The July issue has a great interview with John W. Henry. Some excerpts:
RW, Sr.: Let’s change gears here. I saw in an article that you were on the right side of the Barings Bank blow-up in 1995. Most people focus on all of the losses and, obviously, that the Queen’s bank was taken down by Nick Leeson. But there is another side. After all, in a zero-sum game, someone does have to be on the other side of a loss. Can you go through that a little bit with me?
John W. Henry: Sure. We were on the right side of the market. But we did forego some profits because we weren’t able to get much information out of what was going on at the Singapore exchanges early on, and we were afraid we weren’t going to be able to repatriate our profits. We ended up getting out of that move after the Barings Bank collapse, unluckily only a few days or a week after the news hit. It looks like we may have made a lot of money, which maybe we did, but it was only half of what we should have made. Leeson didn’t have the ability to take a loss. If you look at the great disasters in markets on an individual basis, they are mostly individuals who refused to take a loss. They waited for the market to reflect their belief about the market. Long-Term Capital Management (LTCM), Leeson — Jesse Livermore — you can be the best and the brightest, but without the knowledge of your own limitations and the discipline such knowledge brings, you court disaster.
RW, Sr.: John, you’ve had a tremendously successful career thus far. I always like to ask successful people who their mentor was because sometimes it throws light on what may have influenced that success. Do you have someone who mentored you?
John W. Henry: Actually, there was a fellow named Jiddu Krishnamurti who was a mentor in this regard. He was an iconoclast who really believed that what is was all that was important — at least with regard to making decisions. If you can put aside what should be, what could be, what ought to be, what would have, could have, should have occurred and just pay attention to what is actually happening, the act of paying attention transforms what is. The greatest action, the wisest, the best action that you can take in almost any situation is to stay with what is, instead of jumping to conclusions or trying to come up with conclusions. Just pay attention. And that has had more of an impact on my trading and my life than any other thing. I only knew him briefly — and “knew” him is probably too strong of a word. I met him and was around him briefly, but he had a major impact on my life.
What These Two Answers Reveal
Henry’s answer about Barings is the zero-sum principle stated by the person who was on the winning side of the most famous trading catastrophe of the 1990s. Nick Leeson could not take a loss. He waited for the market to reflect his belief. The market did not. The losses grew. The bank failed. And on the other side of those trades, systematic trend followers who were positioned in the direction the market was actually moving captured the returns that Leeson’s refusal to take losses ultimately transferred to them.
Henry’s characterization of the great market disasters is worth reading carefully: “they are mostly individuals who refused to take a loss.” This is not a statement about intelligence, credentials, or analytical sophistication. Leeson was competent enough to accumulate the largest proprietary trading position in Barings’ history. LTCM had two Nobel Prize winners and former Federal Reserve officials. Jesse Livermore made and lost fortunes multiple times. The knowledge of limitations and the discipline that knowledge brings is not correlated with intelligence or credential. It is a specific psychological and philosophical capacity that must be developed independently.
Krishnamurti’s “what is” philosophy is the complete description of what systematic trend following does at the philosophical level. “What is” is the current price. “What should be” is the analyst’s valuation target. “What could be” is the scenario analysis. “What ought to be” is the fundamental case for the stock. “What would have, could have, should have occurred” is the hindsight that produces regret and overconfidence in equal measure. The systematic trend follower pays attention to what is — the current price and what it is doing — and acts accordingly. The rest is distraction.
Henry saying this was the single greatest influence on his trading and his life is not a casual attribution. He built one of the largest and most successful systematic trading operations in the history of managed futures. He generated enough wealth to buy the Boston Red Sox and the Liverpool Football Club. And the philosophical foundation that produced that success was a simple idea from a philosophical teacher he met briefly: pay attention to what is.
Frequently Asked Questions
How was John W. Henry on the right side of the Barings Bank collapse?
Henry’s systematic trend following approach had positions in the Japanese equity and interest rate markets that were moving in the direction opposite to Leeson’s enormous unauthorized positions. When Leeson’s positions collapsed and Barings failed, the market moved sharply in the direction Henry was positioned. In the zero-sum arithmetic of futures markets, the gains that JWH captured corresponded to a portion of the losses that Leeson and Barings incurred. Henry acknowledged he captured only about half of the available move due to uncertainty about repatriating profits from the Singapore exchange.
Who was Jiddu Krishnamurti and why did Henry credit him as a mentor?
Jiddu Krishnamurti was an Indian philosopher and speaker active through most of the twentieth century who taught that psychological freedom required the direct observation of what is actually happening rather than the filtering of experience through preconception, belief, and accumulated judgment. His teaching that the act of paying attention to what is transforms what is influenced Henry’s approach to trading: responding to current price rather than to expectations about what price should be. Henry credits this as the single greatest influence on his trading and his life.
Why does Henry say the great market disasters involve individuals who refused to take a loss?
Because the specific mechanism of catastrophic trading loss is the same in every documented case: the position moves against the holder, the holder refuses to exit because the market will “eventually” reflect their view, the position grows larger, the loss grows larger, and the catastrophic outcome arrives when the capital is exhausted. This pattern holds for Leeson at Barings, the LTCM partners, Jesse Livermore at multiple points in his career, and every smaller-scale equivalent. The discipline to take a loss while it is small is the specific capacity that prevents the cascade from small loss to catastrophic loss.
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