Personality Case Study: Ralph Vince
Over the past 30 years, Ralph Vince has worked with institutional asset management companies, managed millions of dollars, and advised both sovereign wealth funds and private traders. By profession Ralph is a computer programmer who writes analytical programs for funds, large traders, and professional gamblers. He is also the author of five books on investing in his field of expertise: portfolio management and portfolio/trade optimization.
Ralph Vince and my dad teamed up in 1987, when Pops took $10,000 to $1,110,000 to win the Robbins World Cup. Ralph was there as it happened, watching my dad employ the Kelly Ratio (more on this in a moment) for a very aggressive form of money management. Since then Ralph has developed into the premier expert on money-management systems for traders and investors. He has written numerous books (his latest title being Risk-Opportunity Analysis1) and professional papers on money management for trading, and introduced new statistical techniques that are in widespread use throughout the industry today. Ralph also conducts portfolio risk-management workshops for institutional portfolio managers. In 2011, the world’s foremost index provider, Dow Jones Indexes, teamed up with Ralph’s LSP Partners LLC to develop and co-brand an index family using a proprietary strategy created by Ralph.
In trading circles Ralph’s name is virtually synonymous with strategic money management. But his story is even more interesting than that. In 1980, at the age of 20, Ralph went on his first job interview at a Paine Webber office in Cleveland, Ohio. Ralph was questioned as to whether he was there for the margin clerk job. Although he wasn’t, he answered yes anyway, and started hard at work the next day as a margin clerk, despite having no formal financial education or training. However, what Vince did possess was an incredible ability in mathematics. As such, he was a brilliant margin clerk, as the job took advantage of Ralph’s ability to quickly manually calculate margin requirements for short-option account positions. Ralph describes this initial work experience as “a baptism by fire and a great way to get started in the business.”
But not satisfied with merely being a human abacus that made profits for others, Vince soon began trading his own money. And within several years he started working at a computer firm in New York that handled back-office processing for futures markets. Concurrently, IBM had just introduced the first personal computer. The industry was evolving into the modern era. But there was a problem. Traders could now buy computers, but there were no adequate software programs to help them actually put their computers to use! So it was only a matter of time before traders started knocking on Vince’s door, pleading with him to design computer programs in order to rigorously test various trading strategies.
The next major milestone in Ralph’s career came in 1985, when he first met my dad in the lobby of a Chicago hotel. A friendship was quickly struck, and at that point Williams asked Vince to test trading systems for him. “Larry was trading a lot of money at the time, and he opened my eyes in terms of money management and trading allocations.”
Williams and Vince were both equally intrigued by Ed Thorp’s treatise Beat the Dealer, which was first published in 1962.2 In his book Thorp included formulas derived from the “Kelly criterion.” These formulas examined how much a casino gambler should bet in order to maximize the expected value of his stake. There was only one problem. Thorp’s formulas were initially meant to be used only in gambling scenarios, not in the markets. So Williams and Vince teamed up to tweak Thorp’s formulas and then applied them to the markets.
It was a creative and brilliant application of Thorp’s work. The formulas determine how much a trader should trade in order to maximize profits—based on his account’s equity value as well as the perceived largest loss using a given trading system. Vince went on to publish this work in his book, Portfolio Management Formulas. He coined this money-management approach “optimal f.”3
The bulk of market traders spend most of their time and energy on selecting the right market to trade, spotting a ripe setup, or developing the newest system or pattern than has historically been profitable. Ralph takes a different perspective. As one of the world’s true gurus in money management, he is more diligent and devotes more time to thinking about his trading quantity (how much to trade). To him, strategic money management is more important than market selection and timing.
When I started my interview with Ralph, I initially only told him that his personality traits were remarkably different from those of the other traders we looked at under the microscope, but I didn’t at first tell him what stood out in his trait profile. I wanted to get a raw, unbiased response to telling him that. He replied,
Well, I am not surprised you say that. Trading for me has been a long and painful process, and I think this has to do with some shortcomings in my personality. I tend to be a skittish, flighty, and surface-minded person. These kinds of traits would work against most good traders. People who can focus have a clear advantage in the markets, and I don’t have that going for me. It’s the same in sports with the great athletes. Look at Manny Ramirez; guys like that can stand in the batter’s box and be very relaxed, very fluid. They are able to get into that mental state very naturally. The good traders that I know are able to do the same thing, but I have a hard time with it. I tighten and stiffen up, and I can’t focus on trading. I have really poor attention in this area. Look, the whole goal and purpose of trading is to make money, but when I am trading, I tend to forget that—I get easily distracted by other things, and it works against me.
So over the years I had to come up with my own style that would be able to take this into account. That’s why it was long and painful. And it’s only been in the last three or four years that it’s really become clear to me what that is—the whys are now known to me. What I found is that I need to make trading as boring as possible in order to make it work for me—to be profitable. Historically, that’s where I make money, when what I am doing is as boring as a farmer watching his vegetables grow. When I am trading properly, it’s boring and there is absolutely nothing gratifying about it. It’s not exciting, and it’s not filling some void caused by my psychological shortcomings—either shortcomings that I’m aware of or maybe others that I’m not aware of! I really am “Mr. Boring Farmer” watching his crop grow.
It was at this point in my interview with Ralph that I brought up some of his personality traits. I mentioned that, of all the facets, his most extreme score was on the anger/hostility (N2) scale—on this dimension he almost scored off the charts. His second highest score, also in the very high range, is in assertiveness (E3). Keeping in mind the concept of “dimensions” (Chapter 4), the extreme scores are the most telling (either problematic or advantageous—think back to Yao Ming in Chapter 4!) and where we (psychologists and psychiatrists) turn our attention to first when formulating a client’s personality as a whole. Besides Ralph, none of our other avant-garde traders had either one of these personality components (N2 or E3) in the high or very high range, so I was curious as to how they fit into his trading life. Ralph also scores high in anxiety (N1) and very high in impulsivity (N5). Keep in mind that, of the dozens of winning trader personalities we studied, only one other (that of Dan Zanger) was high in anxiety.
