Tuesday, February 3, 2009

Bruce Kovner: Market Wizard

In the second chapter of Market Wizards, Schwager interviews Bruce Kovner, protege of Michael Marcus.

I liked this interview a lot, mostly because it really seemed that Kovner thought trading was a big game. As he explained:

The pleasure [of trading] is purely intellectual. For example, it is trying to figure out the problems the finance minister of New Zealand faces and how he may try to solve them... Here is a guy running this tiny country and he has a real set of problems. He has to figure how to cope with Australia, the U.S., and the labor unions that are driving him crazy. My job is to do the puzzle with him and figure out what he is going to decide, and what the consequences of his action will be that he or the market doesn't anticipate. That to me, in itself, is tremendous fun.
I can appreciate that. It's not that I wake up each morning thinking in these terms; obviously, Kovner is playing a different game. But what I found appealing was the idea that the markets can be figured out and that there is a human element behind them. When you stare at screens full of numbers all day, that's easily forgotten.

Actually trying to "figure out" the market as opposed to simply reacting to it, is relatively new to me. For much of my career I've been an intuitive trader; a sort of "drunken master," if you will. Developing a daily strategy has given me a new appreciation for trading. It has made it fun again. In this manner, I can relate to Kovner's feelings about it being a game.

Like Marcus, Kovner had an early taste of trading loss. However there was one big difference. Kovner didn't come in and lose a bunch of money like Marcus. Instead, he made a good amount, and gave back half. In the RO, a question that often comes up is, "Is it better to make money and lose it, or to never had made it at all?" Kovner's big giveback taught him the rather unpleasant lesson that he didn't understand the risk involved his trade. The realization that you can lose money in the market as easily as you can make it, was jarring for Kovner.

In discussing the influence that Marcus had on his trading, Kovner didn't talk about the technical aspects he had learned from Marcus, or even what markets they traded. Instead, he simply states that Marcus taught him that he "could make a million dollars." That kind of money was a reality for a good trader. This gave Kovner confidence. Working with the talented members in the RO, I learn this lesson almost every day. There is always someone out there killing it. Why can't it be you?

But, in one of my favorite ironies of trading, the sky is the limit, but only if you're humble and allow yourself to make mistakes. In Kovner's words... "You have to be willing to make mistakes regularly; there is nothing wrong with it. He [Marcus] taught me about making your best judgement, being wrong, making your next best judgement, being wrong, making your third best judgement, and then doubling your money." However, through the losses and the gains, it's important not to personalize your P&L. If you do, it will cripple your ability to trade.

Kovner says the best traders are "strong, independent and contrary to the extreme." He forgot one other thing... many of them like men... at least that's true of some of the best traders in the RO.

Kovner decides to "nerd up" the discussion on breakouts by throwing out the "Heisenberg Principle." It's cool, I already googled it. It states that if something is closely watched, it's going to be altered in the process. So, as it relates to breakouts, Kovner likes to see a stock break out for no apparent reason rather than break out because of a positive news article. This has been my experience as well... the best trades often have the fewest eyeballs watching them.

It's hard to find exact rules in the Market Wizards book. It's more a book of inspiration, a book that lets you know you "could make a million dollars." However, Kovner is very specific about his stop placement rules.

Given today's volatile markets, I found the following very pertinent:

It is better to allocate the predetermined maximum dollar risk in a trade to a smaller number of contracts, while using a wider stop. The is the exact reverse of the typical trader, who will try to limit the loss per contract, but trade as many contracts as possible-an approach which usually results in many good trades being stopped out before ht market moves in the anticipated direction. The moral is: Place your stops at a point that, if reached, will reasonable indicate that the trade is wrong,not at a point determined primarily by the maximum dollar amount you are willing to loser per contract. If the meaningful stop point implies an uncomfortably large loss per contract, trade a smaller number of contracts.
Good trading. Next Tuesday I'll discuss the trader Richard Dennis. Tomorrow, a history post.


Pete said...

surprisingly no jabs at kovner w/ ur weak left liberal hand(assuming you didn't know his political affiliation)

"Like George Soros, Kovner takes a global, top-down view of the investment universe at Caxton, and then uses currencies and stock and bond futures to place his bets on trends. But while his fund has earned him—and many of his investors—a fortune, he may be just as well known around town for his political activities. Unlike Soros, Kovner is a staunch Republican: He's a longstanding supporter of George W. Bush, a close personal friend of Dick Cheney, and a major Republican fundraiser. Formerly the chair of the neoconservative American Enterprise Institute, Kovner has supported a handful of Republicans in recent elections. (One of his few money-losing bets was his support for Rudy Giuliani's 2008 presidential campaign.) Kovner's political agenda extends to the media, too."

Dinosaur Trader said...

Well, he balances out with Richard Dennis, who is a liberal.

Anyway, his support for those dudes has been its own punishment. I'm sure he lost quite a bit of coin in the last couple of years, at least on real estate.


Josh said...

great post Dino...

i keep telling myself I gotta get around to reading that book, but have kept putting it off

i think im convinced to put down the graphic novels and read it already



Attitude Trader said...

Well done.

...not that I really know anything, but still, well done.


Dinosaur Trader said...


I'll just keep posting these summaries and then you won't have to read it... how's that for a deal?


That comment won't get a +1 on your AI, doubting yourself like that.


Charlie G. said...

Finally got the chance to read this, great write up. Thanks. Apros quote on choppy market conditions.