Log In
Or create an account ->
Imperial Library
Home
About
News
Upload
Forum
Help
Login/SignUp
Index
Prologue
PART I
Misadventures in Trading On the lecture tour following the completion of this book’s predecessor, Market Wizards, certain questions came up with reliable frequency. One common question was: “Has your own trading improved dramatically now that you’ve just finished interviewing some of the world’s best traders?” Although I had the advantage of having plenty of room for dramatic improvement in my trading, my response was a bit of a cop-out. “Well,” I would answer, “I don’t know. You see, at the moment, I’m not trading.” While it may seem a bit heretical for the author of Market Wizards not to be trading, there was a perfectly good reason for my inaction. One of the cardinal rules about trading is (or should be): Don’t trade when you can’t afford to lose. In fact, there are few more certain ways of guaranteeing that you will lose than by trading money you can’t afford to lose. If your trading capital is too important, you will be doomed to a number of fatal errors. You will miss out on som
Hussein Makes a Bad Trade In many ways, the elements of good and bad decision making in trading are very similar to those that apply to decision making in general. The start of my work on this book coincided with the events immediately preceding the Persian Gulf War. I couldn’t help but be struck by the similarity between Saddam Hussein’s actions (or, more accurately, the lack thereof) and the typical responses of a foundering novice trader. Hussein’s trade was the invasion of Kuwait. Initially, he had solid, fundamental reasons for the trade. (The fundamentalist reasons came later, of course, as Hussein found it convenient to discover religion.) By invading Kuwait, Hussein could drive up oil prices to Iraq’s benefit by eliminating one of the countries that consistently exceeded its OPEC quota and by creating turmoil in the world oil markets. He also stood a perceived good chance of permanently annexing part or all of Kuwait’s oil fields, as well as gaining direct access to the Persian
PART II
Bill Lipschutz THE SULTAN OF CURRENCIES Quick, what is the world’s largest financial market? Stocks? No, not even if you aggregate all the world’s equity markets. Of course, it must be bonds. Just think of the huge government debt that has been generated worldwide. Good guess, but wrong again, even if you combine all the world’s fixed-income markets. The correct answer is currencies. In the scope of all financial trading, stocks and bonds are peanuts compared with currencies. It is estimated that, on average, $1 trillion is traded each day in the world currency markets. The vast majority of this currency trading does not take place on any organized exchange but rather is transacted in the interbank currency market. The interbank currency market is a twenty-four-hour market, which literally follows the sun around the world, moving from banking centers of the United States, to Australia, to the Far East, to Europe, and finally back to the United States. The market exists to fill the need
PART III
Futures—Understanding the Basics Today’s futures markets encompass all the world’s major market groups: interest rates (e.g., T-bonds), stock indexes (e.g., the S&P 500), currencies (e.g., Japanese yen), precious metals (e.g., gold), energy (e.g., crude oil), and agricultural commodities (e.g., corn). Although the futures markets had their origins in agricultural commodities, this sector now accounts for only about one-fifth of total futures trading. During the past two decades, the introduction and spectacular growth of many new contracts have resulted in the financial markets (currencies, interest rate instruments, and stock indexes) accounting for approximately 60 percent of all futures trading. (Energy and metal markets account for nearly half of the remaining 40 percent.) Thus, while the term commodities is often used to refer to the futures markets, it has increasingly become a misnomer. Many of the most actively traded futures markets, such as those in the financial instruments,
Randy McKay VETERAN TRADER There are few futures traders who have gone from a starting account of several thousand dollars to double-digit million-dollar gains. Those who have kept their winnings are even fewer. If we now add the stipulation of holding a twenty-year record of highly consistent profitability, we are down to about the same number as there are Republican supporters of Teddy Kennedy. Randy McKay is one of those individuals (a consistent trader, that is—I don’t know what his political leanings are). The start of McKay’s trading career coincided with the birth of currency futures trading. Although currencies have become among the most actively traded futures markets, at their inception they were moribund. In those days, the currency trading ring was so quiet that in the list of daily activities conducted in the pit, trading was probably a distant third to newspaper reading and board games. Yet, although the currency futures market’s survival was initially in question, McKay’
