An exerpt from an interview in Market Wizards by Jack Schwager:
Q. How did you first get interested in trading?
A. Investing. I stumbled onto Wall Street. In 1964, I had just finished college and was going on to graduate school. I got a summer job through a guy I met, who happened to work for a Wall Street firm. I didn't know anything about Wall Street at the time. I didn't know the difference between stocks and bonds. I didn't even know that there was a difference between stocks and bonds. All I knew about Wall Street was that it was somewhere in New York and something unpleasant had happened there in 1929. After that summer, I went to Oxford during 1964-1966. Whereas all the Americans I knew at Oxford were interested in politics, I was more interested in reading the Financial Times.
More on Rogers can be found here. He has been a regular on CNBC over the years. Rogers appeared in Michael Covel's film "Broke: The New American Dream".
Articles on Louis Bacon:
- Where the Money's Really Made: Louis Bacon
- Macro Money Maker: Louis Bacon
- Even Better Living: Louis Bacon
- Inside a Reclusive Billionaire's Island Paradise
Institutional Investor Magazine Excerpt: "Macro, Macro Man", by Riva Atlas
Today [Louis] Bacon reigns over not only Moore Capital but over the most visible, most high-octane area of money management - macro investing. He gained the throne by default, and at a time when the future of the realm is increasingly in doubt. After sharp reversals, Julian Robertson in March shut down Tiger Management; in April it was George Soros' turn to slash the size and scope of his funds. With $9.4 billion under management - and $7.6 billion in macro partnerships - Bacon is by far the biggest of the daredevil managers who are still placing big directional bets on stocks, bonds, currencies and commodities at a time when such bold trading has come under withering scrutiny. But he, too, is struggling this year, and many skeptics wonder whether the days are numbered for this high-wire investing style.
Like his bigger, better-known rivals, Bacon has racked up a stunning long-term record. His flagship fund, Moore Global Investments - at $6 billion by far his largest - has returned 31 percent annually after fees since its inception in 1990. Last year the fund was up 26 percent.
But Bacon's hallmark has been consistency: He delivered these returns with low volatility and relatively little correlation to the stock market. From 1995 through 1999, his annual returns ranged from 23 percent to 32 percent (see graph). By contrast, Soros' flagship Quantum Fund zigzagged between 39 percent and -1.5 percent, while Robertson's Jaguar Fund whipsawed from 57.2 percent to -18.1 percent. Moore's funds recorded a Sharpe ratio - which measures risk-adjusted investment returns (the higher the number, the better) - of 1.77, compared with 0.69 for Quantum and 0.45 for Jaguar over those five years. The Standard & Poor's 500 index logged a 1.54.
If you look at Louis's long-term track record, there is probably no trader alive who has better risk control on an asset base his size, says Paul Tudor Jones, a close friend of Bacon's who runs Tudor Investment Corp. Jones wrote the book on capital preservation.
Leveraging up and chasing any investment opportunity anywhere in the world - for a macro trader to be guilty of style drift, he would have to leave the planet. These swashbuckling bettors captured headlines, investors' imaginations, and their funds. The most notorious exploit was Soros' $10 billion bet against the British pound, which earned him the sobriquet of the Man Who Broke the Bank of England. Always volatile, macro trading became increasingly difficult as more players crowded into the arena. A variety of factors, including the development of a single European currency, have eliminated many of the massive global bond and currency trades by which macro traders earned their handsome livings. Since the 1998 blowup of Long-Term Capital Management - technically an arbitrage operation that made huge macro bets - credit for macro traders has been tight.
Indeed, even before this year's woes, many famous players - Michael Steinhardt of Steinhardt Partners and Leon Levy and Jack Nash of Odyssey Partners among them - quit the business. A handful of practitioners remain. Besides Bacon, the most prominent include Jones, Bruce Kovner of Caxton Associates, and Monroe Trout of Trout Trading. Sources in the hedge fund community say that Druckenmiller will be coming off the sidelines in September, to take active control again of his Duquesne Capital Management.
