It is always valuable to read books from investors who use a different approach from yours. The underlying idea is to develop all-weather investing skills by studying a range of techniques and styles, so you can survive, and even thrive, in any investment environment.
Author Larry Hite describes himself as a "trend-follower," and while he found most of his success in commodities, he's willing to traffic in practically anything that moves. It gets the reader to think agnostically about asset classes and sectors, since any investment anywhere can have a trend you can ride.
In other words, think about ways to widen the cast of your net while you widen your range of techniques and styles.
Hite made his fortune a few different times, and suffered a spectacular blow-up when one of his employees hid trades in interest rate futures from him. It's not always the case, but usually the guys who blow up--and yet manage to get wealthy a second time--speak most knowledgeably about risk. They've got the tire tracks on their backs to prove it! Refreshingly, the author writes in clear, jargon-free language, and repeats his central ideas on risk, loss and bet-sizing frequently and helpfully.
[A quick affiliate link to Amazon for those readers who would like to support my work here: if you purchase your Amazon products via any affiliate link from this site, or from my sister site Casual Kitchen, I will receive a small affiliate commission at no extra cost to you. Thank you!]
I'll summarize a few of this book's best takeaways, starting with certain humility-based mental models the author uses. He repeats, almost as a mantra, the phrase "an assumption of wrongness" to convey to the reader the importance of understanding what will happen if you're wrong with any investment, or for that matter with any bet you make in life. It's a great phrase, a sort of looping, self-referential statement of epistemic humility, and it gets you to consider instinctively how to size a given bet properly, and how to grapple with and be ready for the consequences of that bet going bad. Hite repeatedly asks the reader:
"How much are you willing to lose? Do not pass go, or make a single trade, or bet anything at all until you answer this question."
Yet another foundational theme in The Rule is the search for asymmetric opportunities: situations where you can (potentially) make a lot of money with very little upfront investment. These types of investments do float by every so often, and it's a good discipline to stay ready and watchful. One way I've been considered applying Hite-style asymmetry is to put on some long out-of-the money index put options when I see some sort of generalized downward trend in the stock market (or vice versa: long calls in an uptrend), up to maybe 1-2% or so of a given portfolio (this is a low-speed version of what Mark Spitznagel probably did when he famously put up a 4000% return in the first quarter of 2000). Likewise, one could buy OTM puts or calls on specific stocks or sectors that have extra "torque" to whatever trend might be in play. It's an idea where the downside is fully known, so it passes Hite's wrongness test.
A final takeaway. This author openly describes himself as unattractive, short and practically blind. He isn't delusional about himself. He knew his limitations and operated the best he could with them. He did amazingly. We should all be so self-aware and self-perceptive.
[Readers, what follows are my notes and reactions to the book--they are here to help me order my thinking and better remember what I read. If you're interested in investing, feel free to read the bolded parts.]
Notes:
Foreword (by Michael Covel)
ixff Note the link to a podcast that Covel does with author Larry Hite; the first part of this eight page foreword consists of context-free phrases from Larry Hite (like "I'm a trend following trader" and "making friends with losses") that will only make sense once you've read the book; it also contains some oddly self-promotional comments about Covel makes about himself. Then a brief discussion of how the two met and what they talked about together when they met. This part of the book can be safely skipped.
Introduction: Get in the Game
xixff Now we hear from the author himself: the book starts with a joke about a man who is so upset about his neighbor winning the lottery that he screams at God: God answers, "Did you ever buy a ticket?" On the author's "substantial hurdles": he was from a lower middle class family, he had a learning disability and did poorly in school, he was nearly blind, not handsome, not athletic.
xxiff Comments here on fame: "...it always turns out to be a second job." The author claims he has "nearly a hundred million" [in capital]; on how he was the skinny, blind, dyslexic kid at school who sucked at everything: his nickname was "Mr. Coordination." On how when he was young he just assumed if people had a big house they were therefore rich. On how money meant "freedom" to him.
xxiii A few interesting quotes here on this page: "I needed to be rich to make up for my shortcomings." Another interesting quote about the people he knew when he was growing up: the ones who "did not do that well financially have all kinds of regret." "I believe my success came from the fact that I set goals and had the will to pursue it."
xxivff Another interesting comment here on when some Wall Street/Yale economist hedge fund guy approached him with some academic paper talking about the cost of holding inventory, Hite responds, "...every Jewish peddler and their kids knew about the cost of unsold goods. I said to this economist, 'My grandmother was a fruit peddler in Sheepshead Bay. If she didn't sell all her fruit during the day, she'd begin to mark it down because that was the cash that paid for feeding her family of seven that night.' She couldn't read or write, but she could count. Most trading, investing, and entrepreneurial success is about counting and odds, and you can do that if you have the will... A great deal of what you read about investing and wealth building is built on complicated stories and predictions that always crumble under scrutiny."
xxvff "...my early failures forced me to become comfortable with that failure and, more important, with loss, and this has become a foundation for my success." Discussion of how he doesn't try to make predictions, how he uses Bayesian statistics, how he is a trend follower, how his approach is about understanding human fallibility; "When you start following slick reports filled with predictions, you are just finding out who has good copywriters... Wall Street preys off our basic human weakness to want stories."
xxix "I had to learn to trade in a way that would make a lot of money when I was right, and not lose too much when I was wrong." [Sounds just like Mohnish Pabrai: "Heads I win, tails I don't lose much!" or if you want to be pointy-headed about it, you'd call this seeking out "convexity."] "...you can't lose your shirt if you don't bet your shirt."
xxx "My aspiration is to make an understanding of my journey 100 percent free of financial jargon." [Refreshing!] Part I of the book tells about his childhood and teen years and how he found his way into a calling, also on his four foundational principles for the game of money and of life:
1) get in the game.
2) don't lose all your chips because then you can't bet.
3) know the odds.
4) cut your losers and run with your winners.
xxxi Part 2 tells the story of these principles applied to the larger world; how he started his company, Mint, which became a large hedge fund, on his process for investing and the overall philosophy he developed. On his early failures which forced him to adjust.
xxxi Note this interesting list of seven questions Hite asks students when he gives talks:
Who are you?
What is your goal?
What game do you want to play?
Where are you playing the game?
What is your time and opportunity horizon?
What's the worst possible thing that can happen?
What will happen if you get what you want?
xxxii Interesting quote here at the end of the introduction: "Because I am a trend follower, I ask you to look carefully at the trends and numbers you are following in your life. No one can know the future, but what are those trends and numbers telling you?"
