Jon Boorman was a great investor and president of Broadsword Capital who passed away in October 2020. He wrote about the major lessons he learned over his career which unfortunately is no longer online. Reposting here for archiving and as a reminder to myself.
Some Things I’ve Learned Over The Last 30 Years
Today marks 30 years since a confident young man walked into the back office of Schroder Investment Management in London, to start his first day on the job, the first in his career. Ask me a question back then and I would have answered assuredly and quickly. Today I’d be more likely to say ‘I don’t know’ with just as much confidence.
Now older, wiser, but with just as much hair, I have over the years seen many people come and go. Clients, colleagues, bosses, company mergers, bankruptcies (thankfully not my own), through bull and bear markets, booms, crashes, and have seen my own fortunes fluctuate too before setting out on my own a few years ago.
Thirty years is a long time. The good news is it was all worth it.
The first thing to point out is I don’t have all the answers. That’s not what this post is about. I’m always learning. But I have benefited enormously from people sharing their time and expertise, so if I can help others in the same way, I’m happy to share what I’ve learnt also.
These are 30 observations, guiding principles, or simply things that work for me. Some of you who have followed me for a while will recognize many of them. These aren’t universal truths, they’re my truths, my beliefs, shaped by my experience.
And that’s probably a good place to start.
"The more you believe something to be true, the more you will have accumulated evidence to support it."
That’s a quote from trading coach Van Tharp, and I’ve applied it to so many areas as a simple way of explaining people’s expression of their beliefs, my own, and the realization of how powerful confirmation bias is. Van believes we don’t trade the markets, we trade our beliefs in the market. A trading system therefore is simply a set of beliefs, and I think he’s right.
Buy high, sell higher.
Buying a stock at x+1 can be a lower risk trade than buying it today at x. Forget buy low, sell high. When something is falling, it’s more likely to keep falling than it is to reverse, and vice versa. It’s called momentum, and along with value, it’s one of the most empirically proven anomalies to academic theory that the Nobel Prize winners wish would go away. Note to self: Look into buying value stocks that show upward momentum.
Trade small to win big.
All traders and investors need trend and time to profit. Even if you don’t consider yourself a trend-follower, no matter what your timeframe, to make money you need something to trend, even if it’s just a couple of ticks higher, you need price movement.
If you are a long-term trader, time is also your friend. Time allows trends to develop, persist, and time in big trends allows you to trade in smaller size. If you are a daytrader, time is your enemy. The clock is ticking, there’s only x minutes left in the session. You need greater frequency of trades, or you have to trade in greater size and take greater risk.
It amazes me that newcomers to trading choose to start with an area that instantly requires them to either trade more frequently, or in greater size through leverage or margin. It should be the other way around. Only after years of experience and having amassed a fortune should someone attempt such a thing, but of course they don’t. A successful trader or investor will continue to do what made them that money in the first place, and it won’t have been daytrading. 99% of daytraders (a conservative estimate) are under-capitalized and would do better to build up their savings instead of daytrading them.
Limit orders limit performance.
I once worked for a PM who always put on limit orders. It was like chasing a bar of soap around the bathtub. Sometimes weeks or months later the order would still be on our desk, but the stock would now be way way higher. You either want to own it or you don’t. Is a penny here or there really the difference between whether you want to own it or not? Because your limit order is potentially making it exactly that.
I’ve held stocks for over a year and looked back at when I bought it. I could have bought it the next day, the next week, open, close, whatever. It wouldn’t have made a whole lot of difference. Unless you’re trading Cliff Asness/AQR size, for goodness sake, quit playing games with the HFT pikers. Just buy it and move on.
I have never found a way to consistently make money shorting stocks.
If you’re starting out, put this one in the ‘too difficult’ pile until you have the time, energy, or intellectual curiosity to tackle it. Just know that even amongst CTAs, even though they are long/short many different futures markets, the short side of what they do rarely makes much money overall, it merely helps them perform well during ‘crisis alpha’ periods of non-correlation, and smooths the equity curve longer-term, but the lion’s share of performance comes from the long side. That’s futures. Stocks are even harder.
The best strategy is one you’ll stick with.
Or more correctly, the best strategy is the one that you’ll stick with and meets your objectives. There is no one way of investing that is suitable for everyone. There is only what’s right for you. Lots of things work. Buy and hold works. Value works. Momentum works. There are others too. Start with the evidence-based empirically-proven stuff. Find which one, or which combination works for you, in accordance with your timeframe, objectives, and investment horizon.
Buy and hold giving you 7% is fine, but if you can’t tolerate 50-60% drawdowns or trust yourself to not bail precisely when you should be adding any spare cash you have to it, then it’s not for you. Pick a strategy that delivers an acceptable return that won’t have you reaching for the sick bag when turbulence hits.