For a man of his influence and wealth - perhaps $1 billion of his net worth is said to be tied up in his own hedge funds - Bacon maintains a remarkably low profile. No gala charity benefits à la Paul Tudor Jones, whose annual fundraisers for the Robin Hood Foundation regularly grace newspapers' society pages; no Sorosian campaigns to urge Eastern European political reforms or the legalization of marijuana for medicinal purposes. Bacon's incessant trading generates huge commissions, but not many on Wall Street know what he looks like. (Six feet tall, he sports a beard that comes and goes at whim.)
As with life, so with trading: Few know what Bacon is doing at any given time, and he prefers it that way. At a time when hedge fund performance data is freely available on the Internet, Bacon tries to keep his results secret and is even wary of having historical returns for his funds published.
Bacon grew up in Raleigh, North Carolina, and counts among his ancestors Nathaniel Bacon, a rogue colonist who, in 1676, launched an unauthorized attack on Indians that briefly led to his controlling most of Virginia. Bacon's father, Zachary Bacon Jr., ran the North Carolina real estate operations of both Prudential and later Merrill Lynch & Co. Bacon's mother died in 1983. When his father eventually remarried, it was to the sister of a man who was fast becoming a Wall Street legend: Julian Robertson.
Bacon is the middle of three sons. His brothers, Zachary III and Bart, graduated from local public schools, but Louis, in his junior year, ventured out of town to Alexandria, Virginia, enrolling in preppy Episcopal High School, by coincidence Robertson's alma mater. Students at Episcopal were expected to work hard and had to sit in study hall during free periods and evenings. Only in the afternoon did they get a few hours outdoors, to play football or other sports. Bacon didn't seem to mind. One afternoon I passed through study hall, and there was Louis, grinding away, recalls Lee Ainslie Jr., the former Episcopal headmaster and father of Lee Ainslie III, manager of the $4.5 billion Maverick Capital hedge funds. Most other boys would have been happy to be outdoors playing.
For college, Bacon traveled north to Middlebury College, where he majored in American literature. A favorite professor, Horace Beck, says he saw no signs of the budding financial genius. I tried to get him interested in folklore, he recalls. But really, I had no idea what he was going to do.
An aficionado of Ernest Hemingway and Nathaniel Hawthorne, Bacon cultivated his love of the outdoors in the bucolic surroundings of Vermont. Southerners at Middlebury stuck out like sore thumbs, recalls classmate Christopher Brady, who heads money management and advisory firm Chart Group and is the son of former Treasury secretary Nicholas Brady. He hunted a lot, skiied incessantly and studied.
Still, there were some early signs of the future financier: During the summers following his sophomore and junior years, Bacon worked as a clerk for New York Stock Exchange specialist Walter N. Frank & Co. The enterprising Bacon met Frank after working on his deep-sea charter fishing boat off Montauk, Long Island, during the summer of 1976.
From college, Bacon headed to Wall Street, landing a job as a clerk on the New York Coffee, Cocoa and Sugar exchanges. A lot of the great traders on Wall Street are from the South, and many got their start in commodities, explains Brady.
An early influence was Paul Tudor Jones, who was sharing an apartment with Charles Johnson, a former roommate of Zack Bacon's at the University of North Carolina. Jones, who had started out as a cotton trader, was then working as a commodities broker with E.F. Hutton.
Bacon soon headed off to get his MBA at Columbia University, where he used his student loan as capital to continue to trade. To his chagrin, he lost it all - and had to work odd jobs to make up the difference.
From this experience, he learned how to handle risk, explains Arpad Busson, who runs London-based EIM Group, a firm specializing in alternative asset management and fundraising and whose clients have had money with Bacon since 1990.
Bacon landed at Shearson Lehman Hutton in 1983 as a futures broker, trading on behalf of some of the biggest names in the hedge fund world. For a 27-year-old, Bacon deployed a powerful Rolodex. Jones and brother Zack, who deployed landed at Soros Fund Management as head trader, threw plenty of business Bacon's way. He quickly became a top commission producer.
Louis was very fortunate to be right in the middle of that network, notes Charles Stockley, president of Stockley Asset Management, a futures trading firm, and a childhood friend of Jones's. You can't say that his career is a story of someone starting at the bottom and clawing his way up. But he took the ball and ran with it, and ultimately he surpassed them all.
