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“The secret to a happy life is not to have a career or a profession, […] but to have a calling.
“For me, I think everything I’ve done has been a calling — something’s drawn me to it. Rather than me thinking: ‘Gee, I’ve got to go there.’
“And I think that’s a really profound concept. Let life pull you in the direction that just comes naturally, and you’re going to find that perfect intersection of purpose and happiness.”
Paul Tudor Jones — one of the greatest traders in the world, and an original market wizard — explained the above in a Goldman Sachs interview (4:42) from 2018:
I believe Paul’s words are spot on.
They also align to what Robert Greene explains in Mastery: your first step is to discover your life’s task. Then, to simplify his steps, you dedicate yourself to it. You devise a training programme that’ll enable you to not just pursue it, but become great at it.
And looking at Paul’s own background, he’s obviously followed his own advice.
Lesson #1: Follow your curiosity
Paul was a board game fanatic, playing:
Poker
Chess
Parcheesi
Monopoly
Backgammon
He’d play these games for hours and hours, so that, by the time he graduated from university, he had at least a master’s in probability theory.
(He was also extremely competitive, being a welterweight boxing champion at university. This likely helped form his aggressive trading style. More on that later.)
Then, a friend in university suggested he looked at soybean futures — the biggest, most intellectually stimulating game in the world. And that same weekend, Paul came across an article on Richard Dennis (another market wizard).
Paul ultimately achieved an incredible performance: five consecutive years of triple-digit returns in 1985–1989. Or at least, he almost did — he ‘only’ returned 99.2% in 1986.
Lesson #2: Learn to analyse problems expeditiously
Recently, a colleague asked me whether I felt my technical writing experience has helped me as a trader.
I think so. Mainly because, as a technical writer, you learn to identify what’s really important. You take something complex and break it down, aiming to make it as simple as possible. Stripping away the noise is practically a reflex for me now.
Paul takes a similar view to myself, following his time working for his family-owned newspaper while at university.
In the foreword of Reminiscences of a Stock Operator, Paul said:
“Looking back on my education, I would say that journalism was the single most important element of my development as a trader and as a businessman, more so than any of the economics and business classes I took at the University of Virginia.
“Newspaper journalism teaches you how to fact find, analyze, and condense a story down to its most essential points and then to communicate those in a series of paragraphs that read from the most important to the least important. […]
“Learning to report and communicate in this fashion is far and away the best training any businessman, investor, or trader can have.
“It’s a vital yet surprisingly underestimated skill that really enhances one’s ability to be able to frame, analyze, and solve problems in the most expeditious fashion.”
In a 2015 Bloomberg interview, Paul said something similar:
“The single most important thing you need to learn for any job in business is how to communicate. How to write a memo. How to talk. How to think.
“The easiest way to learn how to do that is to take journalism 101. […]
“Today, in business, time is money. And when you’ve got hundreds of decisions to make every week, dozens every day, being able to see, and think, and understand what the issue is — in the first couple of paragraphs — is actually paramount to being efficient at what you do.
“It’s also fantastic at problem-solving, because if you can take the whole issue, distil it down into its most important parts — who, what, where, when, why and how — in the first paragraph, and then the next most important part after that, you’ll be able to:
See the big picture; and
Come up with the answer.”
I often encourage people to write more. By writing about what you want to learn, you gain mental clarity, are better able to connect ideas, and can easily identify knowledge gaps. What’s not to like?
But more specific to technical writing — or indeed newspaper writing — is that you learn to pick out the most important information from a noisy sea. And with practice, you can do this effortlessly and quickly.
This is useful no matter what you pursue. It’s certainly useful for market analysis, whether you’re a macro investor, day trader, or anything in between.
Lesson #3: Take asymmetric risk
When you’re able to analyse situations well, you can find opportunities with asymmetric risk.
Barely a minute into the “Trader” documentary (1:08), featuring Paul, you can see him planning a trade where he’s risking $0.10 to potentially make $8 per contract.
In a more modern example, when Paul interviewed Stanley Druckenmiller (another market wizard), Druckenmiller explained the risk-reward of election night in 2016.
