Wednesday, October 5, 2011

Currency Trader Bill Lipschutz - Interview excerpt from New Market Wizards book

This post is summary of an interview given by Top Currency Trader Bill Lipschutz. This is an book review / interview excerpt  from the book - The New Market Wizards - Conversations with America`s Top Traders - by author - Jack D. Schwager. (Originally published in 1992)
PART II - The World's Biggest Market  Bill Lipschutz : The Sultan of Currencies - 68 Pages. ( This post is an attempt to summarize the 68 pages into 1 or 2 pages)
Bill Lipschutz has been trading currency options since over the last 30 years.While he was a student at Cornell ,Bill had inherited $ 12,000 from his Grandma and turned it into $250k i.e a 20x return over a four year period.(from 1977 to 1981). But in 1982, due to an over leveraged bearish bet (via long puts) made during the bottom of the Dow Bear Market, he lost almost all of his $ 250k made in his personal account.
I checked the Dow during this period. Dow hit peak of 1020 in Apr,1981 and then started falling. By Sep`1982, over the 18 months downtrend period, and 23% correction to 785 level ,Dow made the bottom. And in exactly at this time period, Lipschutz was holding over-leveraged bearish puts position. He had also joined Salomon Brothers during this time in 1982. So to eliminate this conflict of interest and focus all his energies at Salomon ,he stopped trading his personal account.
Bill started his Currency Options trading career with Salomon Brothers 1981.Over the 8 years the spent at Salomon he contributed ~ $500 Mn of total profits.

Trading Style
Based on Fundamental view and trade in the direction as per his fundamental view. If price reaction is not going in ling with his fundamental view , he exits the trade. " You dont want to hold a position when you don`t understand what is going on"
Scales in and out of trades. i.e gradually adds / reduces position.

Successful trades
Salomon has sold a bond issue $150 Mn that could be redeemed either in US Dollars or Pound Sterling. At that  point UK had a very low interest rate vs. US. A risk free arbitrage trade in such a case is to borrow in the lower interest rate currency and buy and invest in the currency with the higher interest rate say for one year and then after 1 year,redeem the deposit and convert back to the original borrowed currency by repaying the principal..But in the real market ,to avoid such a arbitrage, the currency with the lower interest rate will trade a premium (i.e forward price higher than spot). This pricing of this issue didnt cover this aspect. And once he conveying this to his firm, they initially didnt agree. But eventually they agreed to their mispricing.
Bill ended up buying 50% or $ 150 Mn of that total issue and immediately sold at the future rate to lock in the profit.
Another example of a good trade was in 1985 Plaza Accord where he bought up huge amounts of US dollars vs New Zealand Dollars. Single day profit was 25% of annual profits.

Trades gone wrong
Deustche Mark vs US Dollar trade. It was very rangebound within 1-2% for many months and Bill gradually built up a $ 3 Bn short position on Deustche Mark. In 1988, when the Berlin wall fell, Deustche Mark appreciated sharply and he didnt realise the large position he had built up had become difficult to unwind quickly. Initially to reduce the impact he sold $ 300 Mn of D Mark but that didnt help,eventually over next days he squared off the position and took a $ 100 Mn loss. " I had never let myself get into a situation in which I had no control and this had never happened to me before.
Also another bad trade was losing almost 100% of his personal account that he had grown 20x in span of 4 years. His learning after that ."I probably have become more risk - control oriented"

Select Quotes :-
 "Missing an opportunity is as bad as being on the wrong side of the trade"
On his key attributes on being a successful trader
" I don`t have a problem with letting my profits run, which many traders do.You have to be able to let your profits run"
" You have to figure out how to make money by being right just 20%-30% of the time . I dont think you can be a consistently winning trader if you are banking on being right more than 50% of the time"
"Before I put on a trade, I always ask myself. If this trade goes wrong, how do I get out ?"
Characteristics of superior trader
  • Commitment and focus. This doesnt mean he has to spend 15 hours a day but it more means continuously developing scenarios, gather information ,re-evaluating it. Asking questions such as What am I doing right ? What am I doing wrong ? How can I do what I am doing better ? How can I get more information. It`s obsessive.
  • Courage. Its not enough to simply have the insight to see something different from the crowd, you also need to have the courage to act on it and stay on it.
  • Detailed Interview here
  • Bill is currently managing a fund called HatherSage. Details here

No comments: