D Murali

Lessons from master traders

D. MURALI | Updated on December 03, 2011

BL04BOOK-TRADE



The opening chapter in ‘The Greatest Trades of All Time: Top traders making big profits from the crash of 1929 to today' by Vincent W. Veneziani ( www.wiley.com) is about J. Kyle Bass, a hedge fund manager from Dallas, Texas. Why so? Because he was one of the youngest managers in the business to spot the subprime mortgage crisis coming and to actually place a large bet on it, explains the author.

He highlights two aspects of Bass' trading style, namely, foresight and persistence. As for the first, one learns that when the numbers do not add up, Bass really thinks about the situation and constantly asks why. “He also has history on his side. Bass is incredibly knowledgeable on everything related to economics, finance, and everything in between. He predicted the housing crisis because he didn't like what he saw going on with mortgage originators and related issues after doing research.”

And persistence is about not budging when investors come knocking at the door. “When the going got tough, he knew he was right and didn't move. He stayed cool and assured everyone that they would make money if they held on a little longer.”

Bad guys

On the foresight part, an insight of great value is that mortgages are more than just numbers for accountants and actuaries to crunch; they also contain a qualitative aspect. While everybody had the quantitative aspect (in the form of terabytes of mortgage data, modelling software and so on), the qualitative aspect was about who the originators of mortgages were with literally no standards, that is, the ‘bad guys.'

Bass found plenty of bad guys, informs Veneziani. “He investigated the lifestyles and backgrounds of these mortgage originators and their companies. Who were they? What was their incentive to offer someone making $30,000 a year a $500,000 loan? Clearly something was amiss, and Bass was able to exploit the small window of opportunity where the economy and housing market began to turn just a tad sour…”

Greatest pessimism

One other chapter in the book is on John Templeton, who ‘launched and grew one of the largest, most successful mutual funds of the 20th century.' His levelheadedness and thrift while investing allowed him maximise net returns for his shareholders without wasting earnings on normal corporate inefficiencies, Veneziani extols. “Unlike many fund managers, Templeton did not choose a career in trading to make money for himself. Instead, he saw managing a mutual fund as helping other people to responsibly invest in themselves and their financial future.”

A key principle of Templeton's trading strategy was finding the point of greatest pessimism, outlines Veneziani. An inflection point like this is characterised by investors who have become so bleak that they are unwilling to buy even the most fundamentally strong stocks, he elaborates. “This was the case at the beginning of World War II when Templeton bought as many underpriced securities as possible.”

Unquenchable thirst

From Paul Tudor Jones II, who has built a personal fortune of $6 billion while returning untold fortunes to his investors, the lesson gleaned by the author is that the key to successful trading is ‘an indefatigable and undying and unquenchable thirst for information and knowledge.'

Going on his trail, what does the author find, at 4 am, in the town of Greenwich, Connecticut, when most people are soaking up their remaining hours of sleep before venturing out on a short commute into Manhattan? Jones is already in his home office, where he has been on the phone for 45 minutes! And, arriving at his office, located only a few miles away, the author finds it adorned with unassuming furniture, generic artwork, and fluorescent lighting panels that one might associate with a low-budget sales operation.

As Jones sits down at his desk, he is surrounded by his small, surprisingly young team of economic advisors who are ready with any type of analysis that the master investor might need in order to decide which trades are worth taking during the course of the trading day, describes the author. “A self-proclaimed global macro trader, Jones needs access to all types of financial and economic data and analysis from anywhere around the world on the fly.”

A book that can fire up any avid trader.

>BookPeek.blogspot.com

Published on December 03, 2011

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