Advice from the trader who made $1+ billion in 1929…


[Editor’s note: This letter was co-written with Tim Price, co-founder of the VT Price Value portfolio and editor of Price Value International.]

In the late spring of 1720, Sir Isaac Newton decided to sell his stocks.

Newton had been an investor in the South Sea Company, a famous enterprise which effectively commanded a trading monopoly with South America.

The investment had already made Newton a lot of money, he was up more than 100% in a very short time.

In fact, investors were clamoring to buy up the South Sea Company’s stock, and the share price kept climbing. And climbing.

Newton sensed that the market was getting overheated. It no longer made sense to him. So he sold.

There was only one problem: the share price of the South Sea Company kept climbing.

All of Newton’s friends were getting rich. So, against his better judgement, Newton went back in, repurchasing shares at more than three times the price of his original stake.

The market then collapsed, and he lost virtually all his life savings.

The experience is said to have given rise to his bemused response:

“I can calculate the movement of stars, but not the madness of men.”

It’s now been roughly ten years since the Global Financial Crisis began.

In the time-honoured manner of regulators, they waited until the battle was largely over, then waded onto the battlefield and shot the survivors.

The decade since has seen unprecedented monetary stimulus, i.e. central bankers have expanded their various money supplies by trillions upon trillions of dollars, giving rise to a massive bubble in asset price worldwide.

Stocks are at all-time highs. Bonds are at all-time highs. Property prices are at all-time highs. Many alternative assets like private equity and collectibles are at all-time highs.

Yet asset prices keep climbing.

Perhaps desperate to avoid the mistakes of Isaac Newton, Scotsman Hugh Hendry, founding partner of Eclectica Asset Management, has recently announced that he is closing his hedge fund.

Hendry is a famous critic of this monetary absurdity and consequent asset bubble.

It wasn’t supposed to be like this.. markets are wrong,” Hendry told investors.

Of course, the market is under no obligation to be right. Ever.

Hendry’s view is accurate– nearly every objective metric shows that the market is incredibly overpriced.

Clint Eastwood’s infamous character Dirty Harry once remarked that a man needs to know his limitations. We think we know at least some of ours: we can’t time markets.

And the only thing we know with any certainty, as sure as night follows day, is that there are always corrections– both booms AND busts.

A decade’s worth of QE and ZIRP has fuelled a runaway train, and at some point there will be a correction.

Does it make sense to stand in front of the train? Or is it better to, as Isaac Newton did, leap aboard for some final thrills?

We prefer neither.

Instead we’re diversifying as pragmatically as we can, working diligently to find undervalued companies run by honest, talented managers.

It requires more hard work and patience than buying some overpriced index fund or whatever the popular investment du jour happens to be.

But nobody ever said this investing business was supposed to be easy.

Earlier this year my publishers invited me to write the foreword to their definitive edition of Reminiscences of a Stock Operator, a thinly disguised biography of the legendary trader Jesse Livermore.

Livermore was extraordinary. Born in 1877, Livermore ran away from home as a child and soon began trading stocks.

By the time he was 20, he had already amassed a fortune of $3 million, more than $75 million in today’s money.

Livermore sold short, i.e. bet that stock prices would fall, just prior to the 1907 crash, as well as the 1929 crash.

His bets were so lucrative that, going into the Great Depression, Livermore had a fortune of more than $100 million, or about $1.4 billion today.

But Livermore wasn’t just great at making money from overheated markets. He was also a master of losing money.

This book is widely and rightly regarded as an investment classic. It is also crammed with valuable observations about the practice of speculation and successful trading.

Among them, the importance of being patient and disciplined:

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made big money for me. It was always my sitting.”

Sitting. As in, doing nothing. As in… neither standing in front of the train, nor jumping on board.

Hedge fund managers like Hugh Hendry don’t have this option. They have to be invested. They have to report to their investors every quarter… and if they’re not making money, investors bail.

But as an individual, you are not accountable to anyone but yourself.

So you are free to sit… and patiently wait for the safe, compelling investments that will arise once market conditions return to sanity.


Clock Crasher Tue, 09/26/2017 - 16:33 Permalink

No end in sight.In basic training (infantry) you are marched.  You start with a small ruck sack march of about 4 miles.  Over the many weeks of training you build up to 15 miles.  However the Drill Instructors always extended the measured march by several miles.  The final march weighed in at 18.5 miles in about 6 hours.  I remember feeling whipped about half way through when we had a planned 30 minute rest to hydrate and change socks.  Then we marched the other half back to camp.  I started to hit the wall and the pain set in.  It started getting dark.  The pain increased and when I thought it couldn't get any worese - mental fatigue set in on top of the physical torture.All I could see in front of me was another massive ruck sack from the soldier marching in front of me.  We would crest a tiny hill and then down again.  I told myself Oh I think I remember this area from where we started, shouldn't be too much longer now. This up and down continued for what felt like forever.  I thought I could feel the end coming but was wrong and the suffering continued.  The road surface flattened out and I decided to step out of the column enough to look ahead past that ruck sack that prevented my sight of the horizon. In total horror I could see one hundred soldiers spread 10 meters apart (100 on each side of the road 200 total) stretching far into the distance (I had fallen to the back by this point), the front of the formation still marching, I was praying I would see them removing their packs and gear.  This will continue until it doesn't I thought to myself.  All I could do was swallow the pain and focus on putting one foot in front of the other and repeating. That is exactly what waiting out this market feels like. Pure psychological torture.

