Follow the footsteps of bill Lipschutz

In the late 1980s, bill Lipschutz was head of foreign exchange trading at Salomon Brothers. At present, he is a director of hathersage capital management. In new financial geek, Jack Schwarz describes bill Lipschutz as the biggest and most successful foreign exchange trader at Salomon Brothers. This is not surprising, because Lipschutz's single transaction amount is usually up to billions of dollars, and the profit is often calculated in tens of millions of dollars. According to Schwarz's estimation, during his eight years at Salomon Brothers, Lipschutz made more than $500 million in personal profits, equivalent to an average of $250000 a day during the eight years.
Operating other people's funds
The capital source of the transaction may affect the operation style and performance, which is difficult to understand. As Bill Lipschutz explains, it's hard for even the most experienced trader to understand unless he knows it.
"At first, I didn't understand the difference. Seven years ago, I thought very simply that whether the capital came from Salomon Brothers, or from ten wealthy individuals, or from a single customer, the result was no different. My goal is to extract the maximum profit from the market. In fact, different sources of capital will inevitably lead to different trading strategies, forcing the trading to change its motivation. The problem is not simply to say, "I have some funds on hand. No matter what the source, I will try my best to make some profits every day." It's not that simple. When a company is faced with rich customers, it will naturally produce a lot of different involvement forces. The performance of each month will determine your life and death. "
"Money management is a very tricky industry. The problem is not only operational performance, but also customer expectations of investment results. Absolute performance data is often misleading. I can say to you, "over the past five years, the total compensation for our most active products has been 600%." you might say, "Oh! 600％！’ However, if you do not know the operational performance of other foreign exchange managers and the risks we take to achieve this performance, the data itself has no clear meaning. For example, suppose a manager manages $200 million, of which $120 million is a fund with a specific investment target. If the fund earns 600% of the return within four years, the investors are likely to recover the capital, because the risk structure presented by the fund does not meet the investors' expectations. Fund management is a very complex game, often against the common sense judgment. "
"Let's consider the different ways of trading between George Soros and bit Lynch. Soros usually operates through high credit expansion, and his only goal is to make a lot of money. The Magellan Fund managed by bit Lynch is quite different. Its primary goal is to protect capital. He is in the majority, and he is also a top stock picker. He has made a lot of money. However, believe me, as long as the performance of Magellan Fund begins to decline, you can see that investors recover a lot of capital, and eventually even the fund will disappear. People who give money to George Soros must be psychologically prepared. The value of the fund may suddenly drop by 20-30%. I don't think anyone will diversify. The motives of investors are very different. Investors will choose funds that suit their own style. Finally, customer preferences will certainly affect the trading style of the trader. "
As Bill Lipschutz explained, different sources of funds mean different customer motives and fund operation purposes, and may also affect your trading style. As traders, we all need more capital. If the operation goes well, sooner or later we will need new sources of funds, or loans (do not need to accept the specification), or raise customer funds. Regardless of the source of funds, you have to understand that your trading style may be affected, which in turn will affect trading performance. The worst situation is the performance decline, and the funds are not their own. So, before pursuing new capital, be sure to carefully assess how your trade will be affected.
Own funds
The sources of trading capital are different, and the simplest is its own capital. Bill Lipschutz explains how he operates his own funds.
"For pure speculative funds other than investment, I have a high endurance to take risks. In principle, if I lose all the speculative funds, I can accept it. Of course, I don't think I will have a complete loss, but I am absolutely prepared for it. Now I hold some investments, including my own house, which is an investment. I also hold a stock portfolio, which is also an investment. The rest of myself can be used for speculation. My expected rate of return is higher than that of investment, but I am also prepared to accept higher risks and serious price fluctuations. The risk of such transactions being devastating is very high, in other words, a 100% loss may occur. "
For his own funds, bill Lipschutz is only responsible for himself and can trade according to his own preference. However, for other people's funds, the degree of freedom is obviously reduced. He explains this next.
Other people's money
"But when you are entrusted with the management of clients' funds, it's a different matter. The client said, "I know you are a speculative trader, and I can accept a 20% loss." I often talk to clients in detail and try to understand their ideas. I hope our customers fully understand what we can and cannot do. If a customer looks me in the eye and says, "I can accept a 20% loss, no problem." In this case, we know what he means is 5%. If I call him in three days, 'you know what? Your net worth has dropped by 18%. I would like to know what you think so that we can discuss the next step. " I guarantee that he will forget the previous statement about the 20% loss. "
As the customer is not a trader, once a serious loss occurs, the customer may not be able to handle it properly. When you are entrusted with the management of a client's funds, it is your responsibility to assist them and not to leave them emotionally unprepared. You can't simply speculate in the market with customers' funds.
"For a fund manager, if you buy IBM stock and the share price falls by 25%, no one will ask someone to walk because everyone owns IBM - it's a prudent investment. However, if you buy an online speculative stock, the stock price goes up 80% and then goes down, and the company goes bankrupt, you may have to walk away. The client will get the money back. I'm afraid it's hard for you to raise money. "
"The problem is not just the rate of return. There are many different motivations involved in making investment decisions. This will directly affect the level of the transaction. If the odds of a deal are high, why don't you put in more money? Well, because the result of wrong judgment - even if the probability is only 5% - is far worse than that of correct judgment, even if the probability of correct judgment is as high as 95%. Some traders think, "Hey! If I help clients earn 25%, they will be very happy and think I am a great trader, then I can earn a lot of management fees. " But, you know what? If there's a 5% loss, they'll pull back the money and I'll probably shut down. " Therefore, the decision-making of trading is not only related to the probability of winning or losing, the situation is much more complicated. Generally speaking, in addition to the winning and losing probability of profits, traders have to consider a lot of related issues.
Therefore, the complexity of operating customer funds far exceeds that of self owned funds. You have to consider the possible outcome of the transaction and the possible reaction of the customer. Your decision-making is bound to be constrained by customer response, and then affect the performance of the operation. For the company's capital, the pressure is relatively small, and the space to play is also large. Bill will explain this next.
corporate capital
"The key goal is to manage the funds of individual customers and guarantee the capital. As a trader in a company, the goal is to make money. In addition, the company is more able to accept the loss. For a company, the focus is whether the company wants to intervene in foreign exchange trading, and the performance of individual traders will not affect this conclusion relatively. For example, if a company has a loss of $20 million, it may fire the trader who operates, but it is likely that it will not launch foreign exchange trading because of this. Therefore, the foreign exchange market itself will hardly be the object of blame. "
Since the operation of other people's funds must be subject to various restrictions, this may cause a question: "why not make mortgage loan from the bank, regardless of the operation performance, must pay off the loan?" Unfortunately, due to practical difficulties, this kind of feasibility often has to be ruled out.
"First of all, if an investment bank or company is going to entrust trading or speculative products to an individual, they usually want the individual to enter the company system. This does not exclude the management of funds by others, but it involves many sensitive issues. No matter who supervises the operation or approves the loan, it is likely to break the job. For example, if you give money to someone else to manage, in case of millions of losses, everyone will ask, "who approved it?" And then you're fired. On the contrary, if the company hands over the funds to a certain department for management, it is the company's decision. If there is a loss, these decision makers will not lose their jobs. "
In a word, you must consider all kinds of available sources of funds, comprehensively evaluate their possible gains and losses, and then make the final decision. If the hens laying golden eggs will reduce their production because of foreign funds, is it worth it? In other words, if we can't improve the trading performance, what's the point of obtaining additional capital?