We believe the best way to learn to trade is by backtesting and trial and error, but you can get valuable input from traders who have been successful.
This post is a collection of some of the top motivational trading quotes we have collected during the last 20 years.
The post is a work in progress and we add more quotes from time to time.
The article has trading quotes from the following people:
- Juel Anderson
- Victor Niederhoffer and Tom Wiswell
- Victor Niederhoffer
- Curtis Faith
- Rory Sutherland
- Morgan Housel
- Mark Spitznagel
- Edward Thorp
- Ed Seykota
- Nassim Nicholas Taleb
- Random Quotes
Edwin LeFevre, The Reminiscences of a Stock Operator:
The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day – and you lose more than you should had you not listened to hope to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out – too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.
I came out in fine shape. The newspapers said that Larry Livingston, the Boy Plunger, had made several millions. Well, I was worth over one million after the close of business that day. But my biggest winnings were not in dollars but in the intangibles: I had been right, I had looked ahead and followed a clear cut plan. I had learned what a man must do in order to make big money; I was permanently out of the gambler class; I had at least learned to trade intelligently in a big way. It was a day of days for me.
I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out … Of all speculative blunders there are few greater than trying to average a losing game … Always sell what shows you a loss and keep what shows you a profit … Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocketbook and to the soul.
There is what I call the behaviors of a stock, actions that enable you to judge whether or not it is going to proceed in accordance with the precedents that your observation has noted. If a stock doesn’t act right, then don’t touch it: because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit.
I was playing a system and not a favorite stock or backing opinions. All I knew was the arithmetic of it. As a matter of fact, mine was the ideal way to operate in a bucket shop, where all that a trader does is to bet on fluctuations as they are printed by the ticker on the tape … Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that. I suppose I really manage to remember when and how it happened. The fact that I remember that way is my way of capitalizing experience … Those quotations did not represent prices of stocks to me, so many dollars per share. They were numbers. Of course, they meant something. They were always changing. It was all I had to be interested in – the changes. Why did they change? I didn’t know. I didn’t care. I didn’t think about that. I simply saw that they changed … That is how I first came to be interested in the behaviour of prices.
Juel Anderson:
Juel Anderson was not a trader but a poker player. We wrote a summary of Juel Anderson’s book called Sex, Poker (Trading), and Dying.
Here are some brilliant quotes from Anderson’s book:
Gambling is difficult. In some respects it is the most difficult of all endeavours. To succeed takes an enormous conviction and commitment. Most individuals do not succeed because of the inability to know themselves ….and the inability to control their own actions. In gambling the only asset you have is yourself. The majority of individuals simply do not have the capacity to be able to depend solely on nothing more than themselves. The reasons are many, but the main one is the self developed habits or traits that undermine the very structure you are dependent on … In gambling you set the guidelines and make the rules. In effect, you become God. When you are God it is easy to change the rules. You simply say, ‘Well they do not really apply to me’.
The biggest money burner I’ve ever known is called ”public opinion”.
The saddest epitah you will ever read is this:” Here lies a man who never took a chance….He died anyway.”
You have to do the things you don’t like in order to do some of the things you do like.
It’s luck, but not dumb luck. It takes discipline and some intellect to position yourself on the right side of luck.
Poker is an intensely emotional game. More than any other endeavour, it exposes the different personality traits in individuals. Because the stakes are high and the risk is great, personality and emotions are magnified. (Replace poker with trading.)
Emotions, not logic, move the world.
In the insurance actuarial business, there is God. This God is “The law of big numbers”.
Survival is a form of winning until you can really win.
When the pressure is on, when the situation is critical, the result is the tyranny of our dominant personality trait.
The very worst time to learn anything about yourself or your opponent is when you’re involved in a hand. The information is skewed, prejudical. Too often you will see only what you want to see or what you don’t want to see. If you’re involved, the information you receive and the store will always be emotionally tainted.
As a poker player, you’re always naked and exposed.
You can’t be blind to the risk even when the odds are in your favour.
I could give you 100 other examples of how the game and the winning or losing of it is affected by this mere inch. …It’s not the big things that determine success. It’s the attention to and mastering of the small details that so very often decide success.
Victor Niederhoffer and Tom Wiswell:
The motivational quotes in this section are taken from The Education Of A Speculator, but they are made by both Nierhoffer and Tom Wiswell, a checkers player.
The winner of a match is not always determined by who is right….but in the end….who is left.
A bridge is often the road to victory, or it may save you from defeat. I live near a great bridge, and I always try to have one in my games.
