The Job of an Entrepreneur

It is often said that the responsibility of an entrepreneur is to make a better product at a better price. I think it’s something greater than that. The job of an entrepreneur is to better serve more people and to make the world a better place.

Maybe The Kids can copy Rich Dad?

Through his teenage years, Kiyosaki dabbled with silver and gold coins as a starting investment during the 1960s. In a July 2005 Yahoo Finance article, Kiyosaki stated that

If you only have a few dollars, you may want to go to your local coin dealer and buy silver and gold coins as close to the price of gold or silver as possible. I would not invest in 'collectible' precious metal coins unless you really know a good collectible coin from a bad one. For as little as $20 you can buy a few precious metal coins and begin to take steps to prepare for one of the biggest crashes in world history.

Kiyosaki states that he is a "gold bug", meaning that he holds various commodities such as gold and silver to hedge against government misprinting of the US dollar as a fiat currency since the early 1970s when President Richard Nixon took the dollar off the gold standard.

The Psychology of Human Misjudgement

Charlie Munger on Human Psychology

Redfin --- an interesting idea that can get big

Redfin Real-Estate Firm Gets Cold Shoulder in Silicon Valley

How Online Company Is Overcoming Tech VCs 'People Problem'

Updated Dec. 8, 2013 4:47 p.m. ET

"I used to think I was this made man," says entrepreneur Glenn Kelman. "That's what they tell you after you take a company public."

In 1996 Mr. Kelman co-founded Plumtree, a business-software firm that went public in 2002. After that, he assumed that his next idea was as good as paid for.

"Whatever I thought of, they'd fund it," he says.

Then, in 2006, Mr. Kelman became chief executive of a real-estate startup, Redfin Corp.

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Redfin CEO Glenn Kelman, shown in April, believes improving the real-estate business takes more than just better code. Billy Higgins/The Wall Street Journal

Redfin sounds like it would be catnip for technology investors. The company aims to overhaul how people buy and sell houses, using software and data to improve real-estate agents' customer service. Real estate is an opaque, expensive insider's game—exactly the kind of business that is ripe for getting blown up by a less-expensive, more-convenient Web-powered service.

"We wanted to change the whole thing in the consumers' favor," Mr. Kelman says, his voice straining with a revolutionary's passion. "We wanted you to have an agent who was on your side, who used technology the whole way through the process and who charged half the price."

But whenever Mr. Kelman shopped his plan in Silicon Valley, venture capitalists looked at him funny. He raised millions of dollars, but the money came fitfully, often at lower valuations than he expected.

Eventually Mr. Kelman realized the problem. Like Soylent Green, Redfin is made of people—sales staff and customer-service representatives.

To tech investors, companies that depend on such people are old-fashioned. People are unpredictable and hard to manage. They are costly to hire and train, and their path to success is difficult to set into an algorithm. People don't scale.

Yet Redfin is one of a handful of startups showing that people can make a big difference. Mr. Kelman believes that improving the real-estate business takes more than just better code. It takes better people, specifically, better real-estate agents. Consequently, Redfin has hired hundreds of agents on staff, people to whom it pays salaries, benefits and on whose work the company depends.

After years of slow growth, Redfin is poised to hit it big. It's on track to book $100 million in revenue—and turn a profit—next year.

And its path suggests that businesses that try to improve workers—and not just code—can be better for customers and, in the long run, better for the bottom line.

Like Zillow Inc. Z -0.35% and Trulia Inc., TRLA -1.26% Redfin is partly a website that helps you find houses for sale. But unlike those companies, which make money through ads placed by traditional brokers, Redfin is a full-service brokerage. After you find your dream house on its site, Redfin makes money when you sign up with one of its agents to guide you through the home-buying process. (Its agents sell houses, too.)

Mr. Kelman says Redfin's unusual setup offers several advantages over traditional brokerages.

First, it improves service. If you're touring a neighborhood and see a house for sale, you can order up a Redfin agent to drive over to show you the property quickly. In the company's most-established markets, Seattle, for instance, the agent can be at your service within an hour. (It takes longer in Redfin's newer markets, like Dallas). This works thanks to a blend of technology and management. Just as the Uber online ride service maps its drivers, Redfin keeps track of its agents' calendars and real-time locations. Unlike a traditional real-estate brokerage—in which agents essentially are contractors of a brand, not employees—Redfin's agents are salaried workers. The company can tell them where to go and what to do.

Redfin helps soothe other home-buying frustrations as well. Redfin compiles detailed histories on competing brokerages' pricing strategies, strengthening Redfin agents' negotiating prowess. Redfin also conducts most of the home-buying process online, reducing paperwork. And if you're selling your house, Redfin can test offer prices on the Web, helping you to home in on the optimal price.

The biggest opportunity is price. Mr. Kelman says the incentives of traditional real-estate agents are misaligned with those of customers. If you're selling your house, your agent, who gets paid on commission, will prefer that you take a lowball offer over no offer. If you're buying, your agent will want you to bid higher than you might otherwise want—or need—to pay. Economists call this the Principal-Agent Problem, and it has proved stubbornly intractable in real estate.

Mr. Kelman says Redfin has a solution. About half a typical Redfin agent's pay comes through salary. The rest comes through commissions. But crucially, commissions are linked to detailed reviews that Redfin customers complete after sales. The reviews are posted online and affect each agent's future business. Your agent always has an incentive to please you. If pushing a client to close a deal will produce a bad review, the agent would rather not close.

Redfin is still tiny. In its most-established locations, it has about 3% or 4% of the market. In bigger, newer markets, it seems nearly nonexistent.

Mr. Kelman concedes that his people-dependent model has slowed Redfin's growth. But he sees the prospect of long-term returns. "After we hit a certain threshold in the market, our share begins to accelerate," he says. In other words, over time, better service begins to pay off.

Redfin last month said it raised $50 million from T. Rowe Price Group Inc. and Tiger Global Management LLC. Compared with tech-focused venture capitalists, Mr. Kelman says, these investors didn't care that Redfin might take several more years to realize its mission of revolutionizing real estate. They were willing to wait, he says.

"Most of Silicon Valley isn't that patient."

How to Invest in Agriculture?

"Buy shares in farms, farm equipment, fertilizer and seed companies that trade on exchanges around the world. Stock markets in agriculture-producing countries should do better than those in agriculture-importing ones. Retailers, restaurants, banks in agricultural areas will do well. Buy a vacation home on a lake in Iowa, not Massachusetts. And there are listed indexes like the RJA or the RGRA. [The RJA, or Elements Rogers Agriculture Total Return exchange-traded note, tracks the Rogers International Commodity Index, which Rogers designed. The RGRA is the RBS Rogers Enhanced Agriculture ETN]."

Jim Rogers sees opportunity in Agriculture

Rogers: I’d have to say agriculture, because agriculture is very depressed on any kind of long-term basis. Sugar prices, for instance, are down about 75 percent or so from their all-time high in 1974—38 years ago. We have been consuming more agricultural commodities than we have been producing in the world for the last decade or so. So inventories are near historic lows, which, of course, is a dangerous situation.

But worse still, we’re running out of farmers. The average age of farmers in America is 58; in Australia it’s 58; in Japan it’s 66. In America, more people study public relations than study agriculture. So the farmers are dying and retiring, and no young people are coming into agriculture. Agriculture is facing a serious, serious problem, so prices have to go much, much higher, or we’re not going to have any food at any price.

Hot degrees to pursue in 2014 and beyond [ZT from Yahoo Finance]

Hot degrees to pursue in 2014 and beyond

If you're planning on going back to school in 2014, make sure you choose a degree that employers love.

