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==== Do you believe your scaling type of approach in entering and exiting positions is an essential element
in your overall trading success? ====
I think it has enabled me to stay with long-term winners much longer than I’ve seen most traders stay
with their positions. I don’t have a problem letting my profits run, which many traders do. You have to be
able to let your profits run. I don’t think you can consistently be a winning trader if you’re banking on being
right more than 50 percent of the time. You have to figure out how to make money being right only 20 to 30
percent of the time.

==== Did you feel out of place? ====
I felt very much out of place. I was in an artillery unit. Each hour we received weather reports, which we
were supposed to use to derive a composite adjustment factor. We filled out a form specifying the wind .
direction and velocity, air density, temperature, rotation of the earth, ; and other factors and performed a
mathematical process to derive a net t factor. Every time the weather report came in, it became a game to
see Is who could derive this factor most quickly. Before I was there, the speed & record was nineteen
seconds. On my second day there, I broke the record, and I eventually got the time down to nine seconds. I
thought this was great fun. Little did I realize that I was making enemies by the truckload.
The people who were there preferred the new guys being ignorant so that they could have the feeling of
helping to bring them along. Here I was, a new guy, a college kid, doing things better and faster than they
were. I also got three promotions in my first four months, which was unheard of in the marines. All of this
didn’t go over too well. It took me a while, but I finally realized that being a college hotshot was doing me a
lot more harm than good. I made an effort to blend in better, with modest success.

==== I’ve always been puzzled by the multitude of banks in the United States and worldwide that have
large rooms filled with traders. How can all these trading operations make money? Trading is just not that
easy. I’ve been involved in the markets for nearly twenty years and know that the vast majority of traders
lose money. How are the banks able to find all these young trainees who make money as traders? ====
There have been a lot of studies done on that question. A couple of years ago, I read a study on the
trading operations of Citibank, which is the largest and probably the most profitable cuirency trading bank in
the world. They usually make about $300 million to $400 million a year in their trading operations. There is
always some debate as to how they make that kind of money. Some people argue that Citibank has such a
franchise in currency trading that many of the marginal traders and hedgers in the currency market
immediately think of Citibank when they need to do a transaction-and Citibank can earn a wide spread on
those unsophisticated trades. Also, Citibank has operations in many countries that don’t have their own
central bank. In these countries, much or even all of the foreign currency transactions go through Citibank.
The study concluded that if Citibank traded only for the bid/ask spread and never took any position trades,
they probably would make $600 million a year.

==== When you’re interviewing someone for a job as a trader, how do you determine whether they have
that type of commitment? ====
Sometimes it’s obvious. For example, in an interview someone might ask you, “What time do I have to
come to work in the morning?” In my opinion that’s a very bizarre question. Come in whatever time you
believe is appropriate. “How late do I have to stay in the afternoon?” Leave whenever you want. I’m not
going to tell someone when to come in and when to leave.
==== Besides intelligence and extreme commitment, are there any other qualities that you believe are
important to excel as a trader? ====
Courage. It’s not enough to simply have the insight to see something apart from the rest of the crowd,
you also need to have the courage to act on it and to stay with it. It’s very difficult to be different from the
rest of the crowd the majority of the time, which by definition is what you’re doing if you’re a successful
trader.
Many people think that trading can be reduced to a few rules. Always do this or always do that. To me,
trading isn’t about always at all; it is about each situation.
So many people want the positive rewards of being a successful trader without being willing to go through
the commitment and pain. And there’s a lot of pain.

Sometimes the reason people lose is that they’re not sufficiently selective. Upon analysis, a trader may
find that if he only concentrates on the trades that do well and lets go of the other types of trades, he might
actually be successful. However, if a trader analyzes his trades and still can’t make money, then he probably
should try another endeavor.
What is the first rule of trading? I would argue that before anything else, the prospective trader must find
the approach that he or she is comfortable with-that is, the approach that suits the trader’s personality.
McKay cites this quality as the single most important element separating winners from losers, Each trader
must select the appropriate market arena, choose between system trading and discretionary trading,
fundamental and technical methods, position trading and spread trading, short-term and long-term horizons,
aggressive and conservative approaches, and so on. For all of these opposing choices, one alternative will suit
the trader’s personality, while the other will lead to internal conflict.
Karl Popper has championed the idea that all progress in knowledge results from efforts to falsify not to
confirm, our theories. Whether or not this hypothesis is true in general, it’s certainly the right attitude to
bring to trading research. You have to try your best to disprove your results. You have to try to kill your little
creation. Try to think of everything that could be wrong with your system, and everything that’s suspicious
about it. If you challenge your system by sincerely trying to disprove it, then maybe, just maybe, it’s valid.

My instinct was to not trade, but I had other concerns. I take the point of view
that missing an important trade is a much more serious error than making a bad trade. In any worthwhile
system, you have all kinds of backups to protect you (that is, to assure that you get out) when you take a
bad trade. On the other hand, typically, if you miss a good trade, you have nothing to protect you-that is,
nothing in the system will assure that you eventually get in. Also, missing a good trade can be demoralizing
and destabilizing, especially if you’ve been in the midst of a losing period. And like so many bad trading
decisions, it ends up costing you more than just the money lost or not made on the trade. Missing a major
trade tends to have a reverberating effect throughout your whole trading strategy. Sometimes it can be
weeks before you get back on track. For all these reasons, I felt that it was inappropriate to not trade.

==== Of course, you can’t actually prove that price behavior is random. ====
That’s right. You’re up against the problem of trying to prove a negative proposition. Although the
contention that the markets are random is an affirmative proposition, in fact you’re trying to prove a
negative. You’re trying to prove that there’s no systematic component in the price. Any negative proposition
is very difficult to confirm because you’re trying to prove that something doesn’t exist. For example, consider
the negative proposition that there are no chocolate cakes orbiting Jupiter. That may be true, but it’s very
hard to prove.
The random walk theory has the disadvantage of being a negative proposition. Nevertheless, in the
absence of any evidence to the contrary, it might be a plausible theory to maintain. At this point, however, I
think there is enough contrary evidence so that any academic who still espouses the idea that the markets
are random is not looking at the realities.

==== Is there anything unique about your approach to money management? ====
One drawback to many money management schemes is that they are wedded to the assumption of a
logarithmic utility function. Essentially, this model assumes that the increase in people’s utility for additional
wealth remains constant for equal percentage increases in wealth. The problem with this model is that it is
unbounded; eventually it will tell you to bet the ranch.
There is a technical objection to unbounded utility functions, which is known as the St. Petersburg
Paradox. I can give the thrust of it with a simplified example. Suppose you have a billion dollars. If your
utility function is unbounded, there has to be an amount of money that would have such large utility that
you’d be willing to flip a coin for it against your entire billion-dollar net worth. There’s no amount of moneyalthough
there may be nonmonetary considerations (perhaps an extra hundred years of life)-for which a sane
person would gamble away a billion-dollar net worth on the flip of a coin. Therefore, there must be something
wrong with unbounded utility functions.
We use only bounded utility functions in our work on risk management. The particular utility functions we
use also have the desirable technical characteristic of optimal investment fractions being independent of
absolute wealth level.

==== Can you expand on what you consider the normal human habits that lead to losing? ====
Decision theorists have performed experiments in which people are given various choices between sure
things (amounts of money) and simple lotteries in order to see if the subjects’ preferences are rationally
ordered. They find that people will generally choose a sure gain over a lottery with a higher expected gain but
that they will shun a sure loss in favor of an even worse lottery (as long as the lottery gives them a chance of
coming out ahead). These evidently instinctive human tendencies spell doom for the trader-take your profits,
but play with your losses.
This attitude is also culturally reinforced, as exemplified by the advice: Seize opportunities, but hold your
ground in adversity. Better advice to the trader would be: Watch idly while profit-taking opportunities arise,
but in adversity run like ajackrabbit.
One common adage on this subject mat is completely wrongheaded is: You can’t go broke taking profits.
That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals
go broke by taking small profits. The problem in a nutshell is that human nature does not operate to
maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning
trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the
least important performance statistic and may even be inversely related to performance.

