Trading Wisdom for Aspiring Hedge Fund Managers
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Trading Wisdom 25: The first requirement for success
"Sun Tzu said if you sit by the river long enough, you'll see the bodies of your enemies float by. The key is "long enough." If you live long enough, you have to be the survivor. When I was a kid, we didn't have the video games you have today, so we used to listen to comedy records. One of the greatest ones was Mel Brooks doing the 2000 year old man. Carl Reiner says to him, "how did you get to be the world's oldest man?" And he says, "Simple. Don't die." How do you get to be the world's oldest investor? The answer is donât crap out.
"So if you look at distressed debt where we started in 1988, I could tell you who our number one competitor was in every year through 1995 and not one is a main competitor today. And it's not because of what we did; all we did is perform consistently. They crapped out. It sounds simplistic to say, but the first requirement for success is survival..."
- Howard Marks
JS Comment:
What steps do you take to ensure survival as a trader?
Do you think about markets from the perspective of wanting to be around for a very long time? How do you proactively make that happen?
Blowing up, bleeding to death, and grinding out are different ways to "die." Imagine three failed traders, one for each of the ways. What might the postmortems look like?
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"Sun Tzu said if you sit by the river long enough, you'll see the bodies of your enemies float by. The key is "long enough." If you live long enough, you have to be the survivor. When I was a kid, we didn't have the video games you have today, so we used to listen to comedy records. One of the greatest ones was Mel Brooks doing the 2000 year old man. Carl Reiner says to him, "how did you get to be the world's oldest man?" And he says, "Simple. Don't die." How do you get to be the world's oldest investor? The answer is donât crap out.
"So if you look at distressed debt where we started in 1988, I could tell you who our number one competitor was in every year through 1995 and not one is a main competitor today. And it's not because of what we did; all we did is perform consistently. They crapped out. It sounds simplistic to say, but the first requirement for success is survival..."
- Howard Marks
JS Comment:
What steps do you take to ensure survival as a trader?
Do you think about markets from the perspective of wanting to be around for a very long time? How do you proactively make that happen?
Blowing up, bleeding to death, and grinding out are different ways to "die." Imagine three failed traders, one for each of the ways. What might the postmortems look like?
Get Trading Wisdom via e-mail
Nice! I love Tahoe. You guys attending the NYC expo in feb?
surf
Trading Wisdom 26: The Symbol of the Trader
"The symbol of all relationships among such men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot are traders, both in manner and spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws. A trader does not squander his body as fodder, or his soul as alms. Just as he does not give his work except in trade for material values, so he does not give the values of his spirit - his love, his friendship, his esteem - except in payment and in trade for human virtue, in payment for his own selfish pleasure, which he receives from men he can respect. The mystic parasites who have, throughout the ages, reviled the trader and held him in contempt, while honoring the beggars and the looters, have known the secret motive of the sneers: a trader is the entity they dread - a man of justice."
- John Galt, Atlas Shrugged
JS comment:
Ayn Rand is a controversial figure. Do you agree with her idealistic portrayal of the trader? What do you think of Objectivism in general - excellent philosophy or narcissistic bullshit?
Some traders are obviously immoral, corrupt, incompetent, etcetera. But does this matter relative to the ideal of what trading in the pure abstract can represent?
Are you proud to call yourself a trader? Do you have a trader's code that you follow, or any type of moral code for that matter, by which you set certain rules, habits and attitude guidelines for yourself based on aesthetic and intrinsic merit?
If so, where did your code come from? Did you purposely adopt it, or inherit it by accident or default? Have you ever considered modifying, enhancing, or clarifying it?
If no code to speak of, have you considered the potential life benefits of creating or embracing one - to better shape and define a sense of purpose and who you are?
