The Finance Book Club

Mark D. Cook

1. Never give up (Cook blew up his account several times)
2. His Risk:Reward ratio is only 2:1
3. Consider the probability of winning, not just the potential gain to risk
4. If you are experiencing physical or emotional distress, either stop trading altogether, or reduce your trading activity to a level at which you can’t do much damage.
5. Once I make a profit, I consider it my money, and I’m not about to let the market take it out of my pocket. So once I’m ahead on the day, I try to make sure I don’t give back much of it.
6. I try to teach people not to have any preconceived notion about the market direction—to react to the market, not to anticipate it.
7. As long as I have volatility, I’m fine. A true trader can make money in any environment as long as he reacts and doesn’t anticipate. He must feel the markets flow and never fight. He may often be wrong, but never inflexible.

Q: What would a business plan for traders include?

 

1. What markets are you going to trade? You need to select a market that fits your personality because a market is a reflection of the people who trade it. People who trade Internet stocks are definitely different from people who trade utility stocks.
2. What is your trading capitalization? On the one hand, you should honestly be able to say, “If I lose all this money, it won’t change my lifestyle.” On the other hand, you need a large enough account so that making at least as much as you do from your current job is a feasible goal. Otherwise, you will think that you are a failure because you will work harder as a trader than you do at the job you are in now.
3. How will orders be entered? Will you scale into positions or put them on all at once? How will you exit losing trades? How will you exit winning trades?
4. What type of drawdown will cause you to stop trading and reevaluate your approach?
5. What type of drawdown will cause you to shut down trading?
6. What are your profit goals, measured on as short a time frame as is feasible for your trading approach?
7. What procedure will you use for analyzing your trades?
8. What will you do if personal problems arise that could adversely impact your trading?
9. How will you set up your working environment so that it is conducive to trading and maximizes your chances for success?
10. How will you reward yourself for successful trading? Will you take a special vacation, buy yourself a new car, etcetera?
11. How will you continue to improve yourself as a trader?
12. What books will you read?
13. What new research projects will you do?

Alphonse “Buddy” Fletcher Jr.

1. Even if the markets are efficient, if different investors are treated differently, it implies a profit opportunity. (this is probably the fundamental principle on which retail FX trading is made possible)
2. Is only able to earn 2% during the 2001 bear market, but still better than the S&P which was down 45% and the Nasdaq down 75%
3. We can’t control when acceptable opportunities will appear, but we can certainly try to preserve our capital until those opportunities arrive.

Ahmet Okumus

1. Recommends ‘Stock Market Logic’ by Norman Fosback
2. Also ‘One Up on Wall Street’ by Peter Lynch
3. On Insider buying: I compare the amount of stock someone buys with his net worth and salary. For example, if the amount he buys is more than his annual salary, I consider that significant. Also it should represent purchase of new shares, not exercise of options.
4. Spends 100 hours/ week on research
5. I hope we get a bear market. All the momentum players will get killed; all the Internet players will get killed; all the growth players will get killed; the value players, however, will do okay. The companies that I buy are already in bear markets. They are trading at five to six times earnings. They don’t have room to go much lower. Remember, the stocks that I buy are already down 60 to 70 percent from their highs.
6. I don’t buy any companies that have even a remote chance of going bankrupt. I buy companies that have a good balance sheet, a high book value, consistent business track records, good management, and large insider buying ownership. (then how can they go down 60-70%? Only after a crash)
7. Holds about 10 positions, with the max in any one about 30%
8. On shorts: I look for stocks that are trading at a huge multiple to earnings. However, after my experience with Internet stocks last year, I’ve added a rule that there has to be a catalyst. Now, regardless of how extremely overvalued a stock may be, I won’t sell it until there has been a catalyst for change.
9. Once the fundamentals get broken, market manias get broken as well.
10. I think we are witnessing the biggest financial mania ever in the stock market. First, the stock market price/earnings ratio is at a record high level. Second, the average profit margin of companies is at its highest level ever.

Stock purchase checklist:

1. 1. The company has a good track record in terms of growing their earnings per share, revenues per share, and cash flow per share.
2. 2. The company has an attractive book value [the theoretical value of a share if all the company’s assets were liquidated and its liabilities paid off] and a high return on equity.
3. 3. The stock is down sharply, often trading near its recent low. But this weakness has to be due to a short-term reason while the long-term fundamentals still remain sound.
4. 4. There is significant insider buying or ownership.
5. 5. Sometimes a company having a new management team with a good track record of turning companies around may provide an additional reason to buy the stock.
6. Trading rules:
   1. Do your research and be sure you know the companies that you are buying.
   2. Buy low.
   3. Be disciplined, and don’t get emotionally involved.

