PAUL TUDOR JONES ON REMINISCENCES
One of Edwin Lefevre’s key messages in Reminiscences was that the stock market is an unbeatable game that chews up players without remorse. And judging from the trader profiles written as annotations for this edition, it’s easy to agree with that conclusion. Most could be shortened to read: “Born in poverty. Made a fortune. Lost it all. Died in poverty.”
It was a rare player who could out-think and out-work his competitors, win big on a titanic scale, and exercise enough risk control to secure a generational fortune. Harriman, Rockefeller, Morgan and Baruch were able. Livermore, tragic hero of the saga, was not—though paradoxically his insightful ruminations on his flaws have proven to be a rich legacy.
Paul Tudor Jones II, chairman and chief executive of the Tudor Investment Corporation, is a full-blooded example of a modern player along the lines of Morgan: Not a permanent bull nor bear, but a consistent winner. And it turns out he has been a longtime admirer of Reminiscences due to its timeless message of persistence under pressure.
To add fresh perspective to this edition for a new generation of traders, I asked Jones to answer a few questions about his relationship with the book and its themes.
Before we get to his answers, let me tell you a little more about him. Yes, one more annotation.
After growing up in Memphis, Tennessee, and graduating from the University of Virginia in 1976, Jones began his career as a commodities broker in New York, specializing in cotton futures. At age 25, he became a highly successful “local” on the New York Cotton Exchange, trading just for himself. In 1982, on the cusp of a two-decade bull market, he left the floor of the exchange to branch out into equities and bonds. His Tudor Futures Fund has not recorded a single losing year in its 25 years of operation.
Jones built an asset management business from scratch that now invests $11 billion on behalf of institutions, pension funds, and individuals worldwide. He has held seats on the major exchanges, chaired the New York Cotton Exchange, innovated investment products, and led efforts to educate newcomers on strategies and ethics.
He has also become a leading philanthropist on Wall Street, founding an elementary school and after-school programs for under-served children in New York and leading efforts to preserve wildlife in East Africa and Florida. His Robin Hood Foundation, founded in 1988, has partnered with hundreds of grass-roots organizations to invest more than $1 billion in long-term solutions for New Yorkers in need.
Throughout this remarkable journey, the stirring narration of Reminiscences has served as a touchstone for Jones—a reminder to anticipate changes in basic conditions by leveraging experience and intuition, and to listen to the message of the tape as trends develop. He gives the book to new employees to make sure they’re on the same page.
Much like Livermore might have responded in the 1920s while sailing off the coast of Miami, Jones answered my queries in June 2009 while flying to meetings in Tanzania, India, and the United Kingdom before returning to the United States. He typed out his answers on a laptop computer, and emailed them from his ports of call.
Q: Out of the hundreds of books written about trading since the early 1900s, why do you think this one has become a classic?
Jones: Let’s call the book what it really is, and that is a historical novel. Because the book is written by a journalist who is interviewing one of the greatest speculators of all time, it combines the best of two worlds. As you noted in the annotations, the journalist borrowed many of the great trading tenets of the time in composing the mythical Livingston character in the book. This character was partly modeled after the very colorful lifestyle of Jesse Livermore, who had a penchant for high living and fast times to create a larger-than-life, full-blooded character who happened to embody every great trading maxim of the time. As the book states very early on, there is nothing new under the sun in the art of speculation, and everything that was said then completely applies to the markets of today. My guess is that the same will hold true for time eternal as long as man’s basic emotions remain intact—fear, greed, happiness, sorrow, elation, dejection, excitement, and apathy.
Q: Part of the appeal of the book is Livermore’s journey of self-discovery as a person and as a trader. Have you had the same experience as a trader and portfolio manager, or was your path easier or harder?
