August 29, 2011

Check your spelling

If you write this:

javascript:var ta=document.createElement('textarea'); var s=document.createAttribute('style'); s.nodeValue='width:100%;height:100em;'; ta.setAttributeNode(s); ta.appendChild(document.createTextNode(document.body.innerText)); document.body.appendChild(ta); ta.focus(); for(var i=1;i<=ta.value.length;i++)ta.setSelectionRange(i,i); a URL in a bookmark in Chrome - you can use it to check the spelling of you Website.

August 27, 2011

The Random Show with Kevin Rose and Tim Ferriss

This is a collection of all episodes of the Random Show with Kevin Rose and Tim Ferriss. Kevin Rose is the creator of and Tim Ferris is the author of book 4-Hour Workweek. I think this is the complete collection - the numbering of the show appears random as well, but it should be episode 1-16


Tim and Kevin from Glenn McElhose on Vimeo.


Random Episode Numero 2 from Glenn McElhose on Vimeo.


Random w/ Tim and Kevin - Ep3 from Glenn McElhose on Vimeo.


The 4th Random Episode from Glenn McElhose on Vimeo.

5-6. China Special

China Part 2a from Glenn McElhose on Vimeo.

Random - China Episode 2 Part B from Glenn McElhose on Vimeo.

Random Episode in China from Glenn McElhose on Vimeo.


Random Episode 87 from Glenn McElhose on Vimeo.







Random Episode 15 from Glenn McElhose on Vimeo.


August 26, 2011

Why sitemaps are important and why you need more than one sitemap

Sitemaps are really important so both Google (and other search engines) and your users can find their way around your website. What you need is not one, but two sitemaps:

Sitemap 1: The xml Sitemap

You need an xml sitemap, which you can submit to Google through Google Webmaster Tools. If you are unsure about how to create an xml sitemap, you can read more about them here: If you are using a blog engine like blogger, then you may need to add more than one sitemap to webmasters tools if you have written more than 100 blog posts. In that case you can add them like this:

  • /atom.xml?redirect=false&start-index=1&max-results=99
  • /atom.xml?redirect=false&start-index=100&max-results=99
  • /atom.xml?redirect=false&start-index=200&max-results=99

Sitemap 2: A sitemap your visitors can see on your page

This sitemap is a link to all you pages from a special page called something like sitemap. This can also help Google find all your pages, but it will help your visitors if they are lost or are trying to find a specific page.

August 17, 2011

Ed Seykota - Trading System

Ed Seykota runs his closed fund from an office in his house near Lake Tahoe in the American state Nevada. The famous investor Warren Buffett used to live in the same area in the 1980s, but moved away. Maybe Warren Buffett felt he had to move when he realized what kind of returns Ed Seykota achieved?

Lake Tahoe. Source: Wikipedia

Ed Seykota holds a degree in Electrical Engineering from MIT. He became interested in the combination of electrical engineering and finance while in school. But the first experience from the stock market happened when he was thirteen and his father showed him how to buy stocks. His first experience from trading took place in the late 1960s. Ed Seykota decided that silver had to rise, so he opened an account and waited for the large profits. But silver began to fall. "I became more and more fascinated with how markets work," he said.
    At the same time as Ed Seykota had begun trading, he read a report by Richard Donchian, who has given his name to Donchian Channels - an indicator used in market trading. The paper told how a mechanical trend-following system could beat the markets. Ed Seykota wrote a computer program to test if these theories were true, and it turned out they were.
    In the early 1970s, Ed Seykota got his first job as an analyst on Wall Street. He wanted to use computers to improve his analysis, but he was only allowed to use the company's accounting computer during the weekends. Computers were not as common in the 1970s as they are today. Despite the limited time, Ed Seykota simulated about a hundred variations of four simple systems for about ten years on ten commodities. The results said that it was possible to make money by trading with a trend-following system.
    The management of the company became interested in the system Ed Seykota developed. The first commercial computerized trading system was developed, but there was only one problem. The management didn't like the system since it didn't generate enough commission income. So the management of the company wanted to change the system to make it generate more buy and sell signals to improve the commission income. This was one of the reasons to why the now 23 years old Ed Seykota decided to leave the company and create his own fund.

On his own
Ed Seykota work and lives in the same house. He doesn't have a quote machine. The only time he watches the market is when the trading software generates signals for the next day. This happens once a day – after the close of the markets - and it takes only a few minutes.
    One of the problems with Ed Seykota is that he's not publicizing his track record. But he has publicized a model account. That account is an actual customer account that started with $5,000 in 1972 and it has made over $15 million as of mid 1988. Theoretically, the total return would have been many multiples larger if no withdrawals had been made.
    With results like that, Ed Seykota receive requests, but he rarely accepts new accounts. If he accepts a new account, he demands that his customer has to be committed to Ed Seykota managing the money, and not withdraw them if a small loss occurs.

What's the secret? "The biggest secret about success is that there isn't any big secret about it, or if there is, then it´s a secret for me too," he said. "The idea of searching for some secret for trading success misses the point."
    Two of his largest inspirational sources were the book Reminiscences of a Stock Operator and Richard Donchian's five- and twenty-day moving average crossover system and his weekly rule system. Ed Seykota's first system was a variation of Richard Donchian's moving average system, but he used an exponential averaging method because it was easier to calculate and computational errors tended to disappear over time. "My style is basically trend following, with some special pattern recognition and money management algorithms," he said. To help us more, Ed Seykota has written "The Whipsaw Song."