The update on Okumus, curiously says he was down 40% after the bear market, though his comments made it seem like he would have benefited from it. Maybe in the long term. He goes very net long after the crash.

Mark Minervini
Before we begin, hopefully you’ve seen this doing the rounds at some point.
https://www.forexlive.com/news/!/the...ehold-20211018

That tells you about everything you need to know about the personality of Mark Minervini. However the fact that he doesn’t know anything about the companies that he flogs doesn’t necessarily make him a bad trader.

 

1. A good fill is a death blow.
2. Recommends ‘Superperformance Stocks’ by Richard Love
3. Characteristics of successful stock picks
   1. Less than 10 years old
   2. $20 or higher, never under $12
   3. Above average P/E

4. People spend too much time trying to discover great entry strategies and not enough time on money management.
5. Containing your losses is 90 percent of the battle, regardless of the strategy.
6. On losing $40,000 on one of his first trades: My mistake had been surrendering the decision-making responsibility to someone else. I realized that no one was going to do it for me; I had to do it for myself.
7. I don’t give up very easily.
8. Money is the initial attraction but then the passion is about winning, being the best at something.
9. I think paper trading is the worst thing you can do. If you are a beginner, trade with an amount of money that is small enough so that you can afford to lose it, but large enough so that you will feel the pain if you do. Otherwise, you’re fooling yourself.
10. If you go from paper trading to real trading, you’re going to make totally different decisions because you’re not used to being subjected to the emotional pressure. Nothing is the same. It’s like shadowboxing and then getting in the ring with a professional boxer. What do you think is going to happen? You’re going to crawl up into a turtle position and get the crap beat out of you because you’re not used to really getting hit.
11. Quotes from ‘How to Trade Stocks’ by Jesse Livermore:

The basic message is not to have a rigid opinion; the market is never wrong. He also talked about the need for patience, not only in waiting for the right moment to enter a position, but also in riding a gain in a winning position. The message that really hit home with me was the importance of protecting your profits, not just your principal.

1. My most important discovery was that I was holding on to my losing positions too long. After seeing the preliminary results, I checked what would have happened if I had capped all my losses at 10 percent. I was shocked by the results: that simple rule would have increased my profits by 70 percent!
2. Capping my losses at 10 percent only knocked out a few of my winners. I noticed that the winning trades usually worked from the onset.
3. Chart patterns are only useful if you know when to apply them; otherwise, you might as well be throwing darts.
4. Understand that you will always make mistakes. The only way to prevent mistakes from turning into disasters is to accept losses while they are small and then move on.
5. I don’t believe we are likely to see the re-emergence of a sustained uptrend like the one in the 1990s. (because terrorism)

Steve Lescarbeau

1. I replace inferior systems with superior systems.
2. I’m laughing about the people who do make predictions about the stock market. They don’t know. Nobody knows. I don’t think anybody has any idea what is going to happen in the stock market.
3. Systems definitely have a life span. I think it’s because eventually enough people figure it out. When too many people jump on the bandwagon, the market takes it away.
4. What Works on Wall Street - O’Shaughnessy
5. I realized futures were a losing game. The commissions and slippage [the difference between the screen price and the actual trade execution price] placed the odds too much against you. If you have only a 50 percent chance of being right when you buy or sell, and you pay commissions and incur slippage costs, you have to lose over the long run.
6. I couldn’t find any patterns that worked.
7. I don’t sell winners; I don’t hold losers; I don’t get emotionally involved. I do things where the odds are in my favor. Shorting stocks is dumb because the odds are stacked against you. The stock market has been rising by over 10 percent a year for many decades. Why would you want to go against that trend?
8. Don’t confuse activity with accomplishment. I think one mistake novice traders make is that they begin trading before they have any real idea what they are doing. They are active, but they are not accomplishing anything. I hardly spend any time trading. Over 99 percent of my time is spent on the computer, doing research.
9. Although I was cheering for Lescarbeau as I like his style, in 2001 Schwager finds him much diminished, down 5%; his worst drawdown ever.

In truth, my trading approach hasn’t worked since the fall of 2000. For the past six months, I’ve hardly traded at all. I believe the drastic deterioration of the types of systems I use is a direct consequence of the Internet-related surge in hype and speculative activity, which has made the market much more random. There has been a marked decrease in market follow-through. Trends that used to last a week, last two days; trends that used to last two days, last three hours. I’m not bullish on my approach until we wipe out the excess, which I think will take years. Virtually all primary bull markets have been followed by bear markets and then a long period of malaise. This one will be no different. (I think it rather was)

1. He expects a 500 point drop in the S&P500 and Dow in 2007. Not bad for timing, but a year can still break you. And S&P dropped from about 1600 to 800 so not bad for amplitude either, I’d say.