By Terence Loose

Are you thinking of improving your career choices by going back to school for your bachelor's degree?
While that might be a good plan, you want to make sure the degree you choose will be in demand in the future. Because, frankly, some degrees are going to be hot, and some are just not.
And choosing the right degree is just as important as having relevant work experience and skills, says Marie Zimenoff, a career management, job search strategist, and certified résumé writer at A Strategic Advantage, a career coaching company.
"The competition [will be] stiff," says Zimenoff. "So be ready to show innovation and initiative in your résumé, at an interview, and on the job to be successful."
Fortunately, we asked her and another career expert which degrees will be hot in 2014. So read on to get a jumpstart on what degrees and skills add up in the success equation.

Hot Degree #1: Bachelor's in Finance

Some say love makes the world go round, but business leaders usually say it's money. And that's one reason a degree in finance will be in high demand well into the future, says Nicole Williams, LinkedIn's career expert and the author of "Girl on Top: Your Guide to Turning Dating Rules into Career Success."
Why It'll Be Hot in 2014 and Beyond: "Finance is a degree that can be used in a myriad of different professions and is a discipline that benefits anyone, regardless of where they land in terms of their specific job," says Williams.
She adds that finance not only teaches you how to analyze and interpret financial numbers, it also gives you an integrated understanding of how business works - a skill that you could apply in fields as diverse as law and marketing.

Typical Courses: Choose finance as a major and you'll likely take courses such as investments, analysis of financial statements, international finance, and financial management, according to the College Board, a nonprofit research organization that promotes higher education.
Potential Career: Financial Analyst. These professionals assess the performance of investments, such as stocks and bonds, to give businesses financial advice, according to the U.S. Department of Labor. Financial analysts typically need a bachelor's degree in a field such as business administration, accounting, economics, or finance. The Department of Labor expects this occupation to grow by 23 percent from 2010 to 2020.

Hot Degree #2: Bachelor's in Computer Science

If you're into tech, a degree in computer science could be a good call, says Williams. It will be in high demand from employers, resulting in high pay, she says.
Why It'll Be Hot in 2014 and Beyond: "All businesses, regardless of the industry, are relying more and more heavily on technology to do everything from recruiting, marketing, networking, selling, and delivering products and services," says Williams.
This degree teaches specific computer skills like programming, computer languages, and network design and engineering, all of which companies need for their computer networks, she adds. Finally, Williams says, "This degree also teaches broad skills such as problem solving and working within a team."

Typical Courses: The College Board says computer science majors take classes like digital system design, software engineering, artificial intelligence, and the theory of formal languages.
Potential Career: Software Developer. Does designing computer applications sound fun? That's what these creative minds do, says the U.S. Department of Labor. Software developers usually have a bachelor's in computer science. According to the Department of Labor, the projected job growth for software developers from 2010 to 2020 is 30 percent.

Hot Degree #3: Bachelor's in Marketing

Unless you've been living under a rock, you know that in today's world, marketing is crucial to the success of any business. And that's why Williams says this degree is a good bet for the future.
Why It'll Be Hot in 2014 and Beyond: "We're all selling something, and that's an industry that will never die. There will always be people willing to spend money to get their messages out there," says Williams. She adds that social media is the buzzword for employers in marketing, but employers will also seek out these individuals for their strong writing, communication, and interpersonal skills.
Zimenoff says marketing students gain valuable skills in market research, branding, marketing strategy, and product life cycles, as well as currently hot skills like web and graphic design.

Typical Courses: Advertising and promotion, international marketing, marketing management, and consumer behavior are just a few of the typical courses in this major listed by the College Board.
Potential Careers: Advertising, Promotions, or Marketing Manager. These people create and manage advertising campaigns to generate interest in products and services, says the U.S. Department of Labor. A bachelor's degree is required for most of these positions, and courses in finance, accounting, management, statistics, and business law are helpful for pursuing this career. The Department of Labor adds that this job is expected to grow by 14 percent from 2010 to 2020.

Hot Degree #4: Bachelor's in Accounting

Like crunching numbers? This degree might be for you. And if it is, consider yourself lucky, because Zimenoff says employers will seek accounting majors in 2014 and far beyond.
Why It'll Be Hot in 2014 and Beyond: "Similar to finance, accounting is in demand because businesses need to be able to track and analyze their financial transactions to make the best business decisions," says Zimenoff. "They are also facing ever-increasing regulations and need employees who can meet these requirements while also providing business intelligence."
Williams says accounting majors learn the advanced accounting skills needed to meet the demands of today's sophisticated financial world, such as more complicated rules and regulations. "The old stereotype of the brainy but quiet accountant doesn't fit anymore. You'll also develop communication and presentations skills."

Typical Courses: As an accounting major, coursework could include accounting information systems, business law, cost accounting, tax accounting, and auditing, says the College Board.
Potential Careers: Accountant or Auditor. Accountants and auditors prepare and examine financial records, ensuring that taxes are paid properly and on time, says the U.S. Department of Labor. Most accountants and auditors need at least a bachelor's degree in accounting or a related field. The Department of Labor projects that job growth for accountants and auditors will be 16 percent from 2010 to 2020.

Hot Degree #5: Bachelor's in Health Care Administration

Want a degree in what Williams describes as one of the hottest industries going forward? Try a bachelor's in health care management, which Williams says will likely offer opportunities in many different jobs and clear roads to advancement.
Why It'll Be Hot in 2014 and Beyond: "This degree will be more in demand because of rapid and extended growth in the industry as health care becomes increasingly critical for an aging and health-conscious population," says Williams. Zimenoff agrees, adding that older students who already have some work experience combined with this degree will be most competitive.
Williams says this degree will give you skills that mirror the complex health care world. You'll study everything from accounting and technology to human resources and marketing, she says.

Typical Courses: The College Board says health care administration majors take courses as diverse as accounting, health care ethics, human resources management, and anatomy and physiology.
Potential Career: Medical Health Services Manager. These are the professionals who work closely with doctors, nurses, and other health care staff while managing a specific department or an entire facility, says the U.S. Department of Labor. Prospective medical and health services managers have a bachelor's degree in health administration. According to the Department of Labor, this occupation is projected to have 22 percent job growth from 2010 to 2020.

Hot Degree #6: Bachelor's in Business Administration

Here's a versatile degree that gives you a broad range of knowledge that will fit into virtually any industry, says Zimenoff. But she warns that although this degree will remain a good, practical choice in the future, graduates will have to distinguish themselves from others with the same degree.
Why It'll Be Hot in 2014 and Beyond: "Although it may be in demand, new graduates with a business degree may struggle if they don't have a specialty or experience in a certain direction," says Zimenoff. "With their degree of breadth in business knowledge, they will need to be able to pull the pieces together and demonstrate their relevance in a specific position or industry."
She says getting work experience while in school is key, because that's what employers want - the core business and management skills this degree offers coupled with practical skills in areas like marketing, human resources, and even leadership. "Fortunately, most business programs push internships hard, and students with these experiences will find their job search [to be] much shorter," she says.

Typical Courses: Choose a business major, and the College Board says you'll likely take these courses: accounting, human resources management, operations management, and financial management.
Potential Careers: Personal Financial Advisor. These professionals help individuals with financial decisions regarding taxes, investments, and insurance, says the U.S. Department of Labor. A bachelor's degree is needed for most of these positions, and while no specific major is required, a degree in business, finance, economics, accounting, mathematics, or law is good preparation for this career. The Department of Labor also notes that this occupation is expected to grow by 32 percent from 2010 to 2020.

