Paul Tudor Jones: 13 Insights

13 Insights From Paul Tudor Jones

1. 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).

2. Younger generation are hampered by the need to understand (and rationalize)

why something should go up or down. By the time that it becomes self-evident, the
move is over.

3. 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?)

4. There are many more deep intellectuals in the business today. That, plus the
explosion of information on the Internet, creates an illusion that there is an
explanation for everything. Hence, the thinking goes, your primary task is to find
that explanation.

As a result of this poor approach, 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 price action. The pain of gain is just too
overwhelming to bear.

5. There is no training — classroom or otherwise — that can prepare for

trading the last third of a move, whether it’s the end of a bull market or the end of a
bear market. There’s typically no logic to it; irrationality reigns supreme, and no
class can teach what to do during that brief, volatile reign. The only way to learn
how to trade during that last, exquisite third of a move is to do it, or, more
precisely, live it.

6. Fundamentals might be good for the first third or first 50 or 60 percent of a

move, but the last third of a great bull market is typically a blow-off, whereas
the mania runs wild and prices go parabolic.
7. That cotton trade was almost the deal breaker for me. It was at that point that I
said, ‘Mr. Stupid, why risk everything on one trade? Why not make your life a
pursuit of happiness rather than pain?’

8. If I have positions going against me, I get right out; if they are going for me, I
keep them… Risk control is the most important thing in trading. If you have a
losing position that is making you uncomfortable, the solution is very simple: Get
out, because you can always get back in.

9. Losers average down losers

10. The concept of paying one-hundred-and-something times earnings for any

company for me is just anathema. Having said that, at the end of the day, your job
is to buy what goes up and to sell what goes down so really who gives a damn
about PE’s?

11. The normal progression of most traders that I’ve seen is that the older they get
something happens. Sometimes they get more successful and therefore they take
less risk. That’s something that as a company we literally sit and work with. That’s
certainly something that I’ve had to come to grips with in particular over the past
12 to 18 months. You have to actively manage against your natural tendency to
become more conservative. You do that because all of a sudden you become
successful and don’t want to lose what you have and/or in my case you get married
and have children and naturally, consciously or subconsciously, you become more
conservative.

12. I look for opportunities with tremendously skewed reward-risk opportunities.

Don’t ever let them get into your pocket – that means there’s no reason to leverage
substantially. There’s no reason to take substantial amounts of financial risk ever,
because you should always be able to find something where you can skew the
reward risk relationship so greatly in your favor that you can take a variety of small
investments with great reward risk opportunities that should give you minimum
draw down pain and maximum upside opportunities.

13. 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.

 Trading Wisdom – Paul Tudor Jones
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Paul Tudor Jones

Turned $1.5 million into $300 million in five years

“That cotton trade was almost the deal breaker for me. It was at that point that I
said, “Mr. Stupid, why risk everything on one trade? Why not make your life a
pursuit of happiness rather than pain?”

I had to learn discipline and money management. I decided that I was going to
become very disciplined and businesslike about my trading. I spend my day trying
to make myself as happy and relaxed as I can be.

If I have positions going against me, I get right out; if they are going for me, I keep
them. I am always thinking about losing money as opposed to making money. Risk
control is the most important thing in trading. I keep cutting my position size down
as I have losing trades.

When I am trading poorly, I keep reducing my position size. That way, I will be
trading my smallest position size when my trading is worst. If I have positions
going against me, I get right out; if they are going for me, I keep them.

Risk control is the most important thing in trading. If you have a losing position
that is making you uncomfortable, the solution is very simple: Get out, because
you can always get back in. There is nothing better than a fresh start.

The most important rule of trading is to play great defense, not great offense.

Every day I assume every position I have is wrong. I know where my stop risk
points are going to be. I do that so I can define my maximum possible draw down.
Hopefully, I spend the rest of the day enjoying positions that are going in my
direction. If they are going against me, then I have a game plan for getting out.
Don’t be a hero. Don’t have an ego. Always question yourself and your ability.
Don’t ever feel that you are very good. The second you do, you are dead. I know
that to be successful, I have to be frightened. Don’t focus on making money; focus
on protecting what you have.”



