It is said that Paul Tudor Jones (US hedge fund manager and philanthropist) never hired a trader who didn't lose money. The more I trade, the more I appreciate the intelligence of this approach.
Jones, of course, had his own near-death experience in the markets when, after three years of trading cotton, he wiped out 70% of his account on a single ill-conceived, over-leveraged trade. From that moment on, he never had another loss like that.
I think what Jones took away from that event was the realization that no matter how much you learn about risk control, if you don't experience the brutal shock of an uncontrolled loss, you haven't really learned how to trade.
Jones knew there was nothing more dangerous than a winning trader. That's why Jack Schwager (trader and author) asked him, "But you've been very successful for years. Aren't you more confident now than you used to be?" He replied, "I am more scared now than I have ever been since I started trading, because I know how short-lived success can be in this business. I know I have to be scared to be successful. My greatest successes always came after I had a great streak and I started to think I knew something.
Nothing proves Jones right more than John Meriwether - the swashbuckling bond trader at Solomon Brothers who tried to win every bet until he got busted not once, not twice, but three times. Apparently, his experience with Long Term Capital taught him nothing but to trust that investors would trust him with money again and again.
The stock market world is full of stories like this. People who make bold bets get lucky and mistake their sanity for a bull market. Crypto billionaire Mike Novogratz lost a fortune in the LUNA collapse, which was unfortunate but predictable if one had done just a little research to know that less than a decade earlier he had lost a similar, if lesser, fortune in a failed emerging market bet.
Jones realized that the difference between skill and luck in trading is not being able to come up with a fresh buck and bet it all on black, but rather having the will and discipline to bounce back from a setback. For this reason, he never hired successful traders, because most of them were lucky rather than good.
When it comes to being good rather than lucky, I have to admire my trading partners Alexei and Viktor, who have an almost preternatural ability to shake off losses and move on to the next trade. Perhaps what impresses me most is not their ability to come back from a setback, but to come back from a lead.
The ability to come back from a setback is certainly admirable, but I don't think there is anything more daunting and impressive than building up big gains only to see them disappear, and then having the power of money to bring the gains back.
For this reason, the 1980 Wimbledon match between Borg and McEnroe will always stand as the greatest tennis match of all time. It was not only the brilliant shots, but also the fact that Borg missed seven match points in the fourth set and then managed to come back in the fifth set and eventually win the title.
When I ask Alexei and Viktor how they manage to keep coming back after an annoying and unpredictable market move wipes out their weekly gains, they simply reply that they have confidence in their system. They've traded it so many times and gone through so many market cycles that they know it works.
When asked how he recovered from losing the fourth set, Borg replied that he simply relaxed in the fifth set and played his game. Indeed, he trusted the process that had won him so many championships in the past. I think that's the lesson for all of us. The pinnacle of skill in life and in commerce ultimately lies in trusting that the process will work out in the end.