Jim Rogers

Who is Jim Rogers?
Jim Rogers is perhaps the most well-known trader interviewed by Jack D. Schwager in Market Wizards. Rogers and George Soros founded the Quantum Fund in 1973, one of the longest-running and best-performing hedge funds in the world.
Jack D. Schwager was eager to interview Rogers “because of his stellar reputation as one of the shrewdest investors of our time” and Rogers is unique in the sense that he is one of the only traders interviewed in the book that considers himself a bad trader. Rogers says, “I am probably not the person you want to interview. I often hold positions for many years. Furthermore, I’m probably one of the world’s worst traders. I never get in at the right time.” Rogers humble response does not change the fact that he is widely considered as one of the most famous and successful traders of our generation.
The notes I took on this chapter are the longest, and I consider his interview to be the most helpful, most entertaining, and best interview in the book.
On a margin of safety:

Whenever I buy or sell something, I always try to make sure I’m not going to lose any money first. If there is very good value, then I’m probably not going to lose much money even if I’m wrong.

It sounds like you have a great deal of conviction when you put on a trade.

Yes, I usually do; otherwise, I don’t bother doing it. One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people – not that I’m better than most people – always have to be playing; they always have to be doing something. They make a big play and say, “Boy, am I smart, I just tripled my money.” Then they rush out and have to do something else with that money. They can’t just sit there and wait for something new to develop.

Do you always wait for a situation to line up in your favor Don’t you ever say, “I think this market is probably going to go up, so I’ll give it a shot”?

What you just described is a very fast way to the poorhouse. I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, “I just lost my money, now I have to do something to make it back.” No, you don’t. You should just there until you find something.

Trade as little as possible.

That is why I don’t think of myself as a trader. I think of myself as someone who waits for something to come along. I wait for a situation that is like the proverbial “shooting fish in a barrel.”

Are all your trades fundamentally oriented?

Yes. Occasionally, however, the Commodity Research Bureau charts will provide a catalyst. Sometimes the chart for a market will show an incredible spike either up or down. You will see hysteria in the charts. When I see hysteria, I usually like to take a look to see if I shouldn’t be going the other way.

Can you think of any examples?

Yes. Two years ago, I went short soybeans after they had gone straight up to $9.60. The reason I remember it so vividly is because that same evening, I went to dinner with a group of traders, one of whom was talking about all the reasons why he had bought soybeans. I said, “I really can’t tell you why all the bullish arguments are wrong; all I know is that I’m shorting hysteria.”

How do you pick the time to go against the hysteria?

I wait until the market starts moving in gaps.

That brings to mind a classic example of hysteria. In late 1979 – early 1980, the gold market witnessed an incredible accelerated advance. Did you go short that market?

Yes, I sold gold at $675.

That was almost $200 too early!

I told you I’m not a good trader. I’m nearly always too early, but it was only about four days before the top.

I didn’t say you were way off timewise, but pricewise it must have been a pretty scary ride. When you do a trade like that, isn’t there a point where you have second thoughts?

Yes, when it goes to $676 [he laughs].

But you stayed with the trade?

Yes, in that case, because it was chaos. It was something that couldn’t last. It was the gold market’s dying gasp.

Was that a matter of recognizing the fingerprint of a market in its final blowoff, or was it a matter of gold being overpriced?

Both. Gold was overpriced, but basically it was – I like your terminology – the “fingerprint” of hysteria. Just about every time you go against panic, you will be right if you can stick it out.

So when you see panic, do you automatically go against it?

The panic, the hysteria, in and of itself is only a catalyst to make me look to see what is going on. It doesn’t mean I’m going to do anything. In the case of the early 1980 gold market, I had a view of the world that was bearish for gold. Volcker had just become the Federal Reserve Chairman a few months earlier and said that we were going to beat inflation. I believed he meant it. I also happened to be bearish on oil at the time, and I knew that if oil went down, gold would go down as well.

Actually, the decisive step came in October 1979, when the Fed changed its policy from controlling interest rates to controlling money supply growth. Yet the gold market apparently didn’t believe it, because it went up for several months after that point. In situations like that, are the markets too wound up in their hysteria to pay attention to changing fundamentals?

Absolutely. It is amazing how sometimes something important will happen, and the market will keep going despite that. Now, I am experienced enough to know that just because I see something doesn’t mean that everyone sees it. A lot of people are going to keep buying or selling just because that has been the thing to do.
So, just because the market doesn’t respond to some important news, such as the October 1979 change in Fed policy, doesn’t mean that it isn’t important.
All the better. If the market keeps going the way it shouldn’t go, especially if it is a hysterical blowoff, then you know an opportunity will present itself.

Were you short stocks or long puts?

I was short stocks and short calls. I don’t buy options. Buying options is another fast way to the poorhouse. Someone did a study for the SEC and discovered that 90 percent of all options expire as losses. Well, I figured out that if 90 percent of all long option positions lose money, that meant that 90 percent of all short option positions make money. If I want to use options to be bearish, I sell calls.

When did you cover your positions?

During the week of October 19. If you remember, by that time, everybody thought that the financial structure of America was over.

Did you cover because w had hysteria going the other way?

That is exactly right. That week was a textbook case of hysteria. Under those kind of conditions, if you are still solvent, you have to step in there and go against it. Maybe that was going to be the one time it was the end of the world, and I would have been wiped out too. But 95 percent of the time when you go against that kind of hysteria, you are going to make money.
Between October 1987 and January 1988, I didn’t have any shorts. That was one of the few times in my whole life that I didn’t have any shorts. Whether I am bullish or bearish, I always try to have both long and short positions – just in case I’m wrong. Even in the best of times, there is always somebody fouling up, and even in the worst of times, there is somebody doing well.

Going from zero to September 1970, where did you start picking up tradingwise to build up to your ultimate trading success?

My early losses taught me a lot. Since then – I don’t like to say this kind of thing – I have made very few mistakes. I learned quickly not to do anything unless you know what you are doing. I learned that it is better to do nothing and wait until you get a concept so right, and a price so right, that even if you are wrong, it is not going to hurt you.

Is there a lot of similarity between different cases of market hysteria?

It’s always the same cycle. When a market is very low, there comes a time when some people buy it because it has become undervalued. The market starts to go up, and more people buy because it is a fundamentally sound thing to do, or because the charts look good. In the next stage, people buy because it has been the thing to do. My mother calls me up in says, “Buy me XYZ stock.” I ask her, “Why?” “Because the stock has tripled,” she answers. Finally, there comes the magical stage: People are hysterical to buy, because they know that the market is going to go up forever, and prices exceed any kind of rational, logical economic value.
The whole process then repeats itself on the downside. The market gets tremendously overpriced and it starts to go down. More people sell because the fundamentals are turning poor. As the economics deteriorate, more and more people sell. Next, people sell just because it has been the thing to do. Everybody knows it is going to go to nothing, so they sell. Then the market reaches the hysteria stage and gets very underpriced. That’s when you can buy it for a pop. But for a long-term investment, you usually have to wait a few years and let the market base.

Is that a general principle: When government measures are implemented to counteract a trend, you should sell the rally after the government action?

Absolutely. It should be written down as an axiom that you always invest against the central banks. When the central banks try to prop up a currency, go the other way.

What is the biggest public fallacy regarding market behavior?

That the market is always right. The market is nearly always wrong. I can assure you of that.

What else?

Never, ever, follow conventional wisdom in the market. You have to learn to go counter to the markets. You have to learn how to think for yourself; to be able to see that the emperor has no clothes. Most people can’t do it. Most people want to follow a trend. “The trend is your friend.” Maybe that is valid for a few minutes in Chicago, but for the most part, following what everyone else is doing is rarely a way to get rich. You may make money that way for a while, but keeping it is very hard.

But actually, your whole style of trading involves staying with a trend for years. So isn’t what you are saying contradictory?

That kind of trend – a trend that is economically justified – is different. You have to see the supply/demand balance change early, buy early, and only buy markets that are going to go on for years. By “trend following,” I meant buying a market just because it goes up and selling it just because it goes down.

What other trading rules do you live by?

Look for hysteria to see if you shouldn’t go the opposite way, but don’t go the opposite way until you have fully examined the situation. Also, remember that the world is always changing. Be aware of change. Buy change. You should be willing to buy or sell anything. So many people say, “I could never buy that kind of stock,” “I could never buy utilities,” “I could never play commodities.” You should be flexible and alert to investing in anything.