Bacon's gilt-edged client list had another advantage, in addition to the hefty commissions: By trading on behalf of Soros and Jones, Bacon learned their investing styles.
By 1986 Bacon had acquired enough of a reputation to start managing other peoples' money. The following year, while still at Shearson, he set up a small fund called Remington Investment Strategies (it remains part of the Moore Capital family). Right off he hit a home run. He correctly anticipated the stock market crash, going short S&P futures and then shifting to a long position just as the market bottomed.
By the end of the decade, Bacon had established a strong track record, and he decided to move to a bigger stage. When he set up Moore Capital in 1989 (the firm bears his mother's maiden name), he already had more than $100 million under management. He quickly raised $1.8 million more for an offshore fund, Moore Global Investments, which is today Bacon's biggest portfolio. Much of the sum came from Antoine Bernheim, whose Dome Capital Management invests in hedge funds on behalf of European investors. The key thing about Louis is his ability to analyze and process information quickly, while controlling risk, enthuses Bernheim. That is the essence of a talented hedge fund manager.
The early investors were quickly rewarded: That first year, Moore Global was up 86 percent, thanks largely to Bacon's decision to short the Nikkei index just before the Japanese markets collapsed. He also anticipated Saddam Hussein's invasion of Kuwait and went short stocks and long oil.
As Bacon set out to raise more money, his task was made easier by his friendship with Jones, who had decided to close his funds to new money. In a letter to investors, Jones recommended they invest spare capital with Moore. Jones also introduced Bacon to Busson, who had helped him raise money in Europe. By the end of 1990, Bacon had $200 million under management and was up a healthy 29 percent.
Bacon soon began refining his trading style. Though he studies charts and diagrams, he relies on an obsessive attention to detail - and ultimately instinct. He is like an animal in his ability to sense the market, says one longtime investor.
Like any good macro trader, Bacon strives to identify long-running trends, or investment themes, such as euro convergence or structural interest rate moves. But unlike many others, Bacon can have an itchy trigger finger, and he will sometimes trade in and out and around his positions, even if they're moving in the predicted direction. If Louis thinks something is going from 70 to 100, he'll trade in and out 15 times before it gets there, where we would get in and hang on as it went up and down, says one trader at a rival hedge fund.
Even today, with some 230 employees, Bacon keeps a firm hand on the tiller. Very few people at the firm are allowed to take serious risk, says one source. There's a lot of people there, but they are mostly in support, research or administrative positions.
Still, Bacon is capable of holding positions when he thinks they have potential: A source close to Moore notes that the firm maintained a stake in European bonds, particularly Swedish and Italian securities, from 1995 to 1999. But typically, if an investment seems to be moving against him, Bacon will get out quickly.
If a stock goes from 100 to 90, an investor who looks at fundamentals will think maybe it's a better buy, explains one source. But with Louis, he will figure he must have been wrong about something and get out. Contrast that, say, with Robertson, who, even after shutting down his firm, was doggedly holding on to massive positions in such stocks as US Airways Group and United Asset Management Corp.
The difference between Louis and Julian is, Julian sees the mountain from afar and doesn't worry about the valley. Louis has a long-term macroeconomic vision on every position, but he won't let that stand in the way of making money over the next five minutes, says one former employee.
Bacon's risk habits were formed in the futures arena. Interestingly, many of the macro funds that have disbanded or scaled back following losses - Steinhardt Partners, Odyssey Partners, Soros Fund Management and Tiger Management - were led by stock pickers. Meanwhile, most of the surviving macro players - Bacon, Jones, Kovner and Trout - come from the futures business. The only people who survive in the futures world are those who understand and can manage risk, explains hedge fund consultant Hunt Taylor. That's because the leverage is so high.
Agreed Bacon in a recent investor letter: Those traders with a futures background are more 'sensitive' to market action, whereas value-based equity traders are trained to react less to the market and focus much more on their assessment of a company's or situation's viability.