==== Are there any other natural human tendencies that you think tend to sabotage success in trading?
====
There is what I refer to as “the call of the countertrend.” There’s a constellation of cognitive and emotional
factors that makes people automatically countertrend in their approach. People want to buy cheap and sell
dear; this by itself makes them countertrend. But the notion of cheapness or deamess must be anchored to
something. People tend to view the prices they’re used to as normal and prices removed from these levels as
aberrant. This perspective leads people to trade counter to an emerging trend on the assumption that prices
will eventually return to “normal.” Therein lies the path to disaster.

==== Having seen people who have survived as traders and those who haven’t, what do you think are the
characteristics that differentiate these two groups? ====
The people who survive avoid snowball scenarios in which bad trades cause them to become emotionally
destabilized and make more bad trades. They are also able to feel the pain of losing. If you don’t feel me pain
of a loss, then you’re in the same position as those unfortunate people who have no pain sensors. If they
leave their hand on a hot stove, it will bum off. There is no way to survive in this world without pain.
Similarly, in the markets, if the losses don’t hurt, your financial survival is tenuous.
I know of a few multimillionaires who started trading with inherited wealth. In each case, they lost it all
because they didn’t feel the pain when they were losing. In those formative first few years of trading, they
felt they could afford to lose. You’re much better off going into the market on a shoestring, feeling that you
can’t afford to lose. I’d rather bet on somebody starting out with a few thousand dollars than on somebody
who came in with millions.

==== Do you find it difficult to deal with the emotional impact of large losses? ====
In many ways, large profits are even more insidious than large losses in terms of emotional
destabilization. I think it’s important not to be emotionally attached to large profits. I’ve certainly made some
of my worst trades after long periods of winning. When you’re on a big winning streak, there’s a temptation
to think that you’re doing something special, which will allow you to continue to propel yourself upward. You
start to think that you can afford to make shoddy decisions. You can imagine what happens next. As a
general rule, losses make you strong and profits make you weak.

==== What advice do you have for dealing with the emotional pitfalls inherent in trading? ====
Some people are good at not expending emotional energy on situations over which they have no control.
(I am not one of them.) An old trader once told me: “Don’t think about what the market’s going to do; you
have absolutely no control over that. Think about what you’re going to do if it gets there.”
In particular, you should spend no time at all thinking about those roseate scenarios in which the market
goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things
you want least to happen and on what your response should be.

==== Is it meaningfully tougher to lose 4 percent when you are trading $100 million than when you’re
trading $1 million? ====
It is tougher. Dollars have a lot to do with it, too. There are plenty of traders I know who show track
records with an amazing cumulative winning percentage. I’ve seen situations where they might be up 1,000
percent over a five-year period, but if you examine their track record in terms of net dollars made or lost,
you discover they are actually down.
==== Because they made the large percentage returns with small capital and then lost money when they
were managing large sums? ====
Exactly. I’m not in the business of picking CTAs. But if I were, one of the first screens I would use would
be a person’s total dollar profit- how many dollars did the CTA pull out of the market. If that number were
negative, I would eliminate the CTA from consideration, regardless of the percentage return.

==== Are there any technical indicators in the public domain that you find useful? ====
Moving averages are useful. They’ll work if you watch your risk management. I believe you can make an
above-average return by using moving averages, if you’re smart about it.
==== Any indicators that yon consider overrated? ====
Most of the common ones: Fibonacci retracements, Gann angles, RSI, and stochastics. I haven’t found
anything there for any of these indicators.

==== So you believe in streaks? ====
Yes, not just in trading, but in most things in life. If a team has won eight games in a row, you don’t bet
against mem winning their ninth game.
==== Are there trading errors that you’ve learned to avoid? ====
In general, I don’t like placing stops. If you’re a big player, you really have to be careful about putting
stops into the market.

==== What you’re saying is that not all confident people are going to be good traders. However, are nearly
all good traders confident? ====
Yes, I would think that virtually all good traders are probably confident in their trading ability.
==== Do you remember when you really became confident as a trader? Is there some transition point that
you can recall? ====
I guess by the time I decided to go off on my own I was fairly confident. I knew I had to make money just
to pay my rent.
==== Was that confidence derived from the consistency of your retnrns? ====
Yes, I knew I was. getting statistically significant results.

==== You come from an academic background and even did your thesis on a subject related to the
markets. I’m sure you’re quite aware that most of the academic community still holds to the efficient market
hypothesis. Obviously, what you’re doing couldn’t be done if that theory were right? ====
The markets are clearly not a random walk. The markets are not even efficient because that assumption
implies you can’t make an above-average return. Since some people can do that, I disagree with the
assumption.
==== But still, I’m sure a lot of your professors believe in the efficient market hypothesis. ====
Right, and that’s probably why they’re professors and why I’m making money doing what I’m doing. Also,
I think it’s amazing what you can do when you have real money on the line. A person in an academic setting
might think that they have tested all possible types of systems. However, when you have real money on the
line, you can start to think pretty creatively. There is always something else to test. I think that the academic
community just hasn’t tested many of the approaches that are viable. Certainly, if you just spend a short
time doing an academic study, you’re not going to find anything significant. It can’t be any other way. If it
were, everyone would be rich. But if you spend every day of your life researching the markets and have
adequate computer support, you can find stuff that works.

==== They underestimate the difficulty of the game and overestimate the payoff? ====
Exactly. Also, some people blame everyone except themselves when they lose money. It galled me to
read in a recent Wall Street Journal article that some guy actually won a lawsuit against his brokerage firm
because he lost all the money in his account. The point is that it wasn’t even a matter of his broker giving
him bad advice; he was calling his own trades! He sued the brokerage firm, saying that they shouldn’t have
allowed him to trade his account the way he did. I believe it’s a free country, and if you want to trade, you
should have every right to do so, but if you lose money, it’s your own responsibility.

==== Your long-term performance has far surpassed the industry average. To what do you attribute your
superior track record? ====
George Soros has a philosophy that I have also adopted: The way to build long-term returns is through
preservation of capital and home runs. You can be far more aggressive when you’re making good profits.
Many managers, once they’re up 30 or 40 percent, will book their year [i.e., trade very cautiously for the
remainder of the year so as not to jeopardize the very good return that has already been realized]. The way
to attain tmly superior long-term returns is to grind it out until you’re up 30 or 40 percent, and then if you
have the convictions, go for a 100 percent year. If you can put together a few near-100 percent years and
avoid down years, then you can achieve really outstanding long-term returns.

Soros is also the best loss taker I’ve ever seen. He doesn’t care whether he wins or loses on a trade. If a
trade doesn’t work, he’s confident enough about his ability to win on other trades that he can easily walk
away from the position. There are a lot of shoes on the shelf; wear only the ones that fit. If you’re extremely
confident, taking a loss doesn’t bother you.

==== What are the major misconceptions people have about the stock market? ====
They tend to confuse short-term volatility with long-term risk. The longer the time period, the lower the
risk of holding equities. People focus too much on the short term-week-to-week and month-to-month price
changes-and don’t pay enough attention to the long-term potential. They look at all movement as negative,
whereas I look at movement as a constructive element. For many investors, the lack of sufficient exposure to
high-returning, more volatile assets is their greatest risk. In my opinion, investment vehicles that provide the
least shortterm volatility often embody the greatest long-term risk. Without significant price movement, you
can’t achieve superior gains.

==== What are the traits of the people who are successful in this business? ====
They’re open-minded and flexible. They’re also risk takers, because they believe in what they’re doing.

==== That routine being what? ====
My approach is to confront losses even before they materialize. I rehearse the process of losing. Whenever
I take a position, I like to imagine what it would be like under the worst-case scenario. In doing so, I
minimize the confusion if that situation actually develops. In my view, losses are a very important part of
trading. When a loss happens, I believe in embracing it.

==== You said earlier that you were drawn to a trading career because of the analogy to playing cards. Do
you then see trading as a form of gambling? ====
I’d say that gambling is the wrong term. Gambling involves taking a risk when the odds are against you.
For example, betting on a lottery or playing a slot machine are forms of gambling. I think successful trading,
or poker playing for that matter, involves speculating rather than gambling. Successful speculation implies
taking risks when the odds are in your favor. Just like in poker, where you have to know which hands to bet
on, in trading you have to know when the odds are in your favor.

