Personality Case Study: Scott Ramsey
Scott Ramsey has been trading the markets for over 30 years. He founded his company, Denali Asset Management, in 1994 and has been its president since its inception. Although hailing originally from Chicago, today Scott calls the U.S. Virgin Islands his home.
Scott runs Denali as a macro fund. He seeks to profit from broad economic trends by trading futures contracts on equity indexes, commodities, and currencies. Scott especially takes pride in being one of the few hedge-fund managers who survives and even thrives on turbulent market conditions. He says that his personal trading motto is: “From chaos comes opportunity.” He notes that chaos occurs during a financial crisis as well as around significant economic reports and often coincides with trend changes.
Scott’s performance has been amazing. During these hectic times he has never had a down year, and he now oversees over $1 billion worth of funds—all of which are traded exclusively in futures markets. Since the launch of Denali Partners L.P. in 2000, his average annual gain has been 16 percent. His worst monthly drawdown was only 10 percent.
Scott holds his trades for an average of a week or less, and he reports spending on average 50 to 60 hours per week trading or preparing for trades. He places about 20 to 30 traders per week. Scott is in the minority of professional hedge-fund traders in that he employs discretionary trading. As he puts it:
I am a self-taught trader with an engineering background. At first I tried to write some of my own systems, and they did okay. Not great, but okay. It wasn’t until I started reading and learning about the fundamentals of the market, though, that I started to make big money.
I would never claim that either a systematic or discretionary methodology is superior to the other. I believe they are very different and each approach has its benefits and place in an investor’s portfolio. I choose to manage assets as a discretionary CTA (commodity trading advisor), because it utilizes the skills I’ve developed trading on and off the exchange floor for over 30 years. The majority of the participants in the marketplace are traders who make their decisions based on expectations and emotions. Until such a time comes that computers can take over trading altogether, there will be a place for the discretionary trader who can sift through the emotion and act rationally when others aren’t, identify the opportunities, and profit from them.”
Not surprisingly, Scott scores low in C2 facet (order)—just like all of the discretionary traders we tested. A low C2 score basically predicts that a successful trader is using discretionary means to trade.
Many of our clients and prospective clients have portfolios composed primarily of systematic CTAs that perform similarly during most market cycles. Our clients find value added in Denali’s discretionary approach, because it complements their systematic CTAs and potentially smoothes overall portfolio performance during times of market turmoil.
As a prime example, Scott points to the financial crisis of 2008 and the ensuing “Great Recession.” While many systematic CTAs were hemorrhaging money, Scott’s Denali fund profited handsomely. Scott feels that his 30 years of trading experience combined with Denali’s research and trading focus are the keys to its success. He acknowledges that chaos and wild market emotions during times of crisis can create opportunities to capitalize on—at least for those who are prepared and not caught focusing on losing trades!
Although Scott places all of his trades with discretionary wisdom and insight, his fund also uses a highly disciplined risk management approach. For instance, 1 percent is the maximum risk Denali will take on any single trade. The maximum risk allowed in any market sector is 3 percent, and the maximum risk to the portfolio is capped at 10 percent. He also puts strict limits on how much he will allow a profitable trade to retrace.
Without violating the boundaries of our risk management, however, we use considerable discretion. This discretion enables us to add to or subtract from positions as market conditions warrant—maximizing our potential gain or minimizing our risk. Hence, the average duration of our trades is short. In fact, the majority of our trade exits are discretionary, as a result of changing market conditions and expectations. In essence, our initial stop loss acts as a fail-safe exit strategy if a discretionary exit is not otherwise utilized.
I shared with Scott that his N1 score in trait anxiety is low, which is similar to those of the other great market traders we examined. He replied,
Well, that makes sense. In order to look for opportunities, you have to be able to be calm and able to think rationally. It is something that I strive for. Nothing is more important during times of market turmoil. When I find myself getting anxious, it is usually because I am in a trade or trades that aren’t working. My first reaction is to get out of what isn’t working so that I can focus my energy and attention on what is working and the potential opportunity at hand. Basically, I get out first and ask questions later.
I always use stops in my trades. This way I know exactly what my exposure is. Further, if a market looks like it is too volatile or if it isn’t behaving the way experience says that it should, I either cut the position entirely, reduce the size, or move the stop. I may get back into the same position the next day, or even the very same day, if the market behaves again as expected. This often results in small losses. I look at it like an insurance policy. I pay a certain premium through small losses in order to protect equity against the big hit.
At first I thought Scott’s discussion on anxiety and the markets differed substantially from other traders I interviewed. Other traders had told me that it is important to confront anxiety and not back down when one feels panicky. (Remember the quote from Jerry Rice, too!) So I asked Scott why he flees a position if he is starting to sweat and get nervous. Scott replied:
It’s not that I exit at any moment of uncertainty. It’s when the behavior of the market is not what is expected that I get out. For example, if there is a news event and the market is moving against the expected direction, that tells me that the investors are emotional. I don’t want to be following the emotions of other investors. I am always gauging the emotions of the market and asking myself, “What is the other guy thinking?” So it’s really when there is anxiety in the market, and I can feel and sense it myself. That’s when I get out of my position and take cover, and I only get back in when I know that the market is behaving how it is supposed to, given the current conditions.