To generalise, where you have two scenarios (either candidate A will win, or candidate B will win):
Scenario A may present no upside and some risk.
Meanwhile, scenario B may present tremendous upside and some risk.
Then clearly, as a trader taking into account macro factors, you set yourself up to profit from scenario B. If it materialises, you win big. If it doesn’t, you lose a little. It makes no sense to position yourself for scenario A, even if you believe it more likely to occur.
To hear the specifics from Druckenmiller himself, click here.
Lesson #4: Size matters
Paul shot to fame following the market crash in October 1987, which he’d been anticipating since mid-1986. This was based on a mapping of the 1925–1928 market against the 1982–1986 market, showing close to a 92.2% correlation (10:46 in “Trader”).
This gave Paul the confidence to size big when the time came.
In Market Wizards, Jack Schwager asked Paul what made him so sure. Paul responded:
“Because the previous Friday was a record volume day on the downside. The exact same thing happened in 1929, two days before the crash. Our analog model to 1929 had the collapse perfectly nailed.”
As Stockbee explained on his blog:
“Not everyone can and should do big bet size. You need lot of conviction to [place] big bets.
“For a trader just starting out, big bet sizes might be the end of the trading adventure.
“But once you have sufficient experience, periodically betting big on a select few high-quality setups is the key to enhancing returns.”
You also see signs of this in Qullamaggie’s streams. Which brings me to the next lesson:
Lesson #5: Know when to trade aggressively
In Market Wizards, Paul’s chapter is titled “The Art of Aggressive Trading”. Being able to size up when required is a clear example of that — but there are others in Paul’s trading.
More generally speaking, when someone speaks of ‘aggressive trading’, they mean in terms of position sizing and overall account exposure.
But there are other areas in trading in which aggressiveness plays a role:
You can enter aggressively, e.g. at 1- or 5-minute ORH.
You can move up your stop loss aggressively.
You can aggressively sell into strength.
To Schwager, Paul said that he gets “right out” of positions moving against him. And considering that he specialises in picking tops and bottoms, while “missing the meat in the middle”, he often re-enters positions:
“Frequently, I may try repeated trades from the long side over a period of weeks in a market which continues to move lower. […]
“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.”
I think this reflective of someone who’s both an aggressive trader, and extremely risk averse. Speaking of which:
Lesson #6: Always think about the downside first
Quoting Paul from “Trader” (34:00):
“Where you want to be, is always in control, never wishing, always trading, and always first and foremost protecting your ass.
“That’s why most people lose money […] — because they’re not focusing on losing money. They need to focus on the money that they have at risk. How much capital is at risk in any single investment they have.
“If everyone spent 90% of their time on that, rather than 90% of their time on ‘pie in the sky’ ideas about how much money they’re going to make, then they’d be incredibly successful investors.”
In Market Wizards, Paul described a memorable — bad — cotton trade in 1979 (aged 25), which left him so depressed that he nearly quit trading. He said to Schwager:
“It was at that point that I said: ‘Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain?’
“That was when I first decided I had to learn discipline and money management. It was a cathartic experience for me, in the sense that I went to the edge, questioned my very ability as a trader, and decided that I was not going to quit.
“I was determined to come back and fight. I decided that I was going to become very disciplined and businesslike about my trading. […]
“[Since then,] I am always thinking about losing money as opposed to making money.”
In fact, aged 22–25, Paul blew up three times, with $10,000, $20,000 and $50,000 accounts. In the Goldman Sachs interview, he described these as “phenomenal learning experiences”.
Paul explained in Reminiscences of a Stock Operator:
“I think it’s no coincidence that our greatest champions, our greatest artists, our greatest leaders, our greatest everything all seem to have experienced some kind of gut-wrenching loss.
“I think their greatness, in part, was fashioned on the crucible of that defeat.
“Two years before Lincoln was elected as maybe our finest president, he lost that monumental Senate race to Stephen Douglas.
“To a certain extent, I think that holds true in my field as well, and I am leery of traders who have never lost it all. I think that intense feeling of desperation that accompanies such a horrifically deflating experience indelibly cauterizes great risk management reflexes into a trader’s very being.”
Of course, risk management and asymmetric risk lie at the core of every market wizard. Without risk management, you won’t last long.
