My Robot Trades Like Warren Buffet But I Can’t

Boris Schlossberg

The other day I saw a Youtube video of a guy trading the NFPs on his iPhone. He was randomly buying dips in USDJPY at clips of $1 Million, $3 Million, $5 Million at a time against an account size of $5000 USD.

Never mind that he was an American trading illegally with an unregulated overseas broker. Never mind that he was trading at 1000:1 lever factor. Never mind that he was never actually going to see a dime of his winnings (Do you REALLY think any broker who offers 1000:1 lever will actually return your money?)

In a few short hours, he turned that $5000 into 20K and I must admit it was exciting to watch. And that’s exactly what’s wrong with that video. It was the ultimate “dollar and a dream” lottery moment. It was that perfect hit of dopamine that we all crave from the market and of course, it is the road to ruin. Leverage is the opiate of the FX market. It can make us feel like a hero, but the high always wears out and the crash always comes.

The truth of trading is a lot more mundane. Like a sex scene in a Hollywood movie, like a comedy routine written from scratch, the reality of the situation is considerably more pedestrian and far less glamorous than we think. It’s 10 pips and a cloud of dust. Over and over and over again.

Which brings me to Warren Buffett and my robot. Today I read a very interesting article about Mr. Buffett that had a very different take on his success. In Buffett’s Underrated Investment Attribute the writer argues that Buffett’s greatest is skill lies not in picking great investment ideas, but rather walking away from bad ones. The writer gives the example of Sears which in 2005 looked like a toss-up -- yet Buffett passed on the idea without giving it a second thought, not because he was certain that it would go bankrupt but because he knew that turnaround would be hard and Buffett, the ever-astute investor, and ultimate realist wanted to spend his time owning stable, growing businesses that were easier to assess.

That approach dovetails with Buffett’s rule #1 for investing -- “Don’t lose money” which is then quickly followed by rule #2 which is “See rule #1”. Indeed if you look Buffett’s track record, it’s not that he consistently makes more money than the market, its that he loses LESS.

If we as traders are honest with ourselves, we’ll all admit that our underperformance is always caused not by the good trades we missed, but by the bad trades we refused to walk away from. Even as I sit here aimlessly tossing more lots against a rising USDCAD position, I have to admire my robot (which is trading my serious money) as it rests quietly perfectly happy not to engage with the market until a legitimate setup shows up.

That’s a thing about robots. They don’t need excitement. They don’t need dopamine hits. They don’t need to be always right. They are perfectly happy to grind it out, one trade at a time over and over again. And since we can’t all be Warren Buffett, they are as close to his temperament as we’ll ever get.

Why We Should Trade Like Woody Allen Rather Than Warren Buffet

Boris Schlossberg

Regardless of what you think about him personally, you have to admire the artistic accomplishment of Woody Allen. The man has been making movies since the 1960’s and even now, in his 80’s the man continues to produce a film a year.

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What’s even more remarkable about Allen is that the subject of many of movies is neurotic, intellectual Jews -- hardly pop culture fare. I often wonder how people outside my zip code can even understand some of the references in his films. But like all great artists, he is able to make the particular universal and help us laugh at and appreciate our humanity. It is no surprise then, that such wildly different filmmakers like Spike Lee and Chris Rock are big Woody Allen fans.

Of course, when you look at his whole body of work, there is plenty of derivative, repetitive garbage, but there are also absolute gems of world cinema like Manhattan, Hannah and Her Sisters. Midnight in Paris and of course Annie Hall. What’s astounding about Allen is that he brings it. All. The. Time.

A long time ago Allen revealed in an interview, that early on in his career he realized that if he could stay on a modest budget he could make movies the way he wanted. Therefore, his scripts have always centered on the human-scale drama that can be filmed inexpensively in the interiors and exteriors of New York with A-list actors that were willing to work for scale because they all wanted to be part of the project. This has been his formula since he left Hollywood and he has never deviated from it. Even in his most recent work that has taken him to Europe he basically repeated the format making the city a principal character of the script (Midnight in Paris and the wonderful Vicky, Christina, Barcelona).

Woody Allen’s longevity and productivity can be attributed to his consistent work ethic. He is famous for saying that 90% of success in life is just showing up. And he practices what he preaches. The moment he wraps up a movie he starts working on a new script.