Michael Masters

1. When to Sell Stocks by Justin Mammis
2. Graham & Dodd - useful to measure other investor’s perceptions
3. One thing I would caution investors about, however, is paying attention to chat rooms, where the information can be very tainted because people have an agenda
4. Learn from experience - any time you learn something from a trade, write it down
5. Develop a trading philosophy - a continual process as you gain experience
6. Define high probability trades - develop a method for finding good bets; marginal benefits add up
7. Have a plan - know how you will get in, get out; for Masters it’s
   1. Exit at the profit objective
   2. When a catalyst fails to produce the expected result
   3. The trade fails to respond within its allotted time

In 2001 Masters has trouble keeping up his winning rate. He compares the 2001 bear market to the 1929 market.

1. if you’re placing money in bonds as a long-term investment, you are essentially betting that we will repeat the Japanese experience—that is, that the Fed won’t be successful in avoiding deflation—which is not a bet I would make.
2. I think the only way you will make money in the U.S. stock market over the next ten years is by adopting a contrarian approach. Whenever there is panic in the air, as there was in July 2002, you have to be a willing buyer, even though you may not want to be. Then if a year later, prices have rebounded and optimism appears to be returning to the market, you will have to get out. (in retrospect only ½ this advice seems to have been good)

John Bender

1. First, you have to understand edge and maximize your edge.
2. Second, you have to be able to deal with losing.
3. Third, you have to understand gambler’s ruin—not playing too big for your bankroll.
4. The probability distribution has to be estimated on a case-by-case basis. (for every market)
5. Because of the way that stops can trigger a ‘domino effect’, the likelihood of price reaching a far out of the money amount is much more likely than is reflected in the math of price models like Black-Scholes.
6. Options give you the flexibility of making money when price goes up or down as long as it doesn’t stay range-bound.
7. OTC stocks are a ‘den of thievery’
8. A good technology is not necessarily a good investment (cars, planes, internet)

1. Bender’s fund closes up 269 percent in 2000 where he unfortunately had a brain aneurysm and was forced to stop. I realized that trading twenty hours a day and sleeping two hours during weekdays was not a sustainable schedule. I also had a friend who was a trader and had just suffered a heart attack at forty-one.

1. Bender points out that in 2001 boomers were in their peak earning years and there was too much money to invest to expect a bear market like in the past. A lot of people right now are willing to let their money sit in cash because they’re scared. But cash investments are paying almost nothing. It won’t take much to sway people to start putting money back into stocks because the alternative implies almost no return.

David Shaw

1. I find it remarkable how efficient the markets actually are. It would be nice if all you had to do in order to earn abnormally large returns was to identify some sort of standard pattern in the historical prices of a given stock. But most of the claims that are made by so-called technical analysts, involving constructs like support and resistance levels and head-and-shoulders patterns, have absolutely no grounding in methodologically sound empirical research.
2. Andrew Lo at MIT is one of the foremost academic experts in the field. He is responsible for identifying some of these historical inefficiencies and publishing the results. If you talk to him about it, he will probably tell you two things: first, that they tend to go away over time; second, that he suspects that the elimination of these market anomalies can be attributed at least in part to firms like ours.
3. The most obvious and mathematically straightforward ideas you might think of have largely disappeared as potential trading opportunities. (nah)
4. Other things being equal, the more inefficiencies you can identify, the more trading opportunities you’re likely to have.
5. As the field matures, you need to be aware of more and more inefficiencies to identify trades, and it becomes increasingly harder for new entrants.
6. We typically start by formulating a hypothesis based on some sort of structural theory or qualitative understanding of the market, and then test that hypothesis to see whether it is supported by the data. Unfortunately, the most common outcome is that the actual data fail to provide evidence that would allow us to reject the “null hypothesis” of market efficiency. Every once in a while, though, we do find a new market anomaly that passes all our tests, and which we wind up incorporating in an actual trading strategy.
7. The 2000 update finds DE Shaw and associates are doing brisk business with big accelerating returns.
8. More subtle inefficiencies that require complex quantitative techniques to identify and extract tend to persist for a longer period of time.

Steve Cohen
I heard somewhere that the character of Bobby ‘Axe’ Axelrod is based at least in part on Steve Cohen.

“If you’re gonna do a thing, do it all the way!” -A. Axelrod

 

1. The interview begins with him actively shorting Nintendo because it’s a ‘one product company’ (Pokémon)
   1. Although shorting anything before the 2001 crash was going to work out I think the reasoning is highly flawed.

2. You better be able to turn on a dime (in your thinking)
3. My best trader makes money only 63 percent of the time.
4. A basic principle in going short is that there has to be a catalyst.
5. If you think you’re wrong, or if the market is moving against you and you don’t know why, take in half. You can always put it on again.
6. I find that too many traders just stand there and let the truck roll over them. A common mistake traders make in shorting is that they take on too big of a position relative to their portfolio. Then when the stock moves against them, the pain becomes too great to handle, and they end up panicking or freezing.