But — referencing earlier lessons — without asymmetric risk, and being able to get aggressive when the action warrants it, you won’t make exceptional returns. That probability theory he learnt from his board game obsession no doubt came in handy here.
Lesson #7: You need emotional control
Risk isn’t the only thing you need to control — you need emotional control, too.
You can’t trade with big size if you lack it, because you won’t be able to be ruthlessly objective about open positions if you lack a clear head. You have to be able to see that the facts have changed, and get out of a position if and when your hypothesis proves incorrect.
Specific to Paul, I think there are two things worth noting:
Schwager remarked in Market Wizards that when placing orders, Paul shouts them with “the ferocity of a drill sergeant”. Having watched the documentary “Trader”, I think that description is spot on. However, this is in sharp contrast to how he speaks in every other setting — very calmly, very sociably. Even when he’s being decimated in the markets. He knows that a lost battle doesn’t mean a lost war.
From “Trader”, Paul clearly focuses on percentages alone — not dollar amounts. To quote 18:58: “After a while, the size means nothing.” A 100% return is a 100% return, whether that’s on $10,000 or $100 million. “It doesn’t make any difference.” He likens this to completing 78% of your passes, which gives you the same thrill whether you’re in the NFL or in primary school.
On point 1, while this ties into Paul’s aggressive trading style again, and reflects his competitive nature, I personally also suspect that this is a tool to help him maintain emotional control — the importance of which he learnt from his mentor, Eli Tullis.
(For the first year, Paul did nothing but get Tullis’s coffees! However, Paul was soaking in everything Tullis was doing — including showing perfect composure while getting decimated in the markets. Paul recounts that experience in “Trader” (39:40).)
In addition, Paul’s flexibility to shift between shouting orders and having perfectly sociable conversations likely reflects his ability to quickly change his mind as the facts change.
Point 2 ties into not making money the priority, but winning. In any case, simply thinking about the percentages ensures consistency no matter account size, and will make trading a far less emotional experience.
Bringing it all together
Paul sees five steps in the trading process (source):
Market/trade analysis
Instrument selection
Risk management
Execution
Sizing
Much of these we’ve already covered today, with a couple of exceptions:
Instrument selection — or, as Marios Stamatoudis put it, “choosing the right vehicle”. Having an idea about where the market is going is all well and good, but how will you execute that idea? To give a basic example, if you think the market is going to drop, will you short $SPY or $TQQQ? This is something too few traders think about. It also links to the next point:
Execution. Your top priority if you’re looking for consistency. I recently interviewed JUNO about this for a base.report blog.
As to Paul’s steps above, I think these provide a good list, no matter your trading style. I also believe the above lessons provide value, regardless of how you trade.
There’s just one more lesson I’d like to finish with:
Lesson #8: Remember there’s more to life than just trading
In his Goldman Sachs interview, Paul explained that despite doing “pretty well” by 1980 (aged 26), making “a couple of million bucks a year” trading his own account, he was feeling very lonely.
His life basically involved trading cotton, which closed at 15:00. He’d then do his homework until about 16:30, then go home and watch Star Trek. He described it as “financially fulfilling, but unfulfilling in every other way”.
Paul set up a fund that would finance the university education of every graduate of a primary school in an economically disadvantaged area of New York. He also personally met his 86 adopted students weekly. In addition, he started the Robin Hood Foundation, a non-profit.
During the Goldman Sachs interview (28:51), Paul said:
“The best part of my professional career has been being involved on the charitable side. When I think of all my best friends, of all the people I hang around with, enjoy the most, spend the most time with, has generally been people I’ve met through some of those endeavours.”
He went on for a bit longer than that, but I think it makes the point. Jeff Sun has made it, too:
“Since 2020, I have been collaborating with my friends to donate 500 meal packets every month with a budget of $1,000, to disadvantaged individuals living in a community home that has been adversely affected by the drop in donations since [the] Covid pandemic.
“[…] this career in trading may lack any meaningful social impact. But as you progress, you will gain the ability to make positive difference on others, in your own terms.” [Emphasis mine.]
Wise words indeed.
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Lessons to take to heart, for sure
good job