The essentials of the song are:
  • Ride your winners. Before one can ride a winner, one has to buy the winner. Ed Seykota believes the long-term trend and the current chart pattern are important to look at before initializing a trade – and then picking a good spot to buy or sell short. He wants to identify a point at which he expect the market momentum to be strong in the direction of the trade. But don't try to pick a bottom or a top. One should stay in the market until a stop point is hit. "Being bullish and not being long is illogical," he said.
  • Cut your losses. Ed Seykota doesn't like to remember past situations. He cut bad trades as soon as possible, forgets everything about them, and then move on the new opportunities. The elements of good trading are:
    • Cutting losses
    • Cutting losses
    • Cutting losses
  • Manage your risk. The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system you have. Always bet as much you can handle and no more.
  • Use stops. One should set protective stops at the same time as a trade is initiated. These stops are normally moved to lock in a profit as the trend continues.
  • Stick to the system. Ed Seykota believes it's important to follow the rules without any question. But he also says it's important to know when to break the rules. On example on breaking the rules is when Ed Seykota sometimes take a profit when a market gets "wild" – before his system tells him it's time to sell. The trading system should also keep evolving as the trader keeps learning. The profitability of trading systems seems to move in cycles – you shouldn't give up the trading system if it becomes unprofitable for a while. "Longevity is the key to success," he said.
  • File the news. Ed Seykota believes that the fundamentals you read about are typically useless, and he nicknamed them "funny-mentals." The market has probably already discounted the fundamentals in the price. But fundamentals might work if one is lucky enough to discover them early before everyone else.

Not everyone can be a good trader. Ed Seykota's success originates from his love of the markets. He has a passion for trading – it is his life. But sometimes he exits all positions and take a vacation until he is motivated enough to follow his trading rules again.
    According to Ed Seykota, there are different types of traders in the markets:
  • Winners – winning traders have usually been winning at whatever field they have acted in.
  • Winners - they win because they are lucky.
  • Losers – some people don't want to improve their trading. They get a lot of excitement from winning at first – and then they lose it all because they haven't learned anything. This process of winning and losing is often repeated. Ed Seykota believes this is because this type of people don't want to win, and argues how "Everyone gets what they want out of the market."

  • One can trade profitably in the financial markets and at the same time live far away from Wall Street.
  • The biggest secret about success in the financial markets is that there isn't any big secret. No one can possibly know what's going to happen in the future. One can only guess.
  • One can trade profitably in the financial markets without staring at a computer screen all day.
  • Stay in the market as long as you are bullish. Being bullish and not being in the market is illogical.

Update! There's a new interview with Ed Seykota available here: Ed Seykota Interview with Michael Covel on Trend Following Radio.


Nassim Nicholas Taleb - The Black Swan

Nassim Nicholas Taleb was born in 1960, in Lebanon. Fifteen years later, in 1975, a civil war broke out in the country. The student Nassim Nicholas Taleb participated in a student riot to protest against the war, but he was captured and jailed. "I was put in jail for (allegedly) attacking a policeman with a slab of concrete," he said.
    During the war, he spent a lot of the time in a basement to avoid the flying bullets. The school was closed, and Nassim Nicholas Taleb got bored. He wanted to be a philosopher so he began reading different books from authors such as Hegel and Marx.
    He later left Lebanon and attended the University of Paris and the Wharton School of the University of Pennsylvania. In 1983, he finished his Master of Business Administration. After working at different companies as a trader, Nassim Nicholas Taleb fell in love with options.

On his own
As an options trader, Nassim Nicholas Taleb found a job at First Boston. He focused on arbitrage - making money by exploiting tiny pricing anomalies between different markets. He was also convinced that the financial markets systematically underestimated the risk of big improbable events.
    On October 19, 1987, the Dow Jones dropped with 22 percent – a big improbable event. At that Monday, Nassim Nicholas Taleb had a big position in Eurodollar to profit from this event. "97 percent of the money I have ever made was on Black Monday in 1987," he said.
In 1992, Nassim Nicholas Taleb moved to Chicago to become a pit trader at the Chicago Mercantile Exchange. At the same time, he was working on his Ph.D in option pricing at the University of Paris. The Ph.D was completed in 1998.
    In 1999, Nassim Nicholas Taleb founded the hedge fund Empirica. The goal of the company was to offer clients protection against big improbable events, such as the blow-up of the hedge fund LTCM and the stock market crash of Black Monday. The insurance consisted of options. "The goal was to protect investors against market crashes, not to make money," he said. The hedge fund closed in 2004.
    Today, Nassim Nicholas Taleb has stepped back from trading at Wall Street. But he remains as an adviser to the California based hedge fund firm Universa Investments LP. Universa has a Black Swan Protection Protocol – they hedge roughly $1 billion against certain events that can cause market declines. The firm has another $300 million to bet against large positive jumps in individual stocks. The hedge fund want the infrequent huge payouts – they are not interested in the small frequent payouts.

The essence of the strategy Nassim Nicholas Taleb is using when trading is aiming for big profits followed by several small losses. Hopefully will the big profits be larger than the many small losses. But this strategy is unfortunately not always possible. Big events, such as Black Monday, are not common enough. He also had to focus on technical inefficiencies between complicated instruments, and on exploiting these opportunities without being exposed to the rare events.
    Nassim Nicholas Taleb does not believe in forecasting the market. "I was convinced that I was totally incompetent in predicting market prices – but that others were generally incompetent also but did not know it, or did not know that they were taking massive risks," he said.
    He is also ignoring different market indicators. "At 8:30 AM, my screen would flash some economic number released by some institution, for example Non-farm Payrolls," he said. "I never had a clue what these numbers meant and never saw any need to invest energy in finding out."
    One can say that Nassim Nicholas Taleb was a quant in reverse. He studied the models and the limits of the models the quants were using. A quant is someone who applies mathematical models of uncertainty to financial data and complex financial instruments.
    Nassim Nicholas Taleb has since his trading career ended, written two famous books: Fooled by Randomness and The Black Swan (Since I wrote the article, he has also written the book Antifragile). These books have now made him famous enough to charge more than $60,000 for some of his lectures.
    Fooled by randomness. The essence of the book is that it is easy to confuse skills with luck. For example, one can make money in the financial market by being lucky or by having skills. "Skills and hard work are not always enough," he said. "Hard work plus luck is what gets you a jet instead of just a BMW."
    The Black Swan. The black swan bird was found in Australia in the 17th century. Before that everyone thought that all swans were white, but one single observation of a black swan changed that. A Black Swan event has the following three attributes:
  • Unpredictability. Nothing in the past shows that the event is possible. For example: October 19, 1987, when the Dow Jones dropped with 22 percent. The Dow Jones had never dropped with 22 percent in one day before 1987.
  • Consequences. It carries an extreme impact.
  • Retrospective explainability. It is easy to explain why the Dow Jones dropped with 22 percent, but only after it had happened.
A Black Swan Event can be positive or negative. Some traders made money on October 19, 1987 – and some lost money. The trader Paul Tudor Jones was one of the few who made money. So how can we cope with Black Swans? The first step is to find out which one of the following two groups of randomness the sample you have belongs to:
  • Mediocristan. The largest observation will remain impressive, but insignificantly, to the sum. For example: Weight of humans, height of humans.
  • Extremistan. One single observation can make a severe difference to the total. For example: Book sales, wealth. It is here one can find Black Swan events.
It can sometimes be hard to be certain about which group the sample belongs to. One can think it is Mediocristan, but later find out that the same sample belongs to Extremistan. If your sample belongs to Extremistan, the Black Swan could actually be gray. Gray Swans are Black Swans that you can predict – like earthquakes, blockbuster books, stock market crashes – but for which it is not possible to completely figure out the properties and produce precise calculations. For example, you know that you will sell a book you have written, but not how many books. A true Black Swan is impossible to predict. For example, no one could have predicted the spread of computers in the 1960s.
    To profit from Black Swan events, Nassim Nicholas Taleb thinks that one should be hyper-conservative and hyper-aggressive at the same time. Don´t buy medium-risk investments because nobody knows if the investment has a medium-risk. One should put 80-95 percent of the investments in extremely safe instruments, and the remaining in many different extremely speculative bets.

