Stock Market Wizards didn’t offer a whole lot of actionable advice for me specifically. Despite that, I thought it was very interesting to hear the opinion of someone who obviously is very concerned about disclosing his approach. I was also fascinated by the advanced level strategies Shaw MAY be using to exploit inefficiencies he finds in the markets.
Top Five Quotes From Market Wizard David Shaw:
“A single inefficiency may not be sufficient to overcome transaction costs. When multiple inefficiencies happen to coincide, however, they may provide an opportunity to trade with a statistically expected profit that exceeds the associated transaction costs. Other things being equal, the more inefficiencies you can identify, the more trading opportunities you’re likely to have.” – David Shaw
I think it’s interesting that while this advice makes perfect sense, it is often overlooked. It also notes the extent of the detail that Shaw uses in his approach.
An analogy that immediately came to mind for me was my fantasy football leagues. Many of the leagues I participate in use slightly different scoring methods, but the other participants all draft based on standard rankings. By adjusting my rankings to account for the exact scoring differences, I am able to exploit an inefficiency in my opponents’ strategy.
The biggest example of this is return yards. Most standard rankings to not account for players receiving points for kick return yardage. However, some of my leagues do award points for these yards. Therefore, receivers who return kicks are almost always undervalued by my opponents.
While this one inefficiency alone will not win me the league, combining three or four of them each year is why I am able to be consistently successful.
“It’s definitely not just price data. We look at balance sheets, income statements, volume information, and almost any other sort of data we can get our hands on in digital form.” – David Shaw
Clearly, Shaw is not afraid of paralysis by analysis. He believes that he can gain an advantage by processing more data more efficiently than his competitors.
“Hedging against overall market moves within the various markets we trade is one important element of our approach to risk management, but there are also a number of other risk factors with respect to which we try to control our exposure whenever we’re not specifically betting on them.” – David Shaw
As expected, we have another Market Wizard talking about risk control. This type of hedging is not something I am looking to do right now, but I am always fascinated by traders who are able to take profits out of the market from positions that are completely hedged. The idea of trading without betting on a specific market direction is very interesting to me.
“When I take a vacation, I find I need a few hours of work each day just to keep myself sane.” – David Shaw
I can certainly relate to this. I think obsessing about work is built into just about anyone who is naturally motivated to trade. If I don’t get some work done, I usually feel that the day was a waste. It probably helps that I am so passionate about my work.
“Compared with most organizations, we tend to hire more on the basis of raw ability and less on the basis of experience. If we run across someone truly gifted, we try to make them an offer, even if we don’t have an immediate position in mind for that person.” – David Shaw
This is a practice I have started employing at my restaurant. Instead of hiring people because I have a big hole, I hire people because they might be a good fit, whether I need them or not. They great thing about this approach is that bringing in more good people will force other employees to get better.
This approach can be applied to anyone trading a stock portfolio as well. If your entire portfolio is invested and you see a great opportunity, it may be a good idea to sell your worst performing position to take advantage of the new opportunity.