Unknown Market Wizards
Unknown Market Wizards

Unknown Market Wizards

The premise I had when I set out to write Unknown Market Wizards was that there were solo traders, operating in complete obscurity, who were achieving performance results that far surpassed the vast majority of professional asset managers. (Location 60)

If you are expecting to find step-by-step instructions on how to make 100% a year in the markets with only two hours of work a week, quick, put this book down—you’ve got the wrong book! (Location 89)

One major flaw inherent in the Sharpe ratio is that the risk component of the measure (volatility) does not distinguish between upside and downside volatility. (Location 133)

Shapiro has managed assets from as little as several million dollars to as much as $600 million. At this stage of his life, he is quite content running his current CTA as a one-man shop and is not planning to expand beyond that simple operation. (Location 1003)

That experience had a significant effect on me. It was like Jesse Livermore used to say, “You make your money in the sitting.” (Location 1131)

The specific quote is: “After spending many years in Wall Street and after making and losing millions of dollars, I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!”] (Location 1133)

A professor at my business school was married to the head of global fixed income for Salomon Brothers. At my request, she was generous enough to set me up with a meeting with him. (Location 1138)

“I try to find out what everyone is doing, and I do the opposite because when everyone is in the same trade, they lose money.” (Location 1140)

converge. But because the participation in this trade was so extensive, most of the people who had the trade on lost money, and in some cases, the loss was significant enough to sink their firms. (Location 1153)

At the time, the US stock market had been going straight up, and therefore I was going to be bearish, so I could be the hero. I kept shorting it and getting stopped out, over and over again, all the way up. (Location 1162)

“What, now I’m going to go long after being short all this time and losing all this money?” (Location 1169)

Don’t have an opinion. We used to have a saying in Hong Kong, “Should’ve been up, but it’s down, so short it; should’ve been down, but it’s up, so long it.” (Location 1173)

It wasn’t a matter of confidence; it was what I was going to do. There were no two ways about it. I was going to figure it out. (Location 1180)

Although I was doing OK, especially in terms of return to risk, this period coincided with the 1998–1999 bull market in NASDAQ stocks. (Location 1182)

It was while I was running the CTA that I discovered the COT (Commitment of Traders) report. (Location 1190)

Looking at the COT reports, I saw that the data never provided a sell signal until January 2000. I thought, “That is powerful data.” (Location 1195)

The underlying premise of traders, such as Jason Shapiro, who use the report as a market indicator, is that commercials will tend to be right (because they are better informed) and, by implication, speculators will tend to be wrong. (Location 1201)

That’s exactly right. I started using the data from that point on. (Location 1211)

Sure, but I don’t just trade on the COT numbers. First of all, I need price action confirmation, and second, I have tight stops. (Location 1214)

It turned out that it wasn’t as much a hedge fund as a bunch of thieves and incompetent traders in a room. (Location 1228)

In the year I was there, I made really good returns, while they all lost money. At the end of the year, they kicked me out. (Location 1231)

I was essentially fading them, making money, while they were losing money. (Location 1233)

I had no job, and I had a wife who was telling me I was a loser. My wife hated me, and she wanted a divorce. (Location 1240)

I told Helmut about how I was a contrarian trader and used the COT reports as a guide for market positioning. (Location 1247)

I think it was a political thing where the new Goldman Sachs people didn’t want to be told what to do by Helmut, who was supposed to be leaving the firm. (Location 1250)

Happiness—spending your day doing what you want to do. If I’m good at what I do, I make money, and that’s great, but it’s not the driver. (Location 1288)

When I started managing money for Helmut, I had two kids, and we lived in a two-bedroom apartment—and my office was in one of the bedrooms! (Location 1291)

Happiness is believing that the future will be better than the past. (Location 1295)

Having a full-time quant assigned to me allowed me to quantify a lot of what I was doing. We ran the program mostly systematized, but sometimes I would override a system trade, and sometimes I would take a trade the system wasn’t putting on. (Location 1305)

They were mostly stock index trades. I spoke regularly to this guy James Vandell, a former colleague. James was a perennial bear. (Location 1312)

The things James was saying and doing were exactly what I was thinking and doing when I blew up in Thailand. (Location 1315)

