Coming back from the dead

It was said that Paul Tudor Jones never hired a trader who hadn’t lost money. The more I trade the more I appreciate the intelligence of that approach. 

Jones of course went through his own near death experience in the markets when after three years of trading cotton he wiped out 70% of his account in one ill conceived overleveraged trade. From that moment on he never had a drawdown like that again.

I think what Jones took away from that event was the realization that no matter how much you learn about risk control until you actually experience the brutal shock of uncontrolled loss you really haven’t learned how to trade.

Jones knew that there is nothing more dangerous than a winning trader which is why when Jack Schwager asked him, “But you have been very successful for years. Aren't you more confident now than you were before?” He replied, “ I am more scared now than I was at any point since I began trading, because I recognize how ephemeral success can be in this business. I know that to be successful, I have to be frightened. My biggest hits have always come after I have had a great period and I started to think that I knew something.”

Nothing proves Jones more right than John Meriwether - the swashbuckling bond trader from Solomon Brothers who tried to win every bet he made until he blew up not once, not twice but three times.  Apparently the Long Term Capital experience taught him nothing but the confidence to know  that investors would trust him with money over and over again.

Wall Street is full of such stories. Guys who make bold bets get lucky and confuse brains with a bull market. The crypto billionaire Mike Novogratz lost a fortune in the LUNA collapse which was unfortunate but predictable if you had done just a smattering of research to know that he lost a similar though less sizable fortune less than 10 years earlier in an emerging markets bet gone bad. 

Jones realized that what separated skill from luck in trading wasn't the ability to find a fresh chunk of cash and bet it all on black, but rather the will power and the discipline to claw your way back from a drawdown. That’s why he never hired winning traders because most of them were lucky rather than good.

When it comes to being good rather than lucky I have to admire my trading partner Kathy who has almost a preternatural ability to shake off losses and move on to the next trade. Since she trades upwards to 10 times each global day I’ve seen numerous examples of her comeback abilities.  What is perhaps most impressive to me is not her ability to come back behind, but to come back from being ahead. 

Coming back from a drawdown is a skill to be admired for sure, but I don’t think there is anything more disheartening and then impressive than to build up big profits only to see them disappear and then have the strength of money to recover the wins. 
That’s why the Borg-McEnroe Wimbledon match of 1980 will always be considered the greatest tennis battle ever. It wasn’t just the brilliant shot making but the fact that Borg lost seven match points in the fourth set and then managed to come back in the fifth and ultimately win the title.  

When I ask K how she is able to come back time and time again after some annoying and unpredictable market move wipes away her weekly profits she responds simply by saying that she has confidence in her system. She has traded it so many times though so many regimes and market cycles that she knows it works.

When asked how he was able to come back from the devastation of losing the fourth set, Borg noted that he simply relaxed in the fifth set and played his game. He in effect trusted the process  that brought him so many past championships. I think that is the lesson for us all. The pinnacle of skill in both life and trading  ultimately rests on trusting the process to work in the end.