Macro Mavens

All macro traders suffer.

In 1979, when hedge fund titan Paul Tudor Jones was still a broker, he lost over 60% of the equity in his clients’ accounts on a single cotton trade that went horribly wrong. Relating the episode to Jack Schwager, who interviewed him for his 1989 book Market Wizards, Jones revealed:

“I was totally demoralized. I said, “I am not cut out for this business; I don’t think I can hack it much longer.” That was when I first decided that I had to learn discipline and money management. It was a cathartic experience for me, in the sense that I went to the edge, questioned my very ability as a trader, and decided that I was not going to quit. I was determined to come back and fight.”

We all make mistakes, but it’s best to make trading mistakes as early as possible. As Richard Dennis used to say to new traders, “When you start, you ought to be as bad a trader as you are ever going to be.” This is because the money you risk will be small, and the lesson less expensive.

For Jones, this was only his fourth year in the business. He turned his tryst with failure into incredible fortitude, and not long after, produced virtually five consecutive triple-digit return years. Today, he is highly regarded among the most successful macro traders ever.

Louis Bacon, close friend to Jones and founder of Moore Capital, also faced early disappointments. When at college, Bacon decided to use his student loan money to try his hand at trading. He lost money for three straight semesters—on sugar, gold, and cotton—and had to ask his father for money to pay his living expenses. He didn’t turn a profit until his final year.

In 1985, Bacon joined Commodities Corp. as a junior trader. He was given $100,000 to manage and promptly lost a third of the capital. Bacon was so mortified that he returned the rest of the money back to the partners. It took a couple of years before he was coaxed into another try. He now has one of the best long-term track records in the industry.

What accounts for his phenomenal success? In Bacon’s own words, “Hard work, patience, knowing when to hold ‘em, fold ‘em, or go all in.” Bacon is among those rare investors who made money on the infamous Black Monday in October 1987, the tech crash in 2000, and the subprime crisis in 2007.

Of all the people in the business, Stanley Druckenmiller is simply the best. In February 1981, at age 28, Stan launched Duquesne Capital with $1 million under management. It was an easy decision because of a consulting arrangement on the side that provided $120,000 in revenues. His fund performed very well from the start, and by May 1982 its assets had swelled to $7 million.

When his consulting client went belly-up, he had an immediate problem. His 1% management fee only generated $70,000, with $180,000 per year of overhead. At the time, the firm had assets of just under $50,000. Worried about the firm’s survival, Stan decided to place a desperate bet. He was convinced that interest rates would fall. He took all of the firm’s capital and put it into T-bill futures. In four days, he lost everything. This was his first major setback.

To keep himself in business, Stan sold 25% of his company for $150,000. He never looked back. His consistency and annual returns of 30% are unmatched. Stan has not had a single losing year in over thirty years in the business.

When Paul Tudor Jones got his first trading job, his boss gave him Reminiscences of a Stock Operator by Edwin Lefevre. He was told it was the most important book he could read. It chronicled the tale of Jesse Livermore, one of the greatest speculators of all time.

Jones fell in love with the book and called it a “textbook for speculation.” He hands a copy of it to every new trader that joins his firm. Jones wrote the foreword for a new annotated edition of the book published in 2009. I believe his words are as timeless as the book itself. Here’s an excerpt:

“Probably the best lessons to be learned from this book come from his repeated failures and how he dealt with them. In the book, I think he lost his entire fortune four or five times. I did the same thing, but was fortunate enough to do it all in my early twenties on very small stakes of capital. I think I lost $10,000 when I was 22, and when I was 25 I lost about $50,000, which was all I had to my name. … I think it’s no coincidence that our greatest champions, our greatest artists, our greatest leaders, our greatest everything all seem to have experienced some kind of gut-wrenching loss. I think their greatness, in part, was fashioned on the crucible of that defeat. To a certain extent, I think that holds true in my field as well, and I am leery of traders who have never lost it all. I think that intense feeling of desperation that accompanies such a horrifically deflating experience indelibly cauterizes great risk management reflexes into a trader’s very being.

There are two unpleasant experiences that every trader will face in his lifetime at least once and most likely multiple times. First, there will come a day after a devastatingly brutal and agonizing stretch of losing trades that you’ll wonder if you will ever make a winning trade again. And second, there will come a point when you begin to ask yourself why it is you make money and if this is truly sustainable. That first experience tests an individual’s grit; does he have the stamina, courage, guts, and smarts to get up and engage the battle again? That second moment of enlightenment is the one that is actually scarier because it acknowledges a certain lack of control over anything. I think I was almost 38 years old when one day, in a moment of frightening enlightenment, I knew that I really did not know exactly how and why I had made all the money that I had over the prior 17 years. This threw my confidence for a jolt. It sent me down a path of self-discovery that today is still a work in progress.”

Before we marvel at the success of these money masters, we should think with what difficulty they have arrived at it. There are important lessons in it for all of us. As I remind myself of their struggle, and study how they coped with adversity, it always helps renew my ambition. If I enter a bad trading patch, which occasionally besets every investor, I revisit their trading campaigns so as to break the negative behaviours that are liable for my losing streak. Although I have faced some crushing battles, I will not be defeated. I am willing to suffer with patience, with open eyes, and understanding.

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