From Jack Schwager’s Market Wizards:

October 1987 was a devastating month for most investors as the world stock markets witnessed a collapse that rivaled 1929. That same month, the Tudor Futures Fund, managed by Paul Tudor Jones, registered an incredible 62 percent return. Jones has always been a maverick trader. His trading style is unique and his performance is uncorrelated with other money managers. Perhaps most important, he has done what many thought impossible: combine five consecutive, triple-digit return years with very low equity retracements. (I am fudging slightly; in 1986, Paul’s fund realized only a 99.2 percent gain!)

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Lessons From A Trading Great: Paul Tudor Jones

Paul Tudor Jones

Jones has succeeded in every major venture he has tried. He started out in the business as a broker and in his second year grossed over $1 million in commissions. In fall 1980, Jones went to the New York Cotton Exchange as an independent floor trader. Again he was spectacularly successful, making millions during the next few years. His really impressive achievement though was not the magnitude of his winnings, but the consistency of his performance: During his three and a half years as a floor trader, he witnessed only one losing month.

It’s been 25 years since Paul Tudor Jones (PTJ) was featured in the original Market Wizards. He has since maintained his all-star track record. According to the New York Times, as of mid-2014, PTJ’s flagship fund averaged long-term annual returns of around 19.5%. And what’s even more impressive is that he didn’t have a single losing year over those 25 consecutive years — a feat unheard of in the hedge fund industry.

To follow is an examination of this legendary fund manager, whose trading style resembles that of a street fighter and whose gut-instinct for market turns are unparalleled.

Paul Tudor Jones on the most important thing… "Don’t lose money"

“…at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control.”

PTJ has an aggressive, cut-throat trading style, which is necessary if you want to string together multiple 100%+ years like he did. But what’s extraordinary about this record is the lack of drawdowns. It’s something only a handful of traders have ever accomplished (ie, Druckenmiller, Soros, Brandt).

He achieved this by mastering risk-management and consistently chopping off that left tail. This is a key trait of ALL top traders and investors… and PTJ stands out as one of the best. He learned the critical importance of managing risk through the painful and indelible experience of trading and making mistakes.

  • Losing those stakes in my early 20s gave me a healthy dose of fear and respect for Mr. Market and hardwired me for some great money management tools.
  • That was when I first decided I had to learn discipline and money management. It was a cathartic experience for me, in the sense that I went to the edge, questioned my very ability as a trader, and decided that I was not going to quit. I was determined to come back and fight. I decided that I was going to become very disciplined and businesslike about my trading.

Author Brian McGill writes, “We are never taught more deeply and more truthfully than by pain.” True words…

Paul Tudor Jones has mentioned that when hiring traders he prefers those who have blown up accounts and suffered the pain of large losses. These traders have had risk management seared into their very being. This is a trait that almost has to be learned through experience and can’t be taught.

Side note: I remember reading the original Market Wizards book over a decade ago when I was as a green-behind-the-ears market punter. It seemed that every interview included a “Market Wizard” recounting their blown account from the early days and physical and emotional anguish that came with it. I thought to myself “wow, that sounds shitty. I’ll just never do that so I don’t have to experience something similar. Luckily, I’m an extremely levelheaded guy who doesn’t get emotional over trading. I’ll just stick to my risk management protocols and be fine.”

Fast forward a couple of years, two blown out accounts and a lot of money up in flames later, and yours truly finally realized how naive (stupid, ignorant, arrogant etc) he’d been. One of the Market Wizards (don’t remember the name) said something along the lines of “experiencing the pain of blowing up an account is a necessary stepping stone to learning how vital risk management is.” I couldn’t agree more. I emerged from the visceral and painful experiences of those big losses humbled and equipped with a maniacal focus on not losing money. Those early losses were important money spent on my trading tuition.  

Like Seykota said, “The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.” For some reason this is a platitude repeated by many, but understood by very few.

  • I think I am the single most conservative investor on earth in the sense that I absolutely hate losing money.
  • There’s no reason to take substantial amounts of financial risk ever, because you should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum drawdown pain and maximum upside opportunities.
  • Don’t ever let them get into your pocket — that means there’s no reason to leverage substantially.
  • When I am trading poorly, I keep reducing my position size. That way, I will be trading my smallest position size when my trading is worst.
  • I have very strong views of the long-run direction of all markets. I also have a very short-term horizon for pain.
  • Everything gets destroyed a hundred times faster than it is built up. It takes one day to tear down something that might have taken ten years to build.

On The Importance of Asymmetry And Macro

So much of successful trading consists of finding the right balance between risk management and betting big on the juiciest opportunities. This is one of the most difficult questions a trader is forced to constantly grapple with. There are no perfect answers.

Markets are fluid and dynamic. There will always be many unknowns. And because of this inherent complexity, a trader should always err on the side of capital preservation over profit maximization. It’s a lot easier to get steam rolled than it is to hit the cover off a fat pitch.

An important tool in rectifying the capital preservation/profit maximization dilemma is the understanding and implementation of asymmetry in trading.

Profitable trading is about finding and creating positive asymmetry. Positive asymmetry is when potential gains are multiples of potential losses. The greater the positive multiple, the greater the asymmetry. A trader should always be thinking in this fashion of potential risk weighted against potential reward (risk/reward).

A trader can find asymmetric opportunities through many approaches (ie, technical, fundamental, macro, sentiment etc)

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