Part I: Sheepshead, Pork Bellies, and Blackjack
Chapter 1: Know Who You Are: How I Learned from Failure
3ff This chapter starts with an award ceremony where Hite got an achievement award from the Hedge Funds Review: "You never know what you're going to get for just showing up." His grandparents immigated to the US, both worked as peddlers; his father had a small bedspread manufacturing business and never graduated high school; Hite himself was a horrible student, unathletic, blind in one eye and very nearsighted in the other; he writes about when he was young her was often depressed and occasionally ideated suicide during his childhood; he also had dyslexia but he didn't learn about until many years later. [And note this fascinating comment]: He was dating a woman studying special education and happened to see a book in her school describing dyslexia: he had a sense of recognition so powerful that he was flooded with emotion, even though this was many years later. "All that childhood anger and shame came flooding back to me. I thought I'd pretty much gotten past it by then, but in some ways you never get past the start like mine." [Heavy.]
10ff He discovered he had an active imagination, he could entertain people with his stories, and had very good math scores; it's interesting here that he was tested and got very high scores for math, and this gave him validation that he wasn't as dumb as he thought. Also an interesting section here on understanding and defeating a standardized tests: he talks about studying the previous years' exams to understand the dynamics of the exam, and then talks about probabilities with multiple choice tests: usually two to five answers were absurd and then "you can reduce your odds from one in five to one in three." "...once you understand the moves of the game, you can understand how to play the game."
15 On knowing your flaws and getting comfortable with failure; on how people don't want to accept their own fallibility, but Hite failed so much he had no choice.
16-17 A discussion of Hite's definition of a good bet: on understanding your potential for failure and recognizing this more quickly than others in the game. "This led me to define a good bet as when you can make multiples of what you're risking, and a bad bet when you are losing more than what you can possibly make." Also on how failure teaches you "what didn't work" but also on the importance of figuring out why it didn't work: failure doesn't mean a particular action will never work, it just didn't work that time.
18ff Interesting excerpt from a speech he gave to special education kids at a public school in Brooklyn where he talks about as a kid he thought about suicide, he thought he was a dummy, on people gave up on him, but also on the importance of having a goal "because goals make life simple. And making life simple is the key to winning."
19 [I like this author's focus on epistemic humility] On an "assumption of wrongness": he trains his mind with his own assumptions of wrongness in every life domain, not just an investing; thus you have a better chance of getting decisions right. Note this quote: "I can't tell you how many times I've watched people with mega IQs mess up their lives because they were so used to getting A's that they couldn't see or even imagine they were wrong." "I can see early on in life that even at the finest American schools, they don't teach you how to make the most important decisions of your life: the ones where there is no easy right or wrong answer." [He's right schools--even the really good ones--don't teach us about odds, uncertainty or nonludic problems.]
20ff On knowing what you want and setting a goal for the next one month, one year, and your life. "If you ain't aiming you ain't getting." Also a nuance here on understanding where your goals conflict and then reconciling them. The author makes a funny comment about his goal for becoming rich was in conflict with his goal of sleeping till noon and not wearing a suit and tie to work.
21 Good comments here on the utter indifference of the marketplace: it doesn't care whether you're interesting, or black or white or gay, or have bad eyesight, it doesn't give a damn about you, it doesn't care where you came from, etc.
Chapter 2: Find the Game You Love: My Education as a Trader
25 "I still had my clear goal of great wealth, but I had a major handicap: I didn't want to work terribly hard, and I didn't want to do anything I didn't want to do."
25ff Wild story here where he and some friends got offered work to do some final detailing and finishing work on apartments that being rushed to completion before NYC's rent control law went into effect; he hated the work, but he went and found a bunch of other people, offered them them the job, giving them $2 of the $3 that he was offered by the original contractor. It ended up that his friends made a few hundred dollars that summer working hard in the heat [time for money exchange], but he made nearly $1,000 [essentially brokering the work and earning a spread on others' time for money exchange].
28 Interesting text box here "Early career lessons from a trader who never went to business school:
* Profit is the residue of other people paying you for labor you didn't do.
* The key to understanding your opponent's behavior is motive.
* When you lack cash, look for leverage.
* Pay attention to who isn't laughing when everyone else is.
28ff He's still grinding, trying to get through college, taking writing and acting classes, he does some stand-up work, he actually sells a few scripts written with a friend, he was cast in a couple of minor movies, but he hated the movie business: it was hard and tedious work. Note here that he studied method acting, "which was perhaps the best thing I ever learned in my life." [Essentially it helped him eliminate any solipsism, it helped him perceive others' motivations, and see how other people see and think about things.]
29ff He's in a lecture in finance class about commodities and futures, and learns about the leverage involved, with trades put on with initial margin of sometimes as little as 5%. His professor "saw the commodities market as an absurd amount of risk. 'These people trade on a 5% margin, and most of them borrow even that,' he said incredulously. The whole class laughed except one person who later went out and became a multimillionaire. That was me. I thought these crazy traders seemed pretty smart. They can make huge deals with relatively cheap loans, by putting up only a small fraction of the money. What was so funny about that?" Also comments here on how the professor didn't understand that there's a different level of risk between making one commodity bet versus making, say, a portfolio of 20 bets. "I began to learn everything I could about commodity futures." He finds that they're no riskier than stocks. [Another nuance here is leverage isn't really risky if you don't have any capital to lose! It's great to be young and broke: you can really go for it, and if you lose everything you have time to earn/save back another bankroll. You have to be more conservative later in life because you actually have something to conserve!]
32-3 Good story here where he had a business with another kid selling college term papers: they'd get their hands on successful essays and rejigger the opening statements and conclusions and "switched stuff around." But then he noticed that some of the students would get high marks and others would get low marks on what was essentially the same paper; he realizes that grading was a very inefficient market: it depended on the relationship the teacher had with the kid or it might depend on the fact that the teachers weren't actually reading the papers carefully. "I would soon come to know that efficient markets don't exist and never will as long as humans are playing the game..."
33ff He makes some money as a music promoter, booking bands at different clubs; he meets Brian Epstein in 1964, he talks about how Epstein was already successfully promoting The Beatles in Liverpool, and he admired Epstein for also having a backup plan in case the Beatles didn't workout; except then Epstein died of an accidental OD at age 32 in 1967. Hite writes, "It was powerful evidence that you have to take smart risks, and taking a big risk with your life definitely isn't smart." Then there were three separate shootings in clubs where he was managing bands and so his promoter career pretty much ended right then. But then he gets a job at a small brokerage firm in 1968 as a desk clerk taking orders, then he got promoted to broker because they thought he would be good at sales: "They were right." But he hated the work, he didn't really want to have clients or bosses [I hear you brother!]. "And I certainly didn't want to sell. Instead, I wanted to pour all my energy into research--learning and testing my investment ideas without having to make political decisions, influenced by people's needs and desires, which as far as I could tell were basically irrational."