It isn’t only what you know that counts, it’s also what you don’t know; and don’t know that you don’t know.
Before every game say the following: I can defend myself from my opponent, but who will defend me from myself?
The student should concentrate on the weak opening, the strong ones will take care of themselves.
The search for the right move – while you are playing – is helped by the research you have done before playing.
When it comes to playing top games, the champions are workaholics, but it is work they enjoy.
Before you ever push a piece, 90 percent of the work has already been done. The winner is the player who has done his homework.
Don’t try to remember more plays than you can digest. It’s better to know less and understand more.
Indecision is fatal. It’s better to make a wrong decision than build up a habit of indecision.
The difference between victory and defeat is nearly always a single move.
Never let the fear of striking out get in your way.
The true art of playing is not only to make the right move at the right time, but to leave unmade the wrong move at the moment of truth.
I seldom use the word “impossible”; you will see just about everything happen on the board if you play long enough.
Don’t give up what looks like a hopeless game; instead, give up a piece. It may draw – or win. You should not overlook the chance to go a piece down and get a game up.
You are in the greatest danger when your game appears the safest.
The student playing much, suffering much, and studying much; these are the three pillars of learning.
We can play today’s draws and anticipate tomorrow’s wins, but we shouldn’t forget yesterday’s losses.
The losing player who says: “I’ll look it up tomorrow”, very seldom does look it up. Don’t put it off; look it up that day and you’ll be sure to remember it.
After a losing session, begin to prepare for your next game, your next match, your next tournament. Every master loses…and then comes back to win it all.
When is a loss not a loss? When you have learned something new and important.
I suggest you study your great victories a long time, and then study your great defeats twice as long. You may well learn a great deal more from the latter.
The good player is the one who knows he will always have a lot to learn.
In order to win, you should analyze the play, you need to analyze the player, and you must, above all, analyze yourself.
Now and then a patient player will win, mainly on strength of a single virtue. Don’t underrate patience.
It is often the richly talented but lazy player who fails to reach his full potential, while the less gifted, but plodding player, like the tortoise, slowly makes his way up the ladder of success.
Many games are won by players who are smart; many games are lost by players who are too smart.
The master knows exactly the right moment to do nothing.
On the long road to victory, the player who can go that extra mile will probably come up with that extra move that wins the game.
There are players who keep an “open mind” and are ready, when necessary, to change course and improvise, in order to win or draw; then there are others who have a rigid mindset, and plow ahead, regardless of the consequences. The latter philosophy, or lack of philosophy, often leads to defeat.
Victor Niederhoffer:
The quotes are taken from Niederhoffer’s The Education Of A Speculator – a book we strongly recommend:
I can’t show you how to make money by parroting systematic trades. But I can show you something more valuable: a way of thinking that will lead you to greater success.
There are som many ways to lose, but so few ways to win. Perhaps the best way to achieve victory is to master all the rules for disaster and then concentrate on avoiding them.
Some of the features common to most scientific work are: classification, observation, questioning, testing, measuring, collecting information, experimenting, modeling, and revising theories.
I’m aware that it was “unthinkable” to hold a lifeboat drill for the “unsinkable” Titanic. As a reminder, I have a picture of the Titanic in the entrances to all my offices (page viii)
A speculator must think for himself, must follow his own connections, self-trust is the foundation of successful effort. Don’t follow the mentally lazy habit of allowing a newspaper or broker or a wise friend to do our security market thinking.
I have always found it wise to take Wall Street adages, maxims, and advice with a grain of salt. The best way to test taste plausible theories is to quantify, test, and analyze them rigorously (page 19)
If a man didn’t make mistakes, he’d own the whole world in a month (page 20)
During my trading career, I have not had one satisfactory day. (page 22)
The more he talks about his honesty the faster I count my silver (page 27)
Soros once told me once that he lost more money selling short than on any other speculative activity (page 46).