I tell them that I can trade right off of CNBC. You can watch CNBC or Bloomberg all day, and 10 people will come on and say the exact same thing. (Location 1321)

You don’t fight the tape. Be patient, and the market will tell you when. (Location 1329)

Yes, that’s 100% correct. You need both the market positioning and the market action. (Location 1336)

I have a sentiment-based oscillator I developed. When it goes to zero, I look to be a buyer, when it goes back to 50, I’m out. (Location 1344)

I watch Fast Money religiously at 5 p.m. EST every day. (Location 1349)

It’s the greatest consensus show ever. (Location 1350)

All I watch is the first five minutes when they come up with their excuses for why they think the market did what it did that day, and the last two minutes in a segment called Final Trade when they all come up with their trade idea for the next day. (Location 1350)

The most powerful word in the markets is “despite.” If you hear or see a comment like, “Despite the increase in oil inventories being much higher than expected, oil prices closed higher,” that is the tape telling you what is going to happen. (Location 1360)

Yes, at the lows, the COT data was in a bullish zone for the Dow futures, and we had an upside reversal on a day when all the news was negative. (Location 1364)

One of the guys on the call, Adam Wang, is one of the greatest fades that I know. Adam is one of those Ph.D., smarter-than-everyone-else type of guys who works as a risk manager. (Location 1366)

Now that the market is down 30% in three weeks, he’s saying it’s not the bottom because there is no capitulation. (Location 1370)

The market went limit down to new lows that night. I put on a partial long position that night. (Location 1372)

I went from $50 million to $600 million under management in two years. I was there five years and did really well, making money every year, including 2008. (Location 1379)

It was a life event. I got divorced—the divorce I never got in Princeton. (Location 1397)

I was running my trading program totally systematized for marketing purposes. (Location 1400)

Although the returns were still good, they were degrading from what I had done before. And I couldn’t go back to doing a discretionary overlay because we had marketed the program as being fully systematic, and investors had put us in their fully systematic fund products. (Location 1402)

I had six people working for me, and I hated it. I didn’t like managing people and being responsible for their success. My staff looked to me to go out and help with the marketing, which I didn’t like doing. (Location 1408)

They didn’t have the $150,000–$200,000 startup cost for setting up a growing facility that could generate $400,000 a year in revenue. (Location 1431)

I knew what the operators were making and that they could easily afford that rent. (Location 1433)

About a year and a half after I had shut down my CTA. Even though I was very happily remarried and had all the money I needed, I went through a weird depression. (Location 1440)

He put me in touch with a contact he had at Bryson Securities, and they gave me an account to trade. Bryson’s attitude is, “We don’t care what you do; just make money.” If you lose money, you’re gone; if you make money, they love you. (Location 1449)

I used my system and overlaid my discretion and risk management on top of it. I was able to use everything that I knew from my 25 years of experience. It was great. (Location 1452)

No. I don’t get stuck in bad trades; I just get stopped out. I may miss trades because I am stubborn. But I will never, ever violate my stop. So, I don’t get myself in those situations anymore. (Location 1455)

The value at risk will have nothing to do with the current risk. By the time value at risk catches up to reflecting an abrupt shift in correlations, it’s too late. (Location 1461)

I look at the market all day. I’m paying attention to the market correlations, especially the correlations of the positions I am in. If I see that I am concentrated in positions that are all moving together, I will either reduce my position or put on a position that will be inversely correlated. (Location 1463)

It was mostly due to my reducing positions. However, when correlations suddenly increase, as they did recently, I will be more inclined to add an inversely correlated position without necessarily having an official signal. (Location 1469)

Then the COT report came out, and it showed everyone had bought the dip. It was the largest long speculator position in years. (Location 1475)

The trigger was that I was long across the board. I have a system for trading stock indexes that I don’t use very often, but I will use it as a risk mitigator when needed. (Location 1480)

Sometimes, I will put on a non-COT trade. The COT is not a perfect indicator. There has never been and will never be a perfect indicator. (Location 1485)

I’ll put that trade on because I have seen it so many times. It’s all that I do, so I have developed an instinct for those types of situations. I think intuition is just experience. (Location 1491)