==== Specifically, what traits would you look for? ====
Essentially, I would look for people with the ability to admit mistakes and take losses quickly. Most people
view losing as a hit against their self-esteem. As a result, they postpone losing. They think of all sorts of
reasons for not taking losses. They select a mental stop point and then fail to execute it. They abandon their
game plan.

==== What do you think are the greatest misconceptions people have about the market? ====
In my opinion, the greatest misconception is the idea that if you buy and hold stocks for long periods of
time, you’ll always make money.

==== What would you say to the trader who says, “I’m making money overall, and I’m using stops to limit
my losses, but I still have a lot of anxiety about trading. I still can`t stand to lose.”? ====
I would tell that trader to think of each trade as one of the next one thousand trades he’s going to make.
If you start thinking in terms of the next one thousand trades, all of a sudden you’ve made any single trade
seem very inconsequential. Who cares if a particular trade is a winner or a loser? It’s just another trade.

==== That is exactly the attitude I find so fascinating. Your portfolios went from being up sharply the night
before to a 15 percent loss the next morning. Most people would have some very negative emotions in that
type of situation. How were yon able to respond with such emotional aloofness? ====
You have to put it into perspective. I’m fond of thinking of trading in terms of scores of years. If I live long
enough, I’ll trade for fifty or sixty years. I figure that, over that time span, I’ll see devastating declines,
spectacular advances that I virtually can’t believe, and everything in between. If you have done mental
rehearsals to see how you would react in different catastrophic situations, then when such an event occurs,
you become curious.

==== Is this advice that you give to people in general-try to be an observer of yourself? ====
Absolutely. I couldn’t recommend it more. If instead of saying, “I’m going to do this trade,” you say, “I’m
going to watch myself do this trade,” all of a sudden you find that the process is a lot easier.
==== How does having this observer help your trading? ====
The observer is able to say, “You’re getting greedy on this trade, watch out.” You might be straining and
struggling because some of your indicators are bullish and some are bearish, and you don’t know what to do.
The observer might say, “How about doing nothing? You don’t have to trade.” This concept is something I
would recommend not only for trading but for life in general. There’s no reason why you have to struggle and
strain and claw your way through life.

==== Does it ever bother you when you lose? ====
Not at all. It never bothered me to lose, because I always knew that I would make it right back. I always
knew that no matter what happened, I

How many times have you heard someone put down an idea you’re excited about by saying, “If it’s such a
good idea, why isn’t everyone doing it?” This is the battle cry of mediocrity. Think about it for a minute. Any
investment opportunity that everyone else is doing is by definition a bad idea. I would always recommend
doing the opposite. The reason markets get out of line is because everyone is doing the wrong thing. The
good trader always sticks with his own ideas and closes his ears to the why-isn’t-e very one-doing-it cry of
the crowd. He’ll make a trade against the crowd at a conservative level that he can afford, and then get out if
he’s wrong. That’s what a stop is for. could go into any marketplace, with any amount of money, and make
a living.
You need to have the courage to stand up against the crowd, decide your position, and execute it. One
experience that really brought this home to me was when I was taking flying lessons. I had the theory down,
but not very much experience. I was coming in for what was my second or third landing. When I was only
about twenty or thirty feet above the mnway, several gusts of wind blew the plane all over the place. I fought
the plane down for what was probably the worst landing ever in history. When I finally brought the plane to a
stop, I was actually chuckling at how terrible a landing it was, wondering what the instructor would say.
“Well, that was really impressive,” he said.
I laughed a little more and asked, “What was impressive about that? I thought it was terrible.”
He replied,. “I have never seen any other beginner do that. Any other beginner would have taken his hand
off the stick, given up, and expected me to land the thing. You hung in there and implemented the program
all the way until the landing was complete.” He paused for a moment and added, “You’re right, though, it was
terrible. Just terrible.”
I thought about that later and realized that that is the trait you have to have to trade.

==== What do you do to prepare? ====
I go through a mental process. I decide what I’m going to do when X, Y, or Z happens. IfX, Y, or Z is a
surprise, then you’re part of the crowd.

==== Basically, your plan was to let the market run until there was some sign of meaningful weakness.
====
Right. Unfortunately, when the market dropped, it lost 25 percent of its value in one day. Needless to say,
that was a particularly painful loss. But the point is that I still ended up with a large profit on the trade.
In fact, this trade raises the whole question of how you view drawdowns. Most people don’t distinguish
between drawdowns in open equity and drawdowns in closed equity. [The distinction is that open equity
refers to unrealized profits on an existing position. In effect, what Ritchie is implying is that he views a given
loss differently if it is a partial surrender erf profits on a winning trade as opposed to if it is a drawdown in
a'losing trade.] If I protected open equity [i.e., open profits] with the same care I protected closed equity, I
would never be able to participate for a long-term move. Any sensible overall risk control measure could not
withstand the normal volatility in such a move.
==== In other words, in order to score the really large gains, you have to be willing to see those gains
erode significantly before getting out of the market. ====
I can’t see any other way. If you get too careful about not risking your gains, you’re not going to be able
to extract a large profit,

==== Is your advice to people then: Forget what`s out there and do your own work? ====
My advice to people has always been: Stay out of the business; stay completely away from the market.
For novices to come in and try to generate profit in this incredibly complex industry is like me trying to do
brain surgery on the weekends to pick up a little extra cash.
I have a friend who knows three doctors who got together to invest in a stud race horse. When they took
delivery of the horse, they found that it was a gelding. My friend was teasing them about this and asked if
they had ever thought of inspecting the horse. You won’t believe this, but it turns out that they had thought
of it, but they didn’t go any further. So he said, “Well, you guys are all doctors; did you ever bend over and
take a look under there to make sure he had the necessary tools?” If you asked those three doctors
today what their mistake was, I’m sure they would tell you that they should have inspected the horse’s
valuables. They still wouldn’t have learned the lesson: DON’T INVEST WHERE YOU DON’T KNOW WHAT
YOU’RE DOING. If they invest in another horse, they won’t get a gelding, but they’ll make some other
mistake just as laughable……. My willingness to
lose is fundamental to my ability to make money in the markets.
==== And that’s not true of most people? ====
That’s right. Most people come into this business without a willingness to lose money. They also enter the
market with unrealistic expectations. Even if they’re lucky enough to pick a successful trading advisor, they’ll
likely to pull their money out the first quarter he has a drawdown. So they end up losing even though they
may have been in a winning situation.

==== I assume that you probably long ago passed the point where your trading profits took care of any
personal needs or financial security you might envision. In your own case, if the charity aspect were not
there, do you think you would still be trading? ====
I’m not sure that I would be. I just don’t know. Incidentally, let me correct your use of the term charity. I
don’t think in terms of charity. I think in terms of investing in the poor. If someone is starving and you hand
him a buck, you’ve taught him that what he needs is for someone to give him a handout. I prefer to invest in
the poor-to provide capital so they can enhance their own productivity. What the poor need are cottage
industries that allow them to become self-sufficient. That’s the type of funding I believe in, and it may not fit
the conventional view of charity.
I know what I’m going to say can be easily misconstrued, but if I could set up a system where I could
make money off the poor, then I would have achieved my goal. I know that sounds crass. Of course, my
objective is not to make money off the poor, but the point is that charity tends to spawn dependency. That’s
why the Great Society war on poverty was such a failure. In contrast, if I can establish someone in a business
where he can return my money, then I know his situation is stable.

==== Aren’t you concerned that by helping Westernize these villages, their way of life will be destroyed to
their ultimate detriment? ====
It’s a commonly held belief here in the civilized West that the cultures and life-styles of isolated peoples
are to be valued and preserved. And I find that view romantically attractive. I would be inclined to agree with
this premise if only I could find someone in one of these cultures who would stop laughing at it.
An Indian I know named Bee was once read a newspaper article about his beautiful culture. Bee
responded by asking, “Where does this man live that he could be so foolish?” He was told that the man lived
and worked in Caracas. “Why does he sit up there in his comfortable office and write this nonsense about
us?” Bee asked. “Why doesn’t he come down here with his family and join us? Then we can all enjoy this
beautiful place together.” They’re mystified by our lack of compassion. Academics make compelling
arguments extolling the beauty and virtues of Indian culture, but I agree with the Indians.