What, then, is the lesson of Delphi? Oracles, forecasts, and prophecies are a business. They should be evaluated with the same skepticism and savvy that would be applied to a used-car dealership or an Oriental rug auction (page 64)
But, as Einstein put it, “if you want to know the essence of the scientific method, don’t listen to what a scientist tells you, watch what he does”. (page 72)
I’m always telling my colleagues they’re gutless – they don’t go for the edge (page 136)
“One thing is for sure. Among the emotionally charged, you will not find one single long-term winner. Where are they? According to Bacon: “These quiet professionals are quite inconspicuous unless you look for them, because there are so many careless gamblers, crazy amateurs, jumping from one crackpot idea to another betting on hope and fear”. I show this passage to any trader in my office who is showing color or palpitation.” (206)
“During the 10 years I traded for George Soros, I never heard him speak about a winning trade. To hear him talk, you’d think he had nothing but losers. Conversely, listening to the biggest losers, you’d think they had nothing but winners.” (95)
“Do not follow the mentally lazy habit of allowing a newspaper or a broker or a wise friend to do our security market thinking.” (114)
“The best opportunities come out of the clear blue.” (129)
“The exchange is a market ecosystem.” (353)
“Oracles, forecasts, and prophecies are a business. They should be evaluated with the same skepticism and savvy that would be applied to a used-car dealership.” (64)
“The only newspaper I read is the National Enquirer. I don’t own a television, don’t follow the news, don’t talk to anyone during the trading day, and don’t like to read books less than 100 years old.” (ix – preface)
“My resistance to conformity has been the bedrock of my speculative persona.” (110)
“An incapability of relying on oneself and faith in others are precisely the conditions that compel brutes to live in herds.” A quote from Niederhoffer’s intellectual hero, Francis Galton (136)
Like most successful people, secure in their trade and stature, I tend to emphasize my losses. The main reason is that it keeps me humble, an essential for success in a field where one false move can lead to irreversible disaster. I’m aware that it was “unthinkable” to hold a lifeboat drill for the “unsinkable” Titanic. As a reminder, I have a picture of the Titanic in the entrances to all my offices…..During my trading career, involving many hundreds of billions of dollars and at least 5 000 days of entering the fray, I have had not one satisfactory day. When I make money, I always want to kick myself for not being more aggressive. On those all-to-frequent occasions when I lose, every dollar hurt.
The professional has no fear of losing because he has no emotional attachment to his money. His bankroll is merely a means of keeping score. Because he is confident that he will succeed in the long run, he is not susceptible to the pressure of failure. The professional will make objective selections regardless of the situation. But adrenaline often interferes.
Curtis Faith
Curtis Faith was one of Richard Dennis’ students in the famous Turtle experiment in the 1980s. Faith later wrote a book: The Way Of The Turtle. This is a very underrated trading book, mainly about trend following strategies.
Here are the best quotes from the book:
The Turtle Way views losses in the same manner: they are the cost of doing business rather than an indication of a trading error or a bad decision.
……In fact, we were taught that periods of losses usually precede periods of good trading (page 37)
The secret of trading and of the Turtles’ success is that you can trade successfully by using ideas and concepts that are well known and have been around for years. But you have to follow those rules consistently (page 39)
Over the years I kept finding evidence that emotional and psychological strength are the most important ingredients in successful trading. (page 44)
Good trading is not about being right, it’s about trading right. If you want to be successful, you need to think of the long run and ignore the outcomes of individual trades (page 44).
….It takes a lot of time and study before one realizes just how simple trading is, but it takes many years of failure before most traders come to grips with how hard it can be to keep things simple and not lose sight of the basics (page 115).
Keep it simple. Simple time tested methods that are well executed will beat fancy complicated methods every time (page 131).
In a similar manner, simple rules make systems more robust because those rules work in a greater variety of circumstances (page 212).
People have a tendency to believe that complicated ideas are better than simple ones….Some of us thought that trading successfully couldn’t possibly be that simple; that there must be something else to it (page 224).
The primary goal of trading should be to stay in the game (page 116).
Luck or random-effects play a large role in the performance of actual traders and actual funds even though the best traders do not like to admit that to their investors (page 159).
They often do not realize how markets go through phases and change over time, often returning to conditions that previously existed….In trading as in life, the young often fail to see the value in studying the history that occurred before they existed (page 193).
The reality is that you don’t know and can’t predict how a system will perform. The best you can do is use tools that provide a sense of the range of potential values and the factors that affect those values (page 196).
There are many successful discretionary traders, but there are far more unsuccessful ones. The biggest reason for this is that the ego is not your friend as a trader. The ego wants to be right, it wants to predict, and it wants to know secrets. The ego makes it much more difficult to trade well by avoiding the cognitive biases that hinder profits (page 224).
One of the ways in which good traders differ from those who are less successful is that they are not afraid to be different (page 235).
Nothing ventured, nothing gained. Risk is your friend (page 236).
Most successful traders use a mechanical trading system…..It makes it easier for a trader to trade consistently because there is a set of rules that specifically define exactly what should be done (page 245).