Richard Dennis is not the only teacher of trend following. Quietly, Ed Seykota has taught many traders. Some may argue that Ed has been an even more prolific teacher than Dennis. Ed has long called his educational gatherings: The Trading Tribe. Easan Katir adds:
Journalists, interviewers and such like to hedge their praise and use phrases such as "one of the best traders" etc. If one looks at Ed Seykota's model account record, and compares it with anyone else, historical or contemporary, he is the best trader in history, period. Isn't he? Who else comes close? I don't know of anyone. Livermore made fortunes but had drawdowns to zero. There are numerous examples of managers with a few years of meteoric returns who subsequently blow up. The household names, Buffet and Soros, are less than half of Ed's return each year. One might apply filters such as Sharpe ratios, AUM, etc, and perhaps massage the results. But as far as the one central metric -- raw percentage profit -- Ed is above anyone else I know, and I've been around managing money for 20 years.
More Seykota Students
"Jim Hamer's experience and education in business, computer programming, piloting, and the financial markets have provided a solid foundation as an investment manager. Jim graduated from West Virginia University. He began his career working in his family’s lumber business. After spending many years in the lumber business Jim decided to pursue a dream he had always had – managing money professionally. In the late 1980’s Jim became a member of the Chicago Mercantile Exchange. As a ‘floor trader’ he predominately traded stock index and currency futures. He left the floor to move in the direction of portfolio management. He secured the training of one of the industry’s legendary traders – Ed Seykota. Mr. Seykota’s accomplishments have been documented in the book “Market Wizards”. Several other top futures traders: Michael Marcus, Bruce Kovner, David Druz – were influenced by Ed Seykota. Under Mr. Seykota’s guidance Jim learned the importance of risk management and techniques of systematic trend following.
Source: Jim Hamer Bio
Chauncey DiLaura brokered stocks for about 20 years when he met Ed Seykota in 1989. After attending some of Seykota workshops, he quit the brokerage business and started trading for his own account."
Source: Futures Magazine
"Greg Smith, the principal and trader behind IEM Global Trading, went to the UK as a specialist welder in 1980, planning to work on oil rigs in the North Sea. Instead, he got interested in futures while working at the International Commodities Clearing House in London, where he notified brokers of their daily margin positions...Smith did an impressive amount of research and networking before establishing his own...business. In 1990, he joined a loose group of traders brought together by Ed Seykota to discuss the psychology of trading, risk management and other issues...Being in Australia and working at the other end of the clock from much of the rest of the world has not proved a problem for IEM. We set up trades first thing in the morning, at 8 a.m., when we receive the fills from close of New York business, says Smith. They receive all the data, run the trading models and generate orders by 10 in the morning. Then they turn to reconciling the broker's daily trading statement, which comes through at 11 or 12. At around 5 p.m., Smith downloads the prices from the Sydney Futures Exchange. And if he's trading on the SFE, he sends the trades through at night."
Source: Managed Account Reports
Q. What about starting capital? How much money must a person have before starting to trade?
A. Good money management is equity invariant. I'd ask a trader who thinks he needs a certain amount before he can trade exactly what amount he would need to stop trading.
Q. What are some of your favorite books that people should consider reading?
A. Through the years I have gained tremendous insight, perspective, skills, inspiration and strength from books. A short list of some of my favorite books about the markets would have to include Extraordinary Popular Delusions by Charles McKay; Reminiscences of a Stock Operator by Edwin LeFevre (about Jesse Livermore); and The Crowd by Gustave Le Bon.
Copyright (c) Technical Analysis Inc.
More Lessons Seykota Might Preach?
Keep in mind, Livermore's words hold wisdom, but his volatile life is another story. He might well have benefited from Ed Seykota's Trading Tribe.
"The only time I really ever lost money was when I broke my own rules."
"Throughout all my years of investing I've found that the big money was never made in the buying or the selling. The big money was made in the waiting."
"Profits take care of themselves - losses never do."
"Remember, you do not have to be in the market all the time."
"The successful speculator must always have cash in reserve, like a good general who keeps troops in reserve for exactly the right moment, and then moves with great conviction, and commits his reserve armies for final victory, because he has waited until all the odds are in his favor."
I believe that the public wants to be lead, to be instructed, to be told what to do. They want reassurance.They will always move on masse, a mob, a herd, a group, because people want the safety of human company. They are afraid to stand alone because the pressure is to be safely included within the herd, not to be the lone calf standing on the desolate, dangerous wolf-patrolled prairie of contrary opinion."