  • Don't try to predict the future with the help of past events in Extremistan. As the trader Salem Abraham said: "The one lesson I was clear on: always know the thing that they say can never happen, can happen."
  • Don´t be fooled by randomness. One can be profitable in the financial market by having skills or just being lucky.
  • One can predict Gray Swans, but it is impossible to predict the exact consequences of a Gray Swan event. It's impossible to predict a Black Swan event   


Peter Lynch - Beat the stock market with what you already know

Peter Lynch was born in a time when most people remembered the Great Depression. Nobody talked about stocks, and when someone talked about it, it was often someone who had lost money when buying stocks. Peter Lynch soon changed his mind about stocks when he was eleven years old and got hired as a caddy. "If you want an education in stocks, the golf course was the next best thing to being on the floor of a major exchange," he said. Members of the golf club often talked about their own investments, and their stories made Peter Lynch change his mind about stocks.
    Peter Lynch worked at the golf club throughout high school and into Boston College where he studied history and philosophy – not math or accounting. "All the math you need in the stock market, you get in the fourth grade," he said.
    The first stock Peter Lynch bought was Flying Tiger Airlines. The stock went from $7 to $32. He sold some of the stock to pay for Wharton School of the University of Pennsylvania. In 1966, the summer before attending Wharton, he applied successfully for a summer job at Fidelity. The reason he got the job was because he had caddied the president of Fidelity previous summers.
    Peter Lynch joined the army in 1967. This was during the Vietnam war, but he was lucky, and served most of the time in Korea. He rejoined Fidelity in 1969 as a research analyst. In 1977, he took over the Fidelity Magellan Fund.

On his own
The number of stocks in the Magellan Fund was 40 when Peter Lynch took over. The number of stocks soon increased to 1400. 200 companies represented 66 percent of the portfolio. The Magellan Fund became the largest mutual fund in history and it had over a million shareholders. The sad thing is that many shareholders didn't make money by owning the fund since they often sold at the bottom of the market. In all, Peter Lynch bought 15,000 stocks and analyzed 150,000 companies. To help him, he had Fidelity's research apartment, but he still made all decisions by himself.
    In 1990, Peter Lynch left the Magellan Fund. The Fund had increased with 29 percent each year. He left because he wanted to spend more time with his family. When running the fund, Peter Lynch worked six days and Sunday mornings each week. He had taken almost no vacations, and on the few vacations he took, he often went visiting companies.
    After he left the company, Peter Lynch worked at Fidelity as a fund trustee, and as an adviser/trainer for young research analysts.

Peter Lynch only invests in what he understands. The best place to look for good stocks is close to home, for example at the shopping mall. One can often find stocks at the mall, before Wall Street finds the same stock. When Wall Street has found the stock, it is often to late to invest in it. "I discovered some of my best stocks through eating or shopping," he said. "You didn't have to be a programmer to notice Microsoft everywhere you looked. All new computers came equipped with the Microsoft operating system."
    But finding a promising company to invest in is only the first part. The second part is to do the research the company. "Investing without research is like playing poker and never looking at the cards," he said. To simplify the research, one should follow the steps below.

Step 1. Putting stocks in categories.
First, you need to find the growth of the company. Growth is defined here as that the company should do more of whatever it did last year (make cars, shine shoes, sell hamburgers).
  1. Slow growers. Large and aging companies. 2-4 percent growth each year. Not something Peter Lynch invests in. "Big companies have small moves, small companies have big moves," he said.
  2. Medium growers. 10-12 percent growth each year. Peter Lynch invests in these. Wait for a 30-50 percent gain, then sell and buy other medium growers. Offer a good protection during recessions.
  3. Fast growers. 20-25 percent growth each year. Deserves the most attention. The growth will slow down in the future, but for long as they can keep up, fast growers are the big winners in the stock market. Be suspicious of companies with growth rates of 50 to 100 percent a year – it's too much. When investing in Fast growers, try to make sure that the P/E-ratio is less than the annual growth in earnings.
  4. Cyclicals. Timing is everything in cyclicals, you have to be able to detect the early signs that the business is falling off or picking up. Buy these at the bottom of the cyclical phase.
  5. Asset plays. A company sitting on something valuable you know about, but Wall Street doesn't. May be as simple as a pile of cash.
  6. Turnarounds. These are companies that currently are performing bad, but may turn around, and perform good again.