Buy Atlas Shrugged on Amazon
Get Trading Wisdom via e-mail
"The symbol of all relationships among such men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot are traders, both in manner and spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws. A trader does not squander his body as fodder, or his soul as alms. Just as he does not give his work except in trade for material values, so he does not give the values of his spirit - his love, his friendship, his esteem - except in payment and in trade for human virtue, in payment for his own selfish pleasure, which he receives from men he can respect. The mystic parasites who have, throughout the ages, reviled the trader and held him in contempt, while honoring the beggars and the looters, have known the secret motive of the sneers: a trader is the entity they dread - a man of justice."
- John Galt, Atlas Shrugged
JS comment:
Ayn Rand is a controversial figure. Do you agree with her idealistic portrayal of the trader? What do you think of Objectivism in general - excellent philosophy or narcissistic bullshit?
Some traders are obviously immoral, corrupt, incompetent, etcetera. But does this matter relative to the ideal of what trading in the pure abstract can represent?
Are you proud to call yourself a trader? Do you have a trader's code that you follow, or any type of moral code for that matter, by which you set certain rules, habits and attitude guidelines for yourself based on aesthetic and intrinsic merit?
If so, where did your code come from? Did you purposely adopt it, or inherit it by accident or default? Have you ever considered modifying, enhancing, or clarifying it?
If no code to speak of, have you considered the potential life benefits of creating or embracing one - to better shape and define a sense of purpose and who you are?
Buy Atlas Shrugged on Amazon
Get Trading Wisdom via e-mail
Quote from darkhorse:
Trading Wisdom 26: The Symbol of the Trader
"The symbol of all relationships among such men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot are traders, both in manner and spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws. A trader does not squander his body as fodder, or his soul as alms. Just as he does not give his work except in trade for material values, so he does not give the values of his spirit - his love, his friendship, his esteem - except in payment and in trade for human virtue, in payment for his own selfish pleasure, which he receives from men he can respect. The mystic parasites who have, throughout the ages, reviled the trader and held him in contempt, while honoring the beggars and the looters, have known the secret motive of the sneers: a trader is the entity they dread - a man of justice."
- John Galt, Atlas Shrugged
JS comment:
Ayn Rand is a controversial figure. Do you agree with her idealistic portrayal of the trader? What do you think of Objectivism in general - excellent philosophy or narcissistic bullshit?
Some traders are obviously immoral, corrupt, incompetent, etcetera. But does this matter relative to the ideal of what trading in the pure abstract can represent?
Are you proud to call yourself a trader? Do you have a trader's code that you follow, or any type of moral code for that matter, by which you set certain rules, habits and attitude guidelines for yourself based on aesthetic and intrinsic merit?
If so, where did your code come from? Did you purposely adopt it, or inherit it by accident or default? Have you ever considered modifying, enhancing, or clarifying it?
If no code to speak of, have you considered the potential life benefits of creating or embracing one - to better shape and define a sense of purpose and who you are?
Buy Atlas Shrugged on Amazon
Get Trading Wisdom via e-mail
The quote is sophomoric as applied to trading in a financial market. An expert trader would never post this quote.
You claimed that a losing streak is more dangerous for someone in a downswing than an upswing, even if they have identical present capital. Assuming a losing streak is the result of chance (rather than an edge disappearing, or a trader going on tilt), then the mortality risk is no greater for someone who went from 2 million to 1 million and is now betting 1% per trade, than from someone who went from 500k to 1 million and is now betting 1% per trade. If either trader has a huge losing streak, they will lose exactly the same amount, since they are making the same % bets, taking the same trades, and experiencing the same market outcomes.
Your other main claim was that what you call a 'profit cushion' has some kind of influence on results. This is pure mental accounting - accumulated profit is economically identical to initial capital: it buys the same things, funds trading positions exactly the same, it is indistinguishable. Otherwise brokers would allow reduced margin rates for 'accumulated P&L' rather than deposited funds, and luxury goods retailers would offer discounts to those whose dollars were earned by profitable trading, and charge more to people experiencing equity drawdowns. When Forbes calculate their rich list, they don't place a trader higher because he is at a new equity high, or mark someone lower because his stock fell 50% last year - they calculate based on how many dollars he has.