Yes, definitely. Being a contrarian is instinctive for me. I’ve been a contrarian since I was a kid. It’s part of my DNA. Fortunately for me, it is a valuable trait to have as a trader. (Location 1494)

So if everyone is doing something, the only way to make outsize returns is by being on the other side. The great thing about the markets is that I can wait until there is a confirmation before taking the opposite position. (Location 1496)

Being a contrarian works in the markets, but it doesn’t work in social situations. People want to be liked; they want to be part of a group. (Location 1500)

I succeeded because I have failed so many times, and I had an open mind about failure and was able to learn (Location 1518)

People fail, and they quit; they get scared. For some reason, I have a risk instinct. I hate failing, but I don’t mind taking the risk and then failing. (Location 1520)

Everyone is short; the market doesn’t go down on bad news; the market starts to go up. That is what a market bottom is. (Location 1527)

The market doesn’t bottom on good news; it bottoms on bad news. Also, there is a sound underlying reason why the COT has remained and should remain a useful indicator. (Location 1528)

I say, “That is my own thing. I’m going with the people who have the most knowledge. That’s the whole point.” (Location 1537)

I know I am never going to write a book. So I think it is a good idea for someone to write down these concepts. It’s not my story that is important but rather the idea of how markets really work. (Location 1541)

If I have any message to the world—and it is the reason I agreed to do this interview—it is to convey the importance of participation. (Location 1544)

What they don’t realize is that the discounting mechanism is not price; it’s participation. (Location 1545)

Instead, it’s everyone is long, and consequently, the bullish fundamentals are discounted. (Location 1547)

The critical role of participation is a concept that applies well beyond trading. An example I like to use, which is outside the sphere of trading, is football betting. (Location 1550)

If everyone is betting on one side, then the point spread will have to move, and it will probably move too far. (Location 1553)

When 25 or more of them pick the same team, which happens only about six times a year, the other team will win 80% of the time. (Location 1555)

No, it’s because if over 80% of the guys in my sample are choosing the same team, then everyone else must be doing the same thing too, and the point spread is probably too wide. (Location 1556)

At its core, Shapiro’s trading success is grounded in exploiting the flaw in the emotion-based trading decisions of other market participants. (Location 1562)

To make a contrarian trading approach work, a method for timing entry into markets is absolutely critical. There are two essential components to Shapiro’s approach: Taking positions counter to the extremes of speculator market positioning; Timing the entry into such positions based on market action. (Location 1573)

He looks to be on the opposite side of extremes in speculator positioning, or equivalently, on the same side as commercial positioning. (Location 1577)

For timing his contrarian positions, Shapiro will look for market reversals that occur despite a preponderance of news in the opposite direction. (Location 1580)

Although this answer is still valid, Shapiro has a better explanation: participation. Markets bottom because speculators are already fully positioned short—a condition that will naturally occur in an environment of pervasive bearish news. (Location 1582)

The common denominator in these opposite circumstances was the absence of risk management to prevent an account-damaging loss on one wrong idea. (Location 1586)

If there is one absolute in Shapiro’s trading methodology, it is that he will have a stop-loss on every position. (Location 1587)

Shapiro will select a stop point that contradicts his hypothesis that the market has bottomed or topped. (Location 1588)

Specifically, traders need to be cognizant of those times when markets become highly correlated. (Location 1590)

One of the most profitable periods in Shapiro’s early trading career occurred when he went on a three-week vacation in Africa—a trip that made monitoring his market position impossible. (Location 1594)

He realized that his “sitting” with the position had turned out to be far more profitable than his daily trading. (Location 1597)

If Shapiro is not stopped out of a trade, he will hold it until his COT-based oscillator turns neutral—an approach that will often require holding (Location 1599)

a position for months and through multiple market gyrations. (Location 1600)

Namely, if you know or can identify traders or commentators who are reliably wrong—a task far easier than finding those who reliably right—then their opinions could well be useful in a contrarian sense. (Location 1604)

Monthly withdrawals that averaged near £3,000 kept his account equity within £15,000 of zero for the first 14 months, making it impossible to calculate returns for this period. (Location 1612)