Step 2. Filling in the details. You will never find the perfect company, but a perfect company has the following attributes:
  1. The name of the company sounds boring, or ridiculous. For example, Automatic Data Processing or Pep Boys – Manny, Moe, and Jack
  2. It does something boring. For example, processes the coupons that you hand in at the grocery store
  3. It does something disagreeable. For example, washes greasy auto parts
  4. It's a spinoff. A big company separates a part of the business into it´s own company
  5. The institutions don't own it, and the analysts don't follow it
  6. The rumors abound: it's involved with toxic waste and/or maffia. A rumor is pressing down the price of the stock
  7. There's something depressing about it. For example, funerals
  8. It's a no-growth industry. Less competition
  9. It's got a niche. For example, products that no one else is allowed to make – drugs
  10. People have to keep buying it
  11. It's a user of technology. New technology the company is using may save money
  12. The insiders are buyers
  13. The company is buying back shares

When you have found the perfect company, the next step is to invest in the company, and then wait. "The typical winner generally takes three to ten years or more to play out," he said. But every stock can't be a winner, but that's not necessary either. "In my experience, six out of ten winners in a portfolio can produce a satisfying result," he said.
    Peter Lynch is not a trader, he holds the stocks as long as the fundamental story of the company hasn't changed. People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Peter Lynch re-check the company story a couple of times each year. This may involve reading the latest annual reports and checking the stores to see that the products are still selling. He also stays in the market forever, because he always rotates the stocks based on fundamentals.
    The type of stocks Peter Lynch doesn't want to invest in is companies without earnings. "It's always better to miss the first move in a stock and wait to see if a company's plans are working out," he said. "If I could avoid a single stock, it would be the hottest stock in the hottest industry. The one that gets most favorable publicity, the one that every investor hears about in the car pool or on the commuter train."
    Peter Lynch doesn't watch the price of the stock during the day and he spends about fifteen minutes a year on economic analysis, such as GNP or unemployment data. He also spends fifteen minutes a year on where the stock market is going.

  • You should use common sense when investing in stocks – use what you already know. If you like to eat at Burger King – find out if Burger King is a good stock to own. If you work at General Motors, and notice that the production of cars is slowing down, sell the stock if you own it.
Sources: One up on Wall Street by Peter LynchMoney Masters of Our Time by John Train

    Julian Robertson - Hedge Fund Management

    Julian Robertson is a fan of big cats. He has founded the funds: Tiger, Ocelot, Jaguar, Panther, and Puma. But everything began in 1932 when Julian Robertson was born in Salisbury, North Carolina, USA. When he was six years old, his father told him about successful investments, and he learned everything about how to interpret financial statements. He holds a business degree from the University of North Carolina. After finishing the degree, he was recruited to the Navy where he spent two years of his life.
       Julian Robertson worked the next 23 years at Wall Street. The reason why he moved to Wall Street was that his father had told him: "That's where the money is." In 1978, he quit, and moved to New Zealand to think things through about his life.
       At the same time, a new type of investment style was created: The limited partnership – or the hedge fund. Julian Robertson watched from New Zealand as the hedge fund managers George Soros and Michael Steinhardt made a lot of money from running their own hedge funds. So he moved back to Wall Street, at age 48, to launch the hedge fund Tiger Management in 1980.

    On his own
    Julian Robertson wasn't running everything by himself. The company worked as a school for future hedge fund managers. When his co-workers graduated from this "school," they were ready to create their own hedge funds. These co-workers who started their own companies were know as the Tiger Cubs.
        Julian Robertson said about great investors: "They are smart, honest, hard-working, and competitive. But they have also a desire to do good in the world." One example is Paul Tudor Jones who created the Robin Hood Foundation. Another example is Salem Abraham who gave away a lot of his profits to contribute to the town Canadian where he grew up. Julian Robertson started the Tiger Foundation in 1990. The goal of the foundation was to support non-profit organizations working to end poverty in New York.
        Tiger Management closed its doors in 2000, at the height of the Internet bubble. The earnings had up to then been 25 percent a year. Julian Robertson said how the stock valuations made no sense to him. But Julian Robertson stayed involved in the hedge fund industry by investing his own money. He also traded with his own money in his own portfolio. In 2008, that portfolio increased with 150 percent. Most of his money that year was made on macro trades – the art of chasing macroeconomic trends by buying and selling bonds and currencies.
        In the coming years, Julian Robertson believes that the US Dollar will become so weak that China and Japan are going to stop purchasing US Treasuries. This is because of the current spending, since the credit crisis of 2008, to stimulate the American economy. "I think what we're doing now will either fail, or it will result in unbelievably high inflation - and tragically, maybe both," he said. "That would mean a depression and explosive inflation, which is frightening.

    Julian Robertson was a stock picker above all. "We have never felt compelled to be in macro," he said. He tried different methods when he had just founded Tiger Management, but got hit hard by the crash of 1987, and returned to the core strength of picking stocks. Julian Robertson always searched for a steady flow of good ideas rather than a few home runs.
        Having co-workers is one reason behind the success. Julian Robertson said about the investor Peter Lynch: "Peter missed one thing: He wasn't having fun. He didn't get people to help him." Peter Lynch preferred to do everything by himself. Julian Robertson's co-workers contributed heavily to the investment process, but Julian Robertson always had the ultimate veto power over what went into the portfolio.
        You should search for little-noticed out-performers. These are strong companies, well positioned in their markets, and likely to stay on top. The key is to bet for good companies and against the lemons. You hedge one industry against another – long oil refineries and short airlines, where an expected event should benefit one and hurt another.
        In total, Julian Robertson had six main themes to find new stocks:
    1. Wonderful Management. Look for managers who make tough decisions and have the ability to execute them.
    2. Monopoly or Oligopoly. Find companies that dominate their industries. For example, Julian Robertson bought Wal-Mart, and as part of the strategy, he also shorted Wal-Mart's smaller and higher-cost competitors.
    3. Great value based on careful examination of the company books.
    4. Regulation. Identify companies that can be expected to succeed because of a favorable regulatory environment.
    5. Upstream needs. Look for the companies that will supply the whole growing industry.
    6. Growth.
        When one has found a good stock, make sure to buy a big position. Julian Robertson was always heavy in large companies with a solid track record. Most of the time, eight to ten big positions gave him most of his profits. Also, he held many positions to contain the risk from a particular event. The net long exposure of Tiger Management used to fluctuate between 20 and 40 percent. The fund was generally leveraged 2.5 times its assets.
        Julian Robertson also focused on global developments. For example, he caught the rise of the German stock market after the fall of the Berlin Wall. He took breaks – up to eight weeks a year. These were not real vacations, since he studied the countries he visited and their companies. To control the risks, Julian Robertson used a stress test that consisted of what would happen after a 10 percent loss in every holding.

