The purpose of this thread is to post compact nuggets of trading wisdom for aspiring hedge fund managers. The basic concept: A hand-selected, trading-related quote or book excerpt each trading day, with invitation to discuss. The content will mirror that of our Trading Wisdom e-letter, where you can get the same via email. (Though, obviously, the ET discussion aspect could take on a life of its own.) Why for "aspiring hedge fund managers," and not just for traders? Well, wisdom can benefit any trader. But people get involved in markets for lots of different reasons. Some traders just want to dabble and daydream... escape the monotony of a boring day job... spice up life with a little action, have something fun to bitch about (markets), and so on. Nothing wrong with any of that. But if you are going for the brass ring - developing a track record and soliciting OPM, the true road to riches in this game - then your mission, while still fun and exhilarating, becomes dead serious. To become a true competitor you have to find and hone every edge... ferret out all weaknesses... incrementally improve all aspects of your methodology, and so on. A daily reflection on the fundamentals - not market fundamentals, but the fundamentals of trading - can help with that, in respect to keeping you in the zone, keeping your head in the right place, etcetera. As mentioned elsewhere, we further have selfish reason to see aspiring managers succeed. We want to see new traders break through, and can possibly help them do so, through the network of connections we've built up over the years: Capital allocators, prime brokerage providers, high net worth investors, family office managers, prop desk managers, legal counsel, and so on. Developing this flow to the benefit of all, and expanding our circle of camaraderie among fellow successful traders, is why we decided to sponsor the ET Career Trader forum. And so, without further ado...
Trading Wisdom 01: On Getting What You Want "Win or lose, everybody gets what they want out of the market. Some people like to lose, so they win by losing money... "I think that if people look deeply enough into their trading patterns, they find that, on balance, including all their goals, they are really getting what they want, even though they may not understand it or want to admit it." - Ed Seykota (via Market Wizards) JS comment: Could Seykota be right? Are losing traders "getting what they want" from the market? What are some constructive ways to interpret this idea? Could it be that certain goals - desire for entertainment, desire for action, desire for escape etc - are more important than the goal of making money, and thus dilute the necessary focus on profitability? What do you personally "want" from the market? Are your subconscious desires aligned with your objectives? Get Market Wizards via Amazon Get Trading Wisdom via e-mail
The best advice ever given to me by a successful money manager. 1. Find a system. 2. Prove it works. 3. Trade it. Traders find step 1 and step 3 easy. Almost everyone fails to achieve step 2. Most traders fall down on step 2 because of over-confidence or self delusion or information bias. Or a combination of all three. Step 2 done properly requires rigorous, objective and quantifiable scientific methods. Everything else is just guessing.
Interesting view... I would say 1) and 3) are far harder, and that real proof 2) only comes about by 3). What does it mean to have a trading "system?" At least theoretically all forms of trading and investing are done on some type of system, to the extent that one uses a rule-based methodology combined with experience-based pattern recognition. (And not necessarily patterns in charts, but patterns in balance sheets, geopolitical conflicts, distressed debt deals, or what have you.) The ease of step 1) may also be a mirage, because how well a system "works" will to a great degree depend on how well it fits the individual trader. Many traders are attracted to the image or perceived benefits of an approach -- for example e-mini daytrading -- without ever considering whether their talent and temperament profile is right for that approach. So I would modify the process a little to say: 1. Seek out a system / methodology that feels right for you personally 2. Test it, tweak it, make it your own 3. If you like the feedback, incrementally evolve it 4. Keep evolving until you are profitable; confirm that it "works" by making money over a statistically meaningful time period 5. Return to step 3 - never stop evolving
Trading Wisdom 02: No Uninvestable Industries "A fresh, opportunity-minded mind, uncluttered by prejudice, is crucial for superior investing in an environment where the one constant, the one inevitability is change and industry group rotation. By definition, there can be no uninvestable industries." - Barton Biggs JS Comment: Do you ever find yourself leaning too much on areas of familiarity - going back to the same handful of industries, with the same view, because of a "stale" (non-fresh) mind or a market "prejudice?" Do you have a process for keeping tabs on "uninvestable" areas of the market, that may now have reached such valuation extremes as to be good longs... or shorts? Get Trading Wisdom via e-mail
A couple more Seykota quotes: When asked if he tries to buy the bottom of the range: "Oh no, my buy stop would be above the market where I anticipate the momentum to be greatest......... I buy where most people start to think about selling" When recounting how he learned about trading: "My father told me to buy when price breaks out of the top of a box and sell when it breaks out the bottom"
The box method is Darvas, "How I made $2 million in the stock market." It was first published in 1967, so I wonder if he was referring to it. But then, Seykota would have been 20 / 21 in 1967. Maybe you're confusing him w/ Darvas... I met Seykota and hung out at his house in Lake Tahoe a couple times. Very quirky dude.
Say someone wants to build a track record. They save enough to cover 10 years of living expenses. To cover the living expenses and to stay ahead of the true inflation (which according to shadowstats is north of 5%) one needs to make 15% after tax. If one happens to live in a highly taxed location, where roughly half your income goes to taxes, one needs to return north of 30% just to be able to stay in the game. Looks like unless you plan to swing for the fences from the start, you are destined to fade away. What can an aspiring trader do to lower the barrier of entry that the combination of inflation and high taxes create?