Market Wizards

Paul Tudor Jones October 1987 was a devastating month for most investors as the world's stock markets witnessed a collapse that rivaled 1929. That same month, the Tudor Futures Fund, managed by Paul Tudor Jones, registered an incredible 62% return. Jones has always been a maverick trader. His trading style is unique, and his performance is uncorrelated with other money managers. There is an intensity in Jones' placement of an order that is reminiscent of a tennis player aggressively returning a volley. Buy 300 at even, go, go, go! Are we in? Speak to me! Yet he shifted easily between trading and our conversation. You have done tens of thousands of trades. Is there any single trade that stands out? Yes, the 1979 cotton market. One learns the most from mistakes, not successes. I was a broker back then. We had lots of speculative accounts, and I was long about 400 contracts of July cotton. The market had been trading in a range between 82 and 86 cents, and I was buying it every time it came down to the low end of that range. One day the market broke to new lows, took out the stops, and immediately rebounded about 30 or 40 points. I thought the reason the market had been acting so poorly was because of the price vulnerability implied by the proximity of those well-known stops. Now that the stops had been touched off, I thought the market was ready to rally. I was standing outside the ring at the time. In an act of bravado, I told my floor broker to bid 82.90 for 100 July, which at the time was a very big order. He bid 90 for 100, and I remember the REFCO broker came running across the pit, screaming, �Sold!� REFCO owned most of the certificated stock at that time, the type of cotton available for delivery against the contract. In an instant I realized that they intended to deliver against the July contract, which was then trading at about a four-cent premium to the October contract. It also dawned on me that the whole congestion pattern that had formed between 82 and 86 cents was going to be a market measurement for the next move down. The break from 82 cents was going to equal the width of the prior four-cent trading range. So you knew you were wrong immediately? I saw immediately that the market was going straight down to 78 cents, and that it was my blood that was going to carry it there. I had come in long 400 contracts, entered another 100 as a day trade, and a final 100 on that macho-type bid that I should never have made. So you realized instantly that you wanted to be out? No, I realized instantly that I wanted to be short. How fast did you react? Almost immediately. When the REFCO broker shouted, �Sold!� everyone in the ring turned around and looked at me because they knew what I was trying to do. The guy standing next to me said, �If you want to go to the bathroom, do it right here.� He said I looked three shades of white. I remember turning around, walking out, getting a drink of water, and then telling my broker to sell as much as he could. The market was limit down in 60 seconds, and I was only able to sell 220 contracts. When did you get out of the rest of your position? The next morning, the market opened 100 points lower, and I started selling from the opening bell. I sold only about 150 contracts before the market locked limit down again. By the time it was all over, I ended up selling some contracts as much as four cents below the point I first knew the position was no good. Even though you reacted fairly quickly, you still took a big hit. In retrospect, what should you have done? First of all, never play macho man with the market. Second, never overtrade. My major problem was not the number of points I lost on the trade, but that I was trading far too many contracts relative to the equity in the accounts that I handled. My accounts lost something like 60-70% of their equity in that single trade. Did that particular trade change your whole trading style in terms of risk? Absolutely. I was totally demoralized. I said, �I am not cut out for this business. I don�t think I can hack it much longer.� I was so depressed that I nearly quit. That was when I first decided I had to learn discipline and money management. It was a cathartic experience for me in the sense that I went to the edge, questioned my variability as a trader, and decided that I was not going to quit. I was determined to come back and fight. I decided that I was going to become very disciplined and businesslike about my trading.