If you were counseling the average investor, what would you tell him?

Don’t do anything until you know what you are doing. If you make 50 percent two years in a row and then lose 50 percent in the third year, you would actually be worse off than if you just put your money in a money market fund. Wait for something to come along that you know is right. Then take your profit, put it back in the money market fund, and just wait again. You will come out way ahead of everyone else.

Are you ever wrong on a major position play? That is, are one of your almost sure shots ever wrong, or are they so well selected that they just invariably go?

I don’t want to make it sound like I don’t know how to lose money – because I know how to lose money better than most people – but there has not been a major mistake in a long time. But you have to remember that I don’t trade that often. I tis not as though I’m making three decisions a month. I may make three decisions a year, or five decisions a year, and I’ll stay with them.

How often do you make a trade?

Well, there is a difference between making a trade and deciding to buy bonds in 1981. I’ve owned bonds since 1981, but I sell around the position. I make trades, but basically I own them. I went shor the dollar at the end of 1984. Now, I have made a fair amount of trades in currencies since the end of 1984, but it is basically one trade with a lot of trades around it.

Very few investors or traders are as successful as you have been over time. What makes you different?

I don’t play. I just don’t play.

I can understand that. But still, very few people can analyze the same fundamentals you are looking at and so consistently be correct in assessing all the variables.

Just don’t do anything until you know you’ve got it right. As an example, until you see American agriculture hit a low, then no matter what happens in the world – unless the world is going to stop eating – you can’t go wrong. American agriculture is now so competitive, and so many marginal farmers have been washed out, that it has to go up. You just watch American agriculture deteriorate, deteriorate, deteriorate, and then you buy. You may buy early or late. In my case, usually a little bit early. But, so what? The worst that happens is you bought it too early. Who cares?

Is there anything else besides the fact that you are very selective that sets you apart?

I have no boundaries. I am totally flexible. I am open to everything, and I pursue everything. I have no more compunction about speculating in Singapore dollars or shorting Malaysian palm oil than I do about buying General Motors.

Any last words?

Good investing is really just common sense. But it is astonishing how few people have common sense – how many people can look at the exact same scenario, the exact same facts and not see what is going to happen. Ninety percent of them will focus on the same thing, but the good investor – or trader, to use your term – will see something else. The ability to get away from conventional wisdom is not very common.

Michael Steinhardt

Who is Michael Steinhardt?
Michael Steinhardt began his career on Wall Street as a research assistant and later found positions as a financial journalist and research analyst. After a successful career as an analyst, he founded one of the earliest hedge funds, Steinhardt, Fine and Berkowitz at the age of 26. He is considered a legend in the hedge fund industry not only because he was one of the earliest hedge fund managers, but also because of his remarkable investment performance. At the time Market Wizards was written, Steinhardt’s firm had achieved a compounded annual growth rate of over 30 percent in the 21-years since its inception. This far outperformed the S&P 500 which only achieved an 8.9 percent return over the same time period.
I thought that Steinhardt’s responses in highlight the importance of having a contrarian mindset (which he refers to as “variant perception”) and remaining flexible. This chapter is also one of the more interesting chapters in Market Wizards and another interview that I highly recommend.
How would you define your philosophy of trading?

My particular style is a bit different from that of most people. Concept number one is variant perception. I try to develop perceptions that I believe are at variance with the general market view. I will play those variant perceptions until I feel they are no longer so.

Could you give me an example of variant perception in the current marketplace?

We have been short Genentech for a year and a half. There was a period of months and months when we lost a lot of money in that position. But I stayed short because I continued to have a variant perception about the future of their drug, TPA. [TPA can be injected intravenously to dissolve blood clots.] It is our perception that, in a year or two, TPA will be a minor drug that will be supplanted by more effective drugs that also cost substantially less. The thrust of the entire company has been based on this one drug. If our perception is correct, this company will be earning 20 or 30 cents per share and selling for under $10. The stock is currently at $27 [June 1988], down from a high of $65. [By late November, Genentech had fallen below $15 and Steinhardt was still short.] But I think the general perception is still that Genentech is a first class biotechnology company that will produce many products that are going to revolutionize the industry. As long as my view is a variant perception, I will stay short.
My attitude has always been that to make money in the markets, you have to be willing to get in the way of danger. I have always tended to short stocks that were favorites and backed by a great deal of institutional enthusiasm. Generally speaking, I have tended to short too early and, therefore, have usually started off with losses in my short positions. If I short a stock and it goes up a lot, it may skew my exposure a bit, but as long as my variant perception is unchanged, I’ll stay short. If I’m wrong, I’m wrong.

Are you saying that as long as you think the fundamentals, as you perceive them, are unchanged, you will hang tough no matter how much the position goes against you?

Right. Of course, if it is triple horrible, I might trade around the position to take the pressure down a little bit. I would say, “OK, this looks awful; I see nothing but buyers. Why don’t I join the buyers and see if I can make some money.” In a matter of speaking, I dichotomize myself. I have a fundamental view, which I believe in my heart, but I try to separate that from the short-term fervor and intensity I may see in the market. So even though I am short in that type of situation, I might periodically be a buyer.

If you are very negative and short in a particular stock, but are not necessarily bearish on the industry, might you sometimes hedge yourself by buying another stock in that group against your short position?

I have tried that at times, but have generally found it to be unsuccessful. What it tends to do is give me two problems instead of one. Usually, your knowledge about the second stock on the other side will tend to be relatively skimpy because you are just grasping at it to use as a hedge. If your problem is so great that you need to hedge it, why not address the problem directly rather than taking on a totally separate position? Let’s say you are short a paper stock and the paper stocks are roaring, so you buy another paper stock against it. Maybe your short stock will go up more; maybe the other stock will go up more. Who knows? If you have made a mistake, deal with the mistake; don’t compound it.

Besides your variant perception concept, what are some of the other elements of your trading philosophy?

Nothing that is so distinctive. I don’t use stop-loss orders or such. I don’t use any rules about buying on weakness or strength. I don’t look at breakouts or breakdowns. I don’t use charts.

If a stock is not acting like it should based on its fundamentals, would that be the type of market action that would change your thinking?

I try to assume that the guy on the other side of a trade knows at least as much as I do. Let’s say I buy Texaco at $52 and it suddenly goes down to $50. Whoever sold Texaco at $52 had a perception that was dramatically different from mine. It is incumbent on me to find out what his perception was.

Relatively speaking, how important is the bias of the right market direction versus stock selection as a contributing factor to your overall superior performance?

As I look back on the past twenty-one years, there is no set pattern of successful activity. In some years, we did particularly well on the strength of a few well-chosen stocks. In other years, we did exceptionally well because we were on the right side of the market. For example, in 1973-174, when the market went down enormously, we were up substantially, largely because we were net short. There were other periods when the bulk of our money was made in bonds. I think there is a message in the fact that there is no real pattern: Anyone who thinks he can formulate success in this racket is deluding himself, because it changes too quickly. As soon as a formulas is right for any length of time, its own success carries the weight of its inevitable failure.

Where were you, positionwise, coming in on October 19 (Black Tuesday)?

I came in very much long exposed – 80 to 90 percent – and I increased my exposure during the day.

Why? Were you still bullish?

My increasing exposure was strictly a contrarian trade in the sense that when the markets have an enormous move, most of the time, it is right to take the view that there is a lot of emotionalism and extremism in that move. If you can maintain a bit of distance from the emotionalism, you tend to do well. So my buying that day is what I would have done on any 300-, 400-, or 500-point down day.

As you look back on the October 1987 experience, are there mistakes that you believe you learned from?

