FM: There are a lot of successful traders, how do you decide who you will include in your books? Are there any set criteria you use for inclusion?
JS: The first two books I was looking for a spectacular story. And there were quite a number of those around at the time. Those were in the days where you had (Michael) Marcus, (Bruce) Kovner and Paul Tudor Jones, and it was early in their careers. They were not very well known yet [and] had these spectacular track records. That is what I was looking for in those early books. Right now I am not so much focused on returns, I am looking at return-to-risk as a guideline. So it could be someone with good returns or somebody who only earns 10% — a fund like BlueCrest, the flagship fund has returned 14% or so since inception, that is good, it is not eye popping. Bt what I consider spectacular is that he did it with a max drawdown under 5%. My focus is really on return-to-risk.
FM: In a sense, did the series evolve along with your knowledge of investing?
JS: I have evolved to where I never look at returns in isolation. The only way I look at returns is with some normalizing risk factor. It is all the more critical in the CTA space where everything can be notionalized. The only measure really is return-to-risk.
FM: Any second thoughts on profiles?
JS: Oh sure, I have made mistakes. But mistakes would not be someone like Richard [Dennis], who subsequently had less successful careers. Dennis started with less than $1,000 and turned it into $200 million, I don’t really care what happened after that point, that is an accomplishment only a handful of people in the world will ever [achieve]. That was the story. However, I did have people in the books who did do well whose returns I thought were not dependent on the bull market. But at the culmination of the bull market, returns disappeared. So, in retrospect their returns where dependent on the bull market. So I am not happy with everyone I picked.
FM: Are there certain qualities that you have noticed successful traders tend to have? What are they?
JS: There are. It is always hard to pick which ones are most important. One that is most often mentioned by traders themselves and is a bit of a cliché is discipline. But it is true, all these successful traders are disciplined. Discipline is absolutely essential. Another one high on the list is extreme flexibility and the ability to change your opinion. The really good traders can be wrong on a trade and not only just get out but also reverse on a dime.
There are all sorts of examples but the classic of all time would be [Stanley] Druckenmiller who on Friday Oct. 16 of 1987 had been short the market and decided [to get out]. At that time he decided the market had gone down enough and covered his entire short position and [went] long, which is probably the worst trading mistake anyone made. And he came out of October ‘87 with only a small loss and the reason is — of course he made money in the first half of the month — he decided over the weekend that he made a mistake and came in Monday morning with the conviction that he was going to get out of his long position, unfortunately for him the market gapped lower so what did he do, he not only covered it at the first instant but turned around and got short. I don’t know of any better story of extreme flexibility.
The single most important thing, even before discipline and flexibility, is that they evolve a trading methodology that fits who they are. You see all sorts of different types of approaches. Take Jim Rogers who believes in fundamentals, who deals with long-term trends, who is really good at calling these long-term trends and staying with them, who doesn’t believe in technical analysis. So for him, a long-term fundamental player, that works well. And then you have somebody like [Ed] Seykota — or any of the other technical guys — that has a completely opposite view, and they don’t want to know the fundamentals, they just want the prices and that works for them. You have to know who you are. You also have to know if you are short-term or long-term, you have to know if you want to be concentrated or diversified, if you want to take a small risk per trader or a wider risk, on and on and on. Every person has a different approached [based on] who they are and if they try and trade something that doesn’t fit [with who they are] they will go off the rails.
FM: How difficult is it to write about alternative investment traders for a general audience more familiar with traditional investments?
JS: It is unique and it is not unique. Trading is a broader scope. I would draw the line between investing and trading. Trading stocks and trading futures overlaps a lot. Take some of the stock guys in the book. They might use fundamentals that don’t apply to futures, but the way they might integrate fundamentals in risk management is just a different way of doing it but in the same spirit as a futures trader.