Jones: Probably the best lessons to be learned from this book come from his repeated failures and how he dealt with them. In the book I think he lost his entire fortune four or five times. I did the same thing but was fortunate enough to do it all in my early twenties on very small stakes of capital. I think I lost $10,000 when I was 22, and when I was 25 I lost about $50,000, which was all I had to my name. It felt like a fortune at the time. It was then that my father flew up from Memphis and sat me down in my tiny New York City apartment and began lecturing me as lawyers do. He commanded, “Leave the gambling den behind. Come home and get a real job in a safe profession like real estate.” Of course, I did not, and the rest is history. And real estate these past few years has been about as safe as shooting craps to pay the rent, so I was twice blessed. If I’d have taken my father’s advice, I might have lost all of my money again these past few years in my fifties.
Anyway, I think it’s no coincidence that our greatest champions, our greatest artists, our greatest leaders, our greatest everything all seem to have experienced some kind of gut-wrenching loss. I think their greatness, in part, was fashioned on the crucible of that defeat. Two years before Lincoln was elected as maybe our finest president, he lost that monumental Senate race to Stephen Douglas. To a certain extent, I think that holds true in my field as well, and I am leery of traders who have never lost it all. I think that intense feeling of desperation that accompanies such a horrifically deflating experience indelibly cauterizes great risk management reflexes into a trader’s very being.
There are two unpleasant experiences that every trader will face in his lifetime at least once and most likely multiple times. First, there will come a day after a devastatingly brutal and agonizing stretch of losing trades that you’ll wonder if you will ever make a winning trade again. And second, there will come a point when you begin to ask yourself why it is you make money and if this is truly sustainable. That first experience tests an individual’s grit; does he have the stamina, courage, guts, and smarts to get up and engage the battle again? That second moment of enlightenment is the one that is actually scarier because it acknowledges a certain lack of control over anything. I think I was almost 38 years old when one day, in a moment of frightening enlightenment, I knew that I really did not know exactly how and why I had made all the money that I had over the prior 17 years. This threw my confidence for a jolt. It sent me down a path of self-discovery that today is still a work in progress.
Q: Sections of the book that deal with trading psychology sound as if they could have been written this year, the issues and insights are so fresh. Do you have a sense that this was the result of Livermore’s insightful explanation of his craft to his biographer, or Lefevre’s strength as an observer and writer?
Jones: I put this down to Lefevre the biographer. There were any number of people he could have chosen to be the centerpiece of his book, but he brilliantly picked Jesse Livermore. It was not random chance. He did that because of his training. While attending the University of Virginia, I took some summer courses at Memphis State in journalism and at the same time worked editing my father’s small business paper. Looking back on my education, I would say that journalism was the single most important element of my development as a trader and as a businessman, more so than any of the economics and business classes I took at the University of Virginia. Newspaper journalism teaches you how to fact find, analyze, and condense a story down to its most essential points and then to communicate those in a series of paragraphs that read from the most important to the least important. A copy editor has to be able to cut a story from the bottom up so that all the important stories can fit onto one page. Knowing this, a writer immediately focuses on those essential points that need to be communicated in any story and how to deliver those points in a way that answers the who, what, where, when, how, and why in short order. Learning to report and communicate in this fashion is far and away the best training any businessman, investor, or trader can have. It’s a vital yet surprisingly underestimated skill that really enhances one’s ability to be able to frame, analyze, and solve problems in the most expeditious fashion. Lefevre had this skill, and it was his journalistic training that made this book the all-encompassing, spectacular compendium of knowledge on the profession of trading that it is. An untrained writer, even with all the skills and personality Jesse Livermore brought to bear as a subject, could never have written such a classic piece of prose.
Incidentally, this gets to why so many other books on business and trading are so bad; the person writing them, oftentimes the businessman himself, can’t write in an interesting manner that clearly and concisely communicates what he’s trying to say. Also, you asked about the sections that deal with trading psychology. Many of us are blind to key psychological elements of ourselves; that’s why people go to therapists or get outside help for any number of problems. This very thing happened to me in 1993, 17 years into my career, when a combination of people helped me discover, completely unbeknownst to me, that my trading style had incorporated some inimical traits. These bad habits were responsible for the worst year of my career and the only one that came close to being negative for my trading accounts. It’s easier for someone on the outside to understand why people do what they do than it is for people to figure it out themselves. Individually, each of us probably thinks we are just about perfect, which of course is why marriage was invented to kill that delusion. In many ways, it was easier for Lefevre, on the outside, to figure out the psychology of Jesse Livermore’s trading than it was for Jesse. It’s not so easy to see yourself, and it’s even harder to clearly describe what you might see in yourself. Lefevre could see what was unique about Livermore more easily than Livermore could ever have seen it himself, and he had the writing skills to clearly describe what he saw.