Amrit Sall has one of the best track records I have ever encountered. Over a 13-year career, Sall has achieved an average annual compounded return of 337% (yes, that’s annual, not cumulative). (Location 2284)

For a trader like Sall, who has many spectacularly large gains, this penalty is severe. Sall’s adjusted13 Sortino ratio, a statistic that only penalizes downside volatility, is 12 times as large as his Sharpe ratio. (Location 2290)

Although in this book there is another trader with a similar trading style (Richard Bargh), a resemblance that is related to Sall being a mentor to Bargh in his early trading career. (Location 2303)

Daljit Dhaliwal’s track record is extraordinary. In his nine-plus years of trading, he has achieved a remarkable average annual compounded return of 298%. (Location 2826)

His average annualized volatility is extremely high at 84%. (Location 2827)

But, here’s the thing: His volatility is super high because of his many huge gains; his downside has actually been remarkably controlled. (Location 2829)

Dhaliwal attacked trading with the same passion and commitment he had for tennis as a teen. He devoted himself to learning everything he could about markets and trading. (Location 2843)

Dhaliwal spent most of his trading career as part of the same group as Richard Bargh (Chapter 3) and Amrit Sall (Chapter 4). (Location 2851)

I would say that I am a macro, event-driven trader. On the quantitative side, I am using leading economic indicators and historical analogue models we have developed. (Location 2857)

It comes down to the psychological similarities between excelling in a sport and trading. You need to have discipline in both. (Location 2885)

I made 5k and then lost 2k very quickly. I realized I didn’t know what I was doing. (Location 2901)

I wanted to get a job as a trader when I graduated, and I realized that I needed to improve my grades if I was going to get into the field. (Location 2902)

I told him, “I have applied to 30 different places, and I really want to be in this field. If you just give me this job, I will be the hardest worker you will ever see.” (Location 2918)

The first three months were a big learning curve. They taught us about both fundamental analysis and technical analysis in classroom sessions. (Location 2922)

analysis. I didn’t like indicators; I thought they were backward-looking. Whereas, I quite liked chart patterns because they would tell you where you were and give you some context for what to expect. (Location 2926)

I felt uncomfortable with technical analysis because I didn’t understand why it should work, and, consequently, I didn’t have the confidence that it would continue to work in the future. (Location 2934)

This past July [2019], I went short the S&P in what was probably my largest trade ever. I felt the policymakers weren’t doing enough to alleviate the downside risks in the economy. (Location 2975)

My outlook for some key economic indicators for Q4 was indeed bearish. However, in that quarter, the Fed changed its policy stance and switched on the liquidity taps. (Location 3005)

About 20%. (Location 3021)

The next day I received an email from Charitybuzz, the website that had run the auction, saying that Dalio was offering a second lunch and that I could have it if I matched the winning bid, which I happily did. (Location 3063)

After reading Principles, I started questioning everything. I think what Dalio was saying in that book is that your perception of reality is not necessarily the way things are. (Location 3072)

He told me it was essential to go as far back as I could to test my views. Dalio is a master of history. (Location 3086)

He helped me understand that to get conviction, you have to look at history well beyond your own experience. (Location 3088)

It was valuable to understand how Dalio thought about expected value. (Location 3098)

he talked about all the focus and expenditures on space exploration as the big frontier. Dalio thought about it the opposite way—namely that we should go down into the ocean, given the ocean depths are still largely unexplored. (Location 3099)

In other words, the expected value from ocean exploration was much greater than the expected value from space exploration. (Location 3101)

For me, it’s having a contrarian view on a market that is very out-of-favor. (Location 3104)

Prices were at their lowest levels in decades, and the speculative short position was larger than it had been for a very long time. (Location 3105)

I realized an unexpected event that ran counter to the news flow was present in every one of my big winning trades. (Location 3127)

He doesn’t use indicators and only looks at charts, a perspective that resonates with the way I look at markets as well. (Location 3150)

I have a systematic process for cutting my size down when I am in a drawdown. I consider any loss less than 5% to be just the natural fluctuation required to generate my returns. (Location 3166)

If the drawdown exceeds 8%, I cut my size by half again, and if it reaches 15%, I would stop trading and take a break. (Location 3169)

I look for a steady downtrend, and I draw a line connecting the spikes. (Location 3785)