36 He takes a job with a commodities trader named Jack Boyd at a firm called DuPont, Glore Forgan Inc., Boyd traded multiple commodity markets, unlike most traders who just would work sugar or would work wheat. Hite took a big pay cut to work for Boyd. "My father thought it was the stupidest thing he'd ever heard. But I didn't care. When you are young, you can live at home or live with a roommate; it doesn't matter, so long as you are going where you want to go, going where you need to go." [Note how this resembles the "dog and bone problem" (See Godel, Escher, Bach Chapter 12, page 611ff): the problem space is getting to where you want to go, but increasing your salary every time is like running directly towards the bone, but then realizing you have to run away from the bone to get to the gate so you can get to the other side of the fence to actually get to the bone. You have to rethink the problem space and what it means to move "toward" your solution.]
37 He's fascinated by how Boyd trades, basically he was a trend follower but he didn't call himself that; he also followed the cardinal rule: cut your losers and let your winners run. He would buy or sell no questions asked and control his risk by spreading his bets; he did not practice the typical specialization in commodities; he also had a lot of losing trades but they were typically small and he had a few huge winners. "Sometimes only one or two trades accounted for the majority of his profit that year. Lightbulb moment! I now knew I wanted to do what Jack Boyd was doing but with far more scientific rigor." He stumbles on to Ed Thorp's book Beat the Dealer; Thorp tested thousands of blackjack scenarios and devised a system of card counting, he was inspired by Thorp's work and started practicing Las Vegas Solitaire, which helped him achieve the insight that even if you could look at every card, even if you bend the rules, there were some situations where you would still lose; that losing would be inevitable even if you did everything right. "I began to think hard about this. How could I prepare for the inevitable?"
39ff [Money quote right here]: On four kinds of bets: most people think there are two kinds of bets--good and bad bets--but there are actually four kinds: "good bets, bad bets, winning bets, and losing bets." "Good and bad bets refer to the odds. Winning and losing bets refer to the outcome. You can't completely control outcomes. But you can control two things for sure. The odds of the bet you take, and the risk you take."
40 "If you keep placing good bets, over time the law of averages will work for you. But you must never forget you will lose sometimes. That's just the laws of probability in an uncertain world where prediction doesn't work. If I know this in advance, I am prepared to that only what I can afford to lose." Comments here on getting lucky on bad bets and winning big, which is one of the worst things that can happen to you, become desensitized to risk because you've been lucky. "If you keep placing bad bets, over time the law of averages will work against you. This is essentially the probability you never learned in school condensed into a useful heuristic you can use now."
41 Finally a beautiful comment here at the end of the chapter where he talks about trading: "I enjoyed it so much I would have done it for free." [Investing is like that for me too, and it's such a gift when something like this happens in life, where you dig it so much you'd do it for free.]
Chapter 3: Working the Odds: Your Time and Opportunity Horizon
43ff He leaves Boyd's firm to go to a new commodities firm, Hentz: "but that didn't work out, so I decided to go out on my own." [This is another thing to think about: people "create luck" by being blown out from certain firms, and it causes them to work for themselves. It'll be interesting to talk to this author about this particular work experience "that didn't work out" and learn more about what precisely happened there.] He raises some small funds with individual investors in the $50,000 to $100,000 range and builds a small track record; he stumbled onto an idea of sheltering taxes through a partnership, something that was commonly done in the 1970s; this incentivized investors to the point where he soon had $10 million in capital; other firms were trying to copy him. He starts trading pork bellies; note the discussion here of what a pork belly actually is: the meatpacking industry came up with the idea of pressing pork stomachs into massive 40,000lb frozen slabs, roughly the size of a house. [Holy crap!] This gave the industry a standardized frozen unit which could be warehoused for longer periods and thus protect the industry from gluts and shortages. The author discovered certain seasonal pork belly trends that he was able to play profitably.
46 The author gets a little bit bogged down here in the reasons behind the seasonal price trends in pork bellies, but then he recovers himself and says, "But remember, I don't look at the market and tell it what to do. I let the market tell me what to do." On how he made his "first big trade" by raising $100k from families and friends; he puts up 10% of the capital himself and charged his co-investors 20% of the trade's performance. The pork belly trade worked and he turned $100k into $250k and stood to gain some 30% of the total.
47ff "However, I was shocked to discover I did not feel great happiness at making all this money. In fact, I felt great fear... I could now feel the expectations rising both inside myself and from others... So naturally, I went right out and lost all that I'd won." He loses it on a corn futures bet, it was a colleague's idea and he joined in on it. It went south on him, although he managed to get out of it breaking even. "That trade was a huge learning experience. For one thing, I took the corn guy's tip on faith without doing any of my own research. But more important, it was an enormous lesson on risk. I realized I had bet far more than I could afford to lose. I had placed my bet concerning the upside as so many people do, rather than the worst case scenario. I vowed I would never do that again."
49 He continues looking ways for ways to put the odds in his favor and he gets interested in "the emerging field of game theory." [This was only in the 1970s, so good on him!]
50ff "Throughout my career I always needed quantitative people and computer experts who could execute my ideas." He joins forces with a guy [who he names only "Steve" here, oddly] who just graduated from Tufts, and they co-published an article "Game Theory Applications" in the Commodity Journal. "It became a pretty big deal, because no one had written the proof of how game theory could be applied to trading futures."
53 Good comment here on comparing poker to investing: at the poker table you have to put money in the pot before you can play at all, but with commodities futures you don't have to do anything until you see a good situation. [See Buffett's famous comment "there are no called strikes in investing."] Also note this quote in the text box on p53: "The next time you are in the throes of a decision, feeling that you need to make a bet on something, stop and ask yourself, what are the observable facts?" More thinking here about your odds, but in the sense of time horizon: some bets are lifetime bets, but "if you have leeway as to your when, then you have a powerful advantage." [This would be a good theme to flesh out more: ideas come to my mind about "time arbitrage" investments where if you have a much longer time horizon than other investors who might be panicking out of an asset, thus you can afford to wait.]