Rory Sutherland – Alchemy
Rory Sutherland’s Alchemy is not about trading. Nevertheless, the book is brilliant and is strongly recommended:
The human mind doesn’t run on logic any more than a horse runs on petrol.
We discovered that problems almost always have a plethora of seemingly irrational solutions waiting to be discovered, but that nobody is looking for them; everyone is too preoccupied with logic to look anywhere else.
….to reach intelligent answers, you often need to ask really dumb questions.
Human behaviour is an enigma. Learn to crack the code……To avoid stupid mistakes, learn to be slightly silly.
The need to rely on data can also blind you to important facts that lie outside your model.
If this book provides you with nothing else, I hope it gives you permission to suggest slightly silly things from time to time. To fail a little more often. To think unlike an economist.
Being slightly bonkers can be a good negotiating strategy: being rational means you are predictable…..If you are wholly predictable, people learn to hack you.
Like a criminal investigation, what looks neat and logical when viewed with hindsight is usually much messier in real time.
….models of human behaviour devised and promoted by economists and other conventionally rational people are wholly inadequate at predicting human behaviour…….The Wealth of Nations (1776) doesn’t contain a single equation…..there is much more value to be found in understanding how people behave in reality than how they should behave in theory.
Notice that ordinary people are never allowed to pronounce on complex problems. When do you ever hear an immigration officer interviewed about immigration? These people patently know far more about these issues than economists or sociologists, and yet we instead seek wisdom from people with models and theories rather than actual experience.
The trouble with market research is that people don’t think what they feel, they don’t say what they think, and they don’t do what they say.
For a business to be truly customer-focused, it needs to ignore what people say. Instead it needs to concentrate on what people feel.
“Yes, I know it works in practice, but does it work in theory?”
Making a train journey 20 per cent faster might cost hundreds of millions, but making it 20 per cent more enjoyable may cost almost nothing.
If you want to change people’s behaviour, listening to their rational explanation for their behaviour may be misleading, because it isn’t “the real why”. This means that attempting to change behaviour through rational argument may be ineffective, and even counterproductive…..If you confine yourself to using rational arguments to encourage rational behaviour, you will be using only a tiny proportion of the tools in your armoury.
A change in perspective is worth 80 IQ points (Alan Kay)…..an inability to change perspective is equivalent to a loss of intelligence.
To put it crudely, when you multiply bullshit with bullshit, you don’t get a bit more bullshit – you get bullshit squared.
Everyone worries about declining social mobility, rising inequality and the hideous homogeneity of politicians, yet it is possible these have arisen from well-meaning attempts to make the world fairer.
Find one or two things your boss is rubbish at and be quite good at them. Complementary talent is far more valuable than conformist talent.
Usually someone has often already found an answer to your problem – just in a different domain.
Firstly, it doesn’t always pay to be logical if everyone else is also being logical. Logical may be a good way to defend and explain a decision, but it is not always a good way to reach one.
However, most valuable discoveries don’t make sense at first; if they did, somebody would have discovered them already. And ideas which people hate may be more powerful than those that people like, the popular and obvious ideas having all been tried already. We should test counterintuitive things – because no one else will.
The more data you have, the easier it is to find support for some spurious, self-serving narrative. The profusion of data in future will not settle arguments: it will make them worse.
…all i can rely on here for evidence is a recurrent pattern of events – it is surprisingly common for significant innovations to emerge from the removal of features rather than the addition.
Trust grows at the speed of a coconut tree, and falls at the speed of a coconut.
Heuristics look second-best to people who think all decisions should be optimal. In a world where satisficing is necessary, they are often not only the easiest option but the best.
Habit, which can often appear irrational, is perfectly sensible if your purpose is to avoid unpleasant surprises.
Blame, unlike credit, always finds a home.
Defensive decision making – making a decision which is unconsciously designed not to maximise welfare overall but to minimise the damage to the decision maker in the event of a negative outcome.
….in reality, all valuable information starts with very little data – the lookout on the Titanic only had one data point.
Conventional wisdom about human decision-making has always held that our attitudes drive our behaviour, but evidence strongly suggests that the process mostly works in reverse: the behaviours we adopt shape our attitudes.
Remember, if you never do anything differently, you’ll reduce your chances of enjoying lucky accidents.
Morgan Housel:
Morgan Housel’s The Psychology of Money is a brilliant book about personal finance. It’s a short read, but enjoyable:
When things are going extremely well, realize it’s not as good as you think. You are not invincible, and if you acknowledge that luck brought you success then you have to believe in luck’s cousin, risk, which can turn your story around just as quickly.
