Hugh Hendry is the manager of the boutique fund Eclectica. Whilst we see the world in different ways I find him to be interesting because of his ability to construct a cohesive, articulate narrative and the way he shines a light on the inner workings of a hedge fund.
I am intrigued though by the somewhat jarring juxtaposition between the video and the imagery of the outback created by the soundtrack.
Trading is easy when it is going well and during these periods of profitability you learn nothing. You learn nothing because you think there is nothing to learn and winning trades just seem to spring into existence with little or no input from you (luck requires no input). The time when you learn things both about trading and more importantly about yourself are when things are not going as planned. At irregular intervals I have been posting the monthly closed equity returns for the new advisory services live test portfolio. As we saw September ended down a bit – there was nothing to really learn from this because I already knew that a new trading systems always enter drawdown very quickly. This is the nature of trading properly. October ended up strongly. There was nothing really to learn here because I know how the system should perform with a little bit of volatility in the market. After all, its my system I shouldn’t be surprised if it works as it should. November whilst only partially completed is interesting and the closed equity results are shown below -
I am a fan of manually entering results into Excel – without wanting to drift into the land of woo I think it puts in better touch with what is happening in the system. Portfolio managers are good as labour saving devices however you tend to lose touch with what is happening within the portfolio. The simplest of metrics immediately tells you what is happening without the need to resort to overly complex tools. The partly formed results for this month are interesting since they show me that I am taking a series of small hits but that this months closed equity is still up. Seeing that I am taking a series of small hits is interesting to me and is something that I might have missed if I was simply auto updating a portfolio manager. This raises the question of why this happening and has forced me to look deeper into the system to see what is happening.
What reveals itself is interesting . I have to admit I am a fan of small hits – to use an analogy I turned up at LB’s office the other day with bruised forearms. I had been catching a lot of shots on my gloves and forearms that morning which is far better than taking them in the head. I can take these little knocks all day but it only takes one decent smack in the head to cause you to lose interest in proceedings. Trading is the same, small hits are inconsequential, big hits are disastrous . Nonetheless, this still did not answer the question as to why the cluster of small losses. In part ( I think mostly) the answer is that I have an aversion to a profitable position moving to a loss. If a position has been in profit but has not moved sufficiently to allow me to move my stop to breakeven then this is telling me something. My expectation and experience has been that if a trade is right then it is right from the onset. Since I have no fear of moving back into a trade I can always get back onboard and the only cost to me is a small participation cost in the form of a small loss. This is I believe the lesson in these results – if you are in trading for your ego to be stroked by way of claiming that you get x% of trades right then you are probably in the wrong profession. I am only here for the money.