One of the greatest trading books ever written is Reminiscences of a Stock

Operator. The original book was published in 1923, but in 2010, an
Annotated Edition was produced by Jon Markman. This edition reveals the
truth about Jesse Livermore and provides colorful, historically accurate
commentary on the characters, places, and events that have made
Reminiscences such an enjoyable and educational read for generations.

The foreward to the Annotated Edition is written by legendary trader Paul

Tudor Jones. At the end of the book, Jones answers a few questions about
his relationship with the book and its themes. Here is one of the insightful
questions that was asked to Jones. I found a profound meaning in his
response. I hope you discover it as well.

Question: Part of the appeal of the book is Livermore’s journey of

self-discovery as a person and as a trader. Have you had the same
experience as a trader and portfolio manager, or was your path easier
or harder?

Jones: Probably the best lessons to be learned from this book come from
his repeated failures and how he dealt with them. In the book I think he lost
his entire fortune four or five times. I did the same thing but was fortunate
enough to do it all in my early twenties on very small stakes of capital. I
think I lost $10,000 when I was 22, and when I was 25 I lost about $50,000,
which was all I had to my name. It felt like a fortune at the time. It was then
that my father flew up from Memphis and sat me down in my New York City
apartment and began lecturing me as lawyers do. He commanded, “Leave
the gambling den behind. Come home and get a real job in a safe
profession like real estate.” Of course, I did not, and the rest is history. And
real estate these past few years has been about as safe as shooting craps
to pay the rent, so I was twice blessed. If I’d have taken my father’s advice,
I might have lost all of my money again these past few years in my fifties.

Anyway, I think it’s no coincidence that our greatest champions, our

greatest artists, our greatest leaders, our greatest everything all seem to
have experienced some kind of gut-wrenching loss. I think their greatness,
in part, was fashioned on the crucible of that defeat. Two years before
Lincoln was elected as maybe our finest president, he lost that monumental
Senate race to Stephen Douglas. To a certain extent, I think that holds true
in my field as well, and I am leery of traders who have never lost it all. I
think that intense feeling of desperation that accompanies such a
horrifically deflating experience indelibly cauterizes great risk management
reflexes into a trader’s very being.

There are two unpleasant experiences that every trader will face in his
lifetime at least once and most likely multiple times. First, there will come a
day after a devastatingly brutal and agonizing stretch of losing trades that
you’ll wonder if you will ever make a winning trade again. And second,
there will come a point when you begin to ask yourself why it is you make
money and if this is truly sustainable. That first experience tests an
individual’s grit; does he have the stamina, courage, guts, and smarts to
get up and engage the battle again? That second moment of enlightenment
is the one that is actually scarier because it acknowledges a certain lack of
control over anything. I think I was almost 38 years old when one day, in a
moment of frightening enlightenment, I knew that I really did not know
exactly how and why I had made all the money that I had over the prior 17
years. This threw my confidence for a jolt. It sent me down a path of self-
discovery that today is still a work in progress.


Paul Tudor Jones is one of the greatest traders that’s ever lived. He has
the long term record to prove it.

Here are 10 principles that made him a successful and profitable trader.

#1 He has a strong work ethic based on passion for the business.

“The secret to being successful from a trading perspective is to have an

indefatigable and an undying and unquenchable thirst for information and
knowledge.”

#2 He followed price action not fundamental valuations.

“At the end of the day, your job is to buy what goes up and to sell what goes
down.”
#3 He was able to stay humble and stay flexible. He was always ready to admit he
was wrong and exit any trade.

“Every day I assume every position I have is wrong.”

#4 He did not believe in adding to a losing trade.

“Losers average losers.”

#5 Mr. Jones adapted, evolved, and was a competitor in his trading.

“You adapt, evolve, compete or die.”

#6 He learned the lessons of early failure instead of quitting or repeating the

failures.