Q: Technology has sped up trading immeasurably since the early 1900s and yet the fundamentals of trading remain the same. Can you reflect on how trading is much the same now as it was in the 1880s and 1900s despite technological advances?
Jones: The book says it the best on the second page: “There is nothing new in Wall Street.” And even that sentiment is hardly new. King Solomon beat Lefevre to the punch by about 5,000 years when, in the Book of Ecclesiastes, he wrote, “There is nothing new beneath the sun.” But back to Wall Street: The game is the same though the actors have changed. And the content is essentially the same although it’s taken on some new forms. Specialists and floor traders who used to be well-paid gatekeepers of short-term liquidity for customer orders have been supplanted by high-frequency trading programs that provide moment-to-moment liquidity and harvest billions annually from the markets. Instead of working 40-hour weeks as most of our trading forebearers did, we work 80-hour weeks now because the information available has probably multiplied by 1,000 times in what oftentimes is an information race.
But at the end of the day, markets will always be driven by greed and fear, valuations will always swing from too cheap to too dear, and there will always be a new generation to rationalize why this time it is different. But I guarantee that for as long as I live I will always be able to find a chart that will look like another chart from another era, showing once again how Mr. Market ran the full gamut of emotions from bottom to top, and top to bottom all over again. Remember, he was known as King Solomon the Wise, not King Solomon the Clueless. As it is written, there is nothing new beneath the sun or on Wall Street.
Q: Most investors today seem to believe that the banking and credit problems witnessed in the past two years are unique, yet a study of Livermore’s era seem to show that investors 100 years ago faced many of the same concerns. Why do you think that every generation seems to confront the same problems of credit excesses, and it is possible for the cycle to ever be truly smoothed out by better understanding of economics and business processes?
Jones: That is a very interesting question, and I would be reluctant to think that men will ever be smart and farsighted enough to avoid the next bubble unless man’s basic greed can be excised. We know wars are not good, but they seem to be a permanent staple of humanity. Why not bubbles? It seems pretty clear that excess leverage ultimately leads to a very painful unwind. But is this new news? The extreme type of leverage we saw in the 1920s certainly contributed to the stock market crash, and partly in response, Congress over the next decade passed the Securities Act of 1933, the Securities Exchange Act of 1934, and the Glass-Steagall Act in 1933. These laws were designed to prevent the extreme types of leverage that we had in the 1920s, and for over 60 years they worked beautifully until 2000, when Congress, at the behest of the brokerage and banking lobby, decided to repeal aforementioned critical elements of this historical and well-functioning regulatory infrastructure. This legislation never would have made it to the Senate floor had it been opposed by our leading financial regulators or officials. But they, like their counterparts in the Hoover administration of the late 1920s, generally believed in the perfection of the free market system and the inviolate sanctity of noninterference. And that’s in large part why we are where we are today. Because there will always be a powerful contingent of very well connected and very wealthy power brokers who, probably innocently, believe it will be different this time. It will take a fundamental change in human nature to ever truly control this.
Q: Livermore/Livingston lays down numerous rules during the book. Do you ever think about these particular insights as you manage your own trades today, or are there any phrases or anecdotes that linger with you more than the others?