William Eckhardt THE MATHEMATICIAN William Eckhardt is one of the key figures in a famous financial tale, yet he is virtually unknown to the public. If elite traders were as familiar as leading individuals in other fields, one could picture Eckhardt appearing in one of those old American Express ads (which featured famous yet obscure names such as Barry Goldwater’s vice presidential running mate): “Do you know me? I was the partner of perhaps the best-known futures speculator of our time, Richard Dennis. I was the one who bet Dennis that trading skill could not be taught. The trading group known in the industry as the Turtles was an outgrowth of an experiment to resolve this wager.” At this point, the name WILLIAM ECKHARDT might be printed across the screen. So who is William Eckhardt? He is a mathematician who just short of earning his Ph.D. took a detour into trading and never returned to academics (at least not officially). Eckhardt spent his early trading years on the floor. Not su
The Silence of the Turtles Picture an oak-paneled English drawing room. Two obviously wealthy gentlemen sit in their armchairs facing a roaring fire, puffing on their pipes and discussing their philosophy of trading. “It is my proposition, Colin, that anyone can be taught to be a superior trader. There is nothing magical about it. There is no rare talent involved. It is simply a matter of being taught the appropriate rules and following those rules. There is no question in my mind that I could train virtually anyone to make a fortune trading.” “That is nonsense, Duncan. You just think your trading success is due to your system. What you do not realize is that you have a special talent. You could print out your rules in twelve-inch-high letters and have people read them every day for a year, and they still would not be able to do what you do in the markets. Your success is a function of your talent. It cannot be taught!” “Well, Colin, this must be the hundredth time we’ve had this discu
Monroe Trout THE BEST RETURN THAT LOW RISK CAN BUY I first met Monroe Trout several years ago, when a broker in my firm, who was trying to land Trout’s account, brought him by as part of the company tour. I knew that Trout was a commodity trading advisor (CTA) new to the business, but I didn’t know much else. Subsequently, I often heard Trout’s name mentioned as one of the younger CTAs who was doing very well. I didn’t realize how well until I started to work on this book. In consulting the quarterly issue of Managed Accounts Reports while doing research for this book, I found that in terms of return/risk measurements, Trout’s performance was the best of the more than one hundred managers covered. There were a few who exhibited a larger average annual return, and fewer still with smaller drawdowns (although these CTAs had dramatically lower returns), but no one came close to matching his combination of return to risk. Over the five-year period surveyed, his average return was 67 percen
Al Weiss THE HUMAN CHART ENCYCLOPEDIA In terms of return/risk ratio, Al Weiss may well have the single best long-term track record for a commodity trading advisor. Since he began trading in 1982 as AZF Commodity Management, Weiss has averaged 52 percent annually. One thousand dollars invested with Weiss in 1982 would have been worth almost $53,000 at the end of 1991. However, returns are only half the story. The truly impressive element in Weiss’s track record is that these high gains were achieved with extremely small equity drawdowns. During this entire period, the largest single equity drawdown witnessed by Weiss was 17 percent in 1986. In the past four years (1988–91), Weiss has honed his risk control to truly astounding standards: during this period, his worst annual drawdown averaged under 5 percent, while his average annual return exceeded 29 percent. Despite his exemplary track record, Weiss has kept a very low profile. Until 1991, Weiss repeatedly refused to grant any intervie
PART IV
Stanley Druckenmiller THE ART OF TOP-DOWN INVESTING Stanley Druckenmiller belongs to the rarefied world of managers who control multibillion-dollar portfolios. Achieving a near 40 percent return on a $100 million portfolio is impressive, but realizing that performance level on a multibillion-dollar fund is incredible. In the three years since he assumed active management control of the Quantum Fund from his mentor and idol, George Soros, Druckenmiller has realized an average annual return of over 38 percent on assets ranging between $2.0 billion and $3.5 billion. Druckenmiller has been on a fast track ever since he decided to for-sake graduate school for the real world. After less than one year as a stock analyst for the Pittsburgh National Bank, Druckenmiller was promoted to the position of director of equity research. Druckenmiller dismisses his sudden promotion as the act of an eccentric, albeit brilliant, division manager. However, one suspects there was more to it, particularly in
