Jack Schwager’s interview with Michael Platt in Hedge Fund Market Wizards focused quite a bit on big picture trading concepts. I found Platt to be much more interesting from a storytelling perspective than most of the Market Wizards. He was very engaging and provided a great outline of what he looks for in a trader.
Top Five Quotes From Market Wizard Michael Platt:
If the market is going up today, your forecast is going to be that it will continue going up because it is how you feel at the moment that is the most important thing. today become how you felt in the past because you misremember. So everything is about today. If it is going up today, it will go up tomorrow. In this sense, financial markets become self-referential. – Michael Platt
This was the interesting perspective that set the tone for the rest of the interview. While i have considered the idea that memory gets fuzzy, it is very interesting the way that Platt explains it. There is a certain momentum aspect that is actually built into markets.
We run approximately $29 billion, which is about evenly divided between systematic and discretionary approaches. Interestingly, for the prior three calendar years, we made almost identical returns in both systematic and discretionary strategies, but with a better Sharpe ratio on the human side. – Michael Platt
If you asked me to guess, I would have expected that the systematic approach outperformed the discretionary approach in both total returns and Sharpe ratio. Of course, we should keep in mind that those discretionary returns are from a trader with loads of experience.
I talk about macro themes a lot because they are fun to talk about, but it is the risk management that is the most important thing. The risk control is all bottom-up. I structured the business right from the get-go so that we would have lots of diversification. – Michael Platt
Once again we hear that risk management is extremely important. I was glad to hear someone actually admit to having fun talking about macro themes. It seems most people try to avoid talking about them for fear of clouding their judgement.
I look for the type of guy in London who gets up at seven o’clock on Sunday morning when his kids are still in bed, and logs onto a poker site so that he can pick off the U.S. drunks coming home on Saturday night. I hired a guy like that. He usually clears 5 or 10 grand every Sunday morning before breakfast taking out the drunks playing poker because there not very good at it, but their confidence has gone up a lot. That’s the type of guy you want – someone who understands and edge. Analysts, on the other hand, don’t think about anything else other than how smart they are. – Michael Platt
This is a great story that has quite a few possible applications. I used to do the same thing back in college. Platt mentions that you have to understand an edge.
There are a lot of people that if you listen to their ideas, you can make more money off their thinking than they can. I troll around. It’s a treasure hunt for information. I talk to lots of people. Every now and then, someone says something, and I know I’m going to make much more money off of it that they will. There’s a big difference between shooting wine glasses at 20 yards and shooting a wine glass pointing a gun back at you. – Michael Platt
Things change when the pressure is applied. How good are you at making decisions under pressure? Does your system require you to make decisions? Do you really think you will be able to sit tight through a 40% drawdown?