==== How can people identify what goals would make them happy? ====
One NLP exercise that deals with this question is having people imagine themselves at the end of their
lives. Some people are reluctant to do this exercise, but when I tell them to go ahead and imagine that it’s
been a very long, healthy, and active life, they’re more willing to try it. Then I ask them to look back on what
they have accomplished, and see whether they wish they had done something else or something more.
Although it’s a mind trick, by adopting this end-of-life perspective, unconscious expectations are revealed,
and people find it easier to make an assessment about what they really want to fill their lives. I ask my
clients, “What is really worth the time of your life?”
159
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The idea for this exercise came out of an experience I had when I was in college. I worked as
an orderly in a hospital ward that typically had lots of elderly patients. Over the course of three years, I
spoke to hundreds of people who were near the end of their lives. I asked these people how their lives had
been, what they liked about their lives and what they regretted, if anything.
==== What did you find out? ====
I found out that falling in love at nineteen was important. I found out that the willingness to take risks into
the unknown, like leaving one’s small hometown, was important. On the other hand, just simply retiring
because of age was something many of them felt was the biggest mistake of their lives.
One thing that really struck me was that not one of these people said they truly regretted anything they
had actually done-what they regretted was what they hadn’t done. They regretted that they had wasted their
lives on petty pursuits. They hadn’t identified their important values and then done everything they could to
fulfill them. The les
son I learned from this experience was the same one emphasized years later in NLP: If we don’t live true
to our values and fulfill them, we experience disappointment and emptiness.

Fernando Quote:
Not that it really matters. Just as with any large population set, the average hedge fund (or average mutual fund) is just as clueless. Thats why hedge funds or mutual funds as a investing-method can never beat their respective index returns on average. Average anything sucks balls =).
-Fernando

I’m a believer in the theory that the average investor loses money in the markets. On average, people believe they are above average. Most investors believe that they can beat the markets and not lose money without doing much homework. My grandma continues to buy bonds that I find absolutely revolting and have yelled at her about. I am not smart enough to come up with my own ideas as I lack creativity. That’s ok, because I use Prim’s algorithm to effectively sort through ideas of others and augment the good ones and discredit the bad ones.

Peak-Oil throws a wrench into my gears and complicates any future foresight that I’d be able to have on my own. That said, at least I don’t deliberately create misinformation to try to drive down the prices of the most undervalued opportunities and drive up the prices of the most overvalued opportunities. Here are some of my latest favorites:

On Thursday we landed a fun indicator: “Only 48 times has this number been at current levels in the past. 47 out of those 48 times, the market was higher 3 months later.”

Will recently noted:
“Has anybody else noticed that large-cap quality names are very cheap as well? If I managed billions I’d be going to town right now. MSFT, PG, JNJ, ABT, IBM, and so on have grown free cash flow at a healthy clip over the past decade and have recently been using it for massive buybacks and nice dividend increases. P/FCF rates are in the low teens, while revenues and net income are still growing at a decent rate.

I don’t think we’re at the end of the secular bear market for U.S. stocks yet, but how cheap can these get? At current prices these companies could buy back all of their stock in less than a decade.”

Bill Alpert is still trying to short the cheapest and best opportunities in the world. Herb Greenburg is right there alongside him. The short interest in some of the cheapest, fastest growing companies that I know of is surely an unprofitable long-term strategy.

US Treasuries as a “long term asset” is a fallacy. The FED, although they may be the biggest idiots in the room, still gets the privilege of buying as many of them as they want as they have an infinite supply of money. Don’t go short until the FED starts tightening.

Glen,

Thank you for your response. The Morgan Stanley and education reference was not to establish my superior intellect, but as you point out, that is a fact. I went to Rutgers (middle of the road School), but the proximity to the Manhattan provided adjunct instructors with the exposure to some of the best minds in investing. BTW, my dissertation was derivatives on valuation, quantitative in nature and professionally has nothing to with investing in the market in individual stocks. Now that we both agree on my superior intellect, settle down and learn. It’s free too.

What I was trying to point out in my earlier note (which you missed as expected), was that I don’t belong to that one bit club of below par beings, you are trying to establish your expertise with.

Got to go to work and will make it short.

China experts need to have been to China and need a team of analysts on the ground to constantly follow any firm. It is obvious, you consider neither prerequisites before dishing out your recommendations. The Chinese are heady with free markets and disposed to inside deals and lining their own pockets. The below par beings do act on your recommendations. One of them did lose a fair bit and asked to me look into CYXN. Reverse merger and reverse splits firm – stay away from.

So be careful with your recommendations and provide full disclosure of the nature/basis of your analysis. State if you have been to China to meet the management, do channel checks and on-going analysis/channel checks or is the basis of your recommendation SEC filings.

As for CYXN, I can see, you know your tables of 12. That is a good start. CYXN for 2011 and 2012 (eps of $2/share and $3/share), even taking into account the insider dilutions. CYXN will uplist before the end of 2010 and the store expansions will turn in positive cash flow (rolling 6 months out). Their current expansion is largely driven by cash flow from Con Ops. 20% growth rate would make it a $40 stock (2011). With the China discount (reverse merger/reverse split/inside deals), it is probably a $10 stock by end of 2011 and 20 by 2012.

The potential for your blog to harm unsuspecting below par beings should not be underestimated. Take it for what it is worth.

Later,

Anil

On Fri, Aug 20, 2010 at 9:14 PM, Glen Bradford wrote:
> Anil,
>
> Occasionally I run into someone who is clearly superior to me in intellect.
> I think that this may be the case in this particular situation. I’m
> not particularly certain whether your reference to my education as two
> bit is positive or negative — mostly because I don’t know where the
> average school is — and if the average school is one bit, that puts
> me at quite an advantage.
>
> I agree that it is unlikely that I would be able to pass your 2 hour
> Morgan Stanley as I am confident that I would be incredibly unfamiliar
> with the various topics that would be required to know if my intent
> was to pass it. I unfortunately am not good enough to work for Morgan
> Stanley. I do not have a Ph.D and as you may have noticed — I was
> not in any of the financial electives that my MBA school offered me.
>
> It is true that I am an ignorant fool. As such, maybe you will have
> mercy on my soul and enlighten me on this particular occasion. In the
> past, CYXN has issued shares at an incredible discount to their
> current market valuation and I was curious if you could give me an
> idea of what their Earnings Per Share are set to look like for 2010, 2011, and 2012.
>
> My old EPS estimate was $1.80/Share. It was $0.15 before the 1-12 reverse split.
>
> Thanks for your patience, as I rarely get the opportunity to interface
> with a financial superior.
>
> Glen
>
> —–Original Message—–
> From: Anil Vijayan [mailto:vijayan.anil@gmail.com]
> Sent: Friday, August 20, 2010 8:07 PM
> To: Glen Bradford
> Subject: Re: Updates on CYXN
>
> Glen,
>
> A response after a quick scan of a news story does not fool me. You
> knew nothing of this company when you recommended it or since. Your
> MBA (from a two bit school) and blog to pose as an expert (China) does
> not fool me one bit. If anybody takes your picks, they deserve to
> lose. I follow 15 other ignorant fools who blog to pose as experts.
>
> When in NY, come and take the analyst’s 2 hour exam we give our
> analyst’s trainees before they start. The exam after the two year
> training, you will not even know, what hit you.
>
> I work for Morgan Stanley and have a Ph.D in Finance and have seen
> plenty of hustlers like you.
>
> I happen to think CYXN is extremely poised to grow.
>
> Good luck peddling your expertise.
>
> Later,
>
> Anil
>
> On Thu, Aug 19, 2010 at 8:09 PM, Glen Bradford
> wrote:
>> CYXN financing terms were absurd.
>>
>> —–Original Message—–
>> From: Anil Vijayan [mailto:vijayan.anil@gmail.com]
>> Sent: Thursday, August 19, 2010 7:24 PM
>> To: Glen Bradford
>> Subject: Re: Updates on CYXN
>>
>> Glen,
>>
>> This was one of your top three value picks with the strategy to not
>> lose capital. The stock is down 60%.
>>
>> What do you call it? What prompted the drop?
>>
>> Thanks, Anil
>>
>> On Thu, Aug 19, 2010 at 7:02 AM, Glen Bradford
>> wrote:
>>> http://seekingalpha.com/author/glen-bradford/articles/symbol/cyxn.ob
>>>
>>> http://www.youtube.com/watch?v=BovthPByLTo
>>>
>>> I honestly haven’t followed CYXN.ob for a long while. Also, if you
>>> can
> —
>>> please refrain from accusing me of pumping in the future.
>>>
>>> Thanks,
>>>
>>> Glen
>>>
>>> —–Original Message—–
>>> From: Anil Vijayan [mailto:vijayan.anil@gmail.com]
>>> Sent: Wednesday, August 18, 2010 8:11 PM
>>> To: gb
>>> Subject: Updates on CYXN
>>>
>>> Glen,
>>>
>>> You were pumping this stock for a while. 60% haircut since.
>>>
>>> Thanks,
>>>
>>> Anil
>>>
>>>
>>
>>
>
>