54ff On looking for asymmetrical bets: on the idea that small gains are not safe because they aren't going to provide enough to cover his many small losses; it might seem like a safe bet to go for steady, small wins, but it is not as safe as it seems. When you have a really good situation, a really high quality bet, you want to make it large, he uses the phrase "a horizon of opportunity"; the author goes through an example in 1975 where he saw an opportunity in coffee futures and made two separate $250k bets [this was the amount he was okay losing at the time] using call options, and the coffee price went from 60c to $1, and then to $2 as he let the money ride. This $500k initial investment went to $15 million before the trend reversed, and then he ultimately got out with $12 million. "Emotionally, it was a major moment. I was 35 years old, and I had $12 million. No one in my family had ever had $12 million. This was a life-changing breakthrough for me. Yet inside of me a voice was saying, 'It can't be this good.' I was not emotionally ready to be a big winner." [It feels like there might be lots of takeaways here, once again I'd like to press this author more here if I could have the chance. One thing, perhaps, is as you look for opportunities to put yourself in position for being lucky, you want to limit your ego-attachment to that luck actually coming to you: sometimes it does come, gigantically. But then your ego naturally thinks you'll get the mean reversion part of this luck at some point too.]
56ff He goes traveling to Cambodia and works things out; seeing the Killing Fields put things into stark perspective: he realizes that he already beat all the odds by being born into born into an American lower-middle-class family. He still really wasn't ready to accept his luck at this point, so he lays low for a couple of years, not making any major trades. [I think this is also good policy: let the dopamine hit from that big win wear off, don't go crazy, don't take on overhead or extra costs, stay lean, and most importantly don't make it so you "need" to keep having big scores like this by having a big cost structure in your life. Keep everything the same for a while.] "Now it would be a while before I'd really learned to accept this, but sometimes, you get more than you thought in life."
57ff He starts "playing the odds" with dating: "I was not good looking--that was a simple fact" so he stays away from bars or parties where you need to be attractive; instead he approaches women in shopping malls--where women outnumber men! He find a woman who looked bored or who was on lunch break, and he'd ask them if they like to have coffee. He writes that one in four would say yes. [!] Then if the coffee date went well, hed' asked them to dinner, and one in three would say yes to dinner. "Using this method, I drank a lot of coffee and dated a lot of fabulous women." [Talk about knowing the odds!]
60 Another text box here about horse racing: The author talks about "betting to survive" rather than betting a big amount on any specific race; instead make a bunch of small bets, knowing that you know nothing about the horses themselves, such that even if you lost every single race the outcome wouldn't kill you. [Taleb would agree: this is about avoiding ruin at all costs.]
Chapter 4: Trend Following: Cut Your Losses and Let Your Winners Run
63 Discussion here of David Ricardo, the British economist (1772-1823) who had a huge impact on the author; Ricardo came from a family of Sephardic Jews expelled from Portugal, who settled in Holland; later his father moved to London where Ricardo was born; he eloped with a Quaker woman and then joined the Unitarian Church, breaking ties with his family to go off on his own. He made his living in the markets, did well, and published on free trade. [Note here the devastating modern criticisms of Ricardian free trade from Vox Day and Steve Keen, addressing problems like labor mobility and de-industrialization, problems Ricardo never even thought of, much less addressed, with his ultra-oversimplified "cloth and wine" free trade example.] On Ricardo's big bet on British government bonds at rock bottom prices right before Wellington defeated Napoleon at Waterloo, "and practically overnight Ricardo became one of the richest men in Europe."
65 David Ricardo's three golden rules:
1) never refuse an option when you can get it.
2) cut short your losses.
3) let your profits run on.
65ff The author follows up here, repeating his own cornerstones of trading:
1) get in the game.
2) if you lose all your chips, you can't bet.
3) know, and improve, the odds.
And then, adding a fourth rule, "Ricardo's Rule," which he calls the most important:
4) cut your losses, and let your winnings run.
The author elaborates: "When something is not going well, stop doing it. When something is going well, continue." [This is hilarious, it's true, and in investing everybody seems to forget it!] Then a short discussion of his trend following process: "To spot a rising trend, you look at where the price is now relative to where it has been. So for example, if the price of a commodity or stock is higher than it has been for 40 or 50 days, more people believe it is [going] higher, so you can buy and ride this trend. When to get out? I simply ask myself how much can I afford to lose? If the answer is 2 percent, for example, then as soon as the price comes down by 2 percent, it is gone from my portfolio. That's how much I'm willing to risk." [This is not at ALL how I invest, but what he's saying here translated into English is: once you see a stock hit a 40 or 50 day high, you buy it, and keep a trailing stop of 2% below the current price.]
66 Comments here on Richard Donchian, who was considered the father of modern trend following, see his 1960s newsletter Commodity Trend Time, talking about his "four-week rule" where he would buy if prices reached a new four-week high, and sell when they reached a new 4-week low.
68ff Discussion of a thesis on Microsoft stock, where the author talks about certain fundamental drivers but then says, "These [fundamental] factors are certainly influential and interesting. But the underlying fundamentals of a company are not what motivate me, a trend follower. A trend follower will buy Microsoft stock because the stock price is rising and has been rising long enough to establish that there is a trend in place. The trend follower will not try to predict how long it will last. When the trend falls, he or she will get out. In other words, I don't make money because I know anything. I only make money because I do what the market tells me to do." [There is an elegance to this, but the problem is, what happens when everybody else is also watching--and reacting to--this trend just like you are?]
70 On paying the price for overconfidence: "When you start believing you have remarkable market predicting powers, you get into trouble every single time. To repeat myself, I've always built an assumption of wrongness into my trading, and this should be a mandatory practice in your own financial life too. Keep asking, 'What is the worst thing that can happen in this scenario?' Then the worst case scenario is my baseline."
70 "Interestingly, trend followers have tended to do well during times of crisis. Why? Because big sell-offs create dramatic trends across all markets." [Yep.]
71ff But what about buy and hold? The author makes some flawed claims here: first that "the buy-and-hold approach is based on the efficient markets theory" [what??? It most certainly is not], and then further claims that buy-and-hold is based on "the market always wins" and individuals can't beat the market. [again, what?? This is an argument against indexing, not an argument against buy and hold.] He argues this is speculating on what will happen economically in the markets years from now. [The arguments here are incontinent, this is a strange section of the book.]
74 Also note the interesting chart here on page 74 that [coincidentally!] picks the (then) all-time market high in the year 2000, and then compares a trend following index with the S&P 500. And while it admittedly shows a period of divergence favoring the trend following index, the S&P still outperforms by the end of the 20 year period. And this despite picking a time period that severely handicaps the S&P. See photo:
Minor chart crime in here
74-5 Now the author softens his tone a bit here, saying there is no single trading or investing approach that works every time, this is why it is best to mix and diversify. [Agreed: it's much better to master a few--or several--styles. You want to be as all-weather an investor as you can be.]
76ff Cute section here where he uses love, marriage and relationships as a domain to practice trend following too: cutting your losses, letting your winners run, etc.; also comments here on how it's very difficult for people to walk away from sunk costs.
