most people believe
that great players strategize by thinking far into the future, by thinking 10 or 15 moves ahead. That’s just not
true. Chess players look only as far into the future as they need to, and that usually means thinking just a few moves ahead. Thinking too far ahead is a waste of time: The information is uncertain. The situation is
ambiguous. Chess is about controlling the situation at hand.
Leaving the trees could have been our first mistake. Our minds are suited for solving problems related to our
survival, rather than being optimised for investment decisions. We all make mistakes when we make decisions.
Global Equity Strategy
Dresdner Kleinwort Wasserstein Securities Limited
Sporting events, which are played out step by step in the most public of settings, allow the researchers to determine the precise moment that somebody veers from good sense. The professors say that coaches and managers often go awry when faced with a decision involving an obvious, yet ultimately sensible, risk. They seem to focus too much on the worst-case scenario: the Bonds home run, the game-ending brick, the failed fourth down. Travelers who drive hundreds of miles because they are afraid of a plane crash make the same mistake. “It has to be the case that sound knowledge will win out eventually,” Thomas Gilovich, a psychology
professor at Cornell, said. “But the path is tortuous and slow.”
Charles Faulkner quotes Ed Seykota as saying, “I’ve made phenomenal amounts of money for very simple decisions but I was willing to make them. Somebody had to.” Faulkner then comments, “Others are looking or highly complex ways of interacting with the markets, when most of the time it’s only the simple ones that are going to work.”
Everything should be made as simple as possible, but not simpler.
The Greek philosopher Archilochus tells us, the fox knows many things, but the hedgehog knows one great thing. The fox— artful, sly and astute— represents the financial institution that knows many things about
complex markets and sophisticated marketing. The hedgehog—whose sharp spines give it almost impregnable armor when it curls into a ball—is the financial institution that knows only one great thing: longterm investment success is based on simplicity.
John C. Bogle
If you can’t measure it, you probably can’t manage it… Things you measure tend to improve.
From error to error, one discovers the entire truth.
It is remarkable that a science which began with the consideration of games of chance should have become the most important object of human knowledge…The most important questions of life are, for the most part, really only problems of probability.
Marquis de LaPlace
Probability theory is the underpinning of the modern world. Current research in both physical and social sciences cannot be understood without it. Today’s politics, tomorrow’s weather report, and next week’s satellites depend on it.
Do not believe in anything simply because you have heard it. Do not believe in anything simply because it is spoken and rumored by many. Do not believe in anything simply because it is found written in your religious books. Do not believe in anything merely on the authority of your teachers and elders. Do not believe in traditions because they have been handed down for many generations. But after observation and analysis, when you find that anything agrees with reason and is conducive to the good and benefit of one and all, then accept it and live up to it.