The real key to his success is that he’s been a phenomenal investor for three-quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him….His skill is investing, but his secret is time. (About Warren Buffett)
But there is only one way to stay wealthy: some combination of frugality and paranoia….Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast.
But you need short-term paranoia to keep you alive long enough to exploit long-term optimism.
A lot of things in business and investing work this way. Long tails – the farthest ends of a distribution of outcomes – have tremendous influence in finance, where a small number of events can account for the majority of outcomes….Anything that is huge, profitable, famous, or influential is the result of tail event.
There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard to predict ways.
…progress happens too slowly to notice, but setbacks happen too quickly to ignore….There are lots of overnight tragedies. There are rarely overnight miracles.
Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.
The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.
Everyone has an incomplete view of the world. But we form a complete narrative to fill the gaps.
Think about market forecasts. We’re very, very bad at them. I once calculated that if you just assume that the market goes up every year by its historic average, your accuracy is better than if you follow the average annual forecasts of the top 20 market strategists from large Wall Street banks.
Risk is what’s left over when you think you’ve thought of everything.
I can’t tell you what to do with your money, because I don’t know you.
If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.
Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals. Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.
You should like risk because it pays off over time. But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time.
Charlie Munger put it well: the first rule of compounding is to never interrupt it unnecessarily.
One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results.
My investing strategy doesn’t rely on picking the right sector or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades. I spend virtually all of my investing effort thinking about those three things – especially the first two, which I can control.
Edward Thorp:
Ed Thorp is most famous for beating Blackjack. His book Beat The Dealer has sold millions of copies, but his track record in quantitative is much more impressive:
His hedge fund compounded at 19.1% from 1969 to 1988, almost more than double that of the S&P 500, with significantly less drawdowns!
Ed Thorp is a guy well worth listening to, not to mention reading. We recommend A Man For All Markets.
Here are Thorp’s most interesting quotes:
From Nassim Taleb’s foreword:
True success is exiting some rat race to modulate one’s activities for peace of mind.
Thorp’s contributions are vastly more momentous than he reveals. Why? Because of their simplicity. Their sheer simplicity.
The context is as follows. Ed Thorp is the first modern mathematician who successfully used quantitative methods for risk-taking – and most certainly the first mathematician who met financial success doing it.
When you reincarnate as a practitioner, you want the mountain to give birth to the simplest possible strategy, and one that has the smallest number of side effects, the minimum possible hidden complications.
Now money management – something central for those who learn from being exposed to their own profits and losses. Having an edge and surviving are two different things. The first requires the second. As Warren Buffet said: in order to succeed you must first survive. You need to avoid ruin. At all costs.
True success is exiting some rat race to modulate one’s activities for peace of mind.
From Ed Thorp:
A trait that showed up about this time was my tendency not to accept anything I was told until I had checked it for myself. ….From the beginning, I loved learning through experimentation and exploration how my world worked.
For the rest of my life I would meet Depression-era survivors who retained a compulsive, often irrational, frugality and an economically inefficient tendency to hoard.
Understanding and dealing correctly with the trade-off between risk and return is fundamental, but poorly understood, challenge faced by all gamblers and investors.
Chance can be thought of as the card you are dealt in life. Choice is how you play them. I chose to investigate blackjack. As a result, chance offered me a new set of unexpected opportunities.
This plan, of betting only at a level in which I was emotionally comfortable and not advancing until I was ready, enabled me to play my system with calm and disciplined accuracy. This lesson from the blackjack tables would prove invaluable throughout my investment lifetime as the stakes grew ever larger.
Many were good and some would go on to make their living from blackjack, but for the majority the effort and persistence required to practice card counting, the restraint and discipline needed, to say nothing of the temperament, were obstacles to success.
Betting too much, even when though each individual bet is in your favor, can be ruinous…..On the other hand, playing safe and betting too little means you leave money on the table. The psychological makeup to succeed at investing also has similarities to that for gambling. Great investors are often good at both.
Once again, just as with casino games, I was surprised and encouraged by how little was known by so many. And just as blackjack, my first investment was a loss that contributed to my learning.
I had no idea when to sell. I decided to hang on until the stock returned to my original purchase price, so as not to take a loss. This is exactly what gamblers do when they are losing and insist on playing until they get even.
As I would learn, most stock-picking stories, advice, and recommendations are completely worthless.
I learned from this that even though I was right in my economic analysis I hadn’t properly evaluated the risk of too much leverage.
There is another kind of risk on Wall Street from which computers and formulas can’t protect you. That’s the danger of being swindled or defrauded.