Bad traders:

1. They make trades without a good reason.
2. They step in front of freight trains.
3. They short stocks because they are up, as if that were a reason. They’ll say, “I can’t believe the stock is so high,” and that’s their total research.

1. You have to know what you are, and not try to be what you’re not. If you are a day trader, day trade. If you are an investor, then be an investor.
2. Pairs an analyst and a trader as a team. Their livelihood depends on each other.
3. Most traders want to trade everything. I want them to know a lot about something, instead of a little about everything. (focused)
4. I’m concerned about traders who wait for someone else to tell them what to do. I know someone who could be a great trader. He has only one problem: He refuses to make his own decisions. He wants everyone else to tell him what to buy and sell. And then when he’s wrong, he doesn’t know when to get out.
5. If you trade long enough everything happens.
6. Schwager isn’t able to get a followup with Cohen but notes that despite his seat-of-the-pants approach he has not had a negative return month in four years.

Ari Kiev

1. Author of fourteen books! (because if you can’t explain it in one book, thirteen more will definitely help) Including ‘Trading in the Zone’ which is highly acclaimed but I loathed it!!!)
2. You have to be willing to put yourself on the line and go for it, even with the thought that you will feel humiliated if you don’t make it after you have promised that you would.
3. Letting others know that you have set a goal and are committed to achieving it makes it more likely you will achieve that goal, whether it is in the realm of athletics, trading, or something else.
4. One procedure I introduced at S.A.C. seven years ago was to go around the room and have each trader promise his results. In the early years, I got a lot of resistance from just about everyone except Steve Cohen, who was always very willing to promise an extraordinary result. It took a long time for people to accept this process, but now it is amazing how much it has become part of the company culture.
5. Believing that an outcome is possible makes it achievable.
6. The objective of setting a target is not necessarily to reach it, but rather to establish a standard against which to measure your performance. If you are not reaching your target, it forces you to focus on what you are doing wrong or what you may not be doing that you should. The target holds you to a higher standard of performance.
7. Gold medal winners are always stretching for a goal that is uncertain.
8. Some traders get lax once there is money in the till.
9. Being preoccupied with not losing interferes with winning. Trading not to lose is not a good strategy. You need to trade to win.
10. [Steve Cohen] can look at the same one hundred facts everyone else sees—some of which are bullish and some of which are bearish—and somehow pick out the one or two elements that are most relevant to the market at that moment in time.

"I think part of it is preparation and part of it is experience. The trades he’s doing are not new trades. He has a vast repertoire of trades and is able to access them. "

1. According to S.A.C.’s risk manager’s statistics, 5 percent of his trades account for virtually all of his profits. He is also willing to cut his position when he is wrong.
2. You repeatedly hear traders say that when they are in a hot streak, they can do no wrong. I’m suggesting that people can re-create that hot streak in their mind.
3. Define a target, a strategy consistent with the target, a set of disciplines to follow, and risk management guidelines. Then trade, track, and evaluate your performance.
4. You shouldn’t think about making the loss back—that’s too burdensome. You have to start where you are. OK, you’re down, but what can you do this week, this month, and for the rest of the year? You have to try to regain a sense of control.

Schwager closes out this book with a whopping 64 point list of lessons learned from the traders he interviewed. I think it’s too long to include. Read the book. It’s worth the time.

Next: Hedge Fund Market Wizards

Hedge Fund Market Wizards

1. Not surprisingly the book is focused on hedge fund managers, so much of the advice and stories aren’t really applicable to individual traders; if that’s the case I’ll skip it
2. In the introduction, Ed Seykota recommends the following books:
   1. Reminiscences of a Stock Operator by Edwin Lefevre,
   2. The Crowd by Gustav LeBon,
   3. Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay,
   4. and the entire Market Wizards series by Jack Schwager.

3. Because so much of what passes for high returns merely reflects a willingness to take more risk rather than being an indication of skill, I believe that return/risk is a far more meaningful measure than return alone.

Colm O’Shea

1. As an analyst he wasn’t allowed to give a forecast outside the predetermined range

There is massive herding in economic forecasting. By staying near the benchmark or the prevailing range, you get all the upside of being right without the downside.