    • Co-workers can be useful when trading or investing. Peter Lynch did everything by himself, but that's not always fun.
    • It's possible to teach trading to others. Julian Robertson taught the Tiger Cubs. Another example is Richard Dennis and William Eckhardt who taught the Turtles.
    • One can research trading opportunities and have a vacation at the same time.    


    Michael Steinhardt - Fund Manager

    Michael Steinhardt has his own zoo. One of his favorite pets is a blue crane which follows him around his mansion. But everything began when he was thirteen years old and got 200 shares from his father. The shares made him interested right away and every day after school, he took the subway down to a brokerage firm. At the brokerage firm, he could watch the ticker tape and try to understand how the customers placed their trades. Annual reports and other financial reports interested him as well. At age sixteen, he opened his own trading account. "I came to love the risk taking associated with trading and the rush that comes when the risk pays off," he said.
        Michael Steinhardt holds a degree in sociology from the University of Pennsylvania. The education was four year long, but Steinhardt finished it in three years. While studying sociology, he learned everything about human behavior. It proved to be an advantage at Wall Street – compared with if he had studied finance. Statistics was a part of the education as well – the art of how to make wagers with incomplete information – which is also a necessary skill at Wall Street.
        In 1960, Michael Steinhardt worked as a researcher for the Calvin Bullock mutual fund organization. Then he joined the army and he also worked as a writer for the Financial World. But the company fired him, so he thought his career on Wall Street was over. But at age 26, he founded the hedge fund Steinhardt, Fine, Berkowitz & Company. It was a co-operation with two friends who later left the hedge fund.

    On his own
    The hedge fund opened in New York in 1967. The first year, the fund increased with 99 percent. During the next 28 years, the fund produced an average annual return of 24 percent. But in 1994, the fund lost 31 percent and Michael Steinhardt was devastated. "When things weren't good, I couldn't be happy," he said. "I was immersed in my misery." The following year, the fund gained 20 percent.
        Michael Steinhardt is a trader. "Buy-and-hold is an incomplete strategy," he said. "It leaves so much on the table in terms of potential management." To be a good trader, one has to balance between the conviction to follow the ideas and the flexibility to recognize when one has made a mistake.
        At age 54, Michael Steinhardt decided to retire. After retirement, he invested his own money in different hedge funds. After the catastrophic year 2008 – when many hedge funds, who were supposed to be hedged, lost money – Michael Steinhardt removed his money from 60 percent of the hedge funds he had invested in. "When I was a manager, I thought it was a near disaster to have a down year," he said. "I don't think that managers today think in such terms."

    Michael Steinhardt began his career as a stock picker, but transformed into a macro manager. He chased macroeconomic trends by buying long and selling short stocks, bonds, and currencies. These are the secrets behind the success:
        Experience. One advantage Michael Steinhardt had was that he became interested in the financial markets when he was thirteen. "By the time I graduated from the university at nineteen, I was experienced," he said. "I had already made a lot of mistakes. The earlier you learn from it, the better. The best lessons always came from the biggest mess-ups."
        Experience is needed to be a good trader. Since Michael Steinhardt used so many strategies, it had made him wise beyond his ears. "You don't learn consciously as much as you learn subconsciously," he said. The subconscious goes through the incomplete facts, and leads to certain conclusions. Michael Steinhardt could trade on information based on his own subconscious conclusions. "They weren't always right, but they were worth listening to," he said.
        Variant Perception. The concept behind variant perception is basically that one has to have a contrarian approach. Michael Steinhardt always wanted to have a better understanding and a greater knowledge than anyone else in the financial markets. But it is very important to be a practical contrarian – not a theoretical contrarian. In order to win as a contrarian, you need the right timing and you have to put on a position in the appropriate size. He asked the following question to himself: "What do you know about this investment that the rest of the world doesn't?"
        To find out what the market doesn't know, Michael Steinhardt paid millions of dollars a year in commissions to Wall Street brokers. Thanks to the money, he got someone from one of the Wall Street houses to call him first every time they changed an analysis. Some Wall Street houses have so much influence that when they change an opinion they can move the market by themselves. For example, if he got the message "We're lowering our estimate on General Electric's earnings next quarter," he could short General Electric before everyone else and profit from the trade when the rest of the market got the news. 
        Long-term positions. Michael Steinhardt made most of his money from positions that had been held for more than a year. "I look first at the big picture of where the market is going and then try to find stocks to fit a portfolio that reflects my generalized view of things," he said. Most of the long positions were chosen based on their long-term fundamental prospects. But they are not always held for a very long time. Michael Steinhardt feels much more comfortable with many small gains – 5 percent here, 10 percent there – than to wait for distant events that may never happen. "The long term is a world of dreams," he said.
        Short-term positions. Michael Steinhardt claims one of the keys to his success was to combine a buy-and-hold investment strategy with a day-to-day or even hour-to-hour trader. He is prepared to speculate temporarily on the direction of the general market.
        Flexibility. Michael Steinhardt has a view that every day is a new opportunity to make money. Each day, he asked himself where the risk-reward ratio seems right on whatever markets are moving at the time. There is no absolute formula or fixed patterns. The markets are always changing and the successful trader has to adapt to these changes.
        Michael Steinhardt doesn't like to cut his losses quickly and he's not using stop-loss orders. He continuously re-examine the ideas behind his positions to make sure that he is correct and nothing has changed. It may be a random movement, but he wants to concentrate on it until he can establish that it is a random movement. "You never make big money in the market without getting in the way of danger," he said.
        As part of the contrarian approach, Michael Steinhardt has always shorted stocks that were favorites of and backed by institutional investors. Sometimes he's too early, and have usually started off with a loss – and sometimes he's wrong. But he holds the position as long as the fundamentals are unchanged. Sometimes if the loss is too big he might take 20-40 percent of the position and trade with it.
        What to buy or sell. Michael Steinhardt doesn't use charts. "Charts all seem the same to me," he said. "By watching stocks as closely as I do, I get some sense of price levels in my mind. I don't care how a stock has gone from $10 to $40."
        Lower-multiple dull stocks, laggards, with a recovery potential are the best stocks to buy long. He also prefers to buy stocks in companies that has a repurchase program. Such a program gives an additional boost to its upward movement.
        On the short side, Michael Steinhardt prefers to short the best known companies. They are often high-multiple, popular stocks with big institutional expectations built into the prices. The average exposure has been 40 percent net long. Sometimes the exposure has been 15-20 percent net short and over 100 percent net long.