When to add.
Whether trading or investing, the simplest way to know how and when you should add to a position is to imagine you don’t already have a position. What would it take to get you in? That way you’ll be doing it for the right reasons, the same as your initial entry rationale, rather than reacting emotionally.
The best movie about trading
is “Wall Street”, then “Trading Places”, then something else.
The vast majority of arguments on social media could be avoided
if both sides simply declared at the outset what their timeframe is. You mean we could have diametrically opposed views and yet both make money? Yes, that’s right.
No amount of reading or paper trading will prepare you for how it truly feels in the heat of battle.
There is a great scene in ‘Bridge On The River Kwai’ where Jack Hawkins brings a young soldier in and hands him a knife, asking him if he thinks he could use it in cold blood. The boy doesn’t know. “Well, at least he’s honest.” The fact is, none of us know until we face that enemy whether you can thrust that blade home or pull the trigger on your order.
Don’t blithely tell me your backtest says you would have taken that trade in ’87, or 2008/09. You don’t even know what the market liquidity would have been, whether you could trust the prices you’re seeing, or if you could even see any prices. You’ll know in your walk-forward.
I know, because I’ve been there and done it. Traded like an idiot with my own money in the ’87 crash, and have since safely navigated in various trading roles the LTCM collapse, the Asian crisis, the Dotcom crash, 9/11, the Global Financial Crisis, and most recently for myself and clients through a couple of flash crashes. I consider it an edge, one of the few that can never be taken from me. You can’t buy experience like that.
I can’t predict markets, and neither can you.
No, seriously, you can’t. No. You can’t.
Entries, exits, position size.
Watch any trading software ad and you’ll likely hear lots about getting entry signals. The perception is it’s more important than the others, but it’s not. I think exits are more important. A good exit signal doesn’t just get you out when needed, a really good exit signal keeps you in, staying just below the action and not triggering until the trend is over.
Look back at the entry of a successful position you’ve held for many months. How important was it to enter at that precise time, that day? It’s likely what followed was more important. What allowed you to tolerate the volatility and ride it higher to where it is now, making it the big winner it is. That’s all exits and position size, not entry.
Sure, without an entry there’s no trade, but it’s only the exit signal that determines whether in relation to that entry the trade is a winner or loser. Even more important, the position size will determine by how much. Entries merely determine the frequency of trades, or how many signals you have.
The longer your investment horizon, the higher your equity allocation should be to passive strategies.
Yes, I’m an active manager, but hear me out. If I have a 20-something come to see me as a prospect, I’m going to tell him to just put it in an index fund for 15bps and come back and see me when he’s over 40. Come on, the guy’s got 5 decades ahead of him. Go live your life, save, invest, have an emergency fund, put more cash to work every time the market plunges 25%-30%.
By the time he’s 50 and thinking about retirement however, those 30% plunges on that tidy sum he’s built up won’t look like the opportunities they once were. The percentages will be the same, but the nominal amounts will make it way scarier, seeing his hard-earned go up in smoke.
The closer you are to needing your money, or put another way, the less of an investment horizon you have remaining in which to recover losses, the higher your allocation to active strategies should be. By the time you are nearing retirement, your equity allocation should be 100% active, zero passive.
People tend to think in simple terms that passive = safe, and active = risky. The opposite is true. A truly passive strategy exposes you to 100% of the market’s drawdown. With passive you get what you pay for – zero risk management. Active management is risk management. That’s what you pay for. Risk management.
If you want to own oil, buy oil, don’t buy oil stocks.
If you want to own tech, buy a tech ETF, don’t buy Apple. Having a top-down macro view and then trying to apply it to a micro level is one of the hardest things to do. I did it once, and made a lot of money, but now realize it was mostly dumb luck. I have seen people make brilliant calls that were completely right but they lost money executing it horribly. Buy what it is you got your signal on, not where or how you think it might play out a second or third degree. One is quantitative, the other is a guess.
Hedging a position often increases risk instead of reducing it.
I’ve seen traders take on a position and then immediately look for something to hedge it with. Why? Just reduce your initial position. Or sometimes the exposure becomes too great. How can I hedge it? Why not just reduce it down to a more comfortable level? Size it correctly and it won’t need to be hedged, and you’ll also have more capital available.
I once had a boss on the prop desk who insisted on every position being hedged with the equivalent size in index futures. Absolutely insane. Now I’ve got one position I wanted and a whole load of futures I didn’t. He was a big Buffett fan. Insisted the only true measure of our performance was whether we beat the index or not. Weren’t we here just to make money for the firm? Apparently not. When I bought a utility that went up 5% but the index went up 10% over the same period (and I didn’t hedge) he said it was a bad trade.
