Paul Tudor Jones: 4 Ways to Make Money
One of the greatest traders ever is a chap called Paul Tudor Jones (http://en.wikipedia.org/wiki/Paul_Tudor_Jones)
He began his first Hedge Fund in 1980 and made money every year since then for his investors before closing this original fund in 2015. He is a billionaire many times over.
Certainly someone to respect and aspire to as a trader. The clip above was taken during the making of a documentary that was filmed right before the “Black Monday” crash of ’87. Paul and his partner at the time became legends as they correctly called the crash and made an astonishing return in 1 day, indeed tripling their account and that of their clients.
At the 25th anniversary of the crude oil contract on the NYMEX, Paul gave a presentation where he described how he categorizes trading strategies. Here they are with some examples:
1) Specialized knowledge of an Instrument
Stock picking long/short (research analysts)
Floor traders (back in the day tape readers)
Insider trading
2) Arbitrage (take advantage of pricing inefficiencies)
Microstructure (Bid/Ask spreads)
The most notable type here is High Frequency Trading (HFT)
3) Execute at the “Peak of Human Emotions”
For example, value Investors that sell when stocks get overvalued and buy when their fundamentals reflect that they are undervalued and therefore going cheap. Often also looking to invest in distressed companies i.e. BP after the Gulf oil spill. The most famous value investor is of course is Mr. Buffett. As he states: “Be greedy when others are fearful and fearful when others are greedy”
4) Trend (Momentum) Trading
This is my style of trading. Just as Paul has been very good at in his career, I get a great deal of satisfaction from predicting the next trend and getting in at the bottom of each new trend. Some would say market timing is foolish, but Paul and his track record may disagree.
Of course there are trend traders that are day traders, as trends show up in the smallest of timeframes, but that is very difficult to do as there is so much more noise., hence the reason about 95% of people that try to do it fail.
In my opinion, the big money in trading, and I say trading as I do not mean investing, is made by letting your winners run and having small losses when you are wrong. It sure feels good to catch the mega moves that happen several times per year in the ETF’s I trade. It simply means that I make a lot of money while I sit on my hands and do nothing. I believe that one of the traders from the book “Market Wizards” in the 80’s said that the most money he ever made was sitting on his hands! Funny but poignant…
As a conclusion to this post I want to honour Paul’s words in the video above. Managing your risk is key. Although we could argue that the current financial planning industry manages your risk very well…too well perhaps as most people end up dissatisfied as they don’t make ANY money. So risk and reward is a finely tuned balance, but I agree with Paul when he says: You need to spend your time managing your risk rather than thinking about how much money you are going to make. Focus on the risk and the rewards will come.