Well (jokingly referring to his wife), let me tell you that there is someone in the next room who would concur on me having an angry streak! But seriously, it really goes right back to the boredom thing. When I was very, very young and just getting started in this business, it was an issue, such as revenge trading. But over time, I learned to channel this anger into positive trading. Via mathematics I was able to steer my anger emotion into something that was productive, and it helped me remain intensely focused. I used to do things that were self-destructive in the markets, even though I certainly did not want to be self-destructive. If a market I was in would go down in price suddenly and I was getting upset over it, I would buy more of it in a reactive emotional process, not because I really thought I should buy more. This was a long time ago, and this kind of emotional response has really dissipated over the years. I must have been awful back then!
So what really works for me is to trade in a way that is so boring that it’s even intolerable. It’s funny—I remember when I was maybe 11 years old I was given some kind of personality test at school by a psychologist. I remember clearly when they called my name over the PA system to go meet with the psychologist and discuss what the results were and meant. This psychologist explained to me that I was a very impulsive person and at high risk of abusing substances. Even now, 47 years later, I remember how serious this psychologist was at the time. It scared me. They were so concerned about me and my pathological personality, and I think I kept this in mind over the years.
In a sense, this conversation with you is huge. It really is clarifying to me what works for me and how I arrived at that. As long as I keep my trading style as boring as watching a vegetable garden grow, my anxiety and my anger and my impulsivity are kept under wraps. To me it means having my timing and selection work in a very systematic module. I only spend about 15 to 30 minutes per week trading, preparing for trades, or observing my trades. That’s it. In fact, it’s probably closer to 15 minutes per week, not 30. And I have found that the best trading in my life occurs when I stick to this method.
It took me time to figure this out, but by getting myself and my weaknesses out of the way, I can actually have crazy success in the markets, well beyond what I ever even imagined was possible. I used to be able to make money trading, but since I adopted this vegetable-garden method over the last three to four years, my success in trading has been virtually unstoppable. I can’t emphasize this enough: I had to remove myself and any entertainment value from my trading.
I call it my “boredom program”—can you imagine that? Can you imagine if I had an infomercial on TV and tried to pitch my trading technique to others? “Now you too can have an incredibly boring job and life just like me!” It’s almost comical, but this is my system, and it’s what works for me.
I asked Ralph if he has ever or ever would manage money for others.
No. I would rather dig ditches than trade others’ money. Really. Fortunately my system of trading has been integrated into a package of indexes that is marketed by Dow Jones, and this is nice because I know my work is out there, being used, and indirectly people can use me and my ideas to make money. But I would never want the job of trading the money of another person. You see, although it pales in comparison to the responsibility of a trauma surgeon who is operating on a dying patient or a lawyer who is defending someone in a murder trial, in a sense there is a lot of emotional responsibility in trading someone else’s hard-earned money that I just don’t think I would be able to handle.
You need to understand, my father was an extreme compulsive gambler. I grew up seeing how emotions operate in these kinds of realms. Imagine giving a gambler someone else’s money to bet. When it’s my money, I know what my own risks and expectations are. I wouldn’t really know what someone else’s trading criteria would be. They could be trying to fill some sort of psychological void by trading the markets, but by entrusting me to do it for them, the emotions are now mine, and not theirs, and it gets too tricky. If I gave them a 10 percent return, they might not be happy, even though for me 10 percent might be acceptable under certain market conditions.
Anyway, what I know is this. I really cannot afford to get tangled up in the web of human emotions—mine or someone else’s. I have plenty of trouble tending to my own pathological tendencies, and I mean that seriously. I really can’t take on someone else’s.
Early on, I noticed that there was a “spectrum” of personality manifestations in the markets. There were the compulsive gamblers, the guys whose wives would come back to the cage and tell me, “You call me at this number if you see my husband trading options.” Then there were the guys at the other end of the spectrum: the guys sitting in front of the tape, plotting out every little wiggly-jiggly of the market—and never putting on a trade!
And what I found is that the most important thing in trading is to first determine one’s own criteria—what you are really doing it for. And armed with that, you aren’t pulled in either direction on this spectrum—in fact, you aren’t even on that spectrum once you know what you are seeking to accomplish, and the pursuit of those very criteria becomes necessarily boring. I have seen a direct correlation to how well-articulated one’s criteria are and one’s success in trading. Individual traders rarely have articulated criteria; successful institutions almost always do.
The day after my interview with Ralph, he sent me a very nice e-mail:
Thank you! I mean it—thank you so much. Our conversation last night led me to some insights I had not anticipated. Perhaps this is important for others.
I have discovered that the reason I am able to succeed at trading (despite being of a rather desperately tortive personality) is because I was able to find a way to remove myself and my personality from it. I was able to extricate my personal panoply of psychological pathologies from the trading process entirely; to wit, I spend only 15 to 30 minutes a week at my job, if that. I came up with a process that intentionally avoids my inclusion. Because my success at this really is “extreme” in certain ways, I am thinking that it is exactly because I happened to be born with such screwed up traits that the path to removing them from impinging on my trading had to be that extreme. That’s my boredom program, and it has lavished me with what it has.
None of this was entirely evident to me until after speaking to you last night. But it’s starting to crystallize why I have been successful at this, and how I got there. I think you’ve pointed me in the direction of a great truth about all of this stuff, and I am very, very grateful.