Chapter 5: How to Lose Money, Including How I Lost Millions
84 "There was a time in my life when I was flying so high I didn't see the punch coming right at me. As a result, I lost millions and nearly destroyed my life." [This is the famous Mike Tyson punch, coming at you out of nowhere, that arrives whenever you get complacent, whenever you get a little too full of yourself.] "...people who lose a lot freeze when they have a setback." [Yes, they do.]
85 The author offers a list of "eight ways to lose money":
1) Be a genius (the "smart boy," who assumes he's special; note that the market will never care how smart you are, it's not impressed by your grades. Per the author, it's the Ivy League-type people who "hang onto their losses... because they cannot comprehend that after all of their education they are just wrong.")
2) Assume the market owes you money (the author talks about a friend who traded sugar but had some idea that the sugar market somehow owed him money, it kept him betting on sugar for years with nothing to show for it.)
3) Ignore the trend (buying after a sell-off can be an opportunity, but don't use it as a blanket reason: sometimes things go down for a very good reason. See for example technology replacement or disintermediation. "Ask yourself frequently if your vision is corresponding to reality.")
4) Failure to get out of a bad position ("how much can I lose?" should be your first question, not how much can I win.)
5) Hang on when you're losing (the author gives an example of a cousin who trafficked in stock options, but when a position that went against him he didn't get out--he wanted to wait until he got back to even; the author tried to persuade him otherwise and he lost everything, even borrowing extra from the bank to shore up the losing position.)
6) Be a winner (he cites a friend who was a great athlete, good looking, who did well in school and never lost at anything, thus he wasn't able to prepare for loss or cope with loss. "People used to winning are far less likely to acknowledge they are actually losing... Because I'd been a poor athlete and bad student, it never surprised me that I would lose. I would quickly accept it, fold my cards, and move on to come back to play another day. I recommend you practice losing money. In the long run, that will help you win big."
7) Get confused at what your objective is (here he's talking about "falling in love with an investment" and then losing your objectivity)
8) Be arrogant (here he hints at what happened to him: an error that someone else made, but that he didn't see coming; he was on top of the world and saw himself as "the concept guy," jetting around, making deals, and not paying attention to what was really going on inside his firm.)
91 Multi-page discussion here on how he lost everything: he had created a partnership in the mid-70s that was a commodities options market maker; he depended on a partner to run the trading system and manage the books; more comments here from the author about how he always needed people to execute his ideas because of his near-blindness and dyslexia. "I needed eyes to see for me." He has the idea of trading interest rate futures, and then in November 1979 "everything changed": his partner put on a position without hedging it because he thought Federal Reserve Chairman Paul Volker would stop raising rates; essentially his partner overrode Hite's "system" without consulting anyone else; it turned out he had made this mistake quite a bit earlier but had been hiding it, attempting to cover it with other trades, but the losses got worse and worse, and worse, this guy because paralyzed with fear. The author uses the phrase "the first loss is the best"; but his partner thought he would get saved somehow. For a while there was a risk that everyone involved was going to be bankrupted: all the partners, their fund, even the clients. [This situation sounds a little lot like the infamous James Cordier "rogue wave" blowup, where Cordier blew up his firm and all of his clients with a short nat gas position, announcing it with a weepy, surreal apology video. Despite what this author tells you, leverage kills. It kills.]
96 Interesting section here where the author tells his father about the situation, including that among his debts from this blowup, Hite owed $4m to just one guy. His father replies, "No. It's not your problem. It's his problem." [This is a variation on the old joke about if you owe the bank a million dollars, you have a problem, but if you own the bank a billion dollars, the bank has a problem.] Hite has a moment of clarity: he understood that "once you're already dead you can't be threatened," thus he worked out arrangements with the people he was in debt to to try to negotiate away some of the liability. "We owed money to three very major financial firms, and two negotiated with us." In the meantime he salvaged more of the firm's assets with long gold and long silver trades that worked out, and then they did a capital call with their investors, and 98 out of 100 clients agreed to put in more margin.
98 He has to tell his wife, who was pregnant with their first child at the time, and she says "Your kind always has a scheme." [Ouch. That sounds just a bit... anti-semitic.] She turned away and went up the stairs and never said anything else again about it. And she was right: he did have a scheme.
Part II: The Mint Fund, Market Wizards, and Living the Rule
Chapter 6: Making Mint: Know Where You Are Playing the Game
103 He finds a secondary business to help a client with tax strategies, and earns $100,000 doing it, this was enough to cover his expenses, family and business, for a long time. "I'd always been an underspender." [Another takeaway is keep your business lean and keep your life lean: as Felix Dennis says "overhead walks on two legs"; and there might be an instance where being really lean makes the difference between survivial and ruin.] He also has an idea to build a statistics-driven automated buying and selling trading system built on preset rules, but he needed a new partner to help him build a model and do testing etc. [Thinking back to the near blow-up of his firm, thanks to his partner hiding a huge bad trade, another takeaway comes to mind: don't depend too much on partners, or at the least don't be fragile to partners who fuck things up.]
105ff They stuff they were working on back then "you can do on your phone now" according to the author, but back then they needed access to a mainframe computer (which they got for free at American University at night). He wanted the system to be agnostic to whatever market you were trading. They hired yet another guy to program the backtesting and found that their system worked: 90% of all 6-month holding periods were profitable and 97% of all 12-month holding periods, and 100% of all 18-months holding periods [That sounds incredible, hardly believable.] They started Mint Investment Management Company in April 1981. The system would kick out trades and they would send the trades to a futures broker partner in London at the historic commodities firm ED&F Man, which had been around since the 18th century. [Note here that nothing lasts forever: ED&F Man actually had a series of severe problems in recent years, and while it still exists, it is no longer a standalone, independent firm. Yet another commodities firm blowing up...] For the first two years they made 20% a year and then around 1983 Hite convinced ED&F Man to invest in them: offering 50% of the firm in return for covering 5 years of paying all the salaries of him and his partners plus a $5 million line of credit to give them more capital to invest. Interesting.
110ff Comments here on how Hite, married to a Brit, still struggles to understand what a British person means when they say something; he also finds the firm to be less antisemitic than he expected. "I discovered that my colleagues in England really wanted to make money. Of course, as the Brooklyn guy, I was a bit more aggressive than they were used to." [Note these comments here]: "...you need to know where you are playing the game. You need to understand the rules and perspectives of the other players in their culture. If you adapt yourself to the place, you improve your odds."
112ff By 1988 they were running at over 30% annual average compounded returns after 7 years of history, and then in 1987 they put up a +60% year [!]; their worst year was +13%. And then he got profiled in Jack Schwager's [well-known] book Market Wizards in 1989. By 1990 they had a billion dollars under management. [This was actually a lot of money back then.]