I was a bit gung-ho and I let him get to me. When I left the desk I thanked him for making me a better trader. The look on his face! But I was serious, he challenged all my beliefs and as maddening as it was, it made me re-evaluate what it was I believed in and why. You should want to be challenged on everything you believe and be calm and comfortable in explaining it, and in fact, welcome any new information that disproves your existing position, so that you can immediately correct it.
The best book on trading is “Reminiscences Of A Stock Operator.”
It’s an obvious, popular, and cliched choice, but for good reason. Yes, its main protagonist committed suicide, and it’s written in archaic language, but it’s because the stories are from a hundred years ago, and that’s precisely why it appeals. The lessons stand the test of time. The stocks, companies, and players change, but human nature never changes. We’re all human, even millennials.
“If it’s so good, why would they sell it?”
This is one of the most egregious fallacies in the finance periphery. Why would they sell it? Why do you think? Do the math. Let’s take an example of an area where this is most commonly targeted; newsletter writers or subscription services. Imagine for a moment a trader has a $1m portfolio. He makes on average 10% a year, or $100k. That’s his trading income. If he also runs a subscription service that sells for a $1000 a year, he can get an additional $100k a year with 100 subs. That’s very nice passive income.
Now I used $1m in my example. In reality most traders are capitalized at $100k or less. They would only need 10 subscribers to get the same return. If they had 100 subs, it would match their entire portfolio value! The question then becomes not “If it’s so good why would they sell it?” but instead “If it’s so good, why wouldn’t they sell it?”
And it’s also grossly unfair to limit this logic to newsletter/sub services. If hedge fund managers are so good, why do they need clients? We know why. The fees. They can make way more from managing other people’s money than just their own. It’s the exact same principle.
I’ve seen many people get tarred with this brush unfairly, especially in the area of technical research, and yet fundamental research with its dire record gets a pass. I’ve seen it firsthand too. If you give something away for free people think it can’t be worth anything. If you charge for it “If it’s so good, why would you sell it?”
Broker research is mostly redundant.
There are many excellent analysts that no doubt create value for others, but the ratings systems are useless and as analysts they are being assessed incorrectly. Buy/Sell/Hold means nothing. There are so few Sell ratings. They are terrified of not getting corporate business. Broker X upgrades XYZ from Sell to Hold. How do I hold it after you recommended I sell it? Shouldn’t you move to a Buy rating first? Neutral/Outperform/Underperform. Overweight. Yes I am.
The only way it would make sense is if you asked the analyst to rank all his buy ratings. So you cover the tech sector and you have 50 names with a buy rating. That doesn’t help me. How about you rank them 1-50 for me? Now we’re talking. That could be useful. Buy the top one, short the worst, let’s see if he’s any good.
Price targets are also mostly redundant.
Under the guise of assigning their fair value to a company, price targets are simply a way for an analyst to stay in front of clients in a name and reiterate or update their research periodically without necessarily changing their rating. It’s a useful tool for them, but unless you’re also a value investor where a specific value would cause you to act, for the rest of us it’s just another unwelcome noise item that anchors you to a price in the market, and tempts you to act when you should instead just follow whatever your existing plan or strategy is.
If you want to own the strongest stocks, buy the strongest stocks.
Buy something that’s already doing what you want it to. Going up.
The closing price is the most important price.
Let me qualify that. I have likely said before that it’s all that matters but that’s not true. The close is the most significant, simply because so many other investors or traders act off it for end of day signals.
I like to think of the trading day as a jury deciding what a stock is worth that day. The opening statements are heard, and the intraday prices from the high to low reflect the arguments being made throughout the session. The close is the verdict. That’s what stock XYZ is worth today. Record the verdict. Price the mutual funds. Put it in the paper.
I’ve heard people place more emphasis on intraday extremes, but why? The high and low are likely the two lowest volume prints of the entire session, and therefore arguably the two least important. You could argue they provide support/resistance levels, but again by volume I would think the closing price is a better reflection of where most people are gathered or potentially anchored so it has more significance.
And let’s clear something else up. I’ve heard people say amateurs open the market, pros close it. OK, let’s assume for a minute that’s true. Which price would you rather take your trading signal from, and who would you rather trade against? Amateurs or pros? I take my signals from the close and trade at the next day’s open.
For high net worth individuals there is no need for a specific allocation to bonds.