1. Also recommends Lefevre’s book ‘Reminiscences’
2. In the current world of economics, mathematical rigor is valued above all else. It’s the only way you will get your PhD; it’s the only way you will get a career in academia; it’s the only way you will get tenure. As a consequence, anyone I would call an economist has been moved out of the economics department and into history, political science, or sociology. The mathematization of economics has been a disaster because it has greatly narrowed the scope of the field.
3. Markets matter more than policy.
4. As long as no one cares about it, there is no trend. Would you be short Nasdaq in 1999? You can’t be short just because you think fundamentally something is overpriced.
5. Wait until people start to care
6. Yes, by being long options, you can never have a major drawdown. If the bubble continues, you make nice returns; if it collapses, you just lose the premium.
7. The great trades don’t require predictions (they are incredibly obvious). The Soros trade of going short the pound in 1992 was based on something that had already happened—an ongoing deep recession that made it inevitable that the U.K. would not maintain the high interest rates required by remaining in the ERM.
8. After a bull market that goes on for years, who is managing most of the money? The bears are all unemployed; they’re not managing any money at all. You have a few very flexible smart people, but they run relatively small amounts of money; so they don’t matter, either. The managers who are relentlessly bullish and who buy more every time the market goes down will be the ones who end up managing most of the money. So, you shouldn’t expect a big bull market to end in any rational fashion (expect a slow transition).
9. On risk vs. uncertainty: If you play roulette, you are in the world of risk. If you are dealing with possible economic events, you are in the world of uncertainty (because you don’t even know the odds).
10. Implementation is more important than the trade idea behind it. Having a beautiful idea doesn't get you very far if you don't do it the right way. The point is that I tried to do the trade in a way so that my timing didn't have to be perfect.
11. Perseverance and the emotional resilience to keep coming back are critical because as a trader you get beaten up horribly. Frankly, if you don’t love it, there are much better things to do with your life. You can’t trade because you think it is a way to make a lot of money. That won’t cut it.
12. Rules are only applicable to a market at a specific time. Traders who fail may have great rules that work, but then stop working. They stick to the rules because the rules used to work, and they are quite annoyed that they are losing even though they are still doing what they used to do. They don't realize that the world has moved on without them.
13. Q: So the disciplined use of stops that are set too close could lead to the proverbial death by 1,000 cuts.

A:Yes, and that is why I think trading books that provide specific rules can be quite dangerous. They can lead to the illusion that you are in control and being disciplined. And it is true that you are restricting yourself from a single catastrophic loss, but it doesn't prevent repeated losses on the same idea

Ray Dalio

1. Recognize that mistakes are good if they result in learning. (Dalio proceeds to say the same thing seven different ways in his other principles, which is one of the criticisms I have of his books)
2. I learned not to fight the Fed unless I had very good reasons to believe that their moves wouldn’t work.The Fed and other central banks have tremendous power.I learned that a crisis development that leads to central banks easing and coming to the rescue can swamp the impact of the crisis itself.
3. [Losing on pork bellies] taught me to make sure that no single bet, or even multiple bets, could cause me to lose more than an acceptable amount. In trading you have to be defensive and aggressive at the same time. If you are not aggressive, you are not going to make money, and if you are not defensive, you are not going to keep money.
4. Correlation is just the word people use to take an average of how two prices have behaved together. When I am setting up my trading bets, I am not looking at correlation; I am looking at whether the drivers are different. I am choosing 15 or more assets that behave differently for logical reasons.
5. The USA is a country that thinks it is rich but is no longer, and is now in decline
6. the fifth phase of a cycle (decline) lasts for about 20 years.
7. The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment. The tendency of investors to buy after a price increase for no reasons other than the price increase itself causes prices to overshoot.
8. His ‘Big Picture View’
   1. Productivity growth - real per capita GDP has increased at an average rate of near 2 percent over the past 100 years as a result of productivity gains, but has fluctuated widely
   2. Long term credit expansion / deleveraging - initially it expands spending beyond income levels in a self-reinforcing process as net worths rise, raising capacity to borrow, allowing more buying, and spending, and this goes on for decades, but not forever
   3. Eventually the debt service payments become equal to or larger than the amount we can borrow and the spending must decline. When promises to deliver money (debt) can’t rise any more relative to the money and credit coming in, the process works in reverse and we have deleveragings.
   4. But this is different from a recession: In deflationary depressions/deleveragings, monetary policy is typically ineffective in creating credit because interest rates hit 0 percent and can’t be lowered further, so other, less-effective ways of increasing money are followed. Credit growth is difficult to stimulate because borrowers remain overindebted, making sensible lending impossible.
   5. Business cycle—The business cycle refers to fluctuations in economic activity. Dalio explains that “In the ‘business cycle,’ the availability and cost of credit are driven by central bankers, while in the ‘long wave cycle,’ the availability and cost of credit are driven by factors that are largely beyond central banks’ control.” In the standard business cycle, the central bank can boost a lagging economy by lowering interest rates. In the deleveraging phase of the long wave cycle, central banks can’t exert any influence by lowering rates because rates are already at or near zero.