“Failure was a key element to my life’s journey.”

#7 Paul Tudor Jones was a risk manager first and a trader second.

“At the end of the day, the most important thing is how good are you at risk
control.”

#8 He cut losses quickly instead of holding them and wishing they would come
back. He saved a lot of mental pain and stress that way.

“If I have positions going against me, I get right out; if they are going for me, I
keep them… Risk control is the most important thing in trading. If you have a
losing position that is making you uncomfortable, the solution is very simple: Get
out, because you can always get back in.”

#9 Paul Tudor Jones traded smaller during losing streaks.

“When I am trading poorly, I keep reducing my position size. That way, I will be
trading my smallest position size when my trading is worst.“

#10 He looked for only the very best risk/reward trading opportunities.

“I look for opportunities with tremendously skewed reward-risk opportunities.

Don’t ever let them get into your pocket – that means there’s no reason to leverage
substantially. There’s no reason to take substantial amounts of financial risk ever,
because you should always be able to find something where you can skew the
 reward risk relationship so greatly in your favor that you can take a variety of small
investments with great reward risk opportunities that should give you minimum
draw down pain and maximum upside opportunities”



Key Quotes From Paul Tudor Jones in TRADER: The

Documentary
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Paul Tudor Jones is famous for correctly predicting Black Monday when the Dow
Jones Industrial Average dropped by 22 percent in one day. I recently re-watched
TRADER: The Documentary, one of the classics in investor education. Wikipedia
describes it as:

In the 1987, PBS film “TRADER: The Documentary”. The film shows Mr. Jones as a
young man predicting the 1987 crash, using methods similar to market forecaster
Robert Prechter.

Although the video was shown on public television in November 1987, very few
copies exist. Those that do are hoarded by traders who watch the hourlong movie in
the hope of gleaning possible trading tips from Jones. On the Internet, bids for the
video start at $295. According to Michael Glyn, the video’s director, Jones requested
in the 1990s that the documentary be removed from circulation. The video surfaced
briefly on YouTube at the end of July 2009, before being taken down due to alleged
copyright violation.

For the past two years, the video has been available here at Tudou, but recently has
only been limited to viewers in Asia due to copyright violation. I watched a copy that
I had saved to my local hard drive recently with the purpose of transcribing certain
portions that I found particularly enlightening.

One theme throughout the documentary is that Paul Tudor Jones and other individuals
profiled thoroughly enjoy the act of analyzing financial markets and they are not
primarily driven by greed. This is a defining characteristic of investment managers
who have reached the top of their profession:
Well I originally decided to come here to be on vacation, getting away from
everything. Then as it turned out, a number of the clients are here in Europe, so I’ve
been doing an enormous amount of business. I’ve been in Paris, I’ve been in Geneva,
so I can combine business with pleasure. I wish it had been more pleasure, but I still
wouldn’t trade it for anything in the world. If life ever ceased to be an educational
experience, I probably wouldn’t get out of bed.

After a while, the size means nothing. It gets back to the question of whether you’re
making a 100 percent rate-of-return on $10,000 or $100 million. It doesn’t make any
difference. If you complete 78 percent of your passes, it’d be nice if you were in the
NFL, but if you’re in college or high school or even elementary school, I’m sure the
thrill is just as great.

Paul Tudor Jones’s intensity and passion is quite apparent throughout as well. The
film crew follows him over a course of several months, so viewers are able to see him
on a down 5 percent day and an up 5 percent day. Paul Tudor Jones shares some
insights on the qualities he values most as an investment manager:

The whole concept of the investment manager making these incredible intellectual
decisions about which way the market is going to go — I don’t want that guy
managing my money. If he can be that dispassionate, he doesn’t have the competitive
nature which is necessary to be a winner in this game. I want the guy who is not
giving to panic, who is not going to be overly emotionally involved, but who is going
to hurt when he loses. When he wins, he’s going to have quiet confidence. But when
he loses, he’s gotta hurt.