113 Discussion of the author's concept of asymmetrical leverage: He has the idea of setting up a "no lose" fund, holding 60% of the capital in zero coupon Treasuries [this is back when interest rates were a lot higher] and they put the other 40% of the capital into their commodity trading program; with interest rates as high as they were then, this meant the firm would both cover their fees and have flat returns even if they lost everything in the commodity portion of the fund.
115ff The irony here is he gave ED&F Man their own hugely asymmetric opportunity by giving them half of his business! Their $750k investment for them grew to $100 million dollars a decade later. His firm got time, money and guaranteed salaries and costs paid for in return. [Again, it would be useful to discuss this further: how costly that 50% of the firm turned out to be! You want to avoid giving up more equity than you need to...]
116 Also note a very interesting point here that gets to the importance of being a big financial firm: ED&F Man was able to borrow at prime rates, but futures margins paid T-bill rates, thus their financing was extremely cheap.
117 [In keeping with the author's idea of the assumption of wrongness: you can pretty much assume that the outsized returns of his fund would eventually be arbitraged away or "efficiencied" away as their specific trading approach got more and more crowded. It'll be interesting to see what happens to this fund eventually here as I keep reading.]
117 The author discusses three ingredients to asymmetrical leverage: time (the example here is the guaranteed fund had a 5-year lockup), knowledge (knowing the odds, knowing the game, having great partners who contributed essential knowledge), and other people's money ("Money buys you time, buys you knowledge, and allows the long-term odds to work in your favor. Money leverages the advantages of the first two ingredients." Also comments here on OPM is a great source of leverage in building wealth. Also note the sidebar here on Moneyball and some of the insights from that book and movie, including the heavy use of relief pitchers, managing pitch counts and having a big stable of less expensive relievers (and having those relievers pitch more of your innings overall) instead of just a few star starting pitchers, who seem to always get injured anyway. [This looks quite a lot like a "diversified portfolio of pitching" rather than just a few large bets on a couple of star pitchers.]
121 Now in 1994 ED&F Man becomes a public company, and Man and Mint part ways [the author doesn't discuss this at all, nothing on the reasons for the split, this again would be interesting to learn; he just makes vague comments about how we didn't want to have to answer the political interests and "working in a public company would only bring more people to please."] The author also writes that he wanted to stop managing other people's money, and run just his own instead of having to ask permission or sell his ideas before he could put them in play. [Why? Didn't he just say a few pages ago that this was a great source of leverage? And if the firm is his and the fund is his, why is he asking for permission? Or why would he set up an ownership structure where he had to ask for permission to make certain investments? Again, it would be interesting to hear the reasons behind all this, but the author stays glib here and leaves rhe reader in the dark.] The author writes that Stanley Fink, who was CEO at the time, wanted him to help run Man Group, but he said no. "That decision probably cost me $100,000,000, give or take a zero or two." [Note that Hite was born in 1941 so he was around 53 at this point.]
121 "One of the earliest recommendations of this book is to know who you are. I have realized that I am happiest when I am independent and free to come up with new creative ideas to make money."
Chapter 7: How My Philosophy Can Work For You: Applications of the Rule
123ff On people asking him for stock tips and trading ideas: "this is not how it works."
124 Thoughts on getting together your first stake of capital to invest: On using both "want" and "count"; basically the idea here is to have a strong drive to get the capital you need and then using things like your own aggressive savings, finding additional income sources, as well as capital from family and friends to stake up your first investments. And then on other things to "count": like testing what works, making sure you manage your borrowing costs, as well as carefully counting the odds and how much you can lose or make in a given bet.
127 "Risk control is everything. The market is not my friend. I do not know what it will do. I can control, however, how much I bet and when I bet. [And here is where he lists the cardinal rule, "The Rule" that the book is based on]: "How much are you willing to lose? Do not pass go, or make a single trade, or bet anything at all until you answer this question." Then a discussion of other sub-rules: use the worst case scenario as your baseline; risk a very small percent of equity on any single trade (at his firm they would never risk more than 1%); spread your bets ( "diversify and diversify again" and "make sure your diversified trades are not really more of the same kind."); stick with the plan (here he talks about sticking to his trading system in his particular case and then talks about how high-IQ type people will want to tinker with a system or bend the rules of a system rather than follow it).
129-30 Interesting side story about how the firm had just brought on a major Swiss bank as a client and rapidly began losing money under adverse market conditions; he called up the client right away under the argument that "if you don't call your client when he is losing money, someone else will."
130ff Interesting points here about being "frequently wrong": understanding that you will be frequently wrong, and making sure your clients understand it too.
131ff Comments here on practical aspects of cutting losses and letting your winners run: he talks about using the moving averages of 20 days or 30 days, which "will signal trends early but will be more bumpy" vs a 200-day moving average, which will be slower to reflect a trend but stronger. "When do you want to come back to the market? When the moving average tells you that it's a good time to be there. The reverse is also true." [This is absolutely not how I invest at all, but it's always good to think about investment approaches other people use that might impact the price of investments that you're also invested in: you want to know the drivers and motivations of the people alongside you in a stock.]
133ff Discussions of using options and stops: the author uses trailing stops, giving an example of a 2% stop loss that he adjusts to wherever the price is as it goes higher [we heard about this already in the book back in Chapter 4], he also talks about buying options, but he doesn't really give any specifics here at all--this section is pretty thin. Probably if he wanted to detail it would make the book too sophisticated for his audience.
136ff Useful section here on a conversation he had with his mother; his mother kind of still has a "poor person's" mentality, she still has the fear that trailed many people who lived through the Great Depression; she's worried about him, she thinks he's done so well, but also thinks that his business is dangerous [which it is! The author already blew up once], and she asks him why he doesn't quit now that he has enough money. He tries to explain to her, basically saying it's a business I know well and I'm good at it, what else would I do? Then his own daughter comes into his office to ask him the same question: Don't you think enough is enough? Apparently she had the same fear. He tries to explain to his daughter the idea of letting your winnings run, but he also realizes that he had become agnostic about wealth; and then he talks about the guilt that tends to show up in Jewish or Catholic culture. "When things are going too well, you don't believe you are entitled. In my early years, I was not prepared to be successful. I couldn't handle it, but as time went on, I came to see that, yes, life can be better than you expect. I wish the same for you, your family, and your friends, too." [This passage more or less tells the reader that the author doesn't really want to think too much about this stuff. It's fascinating to see how people grapple--or fail to grapple--with these kinds of issues.]