Portfolio insurance was designed to protect investors from large market declines. Ironically, the cure became the cause. (the crash of 1987)
As Princeton Newport Partners closed I reflected on the proposition that what matters in life is how you spend your time.
Heller said he had something the rich man could never have….”The knowledge that I’ve got enough.”
Then again, people tend to make the error of seeing patterns or explanations when there aren’t any, as we’ve seen from the history of gambling systems, the plethora of worthless pattern-based methods, and much of story-based investing.
The consensus of industry studies of hedge fund returns to investors seems to be that, considering the level of risk, hedge funds on average once gave their investors extra return, but this has faded as the industry expanded. Later analyses say average results are worse than portrayed.
It’s difficult to get an edge picking stocks. Hedge funds are little businesses just like companies that trade on the exchanges. Should one be any better at picking hedge funds than we are at picking stocks?
You need to know enough to make a convincing, reasoned case for why your proposed investment is better than standard passive investments such as stock or bond index funds. Using this test, it is likely you will rarely find investments that qualify as superior to the indexes.
In fact, hedge funds frequently start out small and build spectacular records, later turning ordinary as they grow.
…the point being that hedge fund investors don’t have much protection and that the most important single thing to check before investing is the honesty, ethics, and character of the operators.
I apply this to the trade-offs among health, wealth, and time. You can trade time and health to accumulate more wealth. Why health? You may be stressed, lose sleep, have a poor diet, or skip exercise. If you are like me and want better health, you can invest time and money on medical care, diagnostic and preventive measures, and exercise and fitness.
In my experience, superior stock-picking ability is rare, which means almost everyone should make the switch. (to passive investing)
The threat to a buy-and-hold program is the investor himself. Following his stocks and listening to stories and advice about them can lead to trading actively, producing on average the inferior results about which I’ve warned. Buying an index avoids this trap.
The EMH is a theory that can never be logically proven. All you can argue is that it is a good or not-so-good description of reality. However, it can be disproven merely by providing examples where it fails, and the more numerous and substantive the examples, the more poorly it describes reality.
Be a disciplined rational investor. Follow logic and analysis rather than sales pitches, whims, or emotion. Assume you may have an edge only when you can make a rational affirmative case that withstands your attempts to tear it down. Don’t gamble unless you are highly confident you have an edge.
Be aware that information flows down a “food chain”, with those who get it first “eating” and those who get it late being eaten.
Thorp on dividend investing:
Curiously, he thinks he can only spend income, in the form of dividends and interest, and he views capital appreciation as something less real. I tried, and failed, to convince him that a higher total return (after tax) means more money to spend and more money to keep, no matter how it divides between realized income and unrealized capital gains or losses. To own a stock like Berkshire Hathaway, which has never paid a dividend, and therefore produces no “income”, would be unthinkable for him. This investor’s costly preference for realized income rather than total return (economic income) is common.
In recent years, especially in a crisis, world markets, reflecting the increasing globalization of information through technology, have tended to move much more in tandem with the US market, limiting the amount by which diversification overseas reduces risk.
Because you can’t get out in time when trouble is coming, the excess returns you expect from illiquid investments may be offset by the economic impact of unforeseen future events.
Assume that the worst imaginable outcome will occur and ask whether you can tolerate it. If the answer is no, then reduce your borrowing.
On betting size:
William Poundstone points out that for a favorable bet that pays odds of $A for a bet of $1, the optimal Kelly bet is the percent of your capital equal to your edge, divided by the odds, A. In blackjack, the typical favorable edge was usually between 1 and 5 percent and the odds, or payoff per dollar bet, averaged a little more than 1. So, following the criterion when the card count was good, I bet a percentage of my bankroll that was a little less than my percent advantage. Kelly’s criterion is not limited to two-value payoffs but applies generally to any gambling or investing situation in which the probabilities are known or can be estimated.
As I pointed out in the Wilmott magazine, Warren Buffett’s thinking is consistent with the Kelly Criterion.
What if you want the payouts to continue “forever” as you might for an endowment? Computer simulations showed me that with the best long-term investments, such as stocks and commercial real estate, annual future spending should be limited to the inflation-adjusted level of 2 percent of the original gift. This surprisingly conservative figure assumes that future investment results will be similar in risk and return to US historical experience. In that case, the chance that the endowment is never exhausted turns out to be 96 percent……The 2 percent spending limit is so low because, if the fund is sharply reduced in its early years by a severe market decline, a higher spending requirement might wipe out.