There is a very good investor I speak to frequently who said, “All I bring to the party is twenty-eight years of mistakes.” I really believe he is right. When you make a mistake, there is some subconscious phenomenon that makes it less likely for you to make that same mistake again. One of the advantages of trading the way I do – being a long-term investor, short-term trader, individual stock selector, market timer, sector analyst – is that I have made so many decisions and mistakes that it has made my wise beyond my years as an investor.

The typical mutual fund adheres to a buy-and-hold approach. Do you think that concept is basically a flawed strategy?

Yes, although flawed isn’t quite the word I would use. I would say it is too limiting a strategy. The objective of participating in the long-term growth of American equities, willing to suffer through those periods when equities decline, is fine, but it leaves so much on the table in terms of potential professional management. It is an incomplete strategy.

What would be the most important advice you could give to the layman?

One of the allures of this business is that sometimes the greatest ignoramus can do very well. That is unfortunate because it creates the impression that you don’t necessarily need any professionalism to do well, and that is a great trap. So the major advice I would give anybody is: Recognize that this is a very competitive business, and that when you decide to buy or sell a stock, you are competing with people who have devoted a good portion of their lives to this same endeavor. In many instances, those professionals are on the opposite side of your trades and, on balance, they are going to beat you.

Is the implicit message that, most of the time, the novice trader would be better off having his money professionally managed?

The term professionally managed implies a credit I am not sure I would give the average professional in this business. My point is that you should have a good reason to assume that you are going to achieve significantly superior return for investing in stocks. If you can get 9 percent or 10 percent by investing in T-bonds and 7 percent or 8 percent by investing in T-bills, what should get you get in stocks to offset the incremental risk? Probably something much higher. You have to decide what that number should be, and whether you have a realistic change of achieving it.

Don’t underestimate the difficulty of the game.

Right, and forget the shibboleth that stocks are going to give you a higher rate of return because they are more risky. That is not true. They are more risky; therefore, you have to be convinced that you are going to get a higher rate of return in order to play the game. Don’t assume that by investing in some mutual fund, you are going to get a higher rate of return.

What are the elements of good trading?

Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake. You need to believe in something, but at the same time, you are going to be wrong a considerable number of times. The balance between confidence and humility is best learned through extensive experience and mistakes. There should be a respect for the person on the other side of the trade. Always ask yourself: Why does he want to sell? What does he know that I don’t? Finally, you have to be intellectually honest with yourself and others. In my judgment, all great traders are seekers of truth.

Ed Seykota

Who is Ed Seykota?
Ed Seykota is one of the pioneers of computerized trading systems and has been extraordinarily successful with a combination of technical analysis and trend following techniques. Jack D. Schwager writes that Seykota is “one of the best traders of our time”. Seykota claims that one account that he managed in 1972 started with $5,000 and over the course of 16 years has achieved a return of over 250,000 percent on a cash-on-cash basis and several million percent after adjusting for withdrawals. His interview is worth the read for traders interested in implementing a systematic trading system.
Without divulging trade secrets, how have you been able to so spectacularly outperform standard trend-following systems?

The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. There are old traders and there are bold traders, but there are very few old, bold traders.

Witty and true, but the question remains, albeit in translated form: There are many trend-following systems with money management rules; why have you done so much better?

I seem to have a gift. I think it is related to my overall philosophy, which has a lot to do with loving the market sand maintaining and optimistic attitude. Also, as I keep trading and learning, my system (that is the mechanical computer version of what I do) keeps evolving. I would add that I consider myself and how I do things as a kind of system which, by definition, I always follow. Sometimes I trade entirely off the mechanical part, sometimes I override the signals based on strong feelings, and sometimes I just quit altogether. The immediate trading result of this jumping around is probably breakeven to somewhat negative. However, if I didn’t allow myself the freedom to discharge my creative side, it might build up to some kind of blowout. Striking a workable ecology seems to promote trading longevity, which is one key to success.

What are the present and future prospects for trend-following systems? Do you think the growing prevalence of their use will doom them to eventual failure?

No. All trading is done on some sort of system, whether or not it is conscious. Many of the good systems are based on following trends. Life itself is based on trends. Birds start south for the winter and keep on going. Companies track trends and alter their products accordingly. Tiny protozoa move in trends along chemical and luminescence gradients.
The profitability of trading systems seems to move in cycles. Periods during which trend-following systems are highly successful will lead to their increased popularity. As the number of system users increases, and the markets shift from trending to directionless price action, these systems become unprofitable, and undercapitalized and inexperienced traders will get shaken out. Longevity is the key to success.

What are your thoughts about using fundamental analysis as an input in trading?

Fundamentals that you read about are typically useless as the market has already discounted the price, and I call them “funny-mentals.” However, if you catch on early, before others believe, then you might have valuable “surprise-a-mentals.”

Your answer is a bit facetious. Does it imply that oyu only use technical analysis?

I am primarily a trend trader with touches of hunches base don about twenty years of experience. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading. Way down in very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money.

By picking the right spot to buy, do you mean determining a reaction point at which you will buy? If so, how do you avoid sometimes missing major price moves?

Oh no. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk. I don’t try to pick a bottom or top.

What are the elements of good trading?

The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.

How do you handle a losing streak?

I handle losing streaks by trimming down my activity. I just wait it out. Trying to trade during a losing stream is emotionally devastating. Trying to play “catch up” is lethal.

Do you decide where you are getting out before you get in on a trade?

I set protective stops at the same time I enter a trade. I normally move these stops int o lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn’t get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which calm my nerves. Losing apposition is aggravating, whereas losing your nerve is devastating.

What is the maximum percentage of equity you will risk on any individual trade?

I intend to risk below 5 percent on a trade, allowing for poor executions. Occasionally I have taken losses above that amount when major news caused a thin market to jump through my stops.

Very few traders have enjoyed the spectacular success you have. What makes you different?

I feel my success comes from my love of the markets. I am not a casual trader. It is my life. I have a passion for trading. It is not merely a hobby or even a career choice for me. There is no question that this is what I am supposed to do with my life.

What are the trading rules you live by?

a. Cut losses.
b. Ride winners.
c. Keep bets small.
d. Follow the rules without question.
e. Know when to break the rules.

Your last two rules are cute because they are contradictory. Seriously now, which do you believe: Follow the rules, or know when to break the rules?

I believe both. Mostly I follow the rules. As I keep studying the markets, I sometimes find a new rule which breaks and then replaces a previous rule. Sometimes I get to a personal breakpoint. When that happens, I just get out of the markets altogether and take a vacation until I feel that I am ready to follow the rules again. Perhaps some day, I will have a more explicit rule for breaking rules.
I don’t think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached and the trader has to quit or change, or find a new set of rules he can follow. This seems to be part of the process of evolution and growth of a trader.

What is the most important advice you can give the average trader?

That he should find a superior trader to do his trading for him, and then go find something he really loves to do.

At what point did you get the confidence that you could keep on winning as a trader?

I vacillate between (a) “I can keep on winning,” and (b) “I have just been lucky.” I sometimes get the most confident of my ability just before a major losing streak.

Why do so many traders fail in the marketplace?

For the same reason that most baby turtles fail to reach maturity: Many are called and few are chosen. Society works by the attraction of the many. As they are culled out, the good ones are left, and the others are released to go try something else until they find their calling. The same is true for other fields of pursuit.

What can a losing trader do to transform himself into a winning trader?

A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That’s the kind of thing winning traders do.

What traits do you look for to identify the winning trader personality?

He/she loves to trade; and
He/she loves to win.