Richard Driehaus THE ART OF BOTTOM-UP INVESTING Richard H. Driehaus got hooked on the stock market as a kid, and his enthusiasm for the market has never flagged since. While still in his early teens, Driehaus discovered the folly of following the recommendations of financial columnists. As a result, he decided to educate himself by devouring all the stock newsletters and financial magazines he could find at the local branch library. It was during those childhood years that he began to develop the basic market philosophy that would serve as the core of his approach in his later years as a securities analyst and portfolio manager. Upon college graduation, Driehaus set out to find a market-related job and landed a slot as a research analyst. Although he liked the job, he was frustrated by seeing his best recommendations ignored by the sales force. Driehaus got his first chance to manage money in 1970 while working in the institutional trading department at A. G. Becker. To his pleasant su
Gil Blake THE MASTER OF CONSISTENCY Gil Blake calls his management company Twenty Plus. This name ties into the logo on his business card and stationery, which shows a probability curve with a +20 percent return falling two standard deviations to the left of the mean. For those not statistically inclined, the implication is that he has a 95 percent probability of realizing an annual return of at least 20 percent. The sketch of the probability curve does not extend to a 0 percent return, let alone into negative returns—which says a great deal about Blake’s confidence. Blake’s confidence is obviously not misplaced. In the twelve years since he began trading, he had averaged a 45 percent annual return. Although this is an impressive figure, the most striking element of Blake’s performance is his consistency. True to his logo, he has never had a year with a return below 20 percent. In fact, his worst performance was a 24 percent gain in 1984. But even in that subpar year, Blake had a conso
Victor Sperandeo MARKETS GROW OLD TOO Victor Sperandeo started his career on Wall Street straight out of high school. It was certainly an unglamorous beginning, working first as a minimum-wage quote boy and then switching to a slightly higher paying job as a statistical clerk for Standard & Poor’s. Sperandeo found this work, which basically involved copying and transferring columns of numbers, “stupifyingly boring.” He had a difficult time keeping his mind on his work. To his relief, he was eventually fired for making too many errors. After a stint at another nontrading job in a Wall Street accounting department, Sperandeo talked his way into an option trading position. Over the next two years, he was a dealer in the over-the-counter (OTC) options market, matching up buyers and sellers and “making the middle.” In the midst of the 1969 bear market, Sperandeo switched firms in a search for greater autonomy in his trading decisions. At this new firm, he was offered a percentage of the spr
PART V
Tom Basso MR. SERENITY To be frank, Tom Basso was not on my list of interview subjects for this book. Although his track record is solid, it is by no means striking. As a stock account manager, he has averaged 16 percent annually since 1980, approximately 5 percent above the S&P 500 return. Quite respectable, considering that the majority of managers underperform the index, but still not the stuff of legends. As a futures fund manager, Basso has averaged 20 percent annually since 1987 with only moderate volatility. Here, too, the results are significantly better than the industry average, but hardly extraordinary. And yet, in an important sense, Basso is perhaps the most successful trader I have interviewed. To paraphrase a recent commercial, how do you spell success? If your answer is M-O-S-T B-U-C-K-S, then Basso doesn’t make the grade. If, however, your answer is G-O-O-D B-U-C-K-S, G-R-E-A-T L-I-F-E, then Basso has few peers. When I first met Basso, I was immediately struck by his i
Linda Bradford Raschke READING THE MUSIC OF THE MARKETS Linda Bradford Raschke is so serious about trading that she traded right through the last day of her pregnancy. “You didn’t trade while you were in labor?” I asked her half-jokingly. “Well, no,” she said, “but then again, it was four A.M. and the markets weren’t open. I did, however, put on a trade about three hours after I gave birth to my daughter. I was short some currency contracts that were expiring that day. It seemed like such a good trade that I couldn’t bring myself to give up the opportunity of rolling the position over into the next contract month.” As I said, Linda Raschke is very serious about her trading. Raschke knew that she wanted to be involved in the markets from an early age. When she was unable to land a job as a stockbroker after graduating from college, she got into the routine of hanging out on the floor of the Pacific Coast Stock Exchange every morning before work. Although the driving motivation for her d