I agree about pro-cyclical market conditions (and other things like edges degrading, trading worse under psychological pressure etc), but one should adjust for these based on the relevant factors (present market conditions; present psychological state & sharpness of the trader), not the irrelevant ones (past drawdown, or past winning streak).
Winning streaks in poker have an effect on the plays of other players, in a way that doesn't occur in the markets, so it's not a good analogy. Aggressive betting is also superior in poker for reasons related to that card game's specifics; in the markets, aggressive betting is inferior for reasons that are specific to the nature of financial markets (i.e. unpredictable risks, edge-degredation, liquidity constraints, 'runs' by depositors or fund investors and so on). Furthermore, the mean-reverting nature of fund and star trader performance gives good reason to think the opposite - that you should become more sceptical and risk-averse after a long winning streak. Most experienced traders also know that winning streaks actually tend to lead to cockiness and over-betting (see the earlier Soros quote you gave), which is another reason not to press a hot hand.
Your other main claim was that what you call a 'profit cushion' has some kind of influence on results. This is pure mental accounting - accumulated profit is economically identical to initial capital: it buys the same things, funds trading positions exactly the same, it is indistinguishable. Otherwise brokers would allow reduced margin rates for 'accumulated P&L' rather than deposited funds, and luxury goods retailers would offer discounts to those whose dollars were earned by profitable trading, and charge more to people experiencing equity drawdowns. When Forbes calculate their rich list, they don't place a trader higher because he is at a new equity high, or mark someone lower because his stock fell 50% last year - they calculate based on how many dollars he has.
I agree about pro-cyclical market conditions (and other things like edges degrading, trading worse under psychological pressure etc), but one should adjust for these based on the relevant factors (present market conditions; present psychological state & sharpness of the trader), not the irrelevant ones (past drawdown, or past winning streak).
Winning streaks in poker have an effect on the plays of other players, in a way that doesn't occur in the markets, so it's not a good analogy. Aggressive betting is also superior in poker for reasons related to that card game's specifics; in the markets, aggressive betting is inferior for reasons that are specific to the nature of financial markets (i.e. unpredictable risks, edge-degredation, liquidity constraints, 'runs' by depositors or fund investors and so on). Furthermore, the mean-reverting nature of fund and star trader performance gives good reason to think the opposite - that you should become more sceptical and risk-averse after a long winning streak. Most experienced traders also know that winning streaks actually tend to lead to cockiness and over-betting (see the earlier Soros quote you gave), which is another reason not to press a hot hand.
I've read Rand's Atlas Shrugged and The Fountainhead several years ago. Pseudo-intellectual crap. She obviously had a hysterical knee-jerk reaction to the oppressive regime from which she hailed, and figured that if one extreme is destructive, then the other extreme must be the way to go. I think the attraction of her "philosophy" is two-fold. First it appeals to a lot of people's darker sides and validates their baser tendencies. Second, unlike other philospohies, it is much more accessible because it is so one-dimensional. Therefore, falling prey to false equivalency of philosophical thought, it is the lazy man's shortcut to becoming a "deep thinker."Quote from darkhorse:
But this assumes that i) rushes exist and are predictable ii) overbetting due to cockiness doesn't swamp the potential positive effects of rushes iii) there is no way to anticipate favourable trading conditions or performance other than witnessing prior abnormal profits.
It is quite possible for rushes not to exist, for traders to be able to identify when they are 'trading well' (i.e. following their approach faithfully, working hard) and 'trading poorly' (i.e. making mistakes), and to observe when conditions are favourable or hostile and adjust size accordingly. Unlike the trader who relies on past P&L as a rough proxy for these factors, the trader who observes the factor inputs directly will get a more accurate picture.
You are simply asserting/assuming that your view is correct, without providing any evidence to back it up.
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