I’m biased. I’ve been an equities guy for 30 years, but seriously, if you don’t need the income/interest, why allocate to bonds or treasuries at all? You can get exposure via a managed futures strategy. If there’s a meaningful sustained trend, up or down, you’ll catch it, and in 30yr, 10, 5, 2, and even German, Japanese too. You could allocate 50% to Managed Futures, 50% to Equities, and allocate that equity portion to passive/active strategies depending on your age, or maybe a combination of value and momentum. 50% Equities, 50% Futures, covering Trend Following, Momentum, and Value. You don’t need bonds.
If you want to perform differently to the index, you have to invest differently to the index.
When I worked as an assistant to a Portfolio Manager at Schroders we had client portfolios that had something like 60 stocks or more in Japan alone, and that might only be 25% of the entire portfolio. I’d see a stock do really well and it barely made a blip of difference to the portfolio. After a while I would understand there are many playing this game of marginal differences in portfolio structure, overweight this, underweight that. The market goes down 20%, your fund is down 19%. Yay, you beat your benchmark and get a bonus. The incentives are all wrong. Relative returns is a game I know I have no interest in playing.
In my days at Kemper/Zurich/Scudder they had more concentrated portfolios where the stock selection mattered more, and then I got to do that to an even greater extreme as a prop trader at Lehman where you may only have two or three positions, whatever it is you want. It’s not even considered a portfolio. I typically held 8-10 and often do the same now. Through a combination of all these factors, reading material like Van Tharp’s position sizing strategies, and Howard Marks’ letters, I’ve become very comfortable with a highly-concentrated portfolio and all the parameters and performance distribution that entails.
Stocks don’t follow economic theory. They follow socionomic theory.
This is why when a stock goes up people will want to buy more of it. And when it goes down people will sell. That’s not how it works with traditional economic laws of supply and demand. When the price of shoes go up, people don’t rush out to buy more. And when they go on sale people don’t run out of the store. In a supermarket consumers act rationally and logically, but there are no consumers or producers of stocks, there are only investors, and investors herd and are emotional and irrational.
Price is sentiment.
There are some variants to this. Price is truth. Only price pays. I think the way I would phrase it is that price accurately reflects prevailing sentiment. Some think it’s supply and demand, I think it’s Socionomics/social mood, but regardless, whether you believe it’s wrong that it’s trading up at $100 when your fair value is $50, it’s irrelevant. If you want to trade it, the price is $100. You may think it’s wrong, but that is the price. In terms of reflecting current sentiment, price is always right.
I’m ready for what’s next.
I have no idea what the market will do tomorrow, what the next payrolls number will be, or when the Fed will next raise rates, and frankly I don’t care. News is noise. All I know is I will follow my plan. It took me 25 years to work that out. You’re welcome.
I am responsible for everything that happens to me.
Everything. Good and bad, but this mostly comes into play for something bad. You won’t find me blaming the Fed, QE, HFT, or any conspiracy nonsense if my portfolio performs badly. The outcome is a result of my decisions. That bad trade was my stock selection, my execution, my choice of broker, all my decisions that led to that outcome. If it’s something I enacted it always comes back to me. If it’s something that happened to me, it’s because I put myself in that situation. If it’s something my child did, it’s something I allowed them to be doing. Everything is a risk. Getting up, going out, crossing the road, but ultimately I am responsible for everything that happens to me.
People really appreciate honesty.
It might sound obvious, but from the reaction I get it suggests there’s not enough of it around. I’ve made a conscious effort to say “I don’t know” when I don’t know. It can be quite empowering. When I’ve talked about positions or trades on social media, I’ve made a point of following up when things haven’t gone so well. It’s one of the hardest things for me to do. But it’s only right. You can’t just sing when you’re winning. The losing periods are when I least feel like writing something, but when I most need to, because it’s also when anyone who’s been paying attention to anything I say will most need to hear it too.
“All cruelty springs from weakness.”
Social media is a tough arena. I slip up sometimes and get sucked into some troll’s orbit, and on the occasions it’s happened, even when I’ve sent someone packing with their tail between their legs, the short-term satisfaction soon gives way to wishing I hadn’t responded.
When I’m driving and I’m getting frustrated with someone in front of me I imagine I know the person. It’s amazing how it changes how you react. In a similar vein, on twitter now I try to talk to people as you would if having a conversation face to face. Be nice. We all have off days. You never know what’s going on in people’s lives. Everyone’s going through something.
When you’re young, you have so much time but never enough money. When you’re old you have money but never enough time.
How you perceive and value time and money will change many times throughout your life, but at the end there’s only one you’ll want more of, would give anything for, but it won’t be available at any price. Cherish it while you can.
Thanks for being a part of my journey. Here’s to the next 30 years.
The original article was posted at broadswordcapital.com/things-ive-learned-last-30-years/