I wanted to be the guy who was buying a stock right when it’s breaking out above that downtrend line. Often when prices would compress at the downtrend line, there would be large amounts offered. (Location 3792)

The stock should be moving like that [he snaps his fingers]. You usually know right away if the trade is right. (Location 3795)

Back then, I sold half right away at the first blip up, which now is where I start buying more, and then if it consolidated and moved up, I would sell the second half. (Location 3800)

The first time I got into trading the way I am doing it now was when I followed a recommendation posted in a chat room by this great researcher named songw. (Location 3809)

The news had not yet been disseminated on national media. (Location 3816)

That was the first time I saw the power of a sector move with a hard catalyst and a well-defined date. (Location 3823)

It did. It was the first time this sector-trading concept clicked for me. (Location 3828)

I like to buy a whole sector of stocks at the same time. When I get into a sector, I use a shotgun approach. I buy everything in the space—every stock, every related stock. (Location 3830)

At this point, I don’t just sit here and look at a company. I will visit the company. If they make a consumer product, I will buy it and see if I like it. If I don’t like the product, I won’t trade the company. (Location 3840)

There I had to use a 30-day downtrend or a 30-day flat line. (Location 3851)

It all depends. It depends on the significance of the catalyst and the strength of the sector. I don’t have any preset formulas or rules where I get out. For example, I don’t get out when I’m ahead 10% or anything like that. (Location 3854)

I draw an uptrend line to help me get out. When the sector leaders broke their uptrend lines, even though some of the smaller stocks held on, I started getting out of everything. (Location 3862)

I compare trading to a puzzle that needs to be filled in. The number of pieces in the puzzle were growing—other 3D printing stocks were moving higher, which was a big part of the puzzle for me, and volume in the stock was (Location 3870)

However, the biggest thing for me was the filing that showed that insiders had bought half the outstanding shares. (Location 3887)

They were cultish about it, and these are not stock trading friends. (Location 3895)

I never go short. (Location 3929)

I feel like traveling has helped my trading career. Taking summers off has been beneficial to my trading because summer always seems like a really tough time for the markets. (Location 3931)

I had all sorts of new stocks to watch. I was ready to catch a move, whereas people who had been trading during the summer were completely demoralized, and their accounts had been beaten down. (Location 3933)

I saw the stocks breaking through their steep downtrend lines on high-volume. Someone was buying, so I joined in. (Location 3938)

My sweet spot is stocks in the $200 million–$500 million capitalization range. (Location 3948)

Well, I break up my orders into smaller trades. I also scale into positions over time, sometimes buying more every day. (Location 3954)

After the first day, I told him why I was there. I told him that I was interested in the stock and that I had bought a bunch of other CBD stocks as well. He thought that was cool. I got to know the manager pretty well. I noticed the clerks were all drinking the water. (Location 3974)

The stock hit 25 cents. I went into the store for my daily visit, and the manager rushed up to me. His face was white, and he said, “We just pulled all the product. They found something floating in the water.” (Location 3977)

I look at trading like a puzzle; I have to get the four corners in first. (Location 4040)

The first corner is technical analysis; you have to have the right chart pattern. The second corner is a clean share structure. (Location 4042)

The stock has few or no options or warrants, and preferably, there are fewer than 200 million shares. (Location 4044)

Being in the right sector and having a catalyst or story that will make the stock or sector move up. (Location 4046)

Details on filings, checking into what management has done before, trying the product, and pyramiding your position correctly. (Location 4049)

Always look for the next big opportunity. Understand when you get out of a position that’s not acting right, you can always get right back in. Look for 10 to 1 return/risk trading opportunities. (Location 4051)

The King of Asymmetry is Amrit Sall, who had 34 days with returns greater than 15% (three greater than 100%) and only one day with a double-digit loss (and that loss was caused by a computer glitch). (Location 5925)

I don’t care how many times you’ve heard it, but when virtually every successful trader stresses how critical money management is, you better pay attention. (Location 5933)

They never made the same mistake again. As another example of a trader transformation regarding risk control, Shapiro went from blowing up plus-half-million-dollar accounts twice to never entering a trade without a predetermined exit. (Location 5942)