Look, anytime there’s money on the line, there will be some anxiety. All of us traders experience anxiety. You need to feel it. Eliminating anxiety is not the goal. You need to feel anxiety; it’s a great tool. So I really see anxiety as a two-edged sword. It helps you get in tune with what other traders are feeling, but it’s also something you are fighting against at the same time, because obviously it is important to stay calm and to think rationally. So it’s a balance between not succumbing to your emotions and being able to use them as a barometer of sorts.
I asked Scott if he ever senses performance anxiety as a big-time futures hedge-fund trader.
Absolutely, it’s hard not to when you’re managing other people’s money and you’re in a drawdown. However, it’s the path I’ve chosen, and so I have to deal with it. It is part of the process of trading. So the challenge is to keep things in perspective. I try to break it down into the two issues: first, the anxiety of managing other people’s money and, second, the anxiety created by poor performance. I tell clients that if they invest with Denali, I am trading their money exactly as I trade my own. Since I have no control over their decision and they are free to redeem at any month’s end, I am able to handle that emotion without issue. As for performance anxiety, I believe that over time, if I am approaching the markets correctly and managing my risk effectively, the drawdown will end and the anxiety will dissipate. I try to focus on the opportunity at hand and not dwell on recent performance.
Scott also had some interesting insights into traders who are overconfident in what they do (he himself rated average on the C1 scale):
You have to respect the markets. The markets are always right; sometimes I am right with the markets. The minute you start to think you know what’s going on is the minute the markets will show you who’s really in charge! You must always be respectful of the wisdom of the markets or you will get taught an expensive lesson. In 1980, after a brief period on the floor of the Chicago Mercantile Exchange, I started working as a retail futures broker. I saw some clients who, although they were very smart people, were so overly confident in what they were doing in the markets that they would get ingrained in their beliefs. They wouldn’t change their approaches or back down from their beliefs. They wouldn’t get out of a losing trade until they were forced to via a margin call, as they never used stops. Anyway, they inevitably lost money because they could not admit that they were wrong. It was a great experience for me. I learned early on that you can’t fight the markets or have too much self-confidence. It will destroy you.
And although I do not usually trade impulsively, I have noticed from time to time that it still rears its ugly head. I’m a visual person, and over the years I’ve seen millions of charts and chart patterns. Occassionally, I’ll see a pattern, and I will be compelled to impulsively buy or sell based on the overall picture without knowing much else. Quite frankly, the results are mixed. The best trades occur when I am more patient and formalize a trading plan and then implement the plan as the market reaches my entry and exit targets.
Scott had some interesting commentary on the role of teachers, mentors, and advisors throughout his trading life:
I never really had a mentor in trading. I am totally self-taught, although I have read my share of books on the subject. As a kid in college I read your dad’s books, as well as Wells Wilder’s, and it’s funny that today I am your dad’s next-door neighbor. But anyway, I basically learned to trade in a closet—almost literally. My first office had no windows in it. So I just learned to watch the markets very carefully, and I studied how they related to one another. Now that I live in the Virgin Islands, I feel it’s kind of similar in concept. I am far away from the constant chatter of other traders and commentators. It’s dangerous to let yourself be too influenced by others; you have to develop your own style and instincts.
We buy a lot of research at Denali, and I’ve followed some of the same analysts for years. I have found that they provide value even when they are wrong in their market calls. For example, an analyst might tell me it’s a good time to buy gold. If the argument is strong but the price action doesn’t validate the argument, then it suggests to me that many others are probably “long and wrong” and will be forced to sell. That creates the opportunity. The point is that whenever you get trade advice from someone else, you should always ask yourself, “Where are they wrong?” And if the market happens to go there, you might have the setup for a great trade the other way!
At this stage in my career I really don’t even have to be doing this, trading every day. But I still do. I still really enjoy trading. To me trading is a game, and one I never get tired of playing. I don’t care much for Vegas. Gambling is just a process and set of statistical odds. I can sit down at a blackjack table and play, but I never really get into it. I don’t have the edge or the time to develop the edge. But the markets are different. There is a lot of satisfaction in going up against the smartest minds and computers and trying to play this very emotional game. Plus, in market trading price-influencing activity is going on around the world and around the clock, and so the complexity of what moves the markets up and down is ever present and endlessly complex.
I like waking up each morning and settling into a new trading day. I enjoy the process, I enjoy the challenge, and I find it to be fun. I am playing a high stakes game every day, and I’m playing to win. I think we all choose our professions based on our motivations and our skills. Fortunately, I chose a business that seems to suit my skill set.