Again, an investment in corporate bonds more than doubled on average over this period and long-term US government bonds almost did so, showing that diversification into asset classes other than equities, though possibly sacrificing long-term return, can preserve wealth in bad times.
Making a profit is trickier. Like a Ponzi scheme, it’s not easy to tell when it will end. If you bet against it too early you can be ruined in the short run even though you are right in the long run. As Keynes said, the market can remain irrational longer than you can remain solvent.
Education builds software for your brain. When you’re born, think of yourself as a computer with a basic operating system and not much else…..Even more valuable, I learned at an early age to teach myself. This paid off later on because there weren’t any courses in how to beat blackjack, build a computer roulette, or launch a market-neutral hedge fund.
Most of what I’ve learned from gambling also is true for investing. People mostly don’t understand risk, reward, and uncertainty.
Simplistically, there are two types of rich, those who use government to tilt the playing field in their favor and those who don’t….Another theme for dealing with public policy issues is to simplify rules, regulations, and laws. Get the government out of the business of micromanaging.
As Benjamin Franklin famously said: “Time is the stuff life is made of,” and how you spend it makes all the difference.
Ed Seykota:
Ed Seykota’s trend-following strategies are well known. Presumably, he has a fantastic track record and might be worth listening to:
If you can’t measure it, you probably can’t manage it… Things you measure tend to improve.
I feel my success comes from my love of the markets. I’m not a casual trader. It’s my life. I have a passion for trading. It’s 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.
In general, higher-frequency trading succumbs to declining profit potential against non-declining transaction costs.
I’m a self-taught trader who is continually studying both myself and other traders.
Gut feel is important. If ignored, it may come out in subtle ways by coloring your logic. It can be dealt with through meditation and reflection to determine what’s behind it. If it persists, then it might be a valuable subconscious analysis of some subtle information.
The average trader should find a superior trader to do his trading for him, and then go find something he really loves to do.
The markets are the same now as they were five to ten years ago because they keep changing – just like they did then.
Our work is not so much to treat or to cure feelings, as to accept and celebrate them. This is a critical difference.
About having a bigger account:
It becomes more difficult because it is harder to move large positions without moving the market. It becomes easier because you have more access to competent people to support you.
I keep track of a lot of outside advisers, mostly by reading the business press or hearing from my brokers. The services usually break even, except when they start to gloat, then they are likely headed for trouble.
I usually ignore advice from other traders, especially the ones who believe they are on to a “sure thing”. The old-timers, who talk about “maybe there is a chance of so and so”, are often right and early.
I sometimes get most confident of my ability just before a major losing streak.
The stock market behaves differently from all other markets and it also behaves differently from the stock market. If this si hard to understand, it is because trying to understand the markets is a bit futile….A lot of people would rather understand the market than make money.
Great traders are ones who are absorbed by the talent. They don’t have the talent – the talent has them.
I think most good traders have a little extra spark about trading.
My personal life is integrated with my trading life.
Having a quote machine is like having a slot machine on your desk – you end up feeding it all day long. I get my price data after the close each day.
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.
Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money. I think success has to do with finding and following one’s calling regardless of financial gain.
Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.
I still go through periods of thinking I can outperform my own system, but such excursions are often self-correcting through the process of losing money.
My biggest slip-ups occurred shortly after I got emotionally involved with positions.
When you stop trying to please others and concentrate on pleasing yourself, you gradually become aware of what you are passionate about in life.
The biggest secret about success is that there isn’t any big secret about it, or if there is, then it’s a secret from me, too. The idea of searching for some secret for trading success misses the point.
To avoid whipsaw losses, stop trading.
Here’s the essence of risk management: Risk no more than you can afford to lose, and also risk enough so that a win is meaningful. If there is no such amount, don’t play.
Markets are fundamentally volatile. No way around it. Your problem is not in the math. There is no math to get you out of having to experience uncertainty.
It can be very expensive to try to convince the markets you are right.
Life is too dynamic to remain static.
Curiosity is the answer, not degrees.
Losing a position is aggravating, whereas losing your nerve is devastating.
The positive intention of fear is risk control.
Dramatic and emotional trading experiences tend to be negative. Pride is a great banana peel, as are hope, fear, and greed. My biggest slip-ups occurred shortly after I got emotionally involved with positions.
I don’t judge success, I celebrate it. I think success has to do with finding and following one’s calling regardless of financial gain.
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, you might have valuable “surprise-a-mentals.
Trading requires skill at reading the markets and at managing your own anxieties.
