Paul Tudor Jones II may be the most talent hedge fund manager of our generation. We are not so lucky to have a full and detailed report of Paul Tudor Jones investment strategies and methods, however we have researched his public statements to see what we can learn.
Paul Tudor Jones II (Born Sept 1954) Memphis, Tennessee, USA.
Paul Jones received his higher education at the University of Memphis, and later at the University of Virginia, he received a degree in economics. In 1976, quite successfully participated in the championship boxing welterweight.
His business career he began in 1976 with a clerkship, and soon rose to a broker in the company EF Hutton. Since 1980, over two and a half years, Paul was an independent trader. He then went to Harvard Business School, but soon realized that what is taught in this school is not the knowledge that he wants to get. So he abandoned the idea of further education and asked for support and advice from his cousin William Danavanta specialized in cotton trade. William Danavant sent him to New Orleans, what would Jones talks and a major broker Eli Tallis, who offered him a pretty good job. Jones began trading cotton futures on the New York Cotton Exchange.
In 1980, Paul founded the company Tudor Investment Corporation (as at June 1, 2007 firm Jones managed capital 17.7 billion dollars). Paul Tudor Jones has established itself as one of the best traders in the world, has created an outstanding reputation as masters of money-management and build up a successful highly profitable business, which lie at the base of firm principles of risk management. By this time all in the financial world has unequivocally recognized that Paul Tudor Jones' phenomenal talent to make money, multiplied by the enormous capacity for work. Today in the Tudor Investment Corporation invest money investors from 35 countries. These include funds of funds, private investors, banks, specialized funds assets.
Extracts that define his investment approach..
The best money is made at the market turns of course (providing you can pick them) and as he says he has missed a lot of meat in the middle, but catches a lot of tops and bottoms and made huge gains. These trades offer the best risk to reward and his market timing is legendary. ..."I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms." ...
The key to long term success is having sound money management. Jones believes that you need to play great defense first, not great offense. He Never average losers and decreases his position size when he is doing poorly and increases it, when he is trading well and making money. He is trading the least when he doing the worst and protecting equity which is the major consideration for him. .."I'm always thinking about losing money as opposed to making money. Don't focus on making money, focus on protecting what you have" ..
The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge. Because I think there are certain situations where you can absolutely understand what motivates every buyer and seller and have a pretty good picture of what's going to happen. And it just requires an enormous amount of grunt work and dedication to finding all possible bits of information. You pick an instrument and there's whole variety of benchmarks, things that you look at when trading a particular instrument whether it's a stock or a commodity or a bond. There's a fundamental information set that you acquire with regard to each particular asset class and then you overlay a whole host of technical indicators and that's how you make a decision. It doesn't make any difference whether it's pork bellies or Yahoo. At the end of the day, it's all the same. You need to understand what factors you need to have at your disposal to develop a core competency to make a legitimate investment decision in that particular asset class. And then at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control.
Technical Analysis: .."Made well over half the money that I've made in my lifetime"..
Fundamental Analysis: .."Made me the rest"..
Which are your better at?: .."Probably technical analysis"..
I love trading macro. If trading is like chess, then macro is like three-dimensional chess. It is just hard to find a great macro trader. When trading macro, you never have a complete information set or information edge the way analysts can have when trading individual securities. It's a hell of a lot easier to get an information edge on one stock than it is on the S&P 500. When it comes to trading macro, you cannot rely solely on fundamentals; you have to be a tape reader, which is something of a lost art form. The inability to read a tape and spot trends is also why so many in the relative-value space who rely solely on fundamentals have been annihilated in the past decade. Markets have consistently experienced "100-year events" every five years. While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and proud of it.
I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over. When I got into the business, there was so little information on fundamentals, and what little information one could get was largely imperfect. We learned just to go with the chart. Why work when Mr. Market can do it for you? These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything and that the primary task is simply to find that explanation. As a result, technical analysis is at the bottom of the study list for many of the younger generation, particularly since the skill often requires them to close their eyes and trust the price action. The pain of gain is just too overwhelming for all of us to bear!
To add to the above, the book by Jack Schwager Market Wizard highlights that Paul Tudor Jones has an interest in Elliot wave and an undisclosed mechanical trading system. The point being that Paul never stops learning and anything that works in the market, he is interested in. We agree with Paul that Elliot Wave on its own is not powerful enough, but mixed with other charting techniques (in our case Gann, Hurst and Wyckoff) and fundamentals it does carry merit.
Quick review of Paul Tudor Jones approach.
|Read the tape||Critical. Chartist, accumulation, distribution, markup, price, time and volume.|
|Fundamentals||Very Important, but does not dominate.|
|Economics||Macro both domestic and global imbalances are the best source for investment ideas.|
|Market Timing||Tries to determine top and bottoms, rather than the traveling between the two. In short he is a contrian market timer.|
|Money Management||Critical. The stock market game is defensive rather than offensive. Stops losses are both price and time.|
All that we have read about Paul Tudor Jones suggest to us that he would be or is a great fan of Wyckoff, Hurst and Gann (regarding his chartist bias). Here is why.
Timing tops and bottoms: Cycles can predict tops and bottom most of the time between 80-100% accuracy. If the cycle fails, then this is a price inversion to the cycle. The cycle peak, trough and inversion are great market timing events. (Note: We at readtheticker.com do not to trade top and bottoms as bravely as Mr Jones, we would only trade this style when we are sure that the 'fat lady has stopped singing' !)
Reading the tape: Richard Wyckoff accompanied with the latter interpretations by Tom Williams and Tim Ord guide how to read price, volume and time within a chart.
Stop loss: Gann angle measurement of unit of price relative to unit of time would guide the stop loss decision in both price and time.
Paul Tudor Jones express his need to be a master of the tape is due to the simple fact that the fundamentals are not definite when executing a global macro investment strategy, and to re quote one of the most important statements from above..
..."We learned just to go with the chart. Why work when Mr. Market can do it for you? These days, there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything and that the primary task is simply to find that explanation"..
Video: 1987 PBS documentary "Trader"
Youtube (10 min intro)..