Paul Tudor Jones

Who is Paul Tudor Jones?
Paul Tudor Jones is the founder of Tudor Investment Corporation, an umbrella corporation for various hedge funds that are so successful that he is able to charge more than the standard 2/20 fee structure that most “normal” hedge funds are able to charge (2% of the assets under management as the management fee and 20% of the profits). Tudor Investment Corp. charges a 4% management fee and keeps 23% of the profits.
Some of his other achievements include registering a 62% return in the month of October 1987, the same month as Black Tuesday, one of the most devastating market crashes in history. He also has achieved returns over 100% for five consecutive years and has thus far suffered only one down year in his professional investing career.
He is also profiled by PBS in Trader: The Documentary which features an inside look at Jones and Tudor Investment Corporation in the months prior to October 1987.
Jones is one of the more well known traders interviewed in Market Wizards, and I personally thought that his interview responses were extremely informative and helpful to me. I strongly recommend absorbing the wisdom contained in the following curated interview questions and responses.
On changing one’s position quickly and decisively:

There was insufficient time to complete the interview at our first meeting. I returned about two weeks later. Two things were notable about this second meeting. First, whereas he had been strongly bearish and heavily short the stock market at the time of our first conversation, jones’ short-term opinion on the stock market had shifted to bullish in the interim. The failure of the stock market to follow through on the downside at the price and time he had anticipated convinced him that the market was headed higher for the short term.
“This market is sold out,” he emphasized at our second meeting. This 180-degree shift in opinion within a short time span exemplified the extreme flexibility that underlies Jones’ trading success. He not only quickly abandoned his original position, but was willing to join the other side once the evidence indicated his initial projection was wrong.

On contrarian thinking:

By watching Eli, I learned that even though markets look their very best when they are setting new highs, that is often the best time to sell. He instilled to me the idea that, to some extent, to be a good trader, you have to be a contrarian.

Never overtrade:

First of all, never play macho man with the market. Second, never overtrade. My major problem was not the number of points I lost on the trade, but that I was trading far too many contracts relative to the equity in the accounts that I handled. My accounts lost something like 60 to 70 percent of their equity in that single trade.

Did your trading style change radically from that point on?

Yes. Now I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them.

I guess you not only started trading smaller, but also quicker?

Quicker and more defensive. I am always thinking about losing money as opposed to making money. Back then, in that cotton trade, I had a vision of July going to 89 cents and I thought about all the money I was going to make on 400 contracts. I didn’t think about what I could lose.

How much do you risk on any single trade?

I don’t break it down trade by trade. All the trades I have on are interrelated. I look at it in terms of what my equity is each morning. My goal is to finish each day with more than I started. Tomorrow morning I will not walk in and say, “I am short the S&P from 264 and it closed at 257 yesterday; therefore, I can stand a rally.” I always think of it in terms of being short from the previous night’s close.
Risk control is the most important thing in trading. For example, right now I am down about 6.5 percent for the month. I have a 3.5 percent stop on my equity for the rest of the month. I want to make sure that I never have a double-digit loss in any month.

One aspect of your trading style is a contrarian attempt to buy and sell turning points. Let’s say you are looking for a top and go short with a close stop when the market reaches a new high. You then get stopped out. On a single trade idea, how many times will you try to pick a turning point before you give up?

Until I change my mind, fundamentally. Otherwise, I will keep cutting my position size down as I have losing trades. When I am trading poorly, I keep reducing my position size. That way, I will be trading my smallest position size when my trading is worst.

What are the trading rules you live by?

Don’t ever average losers. Decrease your trading volume when you are trading volume; increase your volume when you are trading well. Never trade in situations where you don’t have control. For example, I don’t risk significant amounts of money in front of key reports, since that is gambling, not 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. There is nothing better than a fresh start.
Don’t be too concerned about where you got into a position. The only relevant question is whether you are bullish or bearish on the position that day. Always think of your entry point as last night’s close. I can always tell a rookie trader because he will ask me, “Are you short or long?” Where I am long or short should have no bearing on his market opinion. Next he will ask (assuming I have told him I am long), “Where are you long from?” Who cares where I am long from. That has no relevance to whether the market environment is bullish or bearish right now, or to the risk/reward balance of a long position at that moment.
The most important rule of trading is to play great defense, not great offense. Every day I assumed ever position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out.
Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.
Jesse Livermore, one of the greatest speculators of all time, reportedly said that, in the long run, you can’t ever win trading markets. That was a devastating quote for someone like me, just getting into the business. The idea that you can’t beat the markets is a frightening prospect. That is why my guiding philosophy is playing great defense. If you make a good trade, don’t think it is because you have some uncanny foresight. Always maintain your sense of confidence, but keep it in check.

But you have been very successful for years. Aren’t you more confident now than you were before?

I am more scared now than I was at any point since I began trading, because I recognize how ephemeral success can be in this business. I know that to be successful, I have to be frightened. My biggest hits have always come after I have had a great period and I started to think that I knew something.

My impression is that you often implement positions near market turns. Sometimes your precision has been uncanny. What is it about your decision-making process that allows you to get in so close to the turns?

I have very strong views of the long-run direction of all markets. I also have a very short-term horizon for pain. As a result, frequently, I may try repeated trades from the long side over a period of weeks in a market which continues to move lower.

Is it a matter of doing a series of probes until you finally hit it?

Exactly. I consider myself a premier market opportunist. That means I develop an idea on the market and pursue it from a very-low-risk standpoint until I have repeatedly been proven wrong, or until I change my viewpoint.

In other words, it makes a better story to say, “Paul Jones buys the T-bond market 2 ticks from the low,” rather than, “On his fifth try, Paul Jones buys the T-bond market 2 ticks from its low.”

I think that is certainly part of it. The other part is that I have always been a swing trader, meaning that I believe the very best money is to be made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years, I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops.
If you are a trend follower trying to catch the profits in the middle of  a move, you have to use very wide stops. I’m not comfortable doing that. Also, markets trend only about 15 percent of the time; the rest of the time they move sideways.

What is the most prominent fallacy in the public’s perception about markets?

That markets can be manipulated. That there is some group on Wall Street that controls price action in the markets. I can go into any market and create a stir for a day or two, maybe even a week. If I go into a market at just the right moment, by giving it a little gas on the upside, I can create the illusion of a bull market. But, unless the market is really sound, the second I stop buying, the price is going to come right down. You can open the most beautiful Saks Fight Avenue in Anchorage, Alaska, with a wonderful summer menswear department, but unless somebody wants to buy the clothes, you will go broke.

What other misconceptions do people have about the markets?

The idea that people affiliated with Wall Street know something. My mother is a classic example. She watches “Wall Street Week” and she takes everything they say with almost a religious fervor. I would bet that you could probably fade “Wall Street Week.”

How do you keep all these other opinions from confusing your own vision? Let’s say you are bearish on a market and 75 percent of the people you talk to about that market are bullish. What do you do?

I wait. I will give you a perfect example. Until last Wednesday, I had been bearish on crude oil, while it was in the midst of a $2 advance. The best crude oil trader I know was bullish during that period. Because he was bullish, I never went short. Then the market started to stall and one day he said, “ I think I am going to go flat here.” I knew that instant – particularly, given the fact that bullish news was coming out of OPEC right at that time – that crude oil was a low-risk short. I sold the hell out of it, and it turned out to be a great trade.

Very few traders have reached your level of achievement. What makes you different?

I think one of my strengths is that I view anything that has happened up to the present point in time as history. I really don’t care about the mistake I made three seconds ago in the market. What I care about is what I am going to do from the next moment on. I try to avoid any emotional attachment to a market. I avoid letting my trading opinions be influenced by comments I may have made on the record about a market.

No loyalty to position is obviously an important element in your trading.

It is important because it gives you a wide open intellectual horizon to figure out what is really happening. It allows you to come in with a completely clean slate in choosing the correct forecast for that particular market.

You have been both a broker and a money manager. How do you compare the relative advantages and disadvantages of these two jobs?

I got out of the brokerage business because I felt there was a gross conflict of interest: If you are charging a client commissions and he loses money, you aren’t penalized. I went into the money management business because if I lost money, I wanted to be able to say that I had not gotten compensated for it. In fact, it would probably cost me a bundle because I have an overhead that would knock out the Bronx Zoo. I never apologize to anybody, because I don’t get paid unless I win.