Mark Spitznagel:
Mark Spitznagel wrote a readable book called Safe Haven Investing:
From the foreword of Nassim Nicholas Taleb:
Never underestimate people’s need to look good in the eyes of others.
People’s only excuse for using these models is that other people are using these models.
The Nobel-decorated academics proved in a single month, the fakeness of their model (about the book When Genious Failed)
…it is OPM (other people’s money) they are risking while the returns are theirs – again, absence of skin in the game
Steady returns come along with hiding tail risks.
Random quotes:
The winning strategies to be given in this book depend largely on the fact that as the composition of a deck changes during play, the advantage in blackjack will shift back and forth between the player and the casino. The advantage often ranges between 10% for one side or the other and on occasions even reaches 100% … With the advance in computer technology and mathematical theory, we can expect dramatic progress in predicting the outcome.
– Ed Thorp, Beat The Dealer
The greatest gambling game on earth is the one played daily through the brokerage houses across the country. The similarity between casinos and a brokerage house is striking … The stock exchanges and the ticker tape are the gambling devices … The commissions respond to the house percentage. The board rooms are the casinos themselves … To a good first approximation, stocks show the same mathematical characteristics of randomness that are shown by the chance devices in the gaming houses. But a number of patterns are now being discovered.
– Ed Thorp, Beat The Dealer
Let’s change the subject and look at the stock market. One bit of advice that is constantly given is to diversify. ‘Don’t put all your eggs in one basket.’ Diversification will allow one to do as well as the public in general. The expert trader will carefully study the market and select at most a varied number of stocks (markets) and then invest heavily in them. If there are no stocks currently meeting the trader’s standards, he just won’t buy any at that moment … In addition … the investor is willing to do a lot of reevaluating. This means he is willing to buy and sell quickly if a profit or loss materializes.
– Mason Malmuth, Gambling Theory and Other Topics
The essence of war is rapidity, that is, taking advantage of others who are not ready.
– Sun Tzu,The Art of War
It is a dangerously addictive habit which involves an appeal for fortune, is often accompanied by delusional behaviour and is dependent for success on the control of emotions.
Bernard Baruch
The ABC of Stock Speculation definerer Samuel Nelson spekulasjon slik:
A venture is based on calculation, a speculator assumes risks and responds accordingly.
– Samuel Nelson, The ABC of Stock Speculation
The speculator is not an investor. His object is not to ensure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in.
– Edwin LeFevre, The Reminiscences of a Stock Operator
Stocks do not sell for what they are worth, but for what people think they are worth.
– Garfield Drew
There is a stark parallel between an alcoholic and a trader whose account is being demolished by losses. He keeps changing trading tactics, acting like an alcoholic who tries to solve his problem by switching from hard liquor to beer. A loser denies that he has lost control over his course in the market.
Profits make traders feel powerful and give them an emotional high. They try to get high again, put on reckless trades, and give back their profits. Most traders cannot stand the pain of a string of severe losses. They die as traders after hitting rock bottom and wash out of the markets. The few survivors realize that the main trouble is not with their methods, the trouble is with their thinking. They can change and become successful traders.
– Alexander Elder, Trading For A Living
Show me a great trader and I will show you someone who understands gambling.
– Marty Schwartz, Pit Bull
How could you begin to understand the dynamics of group behaviour well enough to extract money from the group … if you don’t understand the inner forces that affect your own?
- Mark Douglas, The Disciplined Trader
There are no certainties in this investment world, and where there are no certainties, you should begin by understanding yourself.
– Jim Fraser
The biggest risk is not taking one
- Bertrand Russel
The big risk, in fact, would be in not getting the potential big profit. There’s the risk of the trade! …We can’t control the markets, but we can absolutely control our own risk, and you know, that’s the first thing a successful trader has to address.
Charles LeBeau
The collective ‘mind’ of the public imagines that if it could only once find the ‘combination’ for beating the races, it would be all set for life. The public wants to hit on some simple key, shown by numbers in the past performances, and use this key to get richer and richer as racing goes on. The public believes that if it could only once find that past performance key, its troubles would be over … Few players take into consideration the principle of ever-changing cycles of results, although the minor ups and downs of this principle can be seen at every long race meeting. The would-be professional player must always understand that the form moves away from the public knowledge.
– Robert L. Bacon, The Secrets of Professional Turf Betting
«Most people like to think of themselves as risk takers, but what they really want is a guaranteed outcome with some momentary suspense to make them feel as if the outcome had been in doubt.»
– Mark Douglas, The Disciplined Trader
«Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.»
- Calvin Coolidge