9. The ‘Really Big Picture’
   1. Stage 1—Countries are poor and think that they are poor.
   2. Stage 2—Countries are getting rich quickly, but still think they are poor.
   3. Stage 3—Countries are rich and think of themselves as rich.
   4. Stage 4—Countries become poorer and still think of themselves as rich.
   5. Stage 5—Countries go through deleveraging and relative decline, which they are slow to accept.

I'm going to dump all my notes for the rest of the book chapters in one session because I have a lot of testing to do over the next week or two (or three). Enjoy the reading, and see you near the end of the month.

Larry Benedict

1. There is no three-strikes-and-you’re-out rule in pursuing a career in trading.
2. Risk management dominates Benedict’s approach. To say he is cautious is an understatement. If his losses in any month approach 2.5 percent, Benedict will liquidate the entire portfolio and start with a clean slate the next day, trading at a reduced position
3. Q: I have to ask you this. You got fired from your first job. Then you got a trading job and blew through the money. They gave you more money, and you blew through most of that. Then a friend gave you a stake, and you lost money so quickly that he pulled the plug before you reached your cutoff point. [As I am reciting this litany, Benedict’s laughter builds steadily.] Didn’t you at some point say to yourself, “Maybe I’m not cut out to be a trader”?A: No. I never gave up. I just wanted to learn how to do it and win. I saw all these other guys making money, and I thought if they could do it, I could do it.
4. I started paying attention to the intermarket price relationships. For example, if the S&P was moving in an inverse lockstep to the bonds, and bonds were down for the day, but the S&P was not responding on the upside, it would tell me I should sell the S&P. It’s funny, now, crude and the S&P are moving up and down together. That is something new. Before, we never even looked at crude.
5. One of the things I do is three days up, three days down. If the market is up three days in a row, I want to start getting short, and if it’s down three days in a row, I want to start getting long.
6. Trading is very hard, but it is also easy if you maintain discipline. People blow up because they lose their discipline.
7. He is very bearish the S&P in October 2011 (luckily he lets the market dictate what to trade, not his own opinions)

 

1. I don’t make major directional bets. I am a very opinionated guy, but for the first five years of the business, my opinion did nothing but lose me money. So I have to leave my opinions at the door. I think the market is going to eventually crash, but I have to stay in business, and I can’t make that bet.
2. I came in long because today was option expiration day, and 85 percent of the time, they mark up the market on the morning of option expiration day.
3. Since I started in the business, I have seen a number of traders who ended up committing suicide or being homeless. The one trait they all shared was that they had a gambler’s mentality. When they were losing, they were always looking for that one trade that would make it all back.
4. This is a business where you have to work. That is what I do. Every day I make hundreds of transactions. I grind out the returns. If you look at my daily returns, you will see there are very few big up days.

Scott Ramsey

1. Unlike many of the traders interviewed he saw trading on the floor as a big disadvantage
2. The evolution of a trader is when you start letting your money work for you and increasing your size.
3. Just a simple exercise of measuring which markets were the strongest during a crisis can tell you which markets are likely to be the leaders when the pressure is off—the markets that will be the ball popping out of the water. For example, crude made a low early in the month, and on the crisis in Ireland, it didn’t even retest that low. Then, as soon as the pressure was off, crude was $5 higher. Conversely, the markets that were weakest should be the markets that rally the least and the first ones to roll over on a general continued decline.
4. I always want to buy the strongest and sell the weakest. Always.
5. I might lose 10 times on an idea, until the 11th time when it works. If I then get the move I thought I was going to get, it will then more than make up for all the little losses. To me, the most important thing is to control the downside. Rigorous risk control is not only important in keeping losses small, but it also impacts profit potential. You have to put yourself in the position to be able to take advantage of opportunities. The only way you can do that is to have a clear mind. If you have trades that are not working, and your mental energy is going toward damage control, you can’t think clearly about opportunities in the market.
6. “What do you mean your day is ruined? You have all this opportunity sitting in front of you. The market doesn’t care if you lost money on a trade. It doesn’t matter. Think about your next trade. You have to get past the idea that just because you lost money on a trade, it means you failed. Every trading decision you make is subject to some randomness. It doesn’t matter whether you win or lose on any individual trade, as long as you get the process correct.”
7. My own views were irrelevant; it was the market perception that mattered
8. Although I had a directional bias based on my view of the macro environment, I didn’t take the trade until the lira broke out of its two-year trading range. The market had to prove itself before the trade was entered. If there had not been a breakout, there would not have been a trade.
9. Buying a laggard as a proxy for a leader is a bad idea, and as a trader, I am keen to take the other side of such a trade when I see a potential setup.
10. The beauty of selling the weak link is that this market has already shown its reluctance to make new highs. Therefore, I think the risk is the lowest, and sometimes the reward is also the highest. Never sell the strongest markets until they fail.