Reasonable people act unreasonably when they are afraid. And people become afraid when they start to lose money, their judgement becomes impaired. This is our human nature in this stage of our evolution. It cannot be denied. It must be understood.
Ken Tropin was formerly President of John W. Henry. Before that he was President of Dean Witter Futures. Now on his own, he is another successful trader with a trend following trading style. An excerpt from Ken Tropin, of Graham Capital Management:
The ability of trend following strategies to succeed depends on two obvious but important assumptions about markets. First, it assumes that price trends occur regularly in markets. While trends do not exist in all markets most of the time, they do exist in most markets some of the time. Secondly, it assumes that trading systems can be created to profit from these trends. The basic trading strategy that all trend followers try to systematize is to "cut losses" and "let profits run". Trend following has had positive returns over a 20 year period because trends occur in virtually all markets some of the time. Trend followers create quantitative models to capture these long term trends while limiting the cost of doing so. These models create an expected return profile similar to being long options. A strategy has a long option profile when the strategy limits downside losses while potentially achieving very large upside returns. For example, trend followers use stop losses to achieve limited downside exposures on their positions.
Insight from the Institutional Investor:
Making money has been easy for Ken Tropin, although wealth doesn't exactly run in his blood. He grew up comfortably, first in the Bayside section of Queens, New York, and then in Harrison, a suburb about an hour north of New York. His parents both worked for nonprofit organizations.
His father was in public relations at the United Nations, and his mother was employed by the International Committee for European Migration, which helped refugees settle in the U.S. "Their priorities were not about making money," he says. "They were more about helping people out." Nor did Tropin have much use for conventional measures of achievement. In the early 1970s he traipsed off to Plainfield, Vermont, to attend Goddard College, an institution that eschews majors and grade-point averages. When Tropin wasn't sculpting, he was skiing.
After graduating From Goddard in 1974, he moved back to Harrison and started a small contracting business, which did painting and light construction. "I hired all of my friends from high school," he recalls. "We didn't make a lot of money." He soon grew bored. After a family friend suggested he get a job on Wall Street, Tropin hooked up with a small firm called Rosenthal Group, which later merged with Collins Commodities to form the Rosenthal Collins Group.
He then moved to Shearson Loeb Rhoades as a broker specializing in futures and equities...A few months after leaving the firm [John W. Henry], Tropin started getting edgy. He bought a number of computers and taught himself programming, working in the guest cottage at his New Canaan, Connecticut, home. Within nine months he was able to write programs based on his own trading ideas and back-test them.
It was then that he came to understand that neither Dean Witter nor John W. Henry & Co. had fully satisfied his entrepreneurial spirit. "I realized that what I wanted to do was start my own business," he says....Tropin won't go into detail about his proprietary systems except to say that they are designed to take advantage of sustained price changes that take place over several days, weeks or months. "The computer model tells us when to get in and when to get out," he says. "The computer understands what the price is telling us about the trend of the market." What does the software look at, exactly? "Volatility, price behavior. How much does it change every day?
We're trying to use as much data as we can get to interpret potential future price." Successful positions remain in place for about six months; Tropin's programs bail out of unsuccessful trades after a month. "All of the systems are designed to risk modest amounts of capital and to stay with winners as long as possible," he says.
Graham Capital Management White Paper: Trend Following
Ken Tropin is the founder and chairman of Graham Capital Management, L.P. Graham Capital is an alternative investment management company with approximately $4.4 billion in assets under management including over $500 million of proprietary capital. Mr. Tropin developed the majority of the firm's core trading programs and he is additionally responsible for the overall management of the organization, including the investment of its proprietary trading capital. The company is located in Stamford Connecticut and has approximately 80 employees. Prior to founding Graham Capital in 1994, Mr. Tropin was president and chief executive officer of John W. Henry & Company, Inc. and previously, senior vice president at Dean Witter Reynolds, where he served as Director of Managed Futures and as president of Demeter Management Corporation. Mr. Tropin has also served as chairman of the Managed Funds Association and its predecessor organization, which he was instrumental in founding during the early 1980s.
