Wisdom From Kovner

September 14, 2011
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Another trading legend retires…

Bruce Kovner, one of the original Commodities Corp superstars, is hanging up his jersey after 28 years of trading. Via Bloomberg:

Bruce Kovner, the billionaire co- founder of Caxton Associates LP, is retiring from the $10 billion hedge fund, ending a three-decade run during which he traded everything from soybeans to Japanese yen futures and returned twice as much as the Standard & Poor’s 500 Index.

“After 34 years in the trading business and more than 28 years leading Caxton, the time has come to hand the leadership of the company to a new generation,” Kovner, 66, wrote…

Kovner’s main Caxton Global Investment fund has returned an average of 21 percent a year since inception, compared with an average gain of 11 percent including dividends by the Standard & Poor’s 500 Index. The $7 billion fund had one losing year, in 1994, when it fell 2.5 percent. Since 1983, the S&P has fallen in five calendar years, including a 37 percent decline in 2008. The top returns have helped Kovner amass a fortune estimated at $4.5 billion, according to Forbes magazine.

Kovner was also one of the best interviews in the original Market Wizards series.

Some selected excerpts below jump:


On protecting emotional equilibrium:

To this day, when something happens to disturb my emotional equilibrium and my sense of what the world is like, I close out all positions related to that event.

On the first rule of trading:

The first rule of trading — there are probably many first rules — is don’t get caught in a situation in which you can lose a great deal of money for reasons you don’t understand.

On making a million:

Michael [Marcus] taught me one thing that was incredibly important… He taught me that you could make a million dollars. He showed me that if you applied yourself, great things could happen. It is very easy to miss the point that you really can do it. He showed me that if you take a position and use discipline, you can actually make it.”

On allowing for mistakes:

He also taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.

On elements of a successful trading:

I’m not sure one can really define why some traders make it, while others do not. For myself, I can think of two important elements. First, I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen. Second, I stay rational and disciplined under pressure.

[Successful traders are] strong, independent, and contrary in the extreme. They are able to take positions others are unwilling to take. They are disciplined enough to take the right size positions. A greedy trader always blows out.

On having a market view:

I almost always trade on a market view; I don’t trade simply on technical information. I use technical analysis a great deal and it is terrific, but I can’t hold a position unless I understand why the market should move.

…there are well-informed traders who know much more than I do. I simply put things together… The market usually leads because there are people who know more than you do.

On technical analysis:

Technical analysis, I think, has a great deal that is right and a great deal that is mumbo jumbo… There is a great deal of hype attached to technical analysis by some technicians who claim that it predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders.

…For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is — whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge.

…Technical analysis reflects the voice of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates a new chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely critical and alerts me to existing disequilibria and potential changes.


On trading ranges and price patterns:

…as a trader who has seen a great deal and been in a lot of markets, there is nothing disconcerting to me about a price move out of a trading range that nobody understands.

…Tight congestions in which a breakout occurs for reasons that nobody understands are usually good risk/reward trades.

…The more a price pattern is observed by speculators, the more prone you are to have false signals. The more a market is the product of nonspeculative activity, the greater the significance of technical breakouts.

…The general rule is: the less observed, the better the trade.

On predetermined risk points:

Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis… I always put my stop behind some technical barrier.”

I never think about [stop vulnerability], because the point about a technical barrier — and I’ve studied the technical aspects of the market for a long time — is that the market shouldn’t go there if you are right.

On the emotional burden of trading:

The emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If you personalize these losses, you can’t trade.

On imagining alternative scenarios:

One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them on one at at a time. Inevitably, most of these pictures will turn out to be wrong — that is, only a few elements of the picture may prove correct. But then, all of a sudden, you will find that in one picture, nine out of ten elements click. That scenario then becomes your image of the world reality.

On seeking vulnerable consensus:

What I am really looking for is a consensus the market is not confirming. I like to know that there are a lot of people who are going to be wrong.

On stocks vs commodities:

The stock market has far more short-term countertrends. After the market has gone up, it always wants to come down. The commodity markets are driven by supply and demand for physical goods; if there is a true shortage, prices will tend to keep trending higher.

On trading too big:

My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.

On the dangers of correlation:

Through bitter experience, I have learned that a mistake in position correlation is the root of some of the most serious problems in trading. If you have eight highly correlated positions, then you are really trading one position that is eight times as large.

JS

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4 Responses to Wisdom From Kovner

  1. Kojak on September 14, 2011 at 8:36 am

    Hey Jack, Any way we could get a "print friendly" function? some of your posts are absolute gems and would love to save them. Thx for all your efforts

    • Whodaguy on September 14, 2011 at 4:21 pm

      Same sentiments. For these situations I use the actual PrintFriendly.com website, which you may be referring to: http://www.printfriendly.com

      At minimum, and in lieu of reformatting the site, maybe Jack can at least install their button on this site.

      • Jack Sparrow on September 14, 2011 at 9:28 pm

        Thanks! We'll check out printfriendly — meanwhile we try to convert pieces in the Knowledge Center into PDFs, most of them should have that embed for easier printing.

  2. Marcus on September 17, 2011 at 5:24 pm

    I believe it was Kovner (or maybe Michael Marcus) who stated in Market Wizards that trend-following techniques would only regain utility with the re-emergence of strong inflationary/deflationary environments, and were likely to lose effectiveness in the near term (the 90s).

    The way markets have been moving over the past few years really legitimizes that key insight. With such an abundance of huge moves in disparate markets, driven by large macro forces (foreseen by Mercenary and many others), there is really no excuse for missing any of them. How many of us watched silver, then gold, take off, and wondered why we missed the move? Or cotton for that matter, or grains, or…or…? Simple mechanical approaches deserve a place in the toolbox of any global macro trader – a la Kovner, Tudor Jones, etc.

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