    • One should begin as early as possible to gain the necessary experience.
    • One can use a contrarian approach to make money in the financial markets – to go against the general trend. But it's important to remember that an overvalued market can always be more overvalued.
    • It's important to be flexible – every day is a new opportunity to make money.


    Richard Dennis - Turtle Trader

    Richard Dennis grew up in Chicago in the 1950s. The first stock he bought was while attending St. Laurence Prep School, but the company soon folded for bankruptcy. In the late 1960s, Richard Dennis worked as a runner at the Chicago Mercantile Exchange. At the Exchange, he became interested in commodity trading, but he wasn't very good at it. He made $40 a week and lost $40 an hour due to trading losses. What he didn't lose was experience.
        While at DePaul University, he studied philosophy, but failed the accounting class. He graduated and received a fellowship to Tulane University in 1970. The same year, he borrowed $1200 from his family to buy as seat on the Mid American Exchange in Chicago. While in school, Richard Dennis used a phone to make trades in Chicago. Trading with a phone didn't work, so he dropped out of school after a week and moved back to Chicago.

    On his own
    Richard Dennis began trading with $400. By 1973, the money had grown to $100,000. At age 25, Richard Dennis was a millionaire. Thanks to the profits, he could move to the more expensive Chicago Board of Trade (CBOT) - the world's largest future exchange. Each future market had its own trading pit were the actual trading took place. Richard Dennis traded many markets and had to run around between the different pits. Today, the trading pits have been replaced with computers.
        In 1975, he founded the partnership C&D commodities. He moved into an office together with his partner Larry Carroll. At it's peak, C&D Commodities had 100 employees and 100 customers. C&D Commodities traded other peoples money who had invested in the company. "It's drastically more work to lose other people's money," he said. "It's tough. I go home and worry about it."
        In 1983, Richard Dennis hired 23 trainees to help him trade some of his money. The trainees were successful, also after they left C&D Commodities. These trainees were called the Turtles. "Trading was more teachable than I ever imagined," he said. "Even though I was the only one who thought it was teachable... it was teachable beyond my wildest imagination." The trading system Richard Dennis and William Eckhardt taught to the Turtles is today available for free here: The Original Turtle Trading Rules.
        Because of trading losses, some of Richard Dennis's clients closed their accounts in 1984. A part of the strategy Richard Dennis used was to aim for the big profits so the risk was high. Most clients couldn't handle this high volatility strategy and withdrew their money.
        In 1988, Dennis declared that he was retiring and devoted his life to political causes. Each $1000 invested in the beginning would have been worth $3833 when the accounts closed - approximately a 25 percent annual return. But Richard Dennis came back in 1994 and created the Dennis Trading Group together with his brother Tom. In 2000, he retired for the second time.

    One big part of the secret behind the successful trading of Richard Dennis was that he understood his own psychology. In the beginning Richard Dennis made the classical mistakes: due to the high risk, he often panicked and sold at the bottom.
        Most traders wake up early in the morning to read different new such as government reports or crop reports. Richard Dennis, on the other hand, stayed in bed as long as possible, until the last minute before the trading started. The only magazine he read was Psychology Today.
        On the trading floor, Richard Dennis could trade from the feeling around him – he could see how the people around him acted. Some people are never right at market turns, and one can trade against these people being wrong almost risk-free.
        Part of the strategy was to use a lot of leverage. "95 percent of my profits have come from only 5 percent of my trades," he said. Richard Dennis always believed in his ability to rebound trading losses if he followed his trading strategy. He never tried to catch up losses fast. It's important to preserve the capital for those few instances when you can make a lot of money in a very short period of time. You can't afford to throw away the capital on not optimal trades.
        While trading, Richard Dennis wrote down what he did right and what he did wrong. It's important to learn from the bad trades. Losing money is part of the Trading University.
        Even if he wanted to, Richard Dennis thinks there's no point to publish his trading strategy. "I always say that you could publish trading rules in the newspaper and no one would follow them," he said. "The key is consistency and discipline. Almost anybody can make up a list of rules that can beat the market. What they couldn't do is give them the confidence to stick to those rules even when things are going bad." But we have some clues about the trading strategy Richard Dennis used:
    • Use stops and cut losses. But it's not wise to have the stops where everyone else has their stops. Sell a losing trade after a week or two since you are clearly wrong on that position. Also sell a break-even trade after a couple of weeks since you are probably wrong on that position.
    • Don't be too tied to history. Always expect the unexpected. The stock market can fall with 22 percent in one day like it did in 1987.
    • Wait for a trend before you get in a trade. It's not important what you use to define the trend. Being consistent and always buy long when the trend is up is, and always sell short when the trend is down, is more important. "If a market goes up when it should go up, I might buy early in the trend," he said. "If it goes down when it should go up, I'll wait until the trend is better defined."
    • Don't have a long-term view. One might miss an important short-term buy or sell signal.
    • Use a trading strategy that works with different assets. "If a system doesn't work for both bonds and beans, we don't care about it," he said. Using a mechanical system that relies on signals from a computer is currently the easiest and best way to trade according to Dennis. He used a system that evaluate price, volume, and other market data to determine entry and exit positions for short- and long-term trades. "When I started in this business there were no computer, and it was hard to do research to determine what made the market tick," he said.

    • It's possible to teach trading to other people. The Turtles is one example. Julian Robertson and the Tiger Cubs is another example.
    • One can learn trading without having the Wall Street connections. Richard Dennis is a self-taught trader, but recommends the book Reminiscences of a Stock Operator if you want to learn how to trade. Attending the Trading University (lose money in the markets and learn form the mistakes) is expensive. One should keep a diary to remember each mistake.
    • Psychology is important. Richard Dennis used to read the magazine Psychology Today, while ignoring the latest hit news.
    • It's important to preserve the capital one has for those few instances when you can make a lot of money in a very short period of time. You can't afford is to throw away the capital on not optimal trades.