Jones: There are two rules from this book by which I now live during these later stages of my constitution. First is the tenet “The trend is your friend,” which is repeated often—but not often enough. You will simply never make any money unless you begin and end every trading thought with that in mind. Second is the old adage actually popularized in the 1880s, as I learned in your annotations: “Sell down to the sleeping point.” I remember in 1994, during the great bond bear market of that year, I had bought way too many British gilts for just a quick flip one afternoon. Gilts closed three hours before U.S. Treasuries did back then, and Treasuries proceeded to get hammered that afternoon. I knew gilts were going to open substantially lower the next day, and I dreaded the proverbial wake-up call I was going to get from my London desk. Around 2:00 A.A., my wife, Sonia, woke me up and said, “What the hell did you do to our bed?” It was soaking wet; sure enough, the bed was totally drenched. I was also drenched from head to toe as in my sleep I had literally sweated out probably a pound of fluid from the dread of the beating I was about to take. It was the last time I ever went home with an overly large countertrend position.
Q: If you were born in Livermore’s era, what role do you think you’d have liked to play: speculator, railroad baron, deal maker, government financier, or observer, and why?
Jones: How about (F) All of the above? But if I had to say, I would have been the speculator. I simply love the markets too much, and those were some great markets, by the way. Ever since I was a kid, I liked playing games whether it is chess, bridge, backgammon, poker, or sports. I don’t know a single great trader who doesn’t share the same trait. If doing this was about the money, I would have quit a long time ago. Being a deal maker or working in government at that time would have conceivably provided a great social value, and that is very important for me. But I think my highest and best purpose in my professional life is to make as much money as I possibly can and give it away in a very targeted fashion to have a lasting and important social and environmental impact. That is why I still work today.
Q: To what extent do you think that private and/or private/ government cliques still attempt to manipulate equity and commodity markets? Crude oil in the first half of 2008 might be an example, or the run on banks’ credit default swaps and equity in the winter of 2008. If so, how are current methods of manipulation different from the 1890s to 1920s?
Jones: Generally speaking, the markets at a micro level are much freer and less subject to manipulation than in the days of Livermore. There is a veritable alphabet soup of global regulatory agencies providing a significant deterrence against the type of pump-and-dump schemes that were so rampant in the 1920s. Limits on controlling interest, disclosure requirements, and prohibitions against insider trading have all but eradicated market manipulation as described in that book—certainly by private interests.
But “manipulation” of a sort certainly still occurs. Today it is practiced on a much larger, policy-driven scale by sovereign governments and central banks. From agricultural subsidies to currency management, governments practice it daily and with abandon. Certainly, the most glaring example in the past two decades would be the dollar peg enforced by the People’s Republic of China. History will probably remember it as the greatest single misallocation of economic resources in the history of modern civilization. It was not just what they did but the countries that imitated them also. The peg was a significant contributing factor to the Great Credit Bubble as their purchases of public and private debt in the United States sparked a massively unsustainable boom in consumption. That was Act 1. And now that the Chinese own $2 trillion of U.S. debt, my guess is that equally large market moves will be forthcoming in a variety of asset classes as the Chinese one day will try to reduce this unnatural position.
You mention the rise in crude oil in 2008 as a possible example of manipulation. I would characterize that as more of a bubble. Institutional investment in commodity indexes simply swamped what is in reality a very small market. And the price action became self-reinforcing as is always the case in any great bull market, until it reached bubble-like proportions. The exact same thing happened in 1999 with the tech bubble, as evidenced by the fourfold rise in the Nasdaq 100. But there was no manipulation. And certainly, there existed significant regulatory apparatus in both instances to have at least partially prevented them. But the Federal Reserve Board, in the case of the Nasdaq bubble, and the CFTC [Commodity Futures Trading Commission], in the case of the crude oil bubble, chose to let the market take its course. This was very reminiscent of the late 1920s and early ’30s and had as much to do with the prevailing financial wisdom of the times as anything.
One last postscript. We have spent a lot of time in the last two questions discussing the rationale behind recent events in modern financial history and how it compared to that era. It is not fitting to end on this note. The whole point of Reminiscences was that all of those very serious economic issues should be largely irrelevant to a great operator. Yes, they are interesting to debate, important to know, but always secondary to the tale the tape tells us on a continual basis.