This page outlines students of Ed Seykota, Bill Dunn, Richard Dennis, John Henry and Richard Donchian. If you learn anything from this page learn that trading is teachable. All below would agree 100%.
- Ed's Trading Tribe 2003.
- David Druz.
- Michael Marcus.
- Chauncey DiLaura.
- Greg Smith.
- Jim Hamer.
- Easan Katir.
- Bet Sizing Article by Ed Seykota and David Druz
- Jerry Parker.
- Tom Shanks.
- Paul Rabar.
- Mike Carr.
- Curtis Faith.
- Mike Shannon.
- Jim DiMaria.
- Craig Soderquist
- Rudolph Papirnik
- Liz Cheval
- Anthony Bruck
- Jim Melnick
- Michael Cavallo
- Philip Lu
- Erle Keefer
A thought from one of Donchian's students, Brent Elam of Elam Management Corp.:
I remember in 1979 or 1980 at one of the early MAR conferences being impressed by the fact that I counted 19 CTAs who were managing public funds, and I could directly identify 16 of the 19 with Dick Donchian. They had either worked for him or had had monies invested with him. To me, that’s the best evidence of his impact in the early days. Dick has always been very proud of the fact that his people have prospered. He also was proud that after so many years in which his was the lone voice in the wilderness, his thinking eventually came to be the dominant thinking of the industry.
Richard Donchian, though now deceased, left many students that still trade or run money management firms. A sampling of his students include:
- Nelson Chang worked for Donchian. Started Chang-Crowell Corp.
- Robert Crowell worked for Donchian. Started Chang-Crowell Corp.
- Bruce Terry worked for Chang-Crowell Corp.
- Barbara Saslaw Dixon worked for Donchian. Started Spackenkill Trading.
- Paul E. Dean of TrendLogic was a student of Richard Donchian.
- Brentin Elam of TrendLogic was a student of Richard Donchian. Started Elam Management Corporation also.
Howard Seidler was a turtle. His one man company is called Saxon Investment Corporation.
Q. When did you first become involved in the markets?
A. My first exposure was actually as a child, since my father dabbled in the markets. When I was in high school, I became aware of the futures markets. Futures fascinated me because of the symmetry of being able to go short as well as long. I was also attracted by the potential for leverage. As I began to read about the futures markets, the general description seemed to be: Here's this game, and by the way, hardly anyone ever succeeds at it. To me, that was like throwing down the gauntlet. I opened up my first account for $1,000 in high school. I had saved up that money by doing chores. It took me a little over a year before I lost it all.
Q. What advice would you give someone in regards to being successful in the markets?
A. I think the single most important element is having a plan...
Paul Rabar was a Turtle. His company is Rabar Market Research:
It is well known that over a period of several years, Richard Dennis traded an initial stake of $1,200 into $300,000,000. By at least some measures, he thereby achieved the greatest performance in the history of the markets. To do so, his methods must have been different from or contrary to those of other traders in some important respects. The concept of contrarianism is perhaps the most important of those imparted by Dennis. Because each futures market is a zero-sum game, even a marginally profitable trader must extract capital from other market participants and, therefore, must use methods that are different from those of other market participants. Contrarianism in one form or another, whether or not a trader consciously identifies it as such, is the first requisite for profitability.
Rabar Market Research, Inc. uses long-term trend following. Technical indicators are analyzed by computers that generate trading instructions or orders. Though most of these orders are followed strictly without any interpretation, some are modified by Paul Rabar, the company's president. Rabar's risk management limits exposure in each trade, each market, each sector, and each account. Risk is also controlled with extensive diversification of markets traded. Paul Rabar, CEO and sole principal of Rabar Market Research, Inc., was trained in the mid-1980s by Richard Dennis, one of the most successful futures speculators of all time.
Jerry Parker has made the most money as a Turtle. His achievement as the best and most profitable student of Richard Dennis is unquestioned. Some "others" might call themselves the most successful Turtle, but Jerry Parker's track record proves them incorrect.
