I read this book in
year 2013. It was an excellent book that I promised myself I will read it every year. However, time flies and five years later, I am finally free to reread this book.
Well, five years passed... and amazingly, this book still one of the best!!!
One thing I notice...
five years ago, I recorded tons of nice quotes extracted from this book. This time around, the quotes being picked are obviously less. So, it might be a good sign. It is either I improved for the past five years or simply because I gain more knowledge and wisdom via the cruelty of the trading market.
At the same time, when I flip back the
previous post, I notice that my level of appreciation towards this book never reduces. I still think this is one of the best books that traders all over the world need to reread frequently. After all, the variety of traders featured in this book are all elite in their profession. So, this book helps us by revealing tons of different methods towards trading. In another words, we are effectively lectured by the world's most successful traders. However, remember this: pick up something that suits your character!
For a full rating of 10, I have no hesitation to rate this book at 10/10. Five years ago, this book helped to shape into who I am today. This time around, I hope this book will make my trading journey smoother and longer for the next five years. I am convinced that this book will help me achieve this. Loved the book!
Last but not least, some excellent quotes from the book:
Colm O'Shea:
One of the biggest mistakes people made was to join in the bubble, but to do it in positions for which there was no exit. All markets look liquid during the bubble, but it's the liquidity after the bubble ends that matters.
This is what strikes me about really good money managers - they don't get attached to their ideas.
You learn from everyone around you, but you have to do what makes sense for you, even if it's the opposite of what makes sense for other people.
I think the natural way to trade a market that is in the bubble is from the long side, not the short side. You want to be long the exponential upmove without taking on the gap risk of a collapse. Therefore options provide a good way of doing this type of trade.
Perseverance and emotional resilience to keep coming back are critical because as a trader you get beaten up horribly. Frankly, if you don't love it, there are much better things to do with your life. If successful traders were only motivated by the money, you would stop after five years and enjoy the material things.
I use risk guidelines, but I don't believe in rules that way. Traders who are successful over the long run adapt.
Ray Dalio:
By holding uncorrelated assets, I can improve my return/risk ratio by a factor of five through diversification.
For any trading strategy, we can look back at when it won, when it lost and under what circumstances. Each strategy develops a track record that we deeply understand and then combine in a portfolio of diversified strategies. If a strategy is not performing in real time as expected, we can reevaluate it, and if we agree it is desirable, we might modify our systems.
Timeless means that we look at strategy during different times and universal means that we look at how a strategy worked in different countries. There is no reason why a strategy's effectiveness should change in different time periods or when you go from country to country.
There are limits in terms of position size, but not in terms of price.
It is something like the World Trade Center getting knocked down, then yes, we may exercise a discretionary override. In most cases, such discretion would be a matter of reducing risk exposure. I would say probably less than 1% of trades might be affected by discretion.
Larry Benedict:
You always have to manage money for yourself, not your clients. Once you started adjusting your trading to fit what your investors want, you are in trouble.
Scott Ramsey:
Just a simple exercise of measuring which markets were the strongest during a crisis can tell you which markets are likely to be the leaders when the pressure is off.
Ramsey will buy the strongest market in a sector for long positions and sell the weakest market in sector for short positions. Many novice traders make the error of doing the exact opposite. They will buy the laggards in a sector on the typical mistaken assumption that those markets haven't yet made their move and therefore provide more potential and less risk.
Jaffray Woodriff:
The transition to greater diversification also helped improve performance. By 1994, I was trading about 20 markets and I was no longer using market-specific models. These changes made a big difference.
Systems that work well across many markets are more likely to continue to work in actual trading than systems that do well in specific markets.
Edward Thorp:
Suppose you have a bankroll of $1 million and your maximum tolerable drawdown is $200,000; then from the Kelly criterion perspective, you don't have $1 million in capital, you have $200,000. So, you apply the Kelly criterion, but apply to $200,000.
If you bet half the Kelly amount, you get about three-quarters of the return with half of the volatility. So it is much more comfortable to trade. I believe that betting half Kelly is psychological much better.
