A Few Recent IPOs that I am Watching

The IPO market is gradually coming back. After the huge run-ups in ACIA and TWLO, more companies are eager to go public. We may not be too far from seeing a really big fish filing for an IPO – Snapchat or Uber.

Based on current price action, the market is eager for new IPOs. Taking into account that all new companies offer only 10 to 20% of their float and thousands of funds compete to own a limited number of shares, it is not a big surprise that IPOs are a favorite trading vehicle for many traders.

Here are a few names that I am watching: NTNX, COTV, NH, PI, TPIC, LN, PTI, YRD, AVXS, AIRG, FLGT, etc.

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Five Market Insights from Paul Tudor Jones

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.

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I teach an undergrad class at the University of Virginia, and I tell my students, “I’m going to save you from going to business school.  Here, you’re getting a $100k class, and I’m going to give it to you in two thoughts, okay?  You don’t need to go to business school; you’ve only got to remember two things.  The first is, you always want to be with whatever the predomianat trend is.

My metric for everything I look at is the 200-day moving average of closing prices.  I’ve seen too many things go to zero, stocks and commodities.  The whole trick in investing is: “How do I keep from losing everything?”  If you use the 200-day moving average rule, then you get out.  You play defense, and you get out.

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

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 in 2011 after losing 27% in 2009 and 8.7% in 2010.

Here’s Siva-Jothy on why he closed his fund:

In this business you are only as good as your last few trades,” Siva-Jothy wrote. “Mine have not been very good. Whether I have lost my edge or simply need a break after 23 years I am not sure, but I certainly hope it is the latter.

No one gets paid for originality

Generally, I can’t see more than a year ahead because things change so rapidly it is very difficult to have a 5- to a 10-year view. I have a rolling one-year view of the world and I impose discipline on myself by keeping a trading diary. Every morning, I go through the same process: If I have any positions on, I ask why do I have the positions? What has changed?

Putting on positions because someone really smart that you respect has it on is a recipe for disaster because you don’t know why you got in or where to get out.

No one gets paid for originality — you get paid for making money.  I am happy to take other people’s good ideas and run with them, AS LONG AS I UNDERSTAND EXACTLY WHY I AM IN THE TRADE.

The way to make money is to chip away at small trades and then lever up when something big comes up.

I am a great believer that there are three or four major macro opportunities every year. If you catch one, your return will be in the high single digits; if you catch two, you should be up somewhere between 10 and 20 percent; if you catch three or four, you are doing incredibly well.

One of the most difficult things about trading is not to trade. That’s probably one of the most common mistakes that people starting out in this business make. Overtrading is as bad as running losing positions for too long.

On how to manage risk

To me, risk is about liquidity, and that is one of the reasons why I am never short gamma.

Markets can be unbelievably slow to figure out the consequences of big events that there’s no script for.

Implied volatilities are always massively undervalued during big events.

I learned not only not to sell options, but to actively look for options to purchase in times of stress and dislocation.

History can be a useful benchmark but only if everything is put into the right context

People spend far too much time saying things like, “This is what happened in 1987 and this looks very similar so I’ll put the same trade on” or “This is what happened in 1994 when the tightening cycle started; therefore the same thing is going to happen this time.”. I don’t like this approach. Markets are dynamic and people’s reactions are different. It’s much more subtle and nuanced that looking at what happened the last time.

Risk more only when you have won your right to do so

My philosophy has always been to trade up when things are going well and you have a high-confidence view. There’s a big difference between going from 30% to 20%, and going from zero to -10%.

From zero to minus 10% is an unbelievably meaningful drawdown. On the other hand, if we are up 30-40%, I am not going to be worried about a 10% drawdown as long as we’re being rigorous.

Confidence is a very, very dangerous thing. Simply because you’ve had a god run doesn’t mean it will continue. In fact, once you’ve had a good run, you’re at your most dangerous. Markets can take it aways as easily as they give it.

Source: Inside the House of Money, Steven Drobney