Chapter 8: And the Philosophy Continues to Work: The Next Generation
141ff He leaves Mint to run his own money, and in 2000 he establishes Hite Capital, a family office with a small roster of private clients. At first he had a goal of having no clients: "clients can become a diversion... Choose your clients as carefully as you choose your investments." He brings on a couple of staff: one person from Mint who introduced him to Bayesian statistics, along with a couple of others from the old firm. "The band was back together and we enjoyed what we were doing." [Maybe this is really what it's all about: you don't need a big company or a big platform once you've already made it.]
143ff Good discussion here about "letting your winners run" but with the people around you. Also note this quote from the author: "I am not hindered by a formal education in a quantitative field." He goes on to tell all his young quants that everything they know is wrong, all their market efficiency beliefs are wrong, etc.
148ff Note also a book here cited by the author: Trend Following with Managed Futures: The Search for Crisis Alpha by Alex Greyserman and Catherine Kaminski, which tracks commodity prices over for eight centuries' worth of data to look at trend following investment approaches. The author claims here that over 800 years of data trend following strategies generated 13% average annual return with volatility of 11% compared to buy and hold which delivered 4.8%. "Human beings like to create booms and bubbles, which is predictable even if we don't know the exact timing of the next big event."
150 Another interesting insight Hite writes about in a letter to clients, asking "If you knew the ending price of an asset, how much leverage could you potentially use?" He found that even with foresight of the ending price, you couldn't sustain more than 3:1 leverage because you can't predict the path the asset takes to get to that price. [You have to maintain minimum margin requirements with commodity futures.] Very interesting.
151 Discussion of "one of the great asymmetrical leverage moves in my career." First on Aaron Patzer who in 2006 had a company named Mint Software and wanted to buy domain name mint.com which Hite's firm had already bought in 1994. They looked into Patzer's company, liked what they saw, and asked for equity in his business instead; they eventually agreed on 2% of the company with anti-dilution rights, so when the company sold itself to Intuit in 2009 for $177m, this meant that the few hundred bucks Hite spent to buy his domain name ended up being worth $4 million. [See Grant Sabatier's book Financial Freedom, Chapter 9, where he talks about flipping internet domain names as a side business. I wonder if this would be worth considering, especially in a world of inflation/debasing money.]
152ff Then we see how the author gets back into the game of running other people's money all over again: in 2010, Lord Stanley Fink, who had left Man Group by this point, wanted to start a new venture and so Hite Capital was merged into a fun called ISAM, International Standard Asset Management. "Again, don't fight the opportunity. When one arrives--jump on."
153-4 Note another insight where the author meets a gentleman who had made $10 million selling a baked goods business: this guy shares his formula: partner with a man in his mid-30s, because they have energy and youth but they're "old enough to be tempered by experience." [Interesting.] "I could immediately see the beauty of this fellow's philosophy and kept it in mind when considering new ventures of my own."
155ff He gives a talk to an audience of people who had recently become millionaires: he walks out on stage with a British-style black umbrella and opens and closes at a few times, confusing them but getting their attention; then he tells a story about going for a walk in London despite his wife's warning to bring an umbrella--and then it rained and then turned to hail. "The best time to think about risk is before you start."
156 "if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you, and if you know what the worst possible outcome is from the outset, you will have tremendous freedom." Here the author lists his rules of thumb for a crisis:
* Use the worst case scenario as your baseline. I always want to know what I'm missing, and how much I can lose.
* Be prepared to lose capital that is subject to market volatility. You alone control how much of a limited supply of money you are willing to lose. Never expose more of your pile to volatility then you can afford.
* Be prepared to lose roughly the size of your annual return. For example, a strategy with a 10% return over time should be expected to suffer at least double the annual return and a 20% drawdown--so a strategy with a 30% return over time should be expected to suffer a 60% drawdown."
157 "Finally, isn't it true that you make better decisions in any kind of crisis when you are not worried about your own financial survival and the terrible pressures of those feelings? You can't make rational decisions when you have an unhealthy fear of the risks involved. Always, always identify the worst that can happen and change your behavior to protect yourself and maybe your family."
Chapter 9: Conversations with a Young Trader--with Kolade Oluwole
[This chapter is a useful review and summary of the book's ideas in the form of a conversation with a young trader]
159 The author likes to talk to young traders as a form of teaching [he's now in a seventies at the time of this conversation]; this is an actual dialogue here with a young trader who's is involved in Bitcoin futures and derivatives as well as Bitcoin proper; the questions here cover how do you develop an edge? The author says his edge comes from knowing exactly how much he's betting and why, and when he buys he has a stop in mind, he's always focusing on whatever he is willing to lose, usually a predetermined percentage, usually 2%. Also comments here on how he uses various price average time intervals: 10 days, 100 days. 200 days, whatever specific rules he decides to use, and when a price goes above that moving average he buys and vice versa when it goes below. He doesn't have a specific number of trades he does, he just responds to whether there's a breakout or breakdown, and he uses a 2% stop, when those things get triggered that's when he does a trade.
163 Interesting point here about the overall market backdrop: he'll look at the overall market, and if it goes above the 6 month average that's an indicator of where the market is going, thus you buy new highs in that market. Interesting to look at not just a specific asset and its price relative to its moving average, but also the overall market backdrop the asset is a part of. [I'm making up an example, but you might look at the QQQ and then look at the SMH but then have your eye on a specific semiconductor stock like AMAT]. Also a discussion of David Ricardo here again
166 Comments on knowing yourself and knowing your temperament: "You never escape what you are and who you are." Also a discussion here about defining specifically what "rich" means: the young guy says to be financially free, but then Hite presses him for how much money is that specific amount--a very specific amount. The young guy struggles with this at first, but the point here is to have very specific goals which per the author "are powerful things."
168ff Discussion here basically reiterating the idea that there are no called strikes in investing: "The great thing about investing is you don't have to invest." The young guy doesn't understand; Hite explains that you have to know enough about the trade or you don't do it: you have to know how you're going to do it, why, how to go about it, how long you'll be in it, and you'll already have a plan to get out; the entire thing is a discipline that you have to practice. You have to know the probabilities, the risks, you have to know the relevant facts. Also on the idea of practicing with simulations because it costs nothing to run a practice portfolio to learn.
170 More comments here on knowing your nature, Hite talks about how for some people it is hard to cut your losses and let your winners, for others it comes naturally. He talks about a family member [I think this is the same cousin he refers to earlier in the book] who ended up bankrupt because he couldn't bring himself to cut his losses. Again, the idea here is you have to know yourself.
171ff Another summary of his insights here: on being humble and how smart people really think they know everything. "But they forget the most important thing is to stay alive."