There is an important distinction between trading and playing blackjack. In blackjack, you can know the precise probabilities. But, in trading, the probability of winning is always an estimate. Moreover, the amount of extra gain forgone by betting less than the Kelly criterion is much smaller than the amount that would be lost by betting more than the Kelly criterion by the same percentage. Given the uncertainty of the probability of winning in trading combined with the inherent asymmetry in returns around the Kelly fraction, it would seem that the rational choice is to always bet less than Kelly criterion, even if you can handle the volatility. In addition, there is the argument that for virtually any investor, the marginal utility of and extra gain is smaller than the marginal utility of an equal percentage loss.
Overbetting is really punishing - you get lower growth rate and much higher variability. Therefore, something like half Kelly is probably a prudent starting point. Then you might increase from there if you are more certain about the probabilities and decrease if you are less sure about the probabilities.
We tracked a correlation matrix that was used to reduce exposures in correlated markets. If two markets were highly correlated, and the technical systems went long one and short the other, that was great. But if it wanted to go long both or short both, we would take a smaller position in each.
My view on trend following was that I could never be sure that I had an edge. So, I wanted to have a safety mechanism. Whereas for a strategy like convertible arbitrage, I had a high degree of confidence as to the payoff probabilities. So reducing exposure on drawdown was unnecessary.
Michael Platt
Systematic trend following strategy is built on market trends and diversification. It doesn't have any economic information.
We want people to scale down if they are getting it wrong and scale up if they are getting it right.
I don't interfere with traders. A trader is either a stand-alone producer or gone. If I start micromanaging a trader's position, it then becomes my position. Why then am I paying him such a large percentage of the incentive fee?
Platt will express a trading theme, say an expectation that interest rate will decrease, by implementing the trade in a way that minimizes risk relative to the same return potential. Thus, Platt will rarely implement directional trade ideas as outright long or short positions. He will be much more likely to use long options or complex spread structures that will provide equivalent return potential, but with theoretically constrained risk.
Steve Clark
I was so inexperienced that didn't have the fear - the fear that cripples people who have been in the business too long. Very few people maintain their ability to take risk throughout their career Most don't. Most can't. They have had too many bad things happen to them, too many fat tails, and it damaged people.
I decided to look at what I did as a trader. Where did I make money? That was the point at which I started to move to event-driving trading.
Price is irrelevant. It is size that kills you. If you are too big in an illiquid stock, there is no way out.
Nearly all the successful traders I have known are on trick ponies. They do one thing, and they do it very well. When they stray from that single focus, it often ends in disaster.
I think deep down inside they know they are one trick ponies, and that one thing could end. But successful traders who are on trick ponies, when that trick stops, they learn another trick. But, some traders will change while their one trick is still working and destroy it.
Martin Taylor
If someone comes to you and says they only invest in risky assets, but guarantee you limited downside volatility, they are either extraordinary geniuses - and there are probably only two of them n the planet - or they are liars.
RSI doesn't work as an overbought indicator because stocks can remain overbought for a very long time. But, a stock being extremely oversold is usually an acute phenomenon that lasts for only a few weeks.
Tom Claugus
If you have a 10 year time horizon, you can make good decisions and make a lot of money. If you have 3 year time horizon, you could probably still do well. But if you have only 3 month time, anything can happen.
Just because you make money doesn't mean you were right, and just because you lost money doesn't mean you were wrong. It is a matter of probabilities. If you take a bet that has an 80% probability of winning, and you lose, it doesn't mean it was a wrong choice.
A good trade follows a good process that will be profitable (at an acceptable risk) if repeated multiple times, although it can lose money on any individual trade. A bad trade follows a process that will lose money if repeated multiple times, but may make money on any individual trade. As an analogous example, a winning slot machine is still a bad bet because if repeated multiple times, it has a high probability of losing money.
Joe Vidich
As the head portfolio manager, I am also the risk manager and have to follow all the positions. He was hired to help me save time, but I was spending more time following his positions, which interfered with following my own positions. Training someone to think like I do about the market, which is more like a stream of consciousness, is very difficult. It is totally different from the way they learn to think in business school.
I try not to sell on the way up; I try to sell on the way down.
When you are undecided between liquidating a losing position and gritting your teeth and riding it out, remember that there is third alternative: partial liquidation.
If you are going to control your losses, there will be time when you will get out just before the market turns around. Get used to it.
Kevin Daly
For managers, the discipline to turn down additional investor assets when they believe it would impede their performance is an important element in longer term success.