It’s a deceptively simple motto, but it can be of enormous value to us traders because it is essentially a recipe for success in the markets.

Many traders like to look to Warren Buffet as their shining example of success. But Buffet’s “aw-shucks”, folksy wisdom belies a very complex investment structure of an arbitrageur and is never possible to replicate for a simple retail trader. For a much better deconstruction of why you can never trade like Warren Buffett, I recommend this article here.

But back to the Woodman and his simple take on doing one thing over and over again. I thought about it this week when I came across yet another great interview on Chat with Traders with Victor Haghani who, a very long time ago, was one of the principals in Long-Term Management. Presently he is running an active index fund and has started doing a variety of trading experiments. One of those experiments was discussed on the show and it is very apropos to our topic.

Haghani created an experiment with a virtual coin that was 60-40 biased towards heads. In other words for every 10 flips, the expectancy of the coin was 6 heads and 4 tails. He then proceeded to do an experiment with 61 participants -- all then trained in quantitative finance -- by asking them to flip the coin repeatedly and make bets with a $25 bank for a period of 30 minutes. He TOLD the participants ahead of time that they had a 60-40 edge on heads. He told them that the virtual coin was biased. Had they simply bet on heads every single time they would have had a better than 95% chance of winning $250. (Haghani capped the payout -- otherwise, his exposure would have been enormous).

Instead, 30% of the traders went bust. Why? Because they couldn’t resist betting on tails, uselessly trying to capture mean reversion even though they KNEW that they had 60% edge with heads. The experiment is fascinating because it confirms something that I see in myself and in many other traders in my chat room. Even if we have a winning trade strategy we do everything in our power to sabotage it. We exit early. We pull the trade signals. We -- and this was the most common takeaway from Haghani’s experiment -- refuse to do execute the “correct” strategy all the time because it’s “boring”.

It is amazing to me how I manage to sabotage my trades even on my own accounts as I second and triple guess my structures instead of letting them just trade and bank pips.

The Haghani experiment offers true resonance to Woody Allen’s words.

90% of success in life is just showing up. As traders, there are a few simple things we need to do.
We need to trade with the proper size.
We need to always honor our stops.
We need to trust our setups.

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That’s it. It seems so simple. But as Woody Allen shows only a few can do it.

The One Trick That Lets You Trade Like Warren Buffett

Boris Schlossberg

Remember Jon Corzine? The one time CEO of Goldman and former Jersey Governor? As his last gig in finance he became CEO of a futures broker called MF Global. In 2011, in the midst of the Eurozone sovereign debt crisis, Corzine loaded MF Global trading books with Italian and Spanish bonds yielding 7%-9%.

You know where those bonds trading today? At yields of less than 1.5%.

So how come Corzine isn’t hailed in the media as the bond king extraordinaire that he once was? Why did he resign in disgrace after the MF went bankrupt and has spent the last few years fending off lawsuits?

Contrast his fate with that of Warren Buffett who was also buying distressed assets at the time, including BoA and many other financial stocks. Buffett is revered as an investment genius and is called “the Oracle of Omaha”.

But you know the only difference between Corzine and Buffett? Its not intelligence, it’s not courage, its not skill.

Its just money.

Corzine was overleveraged and ran out of capital before his trades could start to work. Buffett on the other hand never runs out of money and can afford to wait for as long as it takes to let his investments make money for him.

Now we may not own an insurance company to provide us with a ready source of funds any time we need it, and in all honesty no retail trader could ever replicate Buffett’s returns even if he shadowed him stock for stock (a topic for another column), but there is one lesson we can all take from Buffett that could greatly increase our chances of success.

Don’t run out of money.

The rule in trading is that money buys you time and time makes you money. This is true if you are long term investor or day trader like me. If you can wait out the adverse excursion of the market 9 times out of 10 you can turn a profit on your position. We do this all day long in my chat room.

Now of course that is not always true. Of course some ideas are never going to work and whether you trade or invest you will eventually have to let some positions go. But if your size is small enough even a total wipeout of an idea won’t take down your whole account.

Buffett may trade in billions of dollars but relative to his equity size he never overlevers his positions. He can afford to have any one trade idea go to zero and he will still be in business tomorrow.

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That -- not strategy, not analysis, not market knowledge -- is the key to Buffett’s success. Money buys you time which as Warren Buffett knows is the most valuable asset in any market environment.