To do the job right requires such an enormous amount of concentration. It’s physically
and emotionally mandatory that you find some time to relax. And you’ve got to be
able to turn it off like that. There will be times though that I get so incredibly excited
about a trade or even a project that I’ll wake up at 4 o’clock in the morning and
there’s no way in hell that I’m going back to sleep. I’ll sit there in my dreams and
trade for four hours.

The one piece of advice directly applicable to individual investors is found in the
middle of the documentary and it is quite simple:

Where you want to be is always in control, never wishing, always trading, and always
first and foremost protecting your ass. That’s why most people lose money as
individual investors or traders because they’re not focusing on losing money. They
need to focus on the money that they have at risk and how much capital is at risk in
 any single investment they have. If everyone spent 90 percent of their time on that,
not 90 percent of the time on pie-in-the-sky ideas on how much money they’re going
to make. Then they will be incredibly successful investors.

And finally, Paul Tudor Jones’s comments on predicting Black Monday are eerily
accurate and insightful:

The accumulation and then the repayment of debt basically drives every economic
cycle that there is. Right now we have probably explored the envelope with regard to
mortgaging our future earnings. The next part of this cycle will be the repayment of
what we’ve enjoyed now for the past four or five years.

The last guy who buys a share of stock when the Dow is at 3,000 or whatever number
it is, he’s buying it because he thinks it’s going to 6,000 because it’s been reinforced
in his mind over the past however many number of months, years, or decades that
stocks can’t go down.

The one thing that I’m certain about as a trader, and you’re talking to someone who is
incredibly long the stock market, is that all of Wall Street and the investment
community at large basically is geared towards a Dow somewhere in the 2,600 to
3,200 range. These are people who have track records that are impeccable. Let’s
assume that they are 100 percent wrong. If nothing else, there will be a time
unquestionably when the market turns down. The investment community almost at
once will say “this was the top”, and you’re going to have all the people who are right
now very comfortably investing, that are feeding off the hope that the market will go
higher, try to get out at the same time. It’s just a question of how fast before we hit the
bottom.
I highly recommend readers to watch this documentary. It has a very strong 80′s feel
to it which is quite pleasant. Thorough searching through Google should yield a
download link — if not, please contact me and I can try to help you obtain a copy.

The Wisdom of the Legendary Paul Tudor Jones

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At 56, Paul Tudor Jonesis a self made billionaire with a net worth of 3.3 billion and is
ranked as the 336th richest person in the world, he knows exactly how to trade the
biggest money for the biggest returns. One of Jones’ earliest and major successes was
anticipating and trading through Black Monday in 1987, tripling his money during the
event due to large short positions. The Dow Jones Industrial Average dropped by 508
points to 1738.74 (-22.61%) on that day. While the majority of others lost more than
they ever had in their lifetime, Jone’s was on the other side of their trade making a
fortune. That is the sign of a truly great trader making money at the tipping points that
most others miss. Paul Tudor Jones has returned double digit annual returns to his
investors for decades. He is one of the greatest traders to have ever lived, we need to
sit up and listen closely to his advice, it is priceless.

Risk Management

“Don’t focus on making money; focus on protecting what you have.”

“Where you want to be is always in control, never wishing, always trading, and
always, first and foremost protecting your butt.”

“At the end of the day, the most important thing is how good are you at risk control.”

Trader Psychology

“Every day I assume every position I have is wrong.”

“Losers average losers.”

“Trading is very competitive and you have to be able to handle getting your butt
kicked.”

Method

“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 secret to being successful from a trading perspective is to have an indefatigable

and an undying and unquenchable thirst for information and knowledge.”

“The concept of paying one-hundred-and-something times earnings for any company

for me is just anathema. Having said that, at the end of the day, your job is to buy
what goes up and to sell what goes down so really who gives a damn about PE’s?”
“The whole world is simply nothing more than a flow chart for capital.”
That cotton trade was almost the deal breaker for me. It was at that point that I said,
‘Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of
happiness rather than pain?’