Do you keep your money in your own funds?

I would say that 85 percent of my net worth is invested in my own funds, primarily because I believe that is the safest place in the world for it. I really believe that I am going to be so defensive and conservative that I will get my money back.

On the importance of using a time stop:

One of the things that Tullish taught me was the importance of time. When I trade, I don’t just use a price stop, I also use a time stop. If I think a market should break, and it doesn’t, I will often get out even if I am not losing any money.

Some of your preliminary comments before the start of our interview today make it sound like you are paranoid because of your success.

If the misery in this country gets deep enough, the perception is going to be that we did well as a trading firm, while other people were hurt, because we had some knowledge. It is not that we had any unfair knowledge that other people didn’t have, it is just that we did our homework. People just don’t want to believe that anyone can break away from the crowd and rise above mediocrity.

Is the positive intensity of winning as strong as the pain of losing?

There is nothing worse than a bad trading day. You feel so low that it is difficult to hold your head up. But if I knew that I could also have a similar experience in the exhilaration of winning, I would take the combination of winning and losing days any time because you feel that much more alive. Trading gives you an incredibly intense feeling of what life is all about. Emotionally, you live on the extremes.

What is the most important advice you could give the average trader?

Don’t focus on making money; focus on protecting what you have.

Bruce Kovner

Who is Bruce Kovner?
New York magazine refers to Bruce Kovner as the most powerful New Yorker you’ve never heard of. Jack D. Schwager writes in Market Wizards that Bruce Kovner may be the world’s largest trader in the interbank currency and future markets. He is the founder of Caxton Associates, a global macro hedge fund with an estimated $14 billion in assets under management – one of the world’s largest hedge funds.
Bruce Kovner struggled to find a direction in his career early in his life. After dropping out of his Ph.D program from Harvard, he took jobs as a political campaign manager, a pianist, and a cab driver before entering the world of commodities trading. He is also intensely secretive, shy, and humble. There is surprisingly little information about his personal life (the New York magazine’s piece contains the most detailed information that I found), but what little I found was extremely high praise for Bruce Kovner’s intellect. His interview in Market Wizards was one of the more insightful interviews in the book and is a must read for students of financial markets. The notes that I took on this section are longer than others.
On making mistakes:

October 19, 1987 – the week of the stock market crash. I closed out all my positions on October 19 and 20 because I felt there was something happening in the world that I didn’t understand. The first rule of trading – there are probably many first rules – is don’t get caught in a situation in which you can lose a great deal of money for reasons you don’t understand.
You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.

You are one of the most successful traders in the world. There are only a small number of traders of your caliber. What makes you different from the average guy?

I’m not sure one can really define why some traders make it, while others do not. For myself, I can think of two important elements. First, I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen. Second, I stay rational and disciplined under pressure.

When you compare the trainees that made it to the majority that did not, do you find any distinguishing traits?

They are strong, independent, and contrary in the extreme. They are able to take positions others are unwilling to take. They are disciplined enough to take the right size positions. A greedy trader always blows out. I know some really inspired traders who never managed to keep the money they made. One trader at Commodities Corporation – I don’t want to mention his name – always struck me as a brilliant trader. The ideas he came up with were wonderful; the markets he picked were often the right markets. Intellectually, he knew markets much better than I did, yet I was keeping money, and he was not.

So where was he going wrong?

Position size. He traded much too big. For every one contract I traded, he traded ten. He would double his money on two different occasions each year, but still end up flat.

On the importance of technical analysis:

There is a great deal of hype attached to technical analysis by some technicians who claim that it predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders. For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is – whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge. Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates anew chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.

On sustainable market moves:

The Heisenberg principle in physics provides an analogy for the markets. If something is closely observed, the odds are it is going to be altered in the process. If corn is in a tight consolidation and then breaks out the day the Wall Street Journal carries a story about a potential shortage of corn, the odds of the price move being sustained are much smaller. If everybody believes there is no reason for corn to break out, and it suddenly does, the chances that there is an important underlying cause are much greater.

Let’s say you do buy a market on an upside breakout from a consolidation phase, and the price starts to move against you – that is, back into the range. How do you know when to get out? How do you tell the difference between a small pullback and a bad trade?

Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis. For example, if the market is in the midst of a trading range, it makes no sense to put your stop within that range, since you are likely to be taken out. I always place my stop beyond some technical barrier.

It would appear that you have reached a size level that impedes your trading performance. Since you have substantial personal funds, did you ever consider just trading your own money and avoiding all the related headaches in managing money?

Yes, but there are several reasons why I don’t. Although I invest a great deal of my own money in my funds, the portion of my funds that is managed represents a call. I don’t say this to be flippant, since my reputation among my investors is extremely important to me, but a call is a much better position than a symmetrical win/lose position.

Can you talk about your fundamental analysis methodology? How do you determine what the right price for a market should be?

I assume that the price for a market on any given day is the correct price, then I try to figure out what changes are occurring that will alter that price.One of the jobs of a good trader is the imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them on one at a time. Inevitably, most of these pictures will turn out to be wrong – that is, only a few elements of the picture may prove correct. But then, all of a sudden, you will find that in one picture, nine out of ten elements click. That scenario then becomes your image of the world reality.

On analyzing current events:

Forgetting trading for a minute, one of the reasons I am in this business is that I find the analysis of worldwide political and economic events extraordinary fascinating.

The way you describe it, you make the whole process sound like a constant game, rather than work. Do you really look at it that way?

It doesn’t feel like work, except when you lose – then it feels like work [he laughs]. For me, market analysis is like a tremendous multidimensional chess board. The pleasure of it is purely intellectual. For example, it is trying to figure out the problems the finance minister of New Zealand faces and how he may try to solve them. A lot of people will think that sounds ridiculously exotic. But to me, it isn’t exotic at all. Here is a guy running this tiny country and he has a real set of problems. He has to figure how to cope with Australia, the U.S., and the labor unions that are driving him crazy. My job is to do the puzzle with him and figure out what he is going to decide, and what the consequences of his actions will be that he or the market doesn’t anticipate. That to me, in itself, is tremendous fun.

You talk about both the importance of risk control and the necessity of having the conviction to hold a position. How much risk do you typically take on a trade?

First of all, I try very hard not to risk more than 1 percent of my portfolio on any single trade. Second, I study the correlation of my trades to reduce my exposure. We do a daily computer analysis to see how correlated our positions are. Through bitter experience, I have learned that a mistake in position correlation is the root of some of the most serious problems in trading. If you have eight highly correlated positions, then you are really trading one position that is eight times as large.

On good trades:

The general rule is: The less observed, the better the trade.

What advice would you give the novice trader?

First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.

Besides overtrading, what other mistakes do novice traders typically make?

They personalize the market. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Whenever a trader says, “I wish,” or “I hope,” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.

On being wrong (this passage is from the New York Magazine article):

Marcus would tell another Commodities Corp. alumnus, Jack Schwager, author of Market Wizards, Interviews With Top Traders, that Kovner’s objectivity made him great. “If you can find somebody who is really open to seeing anything, then you have found the raw ingredient of a good trader—and I saw that in Bruce right away.” Weymar told me that one of the most important qualities of a trader is ego strength, the self-confidence that allows a person to acknowledge his mistakes and not fall in love with his ideas. “The biggest risk in trading is hubris.” This is because being wrong is actually an integral part of success. A successful futures trader makes many more losing trades than winning ones. The key is to recognize and concede the mistakes and cut losses. And ride the winners.

Michael Marcus

Who is Michael Marcus?
Michael Marcus previously worked as a trader at Commodities Corporation, an investment management firm that was later acquired by Goldman Sachs. Reportedly, Michael Marcus was able to increase his account 2500-fold from $30,000 to $80 million over a span of 20 years.
Did the thought ever enter your mind that maybe trading was not for you?

