fbpx

Inside the House of Money by Steven Drobny

Book Reviews, Funds, Investments

Written by:

Alvin Chow

This book is about interviews with hedge fund mangers who are engaged in a strategy known as global macro investing. It can be said the forefather of this strategy is George Soros. Global macro investing has no limits to asset class, geography and direction. In other words, these hedge fund managers can buy/sell stocks, futures, commodities, currency, bonds, etc. And they can do it in any country in the world, as long as they are permitted to trade the securities. It is this flexibility that presents many opportunities to hedge funds than the conventional mutual funds. Their main method of making money is to monitor global trends and situation, looking for dislocations in a particular area and take action to profit from it. And this deep understanding of macroeconomics makes it difficult for the retail investor to learn from them.

Nonetheless, I will quote bits and pieces of advice that the gurus provided in the book. Most of them are reminders of good risk management which are applicable to trading.

Jim Leitner (Falcon Management)

“I never locked myself down to investing in one style or in one country because the greatest trade in the world could be happening somewhere else. My advice would be to make sure that you do not become too much of the expert in one area. Even if you see an area that is inefficient today, it’s likely that it won’t be inefficient tomorrow. Expertise is overrated.”

“…humans in general are biased to look for confirmatory evidence. When someone is bullish oil, they tend to pick out hte pro-oil arguments in whatever they read. Very few people train themselves to look for disconfirming evidence. Psychologists have done tests about how humans approach problem solving and found that we are somehow preprogrammed to look for confirmation and not for disconfirmation. What I try to do in my trades is look for disconfirming evidence. It’s a very difficult practice and I have to continually train myself to ask why I believe something is going to go down, not why it should go up.”

“In equities, we start by looking at various valuation measurements like price to book, price to earnings, and price to cash flow. As I have said earlier, it’s very important to not be too story-driven. A way to avoid that is by using quantitative screens to determine what is cheap. Once you find things that are cheap, then look for stories that argue why it shoudn’t be cheap. Maybe a stock is cheap but ti’ll stay cheap forever because there’s no good story attached to the cheapness. From a global perspective, we look for countries that we believe are cheap. Then we ask, “Do we like the politics? Do we like the economics? What do we like about it and why? What is changing?”

Christian Siva-Jothy (SemperMacro)

“Confidence is a very, very dangerous thing. Simply because you’ve had a good run doesn’t mean it will continue. In fact, once you’ve had a good run, you’re at your most dangerous. Over confidence is an absolute killer. Markets can take it away as easily as they give it… take a step back, and ask, “What can go wrong?” In fact, the better things are going, the more you should look at where your risks are and what the downside is.”

“To maintain discipline is very difficult, but that is why I keep a trading diary, to keep me honest. I wish I could say I follow my own rules 100 percent. It seems one is constantly relearning the same trading lessons. The market is always there to keep you in check and is a totally objective judge of your performance. The P&L at the end of the day is yours with no one else to blame.”

“…there are three or four major macro opportunities each year. If you catch one, your return will be in the high single digits; if you catch two, you should be up somewhere between 10 and 20 percent; if you catch three or four, you’re doing incredibly well. One of the most difficult things about trading is not to trade. That’s probably one of the most common mistakes that people starting out in this business make. Overtrading is as bad as running losing positions for too long.”

Dr Andres Drobny (Drobny Global Advisors)

“I also learned early on that talk is cheap in markets. Everybody runs around with a view, but what leads to success is not having a view but coming up with a direct trade idea. And so I discovered through trading and research how you want to unlock really good trade ideas by having a fundamental view of the process and then comparing that to the perception in the market.”

“The great traders I know are able to manage large position sizes. That’s what makes them great. They also need to be bright, aggressive, and forward looking. Being able to manage large positions is a very rare talent, which is why there are very few great traders.”

“You get stopped out because you want to minimize your losses. Typically what happens is, the market spikes against you, it comes back, and you get back in because you feel that it was the noise that got you out of there. It’s the hardest time for a manager when you’ve been stopped out but you believe in the view. So what do you do? You have to get back in again but with a very tight stop.”

“Talk is cheap; think in terms of risk/reward rather than just direction; and think big move, not little stuff. Be very honest with your thought process. Markets are hard. When we are totally honest with ourselves, we place ourselves in a position to read the news clearly. If you’re stuck in a view, you’re going to kid yourself, disbelieve new news, and probably panic too late… If you’re going to panic in markets, panic early. Panicking late is a recipe for disaster.”

