Colm O’Shea, who is the founder and CIO of London-based COMAC Capital, was once interviewed in Jack Schwager’s “Hedge Fund Market Wizards” – a brilliant and epic book for readers interested in understanding the minds of various types of hedge fund managers and the way they approach the financial markets.
Here are some of my main takeaways from O’Shea’s interview in Schwager’s book, where he shared about his career and experience in money management and global macro investing:
To learn macro trading, read Reminiscences of a Stock Operator and practice:
“It starts off with the protagonist just reading the tape, but that isn’t what he developed into. Everyone gives him tips, but the character Mr Partridge tells him all that matters, “It’s a bull market.”
That’s a fundamental macro person. Partridge teaches him that there is a much bigger picture. It’s not just random noise making the numbers go up and down. There is something else going on that makes it a bull or bear market. As the book’s narrator goes through his career, he becomes increasingly fundamental. He starts talking about demand and supply, which is what global macro is all about.
People get all excited about the price movements, but they completely misunderstand that there is a bigger picture in which those price movements happen. Price movements only have meaning in the context of the fundamental landscape. To use a sailing analogy, the wind matters, but the tide matters, too. If you don’t know what the tide is, and you plan everything just based on the wind, you are going to end up crashing into the rocks. That is how I use fundamentals and technicals. You need to pay attention to both to make sense of the picture.”
To play Bubbles & Manias: use liquid instruments on the long side, be early and structure the trade such that the worst-case loss is limited
“All markets look liquid during the bubble, but it’s the liquidity after the bubble ends that matters.”
“The main thing about bubbles is that you need to be early. The worst thing you can do in a bubble is to be stubborn and then late to convert.”
“I think the natural way to trade a market that is in a bubble is from the long side, not the short side. You want to be long the exponential upmove without taking on the gap risk of a collapse. Therefore options provide a good way of doing this type of trade… because tops are messy, and the reversals in bear markets are horrendous. It is very rare to find comfortable shorts in bear markets.”
Asymmetric profiles are vital. O’Shea seeks to implement a trade in the way that provides the best return-to-risk and limits losses in the event the trade is wrong:
“Having a positive skew is very important. It is not about being right all the time. Most good macro traders will be right only about half the time or even less.”
Place stops & risk levels at areas that invalidate your hypotheses:
“First, you decide where you are wrong. That determines where the stop level should be. Then you work out how much you are willing to lose on the idea. Last, you divide the amount you’re willing to lose by the per-contract loss to the stop point, and that determines your position size. The most common error I see is that people do it backwards. They start with position size. Then they know their pain threshold, and that determines where they place their stop.”
Trade expression & implementation may be more important than the trade idea itself:
“I think implementation is the key in everything. Implementation is more important than the trade idea behind it. Having a beautiful idea doesn’t get you very far if you don’t do it the right way. The point is that I tried to do the trade in a way so that my timing didn’t have to be perfect.”
“You need to implement a trade in a way that limits your losses when you are wrong, and you also need to be able to recognise when a trade is wrong.”
Markets matter more than policy: O’Shea comments on the 1992 Sterling Crisis…
“I learned that markets matter more than policy. You have to look at real fundamentals, not at what policy makers want to happen. The willing disbelief of people can carry on for a long time, but eventually it is overwhelmed by the market. The genius of Soros was recognising the turning point when things change – the ability to not only know that a position was right, but that it was right now, and that now was the time to have a big risk on the trade.”
O’Shea’s comments on what it takes to be a successful trader:
“Perseverance and the emotional resilience to keep coming back are critical because as a trader you get beaten up horribly. Frankly, if you don’t love it, there are much better things to do with your life. You can’t trade because you think it is a way to make a lot of money. That won’t cut it. No one who trades for the money is going to be any good. If successful traders were only motivated by the money, they would just stop after five years and enjoy the material things. They don’t. They continue well beyond any financial need. They can be somewhat obsessive. Trading is simply what they do. Jack Nicklaus has plenty of money. Why did he keep playing competitive golf well into his sixties? Probably because he really liked playing golf. He probably had a compulsive need to do it.”
I highly recommend Jack Schwager’s “Hedge Fund Market Wizards” – a great book for the serious investor’s library!
*image taken from http://www.hedgefundintelligence.com/*