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.