- Posted by Ivanhoff on September 28th, 2016 at 8:22 am
Paul Tudor Jones is one of the most emblematic figures in the hedge fund industry. His best percentage returns happened during severe market corrections: 126% after fees in 1987 when U.S. markets lost a quarter of their market cap in one day. 87% in 1990 when the Japanese stock market plunged. 48% during the tech crash of 2000-2001. He returned 5% in 2008. His funds have underperformed in the past 8 years. He charges 2.75% management fee and 27% performance fee, which significantly above the industry average of 2 and 20.
Outside of financial markets. PTJ founded the Robin Hood foundation, which attempts to alleviate problems caused by poverty in NYC.
The biggest conundrum when studying successful money managers is do you pay attention to what they are doing today or do you focus on what they were doing before they became widely popular, were managing a lot less money and had a lot higher returns?
Here PTJ talks about how new powerful trends often start – basically, a big price expansion from a long base.
The basic premise of the system is that markets move sharply when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try to fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.
PTJ on risk management
If I have positions going against me, I get right out; if they are going for me, I keep them… Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in.
I am not sure he can do that today with the size he is trading. The approach that made him an investing legend might not be the approach that he is using today. He is trading a lot more money and size can change everything, especially when you trade other people’s money.
PTJ is famous for the saying “losers average down losers” and yet if you look at his hedge fund’s record, he dollar-cost averages all the time. Again, the size of his fund has forced him to change his market approach. You can’t just get in and out from a billion dollar position whenever you decide to. There’s not enough liquidity and if you don’t invest enough in your best setups, you are guaranteed to underperform after management fees. It is normal to ladder in and out when you trade with size.
When you are trading size, you have to get out when the market lets you out, not when you want to get out.
That cotton trade was almost the deal breaker for me. It was at that point that I said, ‘Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain?’
Another popular speculator, Jim Rogers is often quoted saying that “he has never met a rich technician”. Well, here’s PTJ on the value of technical analysis:
Markets have consistently experienced “100-year events” every five years. While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and proud of it.
I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over.
When I got into the business, there was so little information on fundamentals, and what little information one could get was largely imperfect. We learned just to go with the chart. Why work when Mr. Market can do it for you? These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates an illusion that there is an explanation for everything and that the primary task is simply to find that explanation. As a result, technical analysis is at the bottom of the study list for many of the younger generation, particularly since the skill often requires them to close their eyes and trust price action. The pain of gain is just too overwhelming to bear.
Trading manias and crashes cannot be taught. It can only be experienced:
There is no training — classroom or otherwise — that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. There’s typically no logic to it; irrationality reigns supreme, and no class can teach what to do during that brief, volatile reign. The only way to learn how to trade during that last, exquisite third of a move is to do it, or, more precisely, live it. Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic.
He looks for great risk/reward setups. Sometimes, those setups are near market’s major turning points:
I look for opportunities with tremendously skewed reward-risk opportunities. Don’t ever let them get into your pocket – that means there’s no reason to leverage substantially. There’s no reason to take substantial amounts of financial risk ever, because you should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward-risk opportunities that should give you minimum draw down pain and maximum upside opportunities.
I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.
Five Market Insights from Christian Siva-Jothy
Posted by Ivanhoff on September 27th, 2016 at 4:46 pm
Christian Siva-Jothy was Goldman Sachs Group Inc.’s co-head of proprietary currency trading until 2004, when he launched his own SempreMacro fund. He closed his fund […]
Five Market Insights from David Tepper
Posted by Ivanhoff on September 26th, 2016 at 12:59 pm
David Tepper has been one of the most followed and admired hedge fund managers for the past decade. He has the folksy wisdom of Warren […]
Five Market Insights from Scott Bessent
Posted by Ivanhoff on September 22nd, 2016 at 10:08 am
Scott Bessent is probably the only one in the world who worked with investing legends like Jim Rogers, Jim Chanos, George Soros, and Stanley Druckenmiller […]
Five Market Insights from Jim Leitner
Posted by Ivanhoff on September 20th, 2016 at 11:56 am
The right trading mindset I was absolutely unemotional about numbers. Losses did not have an effect on me because I viewed them as purely probability-driven, […]
Natural Gas Is Breaking Out
Posted by Ivanhoff on September 20th, 2016 at 11:23 am
Natural gas futures are breaking out from a multi-week consolidation. There’s no technical resistance until $3.50. If you use a stop of 2.80, this gives […]
The Worst Performers of Last Year Are Crushing 2015’s Best Performers in 2016
Posted by Ivanhoff on September 19th, 2016 at 1:01 pm
If you needed more proof that 2016 is a big mean-reversion year, take a look at the performance of the 10 best performing S&P500 stocks […]
The 9 Hottest IPOs of the Past Year
Posted by Ivanhoff on September 16th, 2016 at 10:02 am
The IPO pond has dried out in the past year, but it has remained an incredible source of trading ideas. Due to their small float […]
A Good Trader Should Be Able to Adjust to Changing Markets
Posted by Ivanhoff on September 14th, 2016 at 11:54 am
A good trader should be able to adjust to changing markets. 2 to 20-day swing trades work beautifully in steadily rising markets. We experienced those […]
There Are Two Types of Corrections
Posted by Ivanhoff on September 13th, 2016 at 5:28 pm
There are two major types of corrections: 1. A normal pullback within a bull market – this is a garden-variety 5-8% pullback above a rising […]
- Five Market Insights from Paul Tudor Jones
- Five Market Insights from Christian Siva-Jothy
- Five Market Insights from David Tepper
- Five Market Insights from Scott Bessent
- Five Market Insights from Jim Leitner
- Natural Gas Is Breaking Out
- The Worst Performers of Last Year Are Crushing 2015’s Best Performers in 2016
- The 9 Hottest IPOs of the Past Year
- A Good Trader Should Be Able to Adjust to Changing Markets
- There Are Two Types of Corrections
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