Cashing in on Uplist City
By Glen Bradford
I believe that stock market prices in the long run are a function of shareholder earnings, but in the short run are dictated by market forces, notably supply and demand. One of the easiest ways to capitalize on the short run market forces is to find situations at which point larger investors look to what previously was mostly owned by smaller investors. One of the better ways I’ve found to do this is when companies uplist from the OTC/Pinks to the AMEX/NASDAQ/NYSE exchanges.
New Energy Systems (AMEX:NEWN) just crossed into the AMEX from the OTC’s. For those who have been following the story — it’s about time, right? Who is on deck to follow them up? Let me revise that statement: “Who is cheap and on deck?”
China Ceramics (AMEX:CCLTF) is looking to score the coveted NASDAQ listing, but currently trades on the AMEX. They recently initiated a conversion program that enables investors to convert their warrants into common shares.
Gold Horse International (OTC: GHII) is a company I’ve been following for a few years now. The market cap is $7M, which is embarrassing. My calculations put it at levels of cheapness that I’d rather not talk about — because I’m happily accumulating on the bid. They’re reverse splitting 40-1 and looking to uplist to the AMEX.
China Medicine Corporation (OTC: CHME) is working with JP Morgan, recently authorized a share buyback, and is theoretically bringing a blockbuster drug to market. From a pricing standpoint, the market is pricing China Medicine as if to say, “We don’t believe you!” I’ll go out on a limb and say that uplisting is even closer since they’ve added three new directors.
China Infrastructure Construction (OTC:CHNC) is looking to go NASDAQ from the OTCBB. Likely? I think so. Energroup Holdings Corp (OTC: ENHD) is looking to do the same.
One thing you should know is that both ENHD and CHNC received assistance in coming public on US Exchanges from S3 Investment Company, Inc (PINK: SIVC) which is pretty much owned and run by Jim Bickel. As such, if one makes the leap, odds of the next one making the same leap are pretty good.
I want to close discussing a topic that I know a lot of people reading this article are waging internal battles over. Should they trade or own? I want to say that the market trains people to be traders — to get in and out with a small, quick profit. My word of caution would be that I believe that this strategy could leave you missing large runs as I’ve found that a majority of my gains come from a few stocks that exploded several times the price I bought in at.

Disclosure: Glen and his investors are long all the companies mentioned.

Capture Future Trends: China, Inflation, Petroleum
By Glen Bradford
I became a peak-oil believer this year after reviewing the facts, my point estimate being early 2012 when everyone realizes we are in descent mode. For those keeping track, the top started in 2004. That said, energy costs are going to rise. Also, with global governments printing record amounts of money and future inflation mostly unavoidable, lots of investors seek protection in Gold. I’d like Gold if I didn’t think I could get higher returns elsewhere. So, I’m looking into oil companies located in the country with the marginal competitive advantage of lower production costs, China.
To say China Integrated Energy (NASDAQ: CBEH) has been growing top and bottom lines in the last 3 years would overlook how they’ve grown their top and bottom lines over 5-fold in 4 years. Maybe that doesn’t seem like much to you but let’s take that in the context that Global GDP historically grows at 3% and compare this to CBEH’s mind numbing 50% CAGR. It’s growing at more than 10x GDP growth. Funny thing here is that it’s priced as if they aren’t going to grow anymore. Oh, but wait — they’re guiding for this growth to continue and recently even raised guidance? Look, the best way to avoid loss in stocks requires that you pay a little and get a lot and this is one way to do just that.

China Natural Gas (NASDAQ: CHNG) is growing at a little bit slower growth rate than previously mentioned China Integrated, but they’re running stronger profit margins.

Gushan Environmental Energy (NYSE:GU) is a company that was recommended to me when I polled my readers about peak-oil. Since oil prices have come off their highs, the price of biodiesel has also come down significantly, crushing the profit margins of Gushan and sending them into the red. The stock price has followed suit and dropped from around $15 to around a 52-week low of $0.70, where it rests now. Note that in the three years 2006-2008, they averaged around $275M RMB or $40M USD in profits on increasing revenues. They currently trade at a $121M market cap assuming 166M FD shares. Assuming oil prices return to their recent highs, I believe that this could be one of those turn around plays you wish you knew about.
China Petroleum & Chemical Corp (NYSE: SNP) has also experienced the effects of lower petroleum prices, but is still operating well in the black. It’s crazy to me that you can have a multi-billion dollar company trading at such a steep discount to their intrinsic value. I believe that if you factor out the oil price spike of 2008, you’ve got a growing company priced for no growth. Granted, the growth rate isn’t huge, but that should be offset by the sheer size of the company. Larger companies have a tendency to hover closer to their intrinsic valuations than micro-caps.
I’ve updated my estimates for a company I’ve covered several times before, Longwei Petroleum (AMEX: LPH). When you break it all down, my numbers come out to non-GAAP $0.85 EPS in FY2011, which started 1.5 months ago. I’m also forecasting enough cash on the balance sheet to finance potential expansion similar facilities of a cost around $50M by mid-October — even without the warrants.
I want to do a quick brief on this widely misconceived notion on the premise that there are value stocks and there are growth stocks. That’s entirely the wrong idea. The value of future discounted cash flows is a function of their growth rate. Along the same lines, the intrinsic valuation of a company is a function of its future perceived discounted cash flows. All other things equal, a growing company should have a higher valuation than a company that isn’t growing. If you’re smart, you’ll blow this misnomer out of the water with me and buy growth companies at cheap valuations. Growth also protects you against loss because if the stock price goes against you and the company is still growing and you bought at a cheap valuation, eventually the stock price will catch up to that cheap valuation and you’ll be ahead again.
Lastly, if you follow me, I encourage you to add Zack Buckley to your list at least for the next couple months as he is traveling through China visiting a majority of my favorite companies.
Disclosure: Bradford and his investors were long LPH at the time of publication.

Quickly ramping production to meet current and anticipated demand
Confident in our ability to deliver record performance in 2010.
Q3 looks good, Q4 will be better: not unlike the comments to Zack Buckley — and this shouldn’t surprise anyone following the story. Zack’s notes are at the bottom.
“We are also very excited to begin fulfillment of our large scrap supply contract over the remainder of the year.” Going to try to deliver the entire $100M contract by the end of the year. I don’t expect them to do so.
“We are aggressively looking to add other steel customers to our scrap operations and anticipate adding additional customers as we move forward to 2010. We also intend to execute on our plans to add a second facility to increase our capacity should our sales warrant it as we move through 2010.”
Downward revised guidance:
$180M Top Line
$10M Bottom Line
1M metric tons
500K metric tons
60% capacity
300K metric tons
$110-$130M revenues – just recycling,
$25M Q1 Q2, Top line to do: $155M Q3, Q4
Better than $25M in trading Q3, Q4

Shareholder structure:
14.7M shares as of June 30, 2010
1.4M $5 warrants
1.5M $7.50 warrants
=
17.6M shares fully diluted

Given guidance:
$150M
10.5M
7-8%

Forward Calculations: In 2009, they did 86M Revenues, $5M net income.
If they expect 60% for the rest of this year adds $120M in revenues
Their assumptions of 300K metric tons of recycling yielding $110-$130M in revenues puts per ton prices at $400/metric ton
at 7.5% net margins:

Given that they have done $25M Q1Q2 Top line that implies $155M Q3Q4, out of which $120K comes from recycling and $35M comes from their trading business

They also haven’t made any money for the year and are forecasting $10.5M in profits in 1/2 a year at 60% capacity of their new recycling facility.