171ff Also on thinking in percentages: when you have $100 in your pocket you're not upset if you lose a single dollar, but a 2% loss is 2% whether you have a huge amount of money or not; also Hite talks about how his mother became upset when he lost $100,000 because she was focusing on the dollars, not the percentage. [There are nuances here that evolve as you grow your capital stack: some things you still think about in percentages, but other things--like the amount of total cash you carry to cover X years of expenses for example--you still think about in dollar terms. The nuances get interesting.]
172 Some more wisdom bombs here: "I didn't want to work for anybody. I didn't want to get really good in meetings. I wanted to be really good at trading... Decide if you're going to be a good hunter or a good BS'er."
Chapter 10: You Have Choices: Persistence Pays Dividends
175ff More review of basic ideas of the book along with some more nuggets here: "It wasn't until I was well into my thirties that things started happening, but up until that point no one saw my potential."
176 Note the text box here of "Larry's tips for getting back on your feet when life happens" [see photo]
* Don't hide your losses: get them in the open.
* Get smart people to help you by cutting them in on the profits.
* Keep human emotion away from the equation.
* Have a scheme.
* Be open to a fresh start and working farther from home.
* Never be impulsive with your career.
* Make it easy for people to work with you.
All useful advice
176ff Comments here on how "he ruled out the bad bets"; Hite knew he was never going to be LeBron James.
178ff Other useful nuggets and meta-questions here:
* Which choice brings you closer to your goal?
* Are you playing the game in the right place?
* Is your choice doable?
* What is the worst thing that can happen?
* If you win it, what do you get? [On carefully figuring out the payoffs; does the bet move the needle, is it asymmetrical, etc.]
* After you make your choice, will you have the humility to change if it isn't working? [This is about living with failure and knowing to cut your losses.]
181ff Hite writes here about being in his eighth decade, and still motivated by inventing new ways to make money, testing ideas, calling up his quant partner and asking him to run simulations; he's also buying real estate now ("In my usual fashion, I've found smart people who have expertise that I don't") using the approach of buying a building with near full occupancy, but rent it out at 10% less than the market to keep the occupants there; then remortgage it out 5 to 7 years later by pulling out the cash without having to pay tax [this is a form of "buy, borrow, die" on some level], then pyramid that money into buying building number two.
182 Discussion here about the foundation he started in 1987: "I do not give because I am a religious man. But I do seek to live by the golden rule." Also he brought his daughters in when they were juniors in high school to get involved with the foundation on a very small level; they each made a $5,000 grant to an organization of their choice using the foundation's money: one daughter gave it to an after-school program and another gave to a photography museum, and this actually influenced their career choices.
186 The chapter closes with Kipling's poem "If" [which is actually quite a good poem, I think this is the first time I've actually read the whole thing through.]
Appendix: Pieces of Mind
189ff This is an internal paper Larry Hite wrote for his old firm ED&F Man called "The Theory and Practice of Asymmetrical Leverage (Arranging Big Wins for Small Risks)." Some nuggets:
191 "I would rather have my colleagues point out the flaws and my reasoning then have the marketplace teach them to me."
191ff Making asymmetric bets which gives the benefits of leverage without proportional risk. [Exactly, you don't need to use risky debt leverage if you find a genuinely asymmetric bet. Note also the references here to MIMC this refers to Mint Investment Management Company]; citing different examples, see for example how KKR mastered LBOs and created in twelve years a group of companies the size of GE while paying themselves much more in the process. Another example of an Israeli immigrant, Meshulam Riklis, who kind of pulled an investing approach that's a hybrid of Aristotle Onassis and the Patel family's approach: using other people's money to seed an investment, but also expecting that investment to generate cash equivalent to the amount of cash he put in--and if that condition wasn't met he wouldn't pursue the deal. [It might be worth reading up on this guy, he even married (and divorced) Pia Zadora.] Also note the case here Riklis took a company private (for control) but kept the dept public.
194 A contra-example offered here of Robert Holmes รก Court [another guy I never heard of but should read up on] who built an empire using shares to acquire Broken Hill, Australia's largest company [now known as BHP, a gigantic mining name], using that as a capital base to borrow money to buy shares in other companies, which served collateral as collateral for further acquisitions. But when the market crashed [the author doesn't say when this was but was the 1987 crash] he was unable to tap any cash flow from these investments because he was just another passive investor, he had no control. In other words his downside risk was infinite, thus this guy had a reverse asymmetric leverage position.
195 Structural example of asymmetric leverage in a 1978 study conducted by Theresa Havel on government securities of a varying maturities, finding the 5-year Treasury had 95% of the return of the 30-year but with only 25-30% of the price risk. "The important point being that the slightly higher interest rate on the bonds carried with it 12 times the price risk." ("Every system has a bias: Every bias is a gift for someone.")
196 An example of asymmetric leverage in the entrepreneurial category, citing Trump discovering that casinos and hotels basically cost the same to build, but a casino has 40x more payout than a hotel. ("when two and two make forty.")
197ff On "turning AL into a procedure" citing the Pritzker family using structures in the US tax law; note also the flat management style of the Pritzkers and Berkshire Hathaway, with all operating decisions handled at the unit level but financial decisions and budgets are done vertically and approved at the top. "In other words, the finances are the owners' business, and getting the product out is the operation managers' business... Strict financial control is at the very heart of AL." Also an interesting section here contrasting the activities of Ray Hunt with his stepbrothers Bunker and Lamar Hunt; see for example Ray Hunt sticking to his core competency of the oil industry, developing the 1984 North Yemen field that he acquired, where he sold 49% of his interests to Exxon who agreed to pick up the full development costs of the field, thus his share of the oil production would be all profit and without risk. By contrast, Bunker and Lamar put all their eggs in one basket trying to corner the silver market and once they cornered it "there was no left to whom they could sell." [!!!correct!!!] And worse, instead of cutting their losses they actually pledged their income-producing assets to try to buy time for their losing silver trade.
200 The author once again goes over the deal that his Mint Investment Management Company struck with The Man Group, which gave them five years of expenses and salaries covered plus the use of several million dollars for trading.
202 On cultivating an asymmetric leverage culture in your firm: you want to have time to pick your spots and make your decisions, you do not want to be forced to move quickly; you need to know the odds; and then you need to have money--which will buy you time and knowledge. [Essentially you could substitute the phrase "Dhandho investment" for asymmetric leverage here, these two approaches look very much the same.]
To Read:
Jack Schwager: Market Wizards
Michael Covel: Trend Following
Alex Greyserman and Kathryn Kaminski: Trend Following with Managed Futures: The Search for Crisis Alpha
Meshulam Riklis: $950 Million in 40 Minutes