PART VI
CRT THE TRADING MACHINE You guys make money every day,” said the floor broker to Mark Ritchie in a reference to CRT (Chicago Research and Trading). His voice was a mixture of envy, disgust, and admiration. He was holding a long position, and the market had moved locked limit-down against him, in one of the periodic painful setbacks that are a bane to even successful traders. The amazing thing is that the exasperated broker was exaggerating only slightly. CRT may not make money every day, but it is profitable virtually every month, if not every week. Think about that! The story of CRT is one of the most incredible in the investment world. A mere fifteen years ago, Joe Ritchie (Mark’s brother), the firm’s founder and leading force, was so broke that he had to borrow his brother’s wholesale suit to visit the Chicago Board of Trade. Today, Joe is the helmsman of a trading company of eight hundred employees, including a primary dealer of government securities, that has been estimated to hav
Mark Ritchie GOD IN THE PITS The subtitle of this chapter is taken from Mark Ritchie’s autobiographical book—a highly unusual blend of spiritual revelations, exotic experiences, and trading stories. It certainly does not mean to imply, however, that Ritchie believes he has deity-like trading prowess. On the contrary, the title refers to Ritchie’s convictions about the presence of God that he perceives in his life. It is hard to imagine an educational background further removed from trading—Mark Ritchie attended divinity school. (No, it doesn’t help in praying for positions.) While attending school, he barely scraped by, working a variety of part-time jobs such as correctional officer (night-time shift) and truck driver. In those days, he was so poor that when he drove a truck, he sometimes could not even afford to fill the tank. Mark initially got hooked on trading when he accompanied his bother, Joe, on a visit to the Chicago Board of Trade. Mark spent most of his trading career on th
Joe Ritchie THE INTUITIVE THEORETICIAN Joe Ritchie is the founder and driving force behind CRT. It is his ideas, concepts, and theories that serve as the blueprint for the complex strategies that guide the firm. Although he has never taken an advanced math course, Joe Ritchie is considered by many to be a math genius—a natural. He would have to be, given the intricate mathematical nature of the trading models employed by CRT. Joe describes math as something he almost feels or intuitively understands. Ritchie would be the first to emphasize that the success of CRT is hardly a solo act. There are many individuals that are integral to the company’s achievements. In our interviews, Joe insisted that I also talk to some other CRT personnel. Here is how one key employee described Ritchie’s philosophy: “Joe believes in empowering people. He trusts people. I sincerely believe that one of the reasons we can make so much money is that Joe makes us feel absolutely comfortable to risk his money.”
Blair Hull GETTING THE EDGE Blair Hull came to trading by way of the blackjack tables. This is not as strange as it may sound, since there are actually very strong parallels between the two activities. The point is not that success in trading is akin to luck in gambling, but rather that consistent winning in both is a matter of strategy and discipline, not luck. Luck plays a role only over the short term, where its potential adverse impact must be neutralized by money management controls. After the casinos caught on to Hull’s blackjack team, he sought another avenue for applying probability theory to making money. He found the same general principles could be employed to profit from the mispricings that occurred in the option markets. Hull started with $25,000 in late 1976 and by the start of 1979 had multiplied his stake twentyfold. He continued to score consistent profits in the subsequent years, averaging roughly 100 percent per year (excluding those years in which he took sabbatica
Jeff Yass THE MATHEMATICS OF STRATEGY Jeff Yass started as an option trader on the floor of the Philadelphia Stock Exchange in 1981. He was so enthralled by the opportunities in option trading that he enticed a number of his college friends to try trading careers. During the early 1980s, he trained six of these friends as traders. In 1987, Yass and his friends joined to form Susquehanna Investment Group. The firm has grown rapidly and now employs 175 people, including 90 traders. Today, Susquehanna is one of the largest option trading firms in the world and one of the largest entities in program trading. Yass seeks out nuances of market inefficiencies through complex refinements of standard option pricing models. However, the essence of Yass’s approach is not necessarily having a better model but rather placing greater emphasis on applying mathematical game theory principals to maximize winnings. To Yass, the market is like a giant poker game, and you have to pay very close attention t
PART VII