This is equivalent to $0.596/share in just half a year.

So, normalize this and run it into the first half of 2011 to get a FP/E and you get $310M Revenues — $23.25M net income — $1.32/share

if they hit 100%, that’s $70M + $400M = $470M revenues, $35.25M net income, $2/share

the upside here is if they ever run at 100%, which sounds likely as they are already guiding that they have plans to add an additional facility, possibly starting before EOY

for each recycling facility they build, it adds up to $1.70/share.

The current stock price is $4. forward p/e of 3 at 60% utilization.

The current stock price is $4. forward p/e of 2 at 100% utilization.

The current stock price is $4. forward p/e of 1.08 at 2 plants 100% utilization.

note that they have identified the issue in procuring supply. this implies that demand apparently is huge?

————————————————————————————————

Zack’s Notes:
China Armco Metals (NYSE AMEX:CNAM) began operating a scrap metal recycling facility this year and is also an iron ore distributor.

Q – How are earnings looking for the rest of the year.

A – 2nd quarter – no response; 3rd quarter – should be strong; 4th quarter – should be stronger than third quarter

I was able to talk with the CNAM representative after the conference on the first day, and he explained that CNAM would be changing several things with their company in the next year, including the auditors. He also pointed out to me that the only potential issues with the new scrap metal recycling factory is not the demand for the metal, but actually the supply of metal for the factory. I was worried that the demand would not be there for the factory, but he said demand is very high, so they are focusing on supplying scrap metal, which is more difficult.

————————————————————————————————

Another thing still in the air out there:
CNAM – Dear Mr. Bradford,

Thank you for your inquiry on China Armco Metals regarding Crisnic Fund. The company is releasing the following statement in regards to Crisnic Fund’s press release on August 9, 2010 at this time:

Kexuan Yao and China Armco Metals denies the statements made by the Crisnic Fund SA in its August 9, 2010 press release. Mr. Yao has been in discussions with the Crisnic Fund to return 1.3 million shares of his China Armco Metals stock he pledged to Crisnic Funds SA as collateral for a loan that was never completed. Following unsuccessful efforts on Mr. Yao’s part to resolve the dispute, Mr. Yao intends to take legal action against the Crisnic Fund and other individuals involved in the transaction to recover his shares of China Armco Metals stock and damages and vigorously defend any action by the Crisnic Fund.

Should you have any further questions, please let me know.

Best regards,

Lillian Wong
U.S. Representative
China Armco Metals, Inc.
954.363.7333
———————————————————————————-
CONFIDENTIALITY NOTICE: The information contained in this e-mail message and its attachments is intended solely for the use of the individual(s) to whom it is addressed and may contain trade secrets or information that is the confidential information of China Direct Industries, Inc. and its subsidiaries. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution, or copying of this e-mail is strictly prohibited. If you have received this communication in error, please immediately notify me and destroy the original message. Thank you.

From: Glen Bradford [mailto:globalspeculation@gmail.com]
Sent: Tuesday, August 10, 2010 5:17 PM
To: ir@armcometals.com; Info@ArmcoMetals.com
Subject: Spam> Crisnic Fund

Came across this information:

http://www.newswire.net/newsroom/index.php/permalink/69140.html

Crisnic Fund entered into a loan transaction with Yao secured by 1,300,000 shares of common stock of China Armco. The shares were transferred by DWAC transfer into the account of Crisnic Fund and were purportedly freely tradeable and available for sale. In reliance on the transfer, Crisnic Fund wired $1,000,000 to Yao. In truth, Yao had defrauded Crisnic Fund, the Company’s transfer agent, and possibly even the Company as to the nature of the shares. As a direct result of these actions, Crisnic Fund has been damaged not only with respect to the funds wired, but with respect to business activity at the broker, the clearing firm, the transfer agent and with respect to its business reputation in general. The litigation seeks damages in excess of $5,000,000 for these matters.

Securing a $1M loan with $5M worth of stock. What seems to be the problem? They are suing for $5M for this?

I was just curious if this was a real suit or it was fake or if you’ve even entered into a loan transaction with the Crisnic Fund.

Do Not Lose,

Glen Bradford
CEO ARM Holdings LLC
VP China Growth Partners
www.glenbradford.com
www.armholdingsllc.com
www.chinagrowthpartners.com

None of the above is intended as investment advice. I can’t guarantee the information I gathered is from an accurate source. I may buy or sell any stock or security without prior notice.
Disclaimer: http://www.glenbradford.com/disclaimer.php

China Growth: We Just Don’t Care

By Glen Bradford

Well, now, well, you know look. I’m not going to deviate here, I am not going to deviate. And even if this thing just blew away the numbers, I don’t care! I’ve got to be disciplined. Don’t trust anything in China. Sound familiar? I just wanted to cover a few stocks that I’ve been following that could blow away the numbers and nobody would notice. “If a tree falls in a forest and no one is around to hear it, does it make a sound?” I want to go on record and say that all of these stocks will independently trounce any market average or unleveraged ETF in the next 5 years. Diversify and multiply your portfolio. Also, put me on record predicting 100% average return in the next 12 months. My words of caution: don’t be afraid of making lots of money for being right.

China MediaExpress Holdings (NASDAQ: CCME) is blowing away earnings. My calculations put this at a 10-bagger if it ever gets fairly valued in the next 5 years. Also, I don’t see much downside risk. Traders are concerned that great news does not cause great price appreciation. Meanwhile, I’m ecstatic! Given the two times to buy at a certain price, before the great news or after the great news, I’ll take the sure bet: after the great news at the before news price. But, don’t forget about the consensus: “I don’t care. I don’t care if they just blew away numbers. I don’t care if I could make 1,000% in 5 years. I don’t care if it can grant up to 3 wishes, even if one of those wishes is a guarantee not to lose money.”

On June 1^st, Skystar Bio-Pharmaceuticals (NASDAQ: SKBI) was at $8.71 at which point they filed to raise capital. Since then, the stock has fallen 25% and the company has withdrawn the registration statement at the end of June because the CEO believes that the price is too low to justify expanding at this price instead of operating cash flow. Finally, a CEO that gets it! And, the stock has done nothing since then. But, the consensus: “I don’t care! US Treasuries are the best. Why? Because they’re US Treasuries. Can you tell me how? Sure. I can put in my money and get it back.”

China Armco Metals (AMEX: CNAM) is a company that has been sinking 10-yard birdie puts and has fallen roughly 75% from 11 to 3. The CEO bought shares at $5. Institituional investors placed at $6.50. You can get it for $4. How’s that sound? But wait: “I don’t care! Gold is the best. Inflation is going to happen and gold will go up at least 10%. I don’t care if CNAM prints money and is backed in lines of credit. My eight year old likes gold.”

China Biotics (NASDAQ: CHBT) has only fallen since reporting 62% revenue growth and forecasting 50% growth into 2011. My put this at “hyperconservative.” If that’s not an understatement, I don’t really know what is. Chorus: “I don’t care! It doesn’t matter if they are growing at 50% and are cheap. I need expensive corporate debt now, please. Can you waive the transaction fees? Hello?”

Prevailing sentiment is just that. See where things are going and get there before they do. Sentiment will change to incorporate reality eventually. How long do hot models in the corner of a club go uncourted by single dudes? Not very long. How long will stocks from the fastest growing, sexiest economy in the world, China, remain undervalued and ignored on the US Stock exchange by profit motivated investors?

It’s funny to me when the cheapest companies in the world get cheaper. Nobody understood them to begin with. Why should more people understand them enough to buy them, now? A dirty secret of asset management these days is that the perceived to be “safest” investments are actually the riskiest. Risk comes from overpaying, and joining crowded trades is the best way to ensure this outcome and this is encouraged by the positive feedback loops of intermittent success of asset managers that are measured by immediate relative performance. More and more people are moving out of stocks into bonds, even US Treasuries. Inefficiency bothers some people, but I try to make the most of it. As I’ve always said: “Uncertainty will certainly work for me.”