His company is Chesapeake Capital:
Jerry Parker founded Chesapeake Capital Corporation, a global investment manager headquartered in Richmond, Virginia, in 1988. Chesapeake provides investment and portfolio management services to both private and institutional investors worldwide. Mr. Parker began his portfolio management career in 1983 when he was accepted into the Turtle Program, a select investment training program developed by a successful Chicago portfolio manager. When the program ended in 1988, after almost five years of trading proprietary capital, Mr. Parker decided to continue his professional money management career by forming Chesapeake. Chesapeake?s specialized investment approach offers investors the potential to participate in, and profit from, price trends not typically available through traditional portfolio strategies. Chesapeake?s investment portfolios are not biased toward long or short positions and, therefore, can profit in both rising and falling market environments. Chesapeake actively monitors, and has the potential to invest in, over 90 markets worldwide. These can range from tangible assets, such as coffee, crude oil and gold to global financial instruments, such as German government bonds, U.S. stock indices and global currencies.
"I don’t believe that I am the only person who cannot predict future prices. No one consistently can predict anything, especially investors. Prices, not investors, predict the future. Despite this, investors hope or believe that they can predict the future, or someone else can. A lot of them look to you to predict what the next macroeconomic cycle will be. We rely on the fact that other investors are convinced that they can predict the future, and I believe that’s where our profits come from. I believe it’s that simple."
John W. Henry
"...when I was designing what turned out to be a trend following system...[that] approach – a mechanical and mathematical system - has not really changed at all. Yet the system continues to be successful today, even though there has been virtually no change to it over the last 18 years."
John W. Henry
John W. Henry
"If one theme summarizes Henry’s philosophy, it is the knowledge that one cannot predict anything. Henry is a long-term follower. His philosophy is based on the premise that market prices, rather than market fundamentals, are the key aggregation of information needed to make investment decisions. He says, The markets are people’s expectations, and these expectations manifest themselves as price trends. We live in an uncertain world. One cannot predict the future of anything. In an uncertain world, identifying and following trends may be the only reasonable investment approach over the long term. Henry feels that a mechanical approach has more value since no scientific approach or solid testing can be applied to discretionary trading. Henry says that when he first researched the markets in the 1970s, he was looking for a methodology that would work through many market conditions. His research showed that long-term approaches work best over decades. There is an overwhelming desire to act in the face of adverse market moves. Usually it is termed ‘avoiding volatility’ with the assumption that volatility is bad. However, I found avoiding volatility really inhibits the ability to stay with the long-term trend. The desire to have close stops to preserve open trade equity has tremendous costs over decades. Long-term systems do not avoid volatility, they patiently sit through it. This reduces the occurrence of being forced out of a position that is in the middle of a long-term major move."
The New Investment Superstars
Q. How did you get started in money management, and what advice could you give to someone who would be interested in following in your footsteps?
A. How did I get started? I was hedging crops for farmland that I owned in a couple of states. I just seemed to do fairly well trading by the seat of my pants. It was a broker at Reynolds Securities in those days that asked me if I would manage money for farmers, because I seemed to do so well in the grain markets. That is sort of how it all started. I said no to hedging for farmers. I spent five years working on some ideas I had for trading, and one thing led to another. I came up with a [trend following] philosophy.
"I don't think trading strategies are as vulnerable to not working if people know about them, as most traders believe. If what you are doing is right, it will work even if people have a general idea about it. I always say you could publish rules in a newspaper and no one would follow them. The key is consistency and discipline."
"...he placed classified ads proclaiming 'trader wanted,' he got some 1,000 responses from people eager to learn his methods. He settled on fewer than two dozen novices--among them two professional gamblers and a fantasy-game designer--and after a two-week training program, he gave them money to trade under his firm's auspices. Several went on to become top commodity-fund managers..."
"Unlike Eckhardt (and most other savants) Dennis believed that trading could be taught and learned. Eckhardt belonged to the you're born with it or you're not camp."
Richard Dennis must be saluted for his skills as a trader and teacher. His instruction to his students the turtles was a great story and trend following philosophy has stood the test of time.
Dennis himself has made hundreds of millions of dollars over the years. But while his students have had successful money management careers, Dennis seems to not mesh well with clients. If Dennis just traded for himself he would be fine (and much richer).