Jaffray Woodriff

1. I just can’t stand being part of the herd and simply accepting the consensus. I want to evaluate everything on my own.
2. Notices that some of his rosy memories of his past trading record weren’t accurate (I suspect this is a common issue for all the traders in this series)
3. I discovered that it was much better to use multiple models than a single best model.
4. He cites Shaw on his observation that ‘blindly searching through data for patterns’ is less effective than having a hypothesis and then does the opposite. "Instead, I blindly search through the data".
5. Data mining can be a very positive process. It is just that most people who do data mining are terrible at it. There are various things that you can do to make the data mining process work. It doesn’t work on every data set. For some data sets, there is simply no edge available. Luckily for me, my intuition that there was an edge available in a nontrend following, noncountertrend type of model was correct. My intuition was that there should be other emergent patterns in the price data that are more complex than trend following.
6. The core of the risk management is evaluating the risk of each market based on an exponentially weighted moving average of the daily dollar range per contract.
7. Volatility adjustment worked better than leverage adjustment because they would be trading smaller right when markets got hot
8. Also disparages OTC markets as opaque and crooked
9. Look where others don’t. Adjust position sizes to overall risk to target a particular volatility. Pay careful attention to transaction costs.
10. When I was in my teens, my highly insightful father was somehow able to instill in me the discipline of objectively evaluating your own progress. That lesson, more than anything else, has been critical to my success.

Ed Thorp

1. Author of Beat the Dealer and Beat the Market
2. Worked with Claude Shannon to make a wearable computer to beat roulette tables
3. First market neutral fund, first quant hedge fund, first stat arb fund
4. Detected Madoff’s fraud before Markopolos
5. Don’t bet more than you are comfortable with. Take your time until you are ready.
6. Disparages Edwards and Magee ‘Technical Analysis’ as ‘helpful in the negative’. The book convinced me that technical analysis was a road not to go down. In that sense, it saved me a lot of time.
7. Historically, ideas don’t just appear in one place; they tend to appear in several places at almost the same time.
8. Invents a warrant pricing formula with Sheen Kassouf that is similar to Black-Scholes and was discovered ‘independently’ after examining Thorp’s model
9. Apply the Kelly criterion to your maximum drawdown amount, not your entire capital. I believe that betting half Kelly is psychologically much better.
10. The MUD (most up, most down) system:
    1. Stocks that were most up tended to underperform the market in the next period, while the stocks that were most down tended to outperform the market. That finding led to a strategy of buying a diversified portfolio of the most down stocks and selling a diversified portfolio of the most up stocks.
    2. High risk because the two sides did not track as closely as needed
    3. 20% annual return

11. For that period Stocks that paid no dividends seemed to have above-normal returns.
    1. Also stocks that paid high dividends

12. Earning surprises seemed to have an impact for many months
13. It all depends on how confident you are about your edge. If you have a really strong conviction about your edge, then the best thing to do is sit there and take your lumps. If, however, you believe there is a reasonable chance that you might not have an edge, then you better have a safety mechanism that constrains your losses on drawdowns. My view on trend following was that I could never be sure that I had an edge, so I wanted a safety mechanism. Whereas for a strategy like convertible arbitrage, I had a high degree of confidence as to the payoff probabilities, so reducing exposure on drawdowns was unnecessary.
14. I think inefficiencies are there for the finding, but they are fairly hard to find.
15. Try to figure out what your skill set is and apply that to the markets. If you are really good at accounting, you might be good as a value investor. If you are strong in computers and math, you might do best with a quantitative approach.

Jamie Mai

1. On ratings agencies: I can’t believe they have any credibility left at all. It is difficult to come up with a more extreme case of failure to do a purported job.
2. We love trades that appear to be approaching limits—trades that are so close to their absolute limit that they have tremendous asymmetry.
3. We also look for trades where the market price level itself implies asymmetry. A good example is the Korean stock market in 2005, a situation in which we did a ton of work and ended up having conviction that the entire market was mispriced.

1. Find mispricings in a theoretically priced world.
2. Select trades in which the probabilities appear to be significantly skewed to a positive outcome. As a general rule of thumb, Cornwall requires that the estimated gain if the trade succeeds multiplied by the probability of a positive outcome must be at least twice as large as the estimated loss if the trade fails multiplied by the probability of a negative outcome.
3. Implement trades asymmetrically. Mai structures trades so that the downside is severely limited, while the upside is open-ended. One common way of achieving this type of return/risk profile is by being a buyer of options (of course, only at those times when a mispricing is identified).
4. Wait for high-conviction trades.
5. Use cash to target portfolio risk. Because most of the trades in the portfolio are derivatives, which require much smaller cash outlays than outright positions, Mai will hold a large cash component in the portfolio (typically, 50 to 80 percent). By increasing or decreasing this cash component, Mai can target his desired portfolio risk level.

