How to beat 99% of traders in trading

“This go anywhere fund beats 99% of its peers,” proclaims this week’s headline in Barrons.

How does it do it?

Basically by trading everything under the sun from Mag 7 stocks to Treasury bills to floaters to high yield bonds. Unlike other mutual funds which pigeonhole themselves into a single asset or even a single asset category the Allspring Diversified Capital Builder can buy anything it wants and that flexibility has paid off in spades.  Its total return for the past 15 years is 12.0% per annum.. 

The time horizons are very different but I think there is a lot to learn from the Allspring record if you are trying to day trade. 

Specialization is overrated. 

As day traders we are taught to focus on one set up, one instrument, one time frame.  And that advice works great as long as you choose the right setup, the right instrument and the right time frame. But it's also the reason why so many successful traders including most traders in the Market Wizard series fail miserably over the long run. They are mostly a set of lucky individuals  who happened to have chosen the right idea and stuck to it long enough to have made a fortune.

Don’t get me wrong, that is still a singular achievement worth  celebrating. Very few people could have achieved even that level of success. But in the end none of them could maintain their performance over the long run.

Not Richard Dennis who managed to blow up $200 million I helped raise for him when I was Drexel.

Not Tudor Jones who hasn’t been able to make a double digit return in this century

Not Ray Dalio whose Bridgewater fund barely made money for a decade from 2010 to 2020.

In fact I can only think of four money managers who have made money consistently over the past 50 years. Peter Lynch, who like the true champ that he is left the game at the top and hasn’t really traded since. George Soros who finally retired but even in his eighties could run circles around most macro fund managers half his age. Warren Buffett whose track record needs no introduction and Jim Simmons whose secrets to money making will probably go with him to his grave.

Yet as different as they all were in style  - these masters of the markets are very similar in their approach. Although Lynch restricted himself to stocks he would buy anything and everything under the sun. Soros hoped from European equities to shorting housing stocks to breaking the Bank of England's in his famous $1 Billion GBPUSD  trade. Buffett, contrary to his folksy image, is very adept at buying convertibles, derivatives and  making massive profits from the “insurance vig” which is his primary financing vehicle. 

But perhaps the most interesting to us as traders is Jim Simmons who has managed to compound at 66% - a number so mind numbingly outside the norm that it boggles the mind.

Although we don’t know the secret sauce  that drives Simmons’s money machine we do know the general recipe - namely that he trades a LOT of strategies. And isn’t that what we do as day traders? We  don’t really trade stocks or options or forex or futures or CFDs - we actually just trade strategies. And strategies as we all know are only as good as the market environment they are in.  

So trading just one strategy makes you very vulnerable to regime change. It doesn’t matter how good you are at trend trading, if the market goes into a prolonged period of chop you will lose money on every trade.