“It Takes Courage to be a Pig”

By: Russell Sands

The following is an excerpt from Turtle Secrets

Okay, let’s get down to business.  There are many types of animals roaming around Wall Street (and LaSalle Street).  Bulls and Bears and Turtles to name a few.  There are also a whole lot of Pigs.  Now it’s long been a famous axiom on the Street that “Bulls make money, and Bears make money, but Pigs do not make money.”  I’m here to tell you that is wrong.  One of the most successful traders of all time, none other than George Soros, by his own admission is a Pig.  The quote heading this article is attributed to Soros by his head trader, Stanley Druckenmiller, in Jack Schwager’s excellent book Market Wizards II.   Now let me qualify this by saying that I’m sure Mr. Soros is not always a Pig.  There are time to be a Pig, and times not to be a Pig.  As with many other choices in both trading and life, the great trick is knowing when to be which.  But during the time when it’s right to be a Pig, it nevertheless takes great courage to actually be one.  And that brings us all the way back to the very basics, “knowing the rules is the easy part of trading, but having the discipline to follow the rules, that’s the really hard part.”

One of the hardest rules to follow is that of being aggressive when you’re ahead.  On a good winning position the natural inclination is to sell and take profits, not to add more to the trade.  This inclination stems in part from the false belief that you can make money if you are willing to take small profits and not be greedy.  But this is wrong.  If, as we believe, price is the strongest indicator of correctness of market action, then having a good profit on a trade is an indication of doing something right.  And if you’re doing something right, you want to do more of it, not counteract it.  On a more micro level, it’s very hard to buy or sell a market when there is a strong opening gap against you.  But once again, what’s hardest to do is usually most correct.  In the past I’ve added to a short Orange Juice position on a day that it opened seven hundred points lower, and I have added to a winning trade (Copper) on a day with a four hundred point gap opening.  It is a little easier from a mathematical viewpoint to add to a winning position on a large gap as opposed to initiating a new position, because you already have some built-in profit cushion going for you.  But both are equally correct.

On a larger scale, if you’ve been making money for a few months with your trading, the natural (and again incorrect) inclination would be to cash in your trades, take the profits and go on a spending spree to reward yourself.  For a money manager or CTA, the inclination is to trade very conservatively for the remainder of the year, not wanting to give back those hard earned profits and rest on your laurels for a while.  This is also wrong.  The investors who give capital to money managers unrealistically want it both ways.  They want to make a lot of money, and once they do, they don’t want to give any of it back.  But even if you’re George Soros or Paul Tudor Jones, this is almost impossible.  The way these guys became so big and famous was to make triple digit annual returns for their investors.  But according to Soros and Druckenmiller, the way to make triple digit returns is to be fortunate enough to get ahead twenty or thirty percent in the first few months of the year and then use that profit cushion to start swinging for the fences.  Sometimes you lose it all, but sometimes you become a hero.

I saw an article in Investors Daily showing the top ten highest paid executives on Wall Street last year.  George Soros was at the tope of the list.  Stanley Druckenmiller was right up there too.  Paul Tudor Jones, Bruce Kovner and Louis Bacon were also in the top ten.  In fact, five out of the top ten were futures traders, and nine out of the top ten were money managers, all of whom work for a percentage of profits they earn for clients. Oink, oink!