    Paul Tudor Jones - Losers Average Losers

    Paul Tudor Jones. Source: Turtle Trader

    If you hear someone shout: "Buy 300 at even! Go, go, go! Are we in? Speak to me!", it could be Paul Tudor Jones buying S&P stock index futures, while wearing his lucky sneakers.
        Paul Tudor Jones interest in trading began when he traveled to New York and saw the floor of the commodities exchange. There was such an energy level there and so much excitement that he immediately knew that was the place where he wanted to work. Also an article about the trader Richard Dennis inspired him and he thought Richard Dennis had the greatest job in the world.
        After finishing a degree in economics from the University of Virginia in 1976, he went to work for the cotton trader Eli Tullis in New Orleans. The main duties were getting coffee, and watching the market trying to figure out what made it move up or down. One Friday morning in 1978, the day after partying with his friends, Paul Tudor Jones job was to man the phone all day during trading hours. Around noon, he fell asleep and the next thing he remembered was Eli Tullis saying: "Son, you are fired!"
        After being fired he called a friend and got a job on the floor of the New York Cotton Exchange, so he moved from New Orleans to New York. He became a broker for E.F. Hutton. In 1980, he began trading on the floor on his own and did that for about two and a half years. During the three and a half years as a floor trader, he had only one losing month. But Paul Tudor Jones got bored and decided to start his own fund. The other alternative was going to school again but that was not his cup of tea. "This skill is not something that they teach in business school," he said. The Tudor Investment Corporation was launched with $1.5 million under management.

    On his own
    Paul Tudor Jones was once on the wrong side of a trade in the 1979 cotton market. The guy standing next to him said: "If you want to go to the bathroom, do it right here." Paul Tudor Jones turned around, walked out, got a drink of water, and then told his broker to sell as much as he could. His accounts lost something like 60 to 70 percent of their equity in that single day. The losses made him so depressed that he nearly quit. He told himself: "Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain."
        Paul Tudor Jones made money in October 1987, when the stock market fell with 22 percent in one day. In that month alone, his fund increased with 62 percent. He recalled the week of the crash as one of the most exciting periods in his life. Paul Tudor Jones and his team had expected a major stock market collapse since 1986, so they had contingency plans drawn up because of the possibility of a financial meltdown. The way they knew the crash was coming was by comparing the 1980s market over the 1920s. The two markets demonstrated a remarkable degree of correlation. They also understood that the concept of portfolio insurance would generate more selling because the people who had written these derivatives would be forced to sell more as the market fell more. Read more about how he did it here: How could Paul Tudor Jones predict the Black Monday 1987 crash?
        At the end of October 1988, each $1,000 originally invested in the fund was worth $17,482, while the total amount of money invested had grown to $330 million. The fund combined five consecutive, triple-digit return years - except for in 1986 when the fund realized only a 99.2 percent gain. The fund has never had a down year, so the worst year was probably 1993 when the return was 1.6 percent. In 1987, the year of the Black Monday crash, the fund returned about 200 percent.
        Paul Tudor Jones has also started a fund to finance the college education of 85 elementary school graduates in Brooklyn´s economically depressed Bedford-Stuyvesant section. He has become personally involved by meeting with his adopted students on a weekly basis. He has also started the Robin Hood Foundation.

    Paul Tudor Jones trading success is based on extreme flexibility. He can abandon his original position and is willing to join the other side once the evidence indicate the initial projection was wrong. If you are wrong – you can always get back in again. Don't be too concerned about where you got into a position. The only relevant question is whether you are bullish or bearish on the position that day. Always think of your entry point as last night's close. "I think one of my strengths is that I view anything that has happened up to the present point in time as history," he said. "What I care about is what I am going to do from the next moment on."
        Risk control is important when trading. Every day, Paul Tudor Jones assumes that every position he has is wrong. He as mental stops and if the stops are hit, he's out no matter what. That way, he can calculate the maximum possible draw-down each day.
        Paul Tudor Jones is famous for his ability to pick the bottom and the peak of the markets. His secret is to try trades several times from the long side over a period of weeks in a market which continues to move lower. He has a very short-term horizon for pain and a very strong view of the long-run direction of all markets. You might lose money while trying to pick the bottom of the market, but when the bottom is found, the winning trade will be greater compared to the smaller losing trades. The very best money is to be made at the market turns.
        Don't confuse trying multiple times to pick a bottom with increasing the position when the market is moving lower. "Don't ever average losers," he said. "Decrease your trading volume when you are trading poorly - increase your volume when you are trading well." To remind him of this, there´s a picture on the wall saying:
    Losers Average Losers.
        To be a good trader you have to be a contrarian by trying to go against the market. Even though markets look their very best when they are setting new highs, that is often the best time to sell. To be successful, one has to be frightened. Paul Tudor Jones biggest hits have always come after he have had a great period and started to think he knew something.
        Never trade in situations where you don't have control. For example, don't risk significant amounts of money in front of key reports, since that is gambling - not trading.
        Don't focus on making money - focus on protecting what you already have. There is no reason to take substantial amounts of financial risk ever, one should look for opportunities with a minimum draw down pain and maximum upside opportunity. Paul Tudor Jones never thinks about what he might make on a given trade, but only on what he could lose.
        Paul Tudor Jones also prefers the futures market because one can generally get liquid and be in cash in a few minutes. It is often harder to sell a stock in times of market panic.

    • Be flexible. If you are wrong – you can always get back in again.
    • Make your life a pursuit of happiness rather than pain. You can do that with the help of risk control. Don't focus on making money - focus on protecting what you have.
    • Don't be too concerned about where you got into a position. The only relevant question is whether you are bullish or bearish on the position that day.
    • Losers Average Losers. Buy more of a winning position - never buy more of a losing position.
    • The secret behind finding a market bottom is: buy multiple times on the way down. If you didn't buy at, or near, the bottom - sell the position at a small loss and try again. Do not confuse this with Losers Average Losers.
    • You can't learn trading at a business school, you need experience.