No. I had always done well at school, so I figured it was just a question of getting the knack of it. My father, who died when I was fifteen, had left $3,000 in life insurance, which I decided to cash in , despite my mother’s objections.

On the secret to successful trading:

I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that the fundamentals suggest. Third, when news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news. If you can restrict your account activity to only those types of trades, you have to make money, in any market, under any circumstances.

Did these losses have any of the emotional impact of losses in the market? The reason I ask is that you seem to talk about these investment losses very dispassionately.

Yes, it hurt to realize what a fool I had been, but I have learned not to be as attached to material things. I accepted it as a life lesson. I learned that I don’t have to own a house in every beautiful place in the world; I can stay at a hotel and walk on the beach or climb a trail there.

Do you think being a great trader is an innate skill?

I think to be in the upper echelon of successful traders requires an innate skill, a gift. It’s just like being a great violinist. But to be a competent trader and make money is a skill you can learn.

Having been through the whole trading experience from failure to extreme success, what basic advice could you give a beginning trader or a losing trader?

The first thing I would say is always bet less than 5 percent of your money on any one idea. That way you can be wrong more than twenty times; it will take you a long time to lose your money. I would emphasize that the 5 percent applies to one idea. If you take a long position in two different related grain markets, that is still one idea.The next thing I would advise is to always use stops. I mean actually put them in, because that commits you to get out at a certain point.

When you place an order to get into a position, is it accompanied by an order to get out?

You also have to follow your own light. Because I have so many friends who are talented traders, I often have to remind myself that if I try to trade their way, or on their ideas, I am going to lose. Every trader has strengths and weaknesses.

On exiting a position:

That’s right. Another thing is that if a position doesn’t feel right  as soon as you put it on, don’t be embarrassed to change your mind and get right out. f you become unsure about a position, and you don’t know what to do, just get out. You can always come back in. When in doubt, get out and get a good night’s sleep. I’ve done that lots of times and the next day everything was clear.

Do you sometimes go back in right after you get out?

Yes, often the next day. While you are in, you can’t think. When you get out, then you can think clearly again.

What other advice would you give the novice trader?

Perhaps the most important rule is to hold on to your winners and cut your losers. Both are equally important. If you don’t stay with your winners, you are not going to be able to pay for the losers. Both are equally important. If you don’t stay with your winners, you are not going to be able to pay for the losers. You also have to follow your own light. Because I have so many friends who are talented traders, I often have to remind myself that if I try to trade their way, or on their ideas, I am going to lose. Every trader has strengths and weaknesses. Some are good holders of winners, but may hold their losers a little too long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to your own style, you get the good and bad in your own approach. When you try to incorporate someone else’s style, you often wind up with the worst of both styles. I’ve done that a lot. n the final analysis, you need to have the courage to hold the position and take the risk. If it comes down to “I’m in this trade because Bruce is in it,” then you are not going to have the courage to stick with it. So you might as well not be in it in the first place.

I assume that we are talking about very talented traders, and it still doesn’t make a difference. If it is not your own idea, it messes up your trading?

Right. You need to be aware that the world is very sophisticated and always ask yourself: “How many people are left to act on this particular idea?” You have to consider whether the market has already discounted your idea.

What kinds of misconceptions about the markets get people into trouble?

Well, I think the leading cause of financial disablement is the belief that you can rely on the experts to help you. It might, if you know the right expert. For example, if you happen to be Paul Tudor Jones’ barber, and he is talking about the market, it might not be a bad idea to listen. Typically, however, these so-called “experts” are not traders. Your average broker couldn’t be a trader in a million years. More money is lost listening to brokers than any other way. Trading requires an intense personal involvement. You have to do your own homework, and that is what I advise people to do.

Michael Marcus

Who is Michael Marcus?
Michael Marcus previously worked as a trader at Commodities Corporation, an investment management firm that was later acquired by Goldman Sachs. Reportedly, Michael Marcus was able to increase his account 2500-fold from $30,000 to $80 million over a span of 20 years.
Did the thought ever enter your mind that maybe trading was not for you?

No. I had always done well at school, so I figured it was just a question of getting the knack of it. My father, who died when I was fifteen, had left $3,000 in life insurance, which I decided to cash in , despite my mother’s objections.

On the secret to successful trading:

I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that the fundamentals suggest. Third, when news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news. If you can restrict your account activity to only those types of trades, you have to make money, in any market, under any circumstances.

Did these losses have any of the emotional impact of losses in the market? The reason I ask is that you seem to talk about these investment losses very dispassionately.

Yes, it hurt to realize what a fool I had been, but I have learned not to be as attached to material things. I accepted it as a life lesson. I learned that I don’t have to own a house in every beautiful place in the world; I can stay at a hotel and walk on the beach or climb a trail there.

Do you think being a great trader is an innate skill?

I think to be in the upper echelon of successful traders requires an innate skill, a gift. It’s just like being a great violinist. But to be a competent trader and make money is a skill you can learn.

Having been through the whole trading experience from failure to extreme success, what basic advice could you give a beginning trader or a losing trader?

The first thing I would say is always bet less than 5 percent of your money on any one idea. That way you can be wrong more than twenty times; it will take you a long time to lose your money. I would emphasize that the 5 percent applies to one idea. If you take a long position in two different related grain markets, that is still one idea.The next thing I would advise is to always use stops. I mean actually put them in, because that commits you to get out at a certain point.

When you place an order to get into a position, is it accompanied by an order to get out?

You also have to follow your own light. Because I have so many friends who are talented traders, I often have to remind myself that if I try to trade their way, or on their ideas, I am going to lose. Every trader has strengths and weaknesses.

On exiting a position:

That’s right. Another thing is that if a position doesn’t feel right  as soon as you put it on, don’t be embarrassed to change your mind and get right out. f you become unsure about a position, and you don’t know what to do, just get out. You can always come back in. When in doubt, get out and get a good night’s sleep. I’ve done that lots of times and the next day everything was clear.

Do you sometimes go back in right after you get out?

Yes, often the next day. While you are in, you can’t think. When you get out, then you can think clearly again.

What other advice would you give the novice trader?

Perhaps the most important rule is to hold on to your winners and cut your losers. Both are equally important. If you don’t stay with your winners, you are not going to be able to pay for the losers. Both are equally important. If you don’t stay with your winners, you are not going to be able to pay for the losers. You also have to follow your own light. Because I have so many friends who are talented traders, I often have to remind myself that if I try to trade their way, or on their ideas, I am going to lose. Every trader has strengths and weaknesses. Some are good holders of winners, but may hold their losers a little too long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to your own style, you get the good and bad in your own approach. When you try to incorporate someone else’s style, you often wind up with the worst of both styles. I’ve done that a lot. n the final analysis, you need to have the courage to hold the position and take the risk. If it comes down to “I’m in this trade because Bruce is in it,” then you are not going to have the courage to stick with it. So you might as well not be in it in the first place.

I assume that we are talking about very talented traders, and it still doesn’t make a difference. If it is not your own idea, it messes up your trading?

Right. You need to be aware that the world is very sophisticated and always ask yourself: “How many people are left to act on this particular idea?” You have to consider whether the market has already discounted your idea.

What kinds of misconceptions about the markets get people into trouble?

Well, I think the leading cause of financial disablement is the belief that you can rely on the experts to help you. It might, if you know the right expert. For example, if you happen to be Paul Tudor Jones’ barber, and he is talking about the market, it might not be a bad idea to listen. Typically, however, these so-called “experts” are not traders. Your average broker couldn’t be a trader in a million years. More money is lost listening to brokers than any other way. Trading requires an intense personal involvement. You have to do your own homework, and that is what I advise people to do.