Zen and the Art of Trading One of the hazards of doing a book of this sort is that you can go through the arduous process of transforming a rambling 250-page raw transcript into a readable 25-page chapter only to have the interview subject withhold permission to use the material. (In order to provide an atmosphere conducive to openness on the part of those I interviewed, I felt it necessary to offer them the right of final refusal.) One of the traders I interviewed, an individual who had made several hundred million dollars in trading profits for his firm, felt that the resulting chapter, which contained a lot of copy related to intuition, dreams, Eastern philosophy, and trading anecdotes, presented an image of him that would be viewed askance by his corporate clients. I prevailed upon him, however, to allow me to use the following excerpt anonymously, as I felt it offered an unusual and insightful perspective on trading. I still don’t understand your trading method. How could you ma
Charles Faulkner THE MIND OF AN ACHIEVER Charles Faulkner abandoned graduate school (he was studying psycholinguistics at Northwestern University) after becoming enamored with two early books written by Richard Bandler and John Grinder, the cofounders of Neuro-Linguistic Programming (more on NLP in the interview). Starting in 1981, Faulkner studied extensively with Grinder and then with Bandler and other key NLP codevelopers, becoming a certified NLP trainer in 1987. Faulkner’s focus has been on modeling human excellence, with projects that have included accelerated learning, physician decision making, and futures trading. Faulkner is also a consultant, NLP seminar leader, and program designer and author of several audio tape programs applying the techniques of NLP. I met Charles Faulkner when he approached me after a talk I had given at a futures industry symposium. During my speech, I had made several references to this volume, which at the time was about half-completed. Faulkner exp
Robert Krausz THE ROLE OF THE SUBCONSCIOUS I first learned of Robert Krausz through a letter in Club 3000—a publication that consists largely of letters written by subscribers who share an interest in trading. The trader who wrote the letter described how a set of subliminal tapes he had purchased from Robert Krausz, a member of the British Hypnotist Examiners Council, had improved his trading immensely. I was intrigued. There is almost a Dickensian quality to Robert Krausz’s life story. His early childhood years were spent in a ghetto in Hungary during World War II. At the age of eight, he and a friend escaped from a forced march to a death camp, bolting for the woods in opposite directions during a moment in which the guards were distracted. Having no place else to go, he made his way back to the ghetto, where he stayed until the end of the war. Krausz spent the years after the war in a succession of orphanages, finally ending up in an orphanage in South Africa. There he met a diamon
PART VIII
Market Wiz(ar)dom By now it should be clear that the methods employed by exceptional traders are extraordinarily diverse. Some are pure fundamentalists; others employ only technical analysis; and still others combine the two methodologies. Some traders consider two days to be long term, while others consider two months to be short term. Yet despite the wide gamut of styles, I have found that certain principles hold true for a broad spectrum of traders. After a score of years of analyzing and trading the markets and two books of interviews with great traders, I have come down to the following list of forty-two observations regarding success in trading: 1. FIRST THINGS FIRST First, be sure that you really want to trade. As both Krausz and Faulkner confirmed, based on their experience in working with traders, it is common for people who think they want to trade to discover that they really don’t. 2. EXAMINE YOUR MOTIVES Think about why you really want to trade. If you want to trade for th
A Personal Reflection I am frequently asked whether writing this volume and the first Market Wizards helped me become a better trader. The answer is yes, but not in the way people expect when they ask the question. No trader revealed to me any great market secrets or master plan unlocking the grand design of the markets. (If this is what you seek, don’t despair, the answer is readily available—just check the ads in any financial periodical.) For me, the single most important lesson provided by the interviews is that it is absolutely necessary to adopt a trading approach precisely suited to one’s own personality. Over the years, I have come to clearly realize that what I really like about this business is trying to solve this master puzzle: How do you win in the markets? You have all these pieces, and you can put them together in a limitless number of ways, bounded only by your creativity. Moreover, to keep the game interesting, there are lots of pitfalls to lead you astray, and some of
← Prev
Back
Next →
← Prev
Back
Next →