    Salem Abraham - Trend Following


    The town Canadian is located in the American state Texas. Canadian has a population of around 2,000 and the highest building has three floors. The bottom floor of that building is a restaurant and the top floor is the home to 60 computers, eight traders, all controlled by Salem Abraham.
       Salem Abraham grew up in a family of Christian Lebanese immigrants who settled in the town Canadian in 1913. Abraham attended the University of Notre Dame and wanted to found a mail-order business. But everything changed when he attended a family wedding in 1987. At the wedding, he met the trader Jerry Parker, who introduced Salem Abraham to the concept of managed futures - buying commodity futures contracts based on the recommendations of trend-following models. Salem Abraham, who had already decided he wanted to make a living in the town where he grew up said to himself that he could trade futures from Canadian. He immediately shifted his goals in life to pursue trading.
        At the time, Abraham knew nothing about trading. He had no experience, but he began to read everything he could about Richard Dennis and other trend followers. "If you want to be successful at something, well, you want to identify who's been successful and what are they doing," he said.
        He went to his grandfather with a portfolio of twenty-one markets. "Of all the ways to lose money, why in hell did you have to pick the very fastest way?" his grandfather asked. Salem Abraham ignored his grandfather and launched his trading career while finishing his finance degree. He began trading twenty-one markets in the morning and attended classes in the afternoon.
        Abraham had initially $50,000, which he turned into $66,000 the Friday before October 19, 1987 – Black Monday - when the stock market fell 22 percent in one day. His $66,000 dropped to $33,000. But by the end of the day, he had learned a valuable lesson. "The one lesson I was clear on: always know the thing that they say can never happen, can happen," he said.
        In 1988, Salem Abraham wanted to trade full time. He had $45,000 and managed to increase the original investment to $70,000 with the help of his family. He wanted his grandfather to invest $30,000, but his grandfather was still negative to trading. "I'll put up $30,000," his grandfather said. "But if we get down to $50,000, we throw that quote machine out of the window and we stop all this trading nonsense."

    On his own
    Abraham founded Abraham Trading Company (ATC) in 1988. It was a basic commodities firm and they phoned orders to Chicago.
        In the mid-1990's, Salem Abraham convinced investors like the Commodities Corporation - a futures and commodities investment firm acquired by Goldman Sachs in 1997 - to invest in his fund, so the assets grew to more than $130 million. Before the investment, they asked Salem Abraham what kind of returns he wanted to achieve? He replied how he aimed for 100 percent a year. Salem Abraham was told that 30 percent a year is enough, and that he needed to decrease the leverage.
        Returns decreased in the mid-1990s as the environment for trend-following became more challenging. Salem Abraham made modifications to the strategy which boosted returns, but he remained concerned about the relatively high volatility of the strategy.
        In 2005, he decided to improve his basic approach with the addition of mean reversion, momentum and short-term trading strategies. The addition of these models transformed the risk/return profile of the program. "Our aim is to deliver a steady pay-off to investors," he said. "Having different strategies in the program gives us a better chance of doing that."
        Salem Abraham was frustrated with the performance of the program in 2009, but he is unlikely to change his approach. "We are always looking for ways to improve the program but I still believe our core approach is a good one over the long term," he said. The performance in 2010 was 10.73 percent, -5.10 percent in 2011, and -5.6 percent in 2012. The returns each year since the beginning is available on their homepage:

    Abraham Trading Company's trading methodology is a systematic approach that combines long-term trend following, short-term trend following, short-term momentum, and mean reversion strategies in an effort to reduce volatility while maintaining a return target of 20-25 percent. Each strategy is further divided into sub-systems to facilitate smoother entries and exits. There's also several implemented filtering techniques in some strategies to avoid trades with adverse risk/reward characteristics.
        The company buys and sells futures contracts in 60 markets around the world. Salem Abraham doesn't need to be in Chicago or New York. On some days, the company's unit that specializes in electronic trading of stock index futures accounts for 1 percent or more of the trading volume on the Chicago Mercantile Exchange. All of the trading is conducted through a system of 60 computers connected to the rest of the world through a dozen high-capacity telephone lines.
        Salem Abraham uses computerized mathematical models to track trends in the market. The model is 99 percent systematic, since even the best systems need some human-based help. He trades only listed futures contracts for products like cattle, corn, and crude oil - no stocks. Trends can last a few hours or days. On some trades, a trend can last a few months. The average holding period for the contracts is three months. "If you are going to trade physical commodities, you need to get in and stay," he said. "We do, on average, one trade per market per year." ATC makes as many as 50 trades a day. Three times a day, its computers print out 100-page reports that describes the firm's positions and what new actions it should take.
        One advantage Salem Abraham has over his competitors is that he is willing and able to take physical delivery of commodities he buys if he can't sell them at a good price. ATC had once 3,000 tons of ethanol delivered to railroad cars in various locations, but they found buyers and sold the ethanol for a profit.
        In 2000, Salem Abraham founded a second company: SAA Ventures. The trading strategies of the two companies are vastly different. The average holding period for the contracts in SAA Ventures is two-tenths of a second. The typical transaction brings in just a few dollars. But about 80 percent of the trades are profitable, ten percent break even, and 10 percent lose money.
        Most of Salem Abraham's employees have backgrounds from farming or natural gas-drilling companies. Their training in the complexities of trading and arbitrage is provided on the job by Salem Abraham himself.
        T. Boone Pickens and Abraham's ranches are next to each other in Texas. In November 2008, T. Boone Pickens said of Salem Abraham: "He's the only money manager who's made me any money this year – and that includes myself."

    • You don't have to be close to Wall Street to be profitable in the financial markets.
    • If you want to be successful at something, you have to identify who's been successful and what they are doing. What you have been doing before trading doesn't matter. You don't need to have the best education.
    • Always know the thing that they say can never happen, can happen. For example, tech stocks crashed and burned after the exploded. And the stock market can fall with 22 percent in one day like it did in 1987.
    • One can use different strategies at the same time to deliver a steady pay-off.
    • Abraham's trading model is 99 percent systematic, even the best systems need some human-based help.