Disclosure: Bradford and his investors are long China MediaExpress, Skystar- Biopharmaceuticals, China Armco and China Biotics.

I found myself laughing out loud earlier today. Do you ever believe in something enough to stake your entire life on it? I didn’t think I did either, but that’s exactly what I’ve been doing. I’ve even been advised to seek psychological counseling, but didn’t pursue it because I believe in statistics. It bothers my friends and family to know that I’d rather spend my time undressing financial reports than in bed with a super model.  Yeah, I’m crazy.

I went through the routine motions that I was the stereotypical path for success till about age 22. I was a 3.9 at Penn High School, 3.9 Purdue Industrial Engineer — working for GE to pay for college — and then something clicked. My experience pursuing an MBA turned from a crisp classic corvette weaving down the Transfagarasan on a warm summer night into a slow motion head on collision. I became addicted to the academically destructive habit of questioning underlying assumptions. Nothing was safe. Unfortunately or fortunately, depending on if you’re my teacher or my investor I was positively reinforcing another habit — Thinking for myself.

I would say that a lot of things amaze me, but everything makes sense when you’re looking at it from the right angle. It’s just that this is a rare skill to have.

I’m only interested in learning about things that I can use. I’m terrible at crosswords, random trivia, and Jeopardy. I specialize in avoiding things I suck at.

Inefficiency bothers some people, but I try to make the most of it. Up till about age 20, I was told that for the most part I sucked at writing. I didn’t really like reading books. I still don’t like reading those types of books. I like reading manuals, financial reports, economic statistics, and musings of millionaires/billionaires. I figure, they ought to know something that I ought to try to learn. Anyway, somehow I write for the largest financial publication in the world now. I guess it’s in the family, as my dad enjoyed writing sports for 25 years and my uncle was an editor at the local tribune. My dad even wrote a few books that I haven’t read. It’s worth noting that I’m not even concerned that I don’t feel bad about this. Reading about women’s sports just isn’t making the top of my to-do list. Is there such a thing as Financial Humor? That’s something that I should start doing. I bet I wouldn’t suck at that. I giggle when stock prices go down. It’s funny to me when the cheapest companies in the world get cheaper. Nobody understood them to begin with. Why should more people understand them enough to buy them? There just is a shortage of intelligence out there. Everyone enjoys joining the crowded trades and losing money. Plus the really smart people out there know that this is possible and just wait for lower prices anyway. Others’ panic is their profit. What does really cheap mean to me? P/E of about 0.25 and growth.

I’d try to write a book, but I just can’t dedicate that much time to completing something. That’s why I like stocks. Once I convince myself that I should buy them, I don’t have to explain my reasoning, I just buy. The edge goes to those who can get the right answer in the least amount of time. I was terrible at showing work throughout engineering and math classes. Sometimes, I’d have to reverse derive the question from the answer… just to have stuff written down in the “show your work” section of homework/exams.

Those who preach diversification as a risk control

measure are essentially hedging their fundamental ignorance of their

own holdings. – Michael Lauer – Stock Market Wizards by Jack Schwager

I think a lot of successful traders are unemotional, hardworking, and

disciplined. Ironically, I find myself lacking on each of those counts. I

get very emotional; I really don’t work that hard; and I’m not as disci-

plined as I should be.

The problem is that their approach depends on the “greater fool”

premise. [It's okay to buy a stock that is grossly overpriced, as long as

you sell it to someone else—a greater fool—even higher.] This

process always ends in tragedy for those left holding the bag, which in

this case will likely be mutual fund investors.

So you’re saying that many individual investors who believe they

have placed their money into the most conservative stock funds

are unwittingly holding high-risk investments.

Absolutely. What started out as a conservative, passive investment

strategy has metamorphosed into a “greater fool” investment pyramid.

When this situation begins to unravel, the losses will be horrific.

Remember,

I’m seeking pricing inefficiencies, not high-quality companies. In

fact, as a direct consequence of my methodology, my typical long

position will be a company that has had some difficulty, while my typical

short will be a universally admired entity.

I think of myself as a reasonably courteous person. If an investor

called and asked me why I owned a certain stock, I would probably

tell him. But in the process, I would certainly be wasting my time,

Any investment approach that is dependent on stock market direction

for profitability is doomed to mediocrity. Any investment approach

that is heavily reliant on accurate forecasting or involves the purchase

of high-expectation stocks is inherently risky. Market supply and

demand forces create spectacular pricing inefficiencies. All that is

required for successful investing is the commonsense analysis of

today’s facts and the courage to act on your convictions.

They used what they called “a-pig-at-the-trough” approach. If you

found a stock that you liked and wanted to buy you had to convince

one of the other people to liquidate one of their holdings to make

room in the portfolio, just like one pig has to push another pig out of

the way if he wants to get a spot at the trough.

The assets of the fund were growing rapidly.

Stock investing is not an exact science. The greater the number of

useful things you can look at, the greater you increase your odds.

Do you also mean to imply that you don’t use charts or Wall

Street research?

I never looked at a chart for 99 percent of the stocks I bought for our

funds.

Some

of my research analysts have good friends who are sell-side analysts

and have seen them pressured to recommend stocks they didn’t like.

I usually don’t get excited about winners; I’m

too busy looking for the next trade.

You can’t be afraid to take a loss.

How would you rate the quality of Wall Street research?

Not very good.

For what reason?

Most analysts don’t have a logical reason why a stock should be at a

given price. As long as the company does well, they don’t care what

the price is. Typically, if a stock reaches their target, they will just

raise the target, even though the fundamentals haven’t changed.

What did you learn from your experience in losing all your

money?

I realized that no one was going to do it for me; I had to do it for

myself. My broker still got a commission, but I was sitting there

broke. Incidentally, although I didn’t realize it then, I now fully

believe that losing all of your money is one of the best things that can

happen to a beginning trader.

Why?

Because it teaches you respect for the market. It is much better to

learn the lesson that you can lose everything when you don’t have that

much money than to learn the same lesson later on.

I guess that implies you are not an advocate of paper trading for

beginners.

Absolutely. I think paper trading is the worst thing you can do. If you

are a beginner, trade with an amount of money that is small enough so

that you can afford to lose it, but large enough so that you will feel the

pain if you do. Otherwise, you’re fooling yourself. I have news for you:

If you go from paper trading to real trading, you’re going to make

totally different decisions because you’re not used to being subjected

to the emotional pressure. Nothing is the same. It’s like shadowboxing

and then getting in the ring with a professional boxer. What do

you think is going to happen? You’re going to crawl up into a turtle

position and get the crap beat out of you because you’re not used to

really getting hit. The most important thing to becoming a good trader

is to trade.

The key is to know when to do nothing. Most

people, even if they have a winning strategy, will not follow it because

they lack discipline. For example, everyone knows how to lose

weight: you eat less fat and exercise. So why are most people overweight

(assuming they don’t have a medical problem)? Because they

lack discipline.

Most people prefer to forget

about their failures instead of learning from them,

You need to have a plan for every contingency.

The most important contingency plan is the one that will limit your loss it you are wrong.

Normal human tendencies are traits that cause you to do poorly.

Therefore, to be successful as a trader you need to condition abnormal

responses. You hear many traders say that you have to do the

opposite of your gut response—when you feel good about a position,

you should sell, and when you feel terrible about it, you should buy

more. In the beginning that’s true, but as you condition yourself for

abnormal responses, somewhere along the line you become skilled.

Then your gut becomes right. When you feel good, you actually

should go long, and when you fell bad, you should sell. That’s the

point when you know you have reached competency as a trader.

What did you do after you graduated college?

I decided to go to business school, which allows you to put off the

decision of doing anything for another couple of years.

(Failing out of college, not getting a job, etc.) It was something that I psychologically really wanted to happen.

Although he liked science, he was disenchanted because the career scientists

he observed were forced to spend much of their time seeking

grants instead of doing research.

Do you ever go net short?

Ninety percent of my success is clue to not doing things that are stupid.