Dr John Porter (Barclays Capital)

“Psychology is by far the most important area in the markets. Markets people want to be quantitative and model human behaviour, but the problem is, human behaviour is not stable. When people interact as groups, human behaviour becomes subjugated to that of the overall group.”

“I learned that the stop-loss is by far the most important aspect to a trade. Going back to discipline, the stop-loss is a very difficult thing to implement, but if you have a proper stop-loss, you’ll never blow up. You’ll be out long before you get anywhere near the end.”

Dr Suskil Wadhwani (Wadhwani Asset Management)

“The stories change, technology has changedm and I guess the degree to which things are crowded has probably changed. The enduring features are how long markets can remain irrational, how long you can have bubbles, and the degree to which the same investor biases are influencing process.”

“One of the key things I learned from him [Paul Tudor Jones] was that good defense is paramount. That’s somethings he drilled into you. Another one of the key lessons from Paul was intellectual flexibility. However strongly you believe in something and however coherent the case is, you need to be (1) willing to accept that you might be wrong, and (2) able to take the position off even though you may not be wrong in a medium-term sense.”

Yra Harris (Praxis Trading)

“How to take a loss – just do it, because you can always get back in. Don’t ever put your ego out there where you’re afraid to say that you’re wrong, because the market is right and wrong. Respect that. That was the greatest lesson I learned.”

“It’s my mental picture of how money flows around the world, the flow of funds on a global basis seeking out the highest risk-adjusted return. Money is always moving somewhere, whether it’s from oil to currencies to metals or to stocks. I follow it. The only time when global money doesn’t flow is when it’s afraid. like during 1998 or after 9/11, and then it heads to Switzerland. Markets are based on two emotions: fear and greed. The greed part is nice when you’re a part of it and are invested, but when fear takes over, it’s an unbelievable thing. Money starts running for cover and stops thinking about return. It just wants to save its principal.”

“If breaking even is your goal, you’re not trading anymore.”

Jim Rogers

“… when everybody in an industry is losing money and you have a few bankruptcies, the industry is usually making a bottom. Either it is going to disappear or it is going to turn around.”

Dwight Anderson (Ospraie Management)

“What I learned was that you can’t buy a high-cost asset cheap enough. We paid five cents on the dollar and sold it for four. When you have a high-cost asset, you have to get the price and the timing right. After that experience, we will only invest in low-cost companies because we don’t have to get the timing right.”

“Another thing I learned is that management has to have at least mediocre competence, from operations, costs, and shareholder returns perspectives. Because our industries [tech] have huge cash flows, it’s very important how management handles the cash. Do they reinvest those cash flows or buy a shiny new toy that interests their engineers or do they focus on generating the best returns for their shareholders? A management that focuses on what is best for their shareholders is mandatory.”

Scott Bessent (Bessent Capital)

“People always forget that 50 percent of a stock’s move is the overall market, 30 percent is the industry group, and then maybe 20 percent is the extra alpha from stock picking. And stock picking is full of macro bets. When an equity guy is playing airlines, he’s making an embedded macro call on oil. I honestly think that people forget what a macro trend is.”

Marko Dimitrijevic (Everest Capital)

“In general, markets are made up of human reactions. To the extent that human nature hasn’t changed in the past few hundred years, and certainly not in the past decade, I don’t think the markets have changed. Look at what happened with the NASDAQ in 2000 and you see that human nature is still the same. There are booms, busts, greed, fear. That won’t change.”

“In terms of valuation, no matter how cheap you think something is, it can always get cheaper. Vice versa, no matter how much you think something’s overvalued, it can become more overvalued.”

Anonymous

“I read the subject line of the Bloomberg messages I get, but most of it’s rubbish anyway. Again, how many truly new pieces of data are there at any one time? Not very many. Every time I hear people talk about China revaluing its currency, I tell them to shut up because it’s just crap, absolute crap. Nobody knows, and the last person who is going to know is some sales guy at a bank. Opinions are like assholes – everybody’s got one.”

“In trading, like gold, it’s how you play the bad shots that really matters. How you play the really crap shots is the difference between the good guys and bad guys. When the shit’s hitting the fan, you don’t pull out a 1-iron. You just don’t – you play defense.”

3 thoughts on “Inside the House of Money by Steven Drobny”

Leave a Reply to sgdividends Cancel reply