LEARN FROM THE GENERALS OF THE MARKETS - PART 59
“To me, the freedom to be able to work when and where I
want to is even more important than the money. This freedom is, of course, easy
to attain by working as a trader.” - Ruediger Born
Daniel S. Loeb was born in December 18, 1961, in Santa
Monica, California, U.S.A. He was born
to Jewish parents. His father was a partner at a law firm, while his mother was
a historian. He went to the University of California, but graduated from
Columbia University, earning a degree in economics. He’d been fascinated by the
market at a very young age. For instance, he had a profit of $120,000 from his
stock market investment (while still at the University). However, the profit was
forfeited in another venture, which, needless to say, taught him a special
lesson.
From 1984 to 1987, he worked at Warburg Pincus. He worked as
a director at a record label; after which he worked as a risk arbitrage analyst
at Lafer Equity Investors. He worked at Jefferies LLC from 1991 to 1994. He
then worked as a specialist at Citigroup.
In 1995, he founded Third Point Partners LLC with $3,300,000
only. He reveals his feelings when starting at that time, and I quote him: “I
almost got stage fright the day before I started the fund. I had five or six
family members and a few friends and $340,000 of my own money, which was my
life savings from ten years working on Wall Street.”
Many years later, in the year 2013, he’s featured among the
40 wealthiest funds managers. This shows that his investment strategies have
been working for him. The portfolio
that’s being managed by his New York-based company is now worth
$14,000,000,000.
Dan has been famous for his letters, which he writes to
company executives, criticizing them for poor management decisions which are
against the interests of shareholders. Some of the letters have been effective
enough to cause changes in the companies’ executives. His tactics is to invest
in a company, increasing his stake considerably so that he can have his say in
the company. For example, he initiated an effective attempt to remove Scott
Thompson as chief executive officer at Yahoo!, replacing him with Marissa
Mayer.
As of April 2014, Dan Loeb himself is worth $2,200,000,000.
He’s married to Margaret Davidson Munzer. He likes to surf in the Caribbean and
Indonesia.
He’s involved in many programs that have to do with
philanthropy, education, human rights, politics, military, medical research,
industry, arts; either participating or donating generously. In return, he’s
been honored with awards.
Lessons:
These are some of the lessons you can learn from Dan:
- The markets are a level
playing field. They don’t respect your place in the society. Yes, as Dan
puts it: “One's place in society' does not matter at all. We are a bunch
of scrappy guys from diverse backgrounds (Jewish, Muslim, Hindu etc.) who
enjoy outwitting pompous asses like yourself in financial markets
globally." Our ethnic or religious background doesn’t matter. What
matters is that we want to be successful market speculators that are
smarter than most others.
- Dan loves to bet on the
markets that most others are afraid to invest in. He purchases stocks at
companies that look hopeless, and then effects radical changes in the
management of the companies and help them become profitable again. Dan cares about making money for his
investors, and he does everything possible to realize the goals. Our
stakeholders and investors’ interests should have preponderance over our
personal interests and motives.
- You need to adopt trading
principles that work – even becoming philosophical about them. You need to
know that opportunities to make money arise from chaos and imbalance in
the markets. How do you then make money from that? Look for a good
strategy that has high probability setups.
- Good trading principles
are also helpful in normal life. Traders think and act like traders. For
example, a good trader may translate the discipline and emotional control
she/he accomplishes in trading to life outside trading as well. Traders
ought to be diligent and hardworking, having the tenacity and grit,
enjoying what they do with great passion.
- When we follow our
time-tested rules and lose, that’s better than when we violate our
time-tested rules and win. We don’t make mistake when we follow our rules
(even if we lose with them), we make mistakes only when we violate our
rules. About this Dan says that he wants people with good processes and
good outcomes, but he’d rather have somebody working for him who had a
good process and a bad outcome in a given year than somebody with a bad
process and a good outcome.
- Timing is everything in
the markets. How often have you opened orders, only to see that the market
moves in your favor after you’ve been stopped out? Look for ways to
improve you timing. One method is to join an uptrend during a pullback;
and vice versa for a downtrend.
- When you become really
good at trading, you’ll become good at pattern recognition and
identification of historical trends/cycles. The ability to do this comes
from experience you gain from looking at charts. Some wrongly call this
“instinct.”
- Super trades aren’t
infallible. We can be sure that we’ll make mistakes, since we don’t have
answers to everything, nor are we perfect. We should bear this in mind
when we make losing trades. Yet, this shouldn’t deter us from being
profitable.
- Leverage is good when used
judiciously, but very dangerous when used illogically. When you make a
profit of 20% per annum as a result of risking 0.5% of your account per trade,
and another person generates a profit of
40% or 60% per annum out of risking 1% or 1.5% per trade, do you
think the other person is a smarter trader? The answer is NO! It’s just
that the other person has achieved higher returns by betting bigger per
trade, thus increasing her/his risk of higher drawdowns. With that, the
person can also suffer about 50% or 70% drawdowns. Therefore the best
trading method is to look for ways to optimize profits with as little
drawdowns as possible. Dan has made big improvements in this area since
2008.
- Traders and investors
should look for opportunities the world over. The American markets are
still the biggest, most important, and most profitable (with arguably the
best companies and capital markets), but there are increasing
opportunities in other countries like India, China, Brazil, etc. You miss
wonderful opportunities to make profits if you ignore these countries.
- For you to make money, you
must be willing to take risk. There is no way to tap the riches in the markets
unless you become a trader or investor. People go into trading because
they think they can become rich quickly, but it’s rather good to be
realistic than idealistic. A healthy appetite for risk involves effective
risk management.
Conclusion: We mayn’t
fully understand all the forces behind market actions. For example, pullbacks
in weak markets may be stronger than pullbacks in strong markets, but we can
make money in these kinds of price actions.
When gaining more and more experience as speculators, we become more
effective at controlling risk… and our rewards also increase accordingly.
Please see the quote below. Super traders aren’t infallible gods that predict
the markets accurately. They’re rather experts who’re good at taking
opportunities. True, trading principles that work are timeless and they don’t
change with changing market conditions and the time.
This article is ended by a quote from Dan:
“I have never professed to have a crystal ball that
forecasts market direction… The secret to our success is congruence between our
investment style and my personal investment style and philosophy, the
fundamental elements of which have remained constant over almost 18 years.”
Source: www.tallinex.com
Learn from the Generals of the Markets: Market Generals
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