I don’t sell winners; I don’t hold losers; I don’t get emotionally

involved. I do things where the odds are in my favor. Shorting stocks

is dumb because the odds are stacked against you. The stock market

has been rising by over 10 percent a year for many decades. Why

would you want to go against that trend?

Any advice for novice traders?

Don’t confuse activity with accomplishment. I think one mistake

novice traders make is that they begin trading before they have any

real idea what they are doing. They are active, but they are not

accomplishing anything. I hardly spend any time trading. Over 99

percent of my time is spent on the computer, doing research.

If John Bender is right about options*—and, given his performance, there is

good reason to believe he is—then virtually everyone else is wrong. Bender

asserts that the option pricing theory developed by Nobel Prize-winning

economists, which underlies virtually all option pricing models used

by traders worldwide, is fundamentally flawed. This contention is not

just a theoretical argument; Bender’s entire methodology is based on betting

against the price implications of conventional option models. Bender

places trades that will profit if his model’s estimates of price probabilities

are more accurate than those implied by prevailing option prices, which

more closely reflect standard option pricing models.

What did they get for backing you?

Initially, 50 percent of my profits. I eventually bought them out.

There are a lot of similarities between gambling and trading, although

gambling is a bad term.

Because?

Because it implies that your results depend on luck. The people that

I’m talking about look at poker or backgammon as a business, not a

game of chance. There are a few things that are essential to success

in both trading as well as playing gambling games as a business. First,

you have to understand edge and maximize your edge. Second, you

have to be able to deal with losing.

I don’t mean to suggest that Black and Scholes made stupid

assumptions; they made the only legitimate assumptions possible, not

being traders themselves. In fact, they won the Nobel Prize for it.

Although, to be honest, that always seemed a bit strange to me

because all they used was high school mathematics. All my trading

operates on the premise that the most important part is the part that

Black-Scholes left out—the assumption of the probability distribution.

Why do you say with such assurance that stock prices don’t even

come close to a random walk?

As one example, whether you believe in it or not, there is such a thing

as technical analysis, which tries to define support and resistance levels

and trends. Regardless of whether technical analysis has any validity,

enough people believe in it to impact the market. For example, if

people expect a stock to find support at 65, lo and behold, they’re

willing to buy it at 66. That is not a random walk statement.

Even though you manage a quarter of a billion dollars you seem

to keep an incredibly low profile. In fact, I’ve never seen your

name in print. Is this deliberate?

As a policy, I don’t do interviews with the media.

Why is that?

My feeling is that it is very difficult for a money manager to give an

honest interview. Why would I want to be interviewed and tell the

world all my best investment ideas? Let’s say I am a fund manager

and I have just identified XYZ as being the best buy around. Why

should I go on TV and announce that to the world? If I really believe

that is true, shouldn’t I be buying the stock? And if I am buying it,

why would 1 want any competition?

Don’t accept anything; question everything.

Actually, there is really no way to prove that is the case. All you

can ever demonstrate is that the specific patterns being tested do

not exist. You can never prove that there aren’t any patterns that

could beat the market.

That’s exactly right. All that being said, I grew up with the idea that, if

not impossible, it was certainly extremely difficult to beat the market.

And even now, I find it remarkable how efficient the markets actually

are. It would be nice if all you had to do in order to earn abnormally

large returns was to identify some sort of standard pattern in the historical

prices of a given stock. But most of the claims that are made by

so-called technical analysts, involving constructs like support and

resistance levels and head-and-shoulders patterns, have absolutely no

grounding in methodologically sound empirical research.

But isn’t it possible that many of these patterns can’t be rigor-

There are three variations of this theory: (1) weak form—past prices cannot be used lo

predict future prices; (2) semistrong form—the current price reflects all publicly

known information; (3) strong form—the current price reflects all information,

whether publicly known or not.

ously tested because they can’t be defined objectively? For example,

you might define a head-and-shoulders pattern one way

while I might define it quite differently. In fact, for many patterns,

theoretically, there could be an infinite number of possible

definitions.

Yes, that’s an excellent point. But the inability to precisely explicate

the hypothesis being tested is one of the signposts of a pseudoscience.

Even for those patterns where it’s been possible to come up

with a reasonable consensus definition for the sorts of patterns traditionally

described by people who refer to themselves as technical analysts,

researchers have generally not found these patterns to have any

predictive value. The interesting thing is that even some of the most

highly respected Wall Street firms employ at least a few of these “prescientific”

technical analysts, despite the fact that there’s little evidence

they’re doing anything more useful than astrology.

Even if there’s no change in the fundamentals?

Oh sure. I always tell my traders, “If you think you’re wrong, or if the

market is moving against you and you don’t know why, take in half. You

can always put it on again.” If you do that twice, you’ve taken in threequarters

of your position. Then what’s left is no longer a big deal. The

thing is to start moving your feet. I find that too many traders just stand

there and let the truck roll over them. A common mistake traders make

in shorting is that they take on too big of a position relative to their

portfolio. Then when the stock moves against them, the pain becomes

too great to handle, and they end up panicking or freezing.

You have had quite a run—years of mammoth returns and a sizeable

amount of capital under management. Are you ever tempted

to just cash in the chips and retire?

A lot of people get scared and think that since they made a lot of

money they’d better protect it. That’s a very limiting philosophy. I am

just the opposite. I want to keep the firm growing. I have no interest

in retiring. First, I have nothing else to do. I don’t want to go play

golf. You know the old saying: “Golf is great until you can play three

times a week, and then it’s no fun anymore.” Second, I enjoy what

I’m doing.

One procedure I introduced at S.A.C. seven years ago was to go

around the room and have each trader promise his results. In the

early years, I got a lot of resistance from just about everyone except

Steve Cohen, who was always very willing to promise an extraordinary

result. It took a long time lor people to accept this process, but now it

is ama/ing how much it has become part of the company culture.

If you are not reaching your target, it forces you to focus on

what you are doing wrong or what you may not be doing that you

should.Sometimes when people reach their target and nothing happens, they

stop paying attention to whatever the commitment was to get there.

This explains why some people begin to lose after they succeed.

When someone achieves his goal, the question

is often, “What now?” My answer, which is based on comparing

athletes who have won gold medals with those who haven’t, is to set

up another target that will provide a challenge. The gold medal winners

are always stretching for a goal that is uncertain.

Failing to redefine the goal can limit success.

One trader came to me and said, “When I’m winning, I keep winning—

I can do no wrong; when I’m losing, I keep losing—I can’t do

anything right.” The solution was to create the same state of mind

when he was losing as when he was winning.

When he is on a winning streak, he is fearless, intuitive,

and makes the right choices. When he is on a losing streak, he needs

to visualize, remember, and feel those same positive traits so that

when he comes into the office, he has the same attitude toward his

trading as when he is in the middle of a winning streak.

Any other examples of personal flaws that prevented a trader

from reaching his full potential?

One trader who runs a large hedge fund is never willing to buy a stock

at the market; he is always trying to bid it lower. As a result, he misses

a lot of trades.

What is another example of a behavioral pattern that was holding

a trader back?

One trader selected his stocks fundamentally and then scaled into

the position as the stock declined. Even though he had chosen to

enter his positions by averaging down, when a stock got back to even,

he was so relieved that he would often get out.

Disagreed with the following – A disagreement requires a reason, my reason is in ()

Now consider two money managers: one only buys stocks and is up an

average of 25 percent per year for the period while the other only sells

stocks and is up 10 percent per year during the same period. Which manager

is the better trader? Again, this is a nonsensical question.

(Well, the guy that made 25 percent was the better trader; 25>10)

Funny Blurbs

Had you had any experience before?

Not picking stocks.

Then how did you get a job as a portfolio manager?

I didn’t have a whole lot of respect lor him as a portfolio manager.

I’ll tell you one story that is a perfect example. During the time I

worked for him, junk bonds had become very popular. Henry had a

friend at a brokerage firm who offered to give him a large account if he

could manage a junk bond portfolio. We had no clue. Henry gave us

all a book about junk bonds and told us to read it over the weekend.

The following Monday we began trading junk bonds

Another hedge fund manager I interviewed who also does a lot of

short selling said that the value of audits on a scale of 0 to 100

was zero. Do you agree?

Yes.

Even if it’s a leading accounting firm?

Oh yeah.