Bam_Man Clock Crasher Tue, 09/26/2017 - 17:42 Permalink

"18.5 miles in about 6 hours"Once upon a time, I was a light ("leg") Infantry Platoon Leader.We did TIMED road marches with full combat load, in combat boots - not running shoes like they do today.12 miles in 3 hours or less. If not, remedial PT and then a re-test for you!NEVER took me more than 2 and 1/2 hours. Bet I could still do it today - 35 years later.

In reply to by Clock Crasher

Bam_Man Clock Crasher Tue, 09/26/2017 - 18:29 Permalink

Had to jog whenever you were going down hill, or you couldn't break the 3 hour mark.Carrying about 65 pounds of gear and an M-16. I STILL have a scar where that gas mask hung on my waist.And then there was the jumping out of airplanes, but that's another story.It's a miracle my back didn't get completely wrecked (only mostly). 

In reply to by Clock Crasher

R2U2 Tue, 09/26/2017 - 17:59 Permalink

"I can calculate the movement of stars, but not the madness of men"Anyone can calculate the movement of stars you asshole. Their movement is FIXED in the sky.Isaac Newton, said to be the discoverer of gravity, knew there were problems with the theory. He claims to have invented the idea early in his life, but he knew that no mathematician of his day would approve his theory, so he invented a whole new branch of mathematics, called fluxions, just to “prove” his theory. This became calculus, a deeply flawed branch of mathematics having to do with so-called “infinitesimals” which have never been observed. Then when Einstein invented a new theory of gravity, he, too, used an obscure branch of mathematics called tensors. It seems that every time there is a theory of gravity, it is mixed up with “fringe” mathematics. Anything that can be manipulated cannot be trusted. And mathematics can be manipulated.?  

HominyTwin R2U2 Tue, 09/26/2017 - 22:28 Permalink

Are you that fucking stupid? Gravity is just a theory and Calculus is flawed?Oh and Einstein did not invent  tensor mathematics. That was the problem: because he slacked off in math and didn't study tensors, he had a hard time describing his theory. When he gave a speech at Gottingen about his problem, I think it was Hilbert that went off and wrote down the tensor equations for the general theory. However, he never claimed credit because ideas came from Einstein.

In reply to by R2U2

Setarcos R2U2 Tue, 09/26/2017 - 23:00 Permalink

I invite you to step off a 9.8 metre tall building, then write your comment again one second later as your legs shatter at best, you die at worst.  Newton's Second Law: F = mass x acceleration (due to gravity), no "fluxions" involved.  If your question is, "What is gravity-in-itself?"  The answer is that no one knows (yet).  No one knows what magnetism-in-itself is either.  You cannot see it, but you can see and utilize its effects, e.g. spinning a magnet in a coil and generating electricity.  Again the maths involved are quite simple.Have you ever actually learned and used calculus?  If you had then you would not spout this nonsense.  If you had come even close to understanding Relativity then you might grasp that the General Theory, involving acceleration, is the most important ... you might even come to doubt Einstein (as I do) but for sound reasons, not some BS about "tensors".  Nothing much worse than someone who imagines he is an expert when lacking sufficient knowledge, including about stars and their apparent movement, except for the Pole Star.

In reply to by R2U2

Anteater Setarcos Wed, 09/27/2017 - 01:37 Permalink

It would actually take 1.41 seconds to hit, and you wouldonly be traveling 50mph, so it's survivable. And many have.One guy survived a drop twice that high. Einstein was not aware of the solar corona, that refractsincoming light the same as a prism. Has nothing to dowith gravitational effect on light, of which there is none,or his 'gravitational distortion of time-space', which isunobservable within tiny distances we can metricate. Having nothing better to do than drink in their longnorthern winters, Whites became the insane species.You don't find anything like 'White' in other races,talking about 'habitable planets' on remote stars,and five years of global GDP to go explore Mars. Wait until this 2011 QEn Ponzi collapses, you'll seeWhites chattering like gibbons and climbing trees, lol.City blocks of empty cells. Planes falling from the sky.

In reply to by Setarcos

Hoffman Lenz Anteater Wed, 09/27/2017 - 02:38 Permalink

Whites became so insane that they harnessed steam to power machines. Then volatile fuels to power machines.They harnessed electricity that allowed anyone to have light, heat and to refridgerate food.They were so insane during the industrial revolution that many of their inventions are still used today.Then, in their madness, they developed communication systems that spanned the globe, semiconductors, computers, anti-biotics. In fact, nearly everything that is used in any society, anywhere in the world, is powered by the things that those insane 'whites' invented.Totally insane. GFY!

In reply to by Anteater

Dr. Bonzo Wed, 09/27/2017 - 03:33 Permalink

So you are free to sit… and patiently wait for the safe, compelling investments that will arise once market conditions return to sanity. 10 years and counting. Might as well walk away and pursue something else