Bill Lipschutz: The Sultan of Currencies

(continued)

---

 

The more supertraders I interview, the more convinced I become that, at least to some degree, their success can be attributed to an innate talent. Bill Lipschutz provides an excellent example. His first encounter with trading actually involved paper trading in a college investment course. Lipschutz ended up running a hypothetical $100,000 into an incredible $29 million by the end of the course. Although this accomplishment has to be taken with a grain of salt because it didn't involve real money and the rules of the experiment were flawed by the lack of realistic limitations on leverage, the results were striking nonetheless.

Lipschutz's first experience in actual trading was prompted by a $12,000 inheritance that he steadily built up to $250,000 over a four-year period. Although he ended up blowing the entire account because of one drastic mistake of wildly overleveraging his position, that does not take away from the skill that was needed to produce the steady equity growth in the first place.

Finally, and most important, despite having had no previous experience whatsoever in the currency markets, Lipschutz was significantly profitable in his very first year of trading these markets and extraordinarily profitable over the next seven years. Although he declines to quote any specific figures, it has been estimated that his trading alone accounted for an excess of one-half billion dollars in profits for Salomon Brothers over his eight-year stay with the firm.

Lipschutz himself cites hard work and an all-consuming commitment to the markets as the principal ingredients for his success. Although hard work by itself is not sufficient to make one a great trader, it does appear to be an important ingredient in the success of many of the world's best traders. Lipschutz also believes that superior intelligence is an important ingredient to trading success. However, it should be noted that others whom I have interviewed (e.g., Victor Sperandeo) do not share this view.

One theme that seems to recur in many of my conversations with the world's top traders is their view of the markets as a wonderful game rather than as work. Lipschutz emphatically claims that, for him, trading is such an engaging game that he would do it for free if he had to.

One lesson that could be drawn from Lipschutz's trading style is that you don't have to get in or out of a position all at once. Lipschutz scales in and out of virtually all his trades. One sensible piece of advice for most traders is this: Avoid the temptation of wanting to be completely right. For example, let's say you become convinced that a market should be bought, but prices have already had a sizable run-up. In many instances, if the trade is really good, by waiting for a significant reaction before putting on the entire position you are apt to miss the move completely. However, by adopting a scale-in plan-putting on part of the intended total position at the market and the remainder on a scale-down basis-you assure that you will at least have a partial position if the market keeps on going, without the excessive risk that would be implied by putting on the entire position after a large, uninterrupted advance.

As another example, assume that you are long with a large profit and are concerned about a market top. If you get out of the entire position and the market advance continues, you can miss a large part of the total move. On the other hand, if you keep the entire position and the market does indeed top, you can end up giving back a very large portion of the gain. By using a scale-out approach, you may never get the best outcome, but at the same time you will never get the worst outcome either. Also, by using a scale-in and scale-out approach, you can restrict full positions to those instances in which your confidence in a trade is greatest.

Another lesson to be learned from this interview is that if you have a strong conviction about a trade and the market has a large move because of a news event, the best decision may well be to bite the bullet and buy on extreme strength (or sell on extreme weakness). A perfect example of this concept was provided by the way the trader in Lipschutz's group handled trading the market following the G-7 meeting.

In Market Wizards, Marty Schwartz made the observation that if a trade that you are very worried about does not turn out as badly as feared, don't get out. The rationale is that if there is no follow-through in a direction adverse to your position, then there must be some very strong underlying forces in favor of the direction of the original position (since the reasons-fundamental or technical-for your own fears are probably shared by many others in the marketplace). A prime example of this rule in action was provided by the one trade that Bill Lipschutz admitted scared him. In that instance, he was short a very large dollar position against the D-mark in the midst of a sharp dollar rally and had to wait for the Tokyo opening to find sufficient liquidity to exit the position. However, by the time Tokyo opened, the dollar was weaker, letting him off the hook easily and therefore implying that he shouldn't get out. Lipschutz, being a highly skilled trader, responded exactly right and delayed liquidating his position, thereby recouping most of his loss.

One item I found particularly curious was that after more than four years of steady trading gains in his stock option account, Lipschutz lost virtually the entire amount in a few days. Ironically, this loss coincided with his start of fall employment at Salomon Brothers. Interestingly, as expressed in the interview, he had strong feelings against simultaneously trading personal and company accounts. The demise of his own account, therefore, played neatly into avoiding any potential source of conflict. In our conversation, Lipschutz insisted that the loss was probably coincidental since he was only in the training class and not yet aware of any potential conflict.

Despite Lipschutz's denial, I couldn't help but be reminded of the provocative aphorism: "Everybody gets what they want out of the market."* I wondered whether Lipschutz's subconscious was perhaps a bit more foresightful than he realized. In any case, the timing of this large loss and its relative uniqueness in Lipschutz's trading career does seem somewhat ironic. Whether this interpretation is strained conjecture or fact, one thing is certain: Lipschutz did indeed get what he wanted - a perfect job, huge trading profits, and an absence of conflict between his personal and company trading.

* As proposed by Ed Seykota in Market Wizards.

• < previous