Mai identified five generally accepted assumptions that sometimes are invalid:

1. Prices are normally distributed—Options are priced based on the assumption of a normal distribution, which effectively implies that future prices near the current level are most probable and that probabilities drop steeply for prices further removed from current levels. In some instances, however, large price moves are much more likely than implied by the normal distribution.
2. The forward price is a perfect predictor of the future mean—This assumption implies that options will be priced with probabilities centered at the corresponding forward price. Sometimes, however, when the forward price is well removed from the current price, it may not be reasonable to assume that a price change equal to the difference between the forward and spot price is the most likely market outcome.
3. Volatility scales with the square root of time—This assumption, which is embedded in option pricing, may be reasonable for shorter time intervals. For longer time periods, however, this volatility assumption may understate potential volatility, particularly if current volatility is low, for two reasons. First, the longer the time period, the more likely volatility will revert to the mean from current low levels. Second, longer periods allow for more opportunity for trends to result in larger price moves than implied by the volatility assumption.
4. The trend can be ignored in the volatility calculation
5. Current correlations are good predictors of future correlations

Michael Platt

1. Value is irrelevant in times of market stress; it’s all about positions. They [his trading team] understand that markets will trade against positions. They get it. It is built into their books. It colors the way they think. I look for the type of guy in London who gets up at seven o’clock on Sunday morning when his kids are still in bed, and logs onto a poker site so that he can pick off the U.S. drunks coming home on Saturday night. I hired a guy like that. He usually clears 5 or 10 grand every Sunday morning before breakfast taking out the drunks playing poker because they’re not very good at it, but their confidence has gone up a lot.
2. On the traders who didn’t work out: Both the ex-market makers who blew up became way too invested in their positions. Their ego got in the way. They just didn’t want to be wrong, and they stayed in their positions.
3. I don’t have any tolerance for trading losses. I hate losing money more than anything. Losing money is what kills you. It is not the actual loss. It’s the fact that it messes up your psychology. You lose the bullets in your gun. What happens is you put on a stupid trade, lose $20 million in 10 minutes, and take the trade off. You feel like an idiot, and you’re not in the mood to put on anything else. Then the elephant walks past you while your gun’s not loaded. It’s amazing how annoyingly often that happens.
4. I don’t trade unless I have done all the work and really have a view. If I enter a trade, and the minute I put it on, I feel uncomfortable, I will just turn around and get right out. Also, I look at each trade in my book every day and ask myself the question, “Would I enter this trade today at this price?” If the answer is “no,” then the trade is gone.
5. There are three things you need to make money in a market.
   1. You need a decent fundamental story,
   2. a good trend that looks like it will carry on,
   3. and the market handling news the way you think it should. Bull markets ignore any bad news, and any good news is a reason for a further rally.

6. System trading is a ‘research war’.

Steve Clark

1. Do more of what works and less of what doesn’t. Young traders come to me and say, “Well, I have been running this book, and these things have been going really well, but I keep losing money on this.” I tell them to just stop doing the things that are not working. Dissect your P&L and see what works for you and what doesn’t. It is a very interesting process to analyze where your profits come from, and traders often don’t know.
2. Price is irrelevant; it is size that kills you. If you are too big in an illiquid stock, there is no way out. I wanted to cut the position, but I couldn’t. The other lesson this trade taught me is to focus on what works. The trade was just a punt.
3. You don’t want to be sitting in front of your screen and staring at market prices for 12 hours a day. Staring at the price is not going to tell you very much. You will start to overprocess and overtrade.
4. I have had several occasions in my career where I sat with my head in my hands, thinking, I am never going to make a penny again. I am crap. I have always been crap. I have just been found out. Even though you may have made money for 10 years, you can still get into that mind-set. I have learned over the years that when you get into that mode, don’t do anything. Discipline yourself not to trade for two weeks or whatever time period you choose. Take a holiday.
5. You need to be a bit obsessive to do the same thing 10 hours a day. People who are obsessive can become very good traders.
6. Really good traders are also capable of changing their mind in an instant. They can be dogmatic in their opinion and then immediately change it.
7. I’ll never accept anybody saying they can’t cut a position.
8. Does not scale out of positions - just exits.
9. The market is not about facts; it’s all about people’s opinions and positions. Consequently, anything can be at any price, any time. Once you understand that, you realize that you need to have protective stops.
10. He advises traders to find something else (preferably productive) to occupy part of their time to avoid the pitfalls of watching the market too closely.