Thursday, January 29, 2015

Dan Loeb: Kanye West of the Wall Street


“To me, the freedom to be able to work when and where I want to is even more important than the money. This freedom is, of course, easy to attain by working as a trader.”  - Ruediger Born

Daniel S. Loeb was born in December 18, 1961, in Santa Monica, California, U.S.A.  He was born to Jewish parents. His father was a partner at a law firm, while his mother was a historian. He went to the University of California, but graduated from Columbia University, earning a degree in economics. He’d been fascinated by the market at a very young age. For instance, he had a profit of $120,000 from his stock market investment (while still at the University). However, the profit was forfeited in another venture, which, needless to say, taught him a special lesson.

From 1984 to 1987, he worked at Warburg Pincus. He worked as a director at a record label; after which he worked as a risk arbitrage analyst at Lafer Equity Investors. He worked at Jefferies LLC from 1991 to 1994. He then worked as a specialist at Citigroup.

In 1995, he founded Third Point Partners LLC with $3,300,000 only. He reveals his feelings when starting at that time, and I quote him: “I almost got stage fright the day before I started the fund. I had five or six family members and a few friends and $340,000 of my own money, which was my life savings from ten years working on Wall Street.”

Many years later, in the year 2013, he’s featured among the 40 wealthiest funds managers. This shows that his investment strategies have been working for him.  The portfolio that’s being managed by his New York-based company is now worth $14,000,000,000.

Dan has been famous for his letters, which he writes to company executives, criticizing them for poor management decisions which are against the interests of shareholders. Some of the letters have been effective enough to cause changes in the companies’ executives. His tactics is to invest in a company, increasing his stake considerably so that he can have his say in the company. For example, he initiated an effective attempt to remove Scott Thompson as chief executive officer at Yahoo!, replacing him with Marissa Mayer.

As of April 2014, Dan Loeb himself is worth $2,200,000,000. He’s married to Margaret Davidson Munzer. He likes to surf in the Caribbean and Indonesia.

He’s involved in many programs that have to do with philanthropy, education, human rights, politics, military, medical research, industry, arts; either participating or donating generously. In return, he’s been honored with awards.


These are some of the lessons you can learn from Dan:

  1. The markets are a level playing field. They don’t respect your place in the society. Yes, as Dan puts it: “One's place in society' does not matter at all. We are a bunch of scrappy guys from diverse backgrounds (Jewish, Muslim, Hindu etc.) who enjoy outwitting pompous asses like yourself in financial markets globally." Our ethnic or religious background doesn’t matter. What matters is that we want to be successful market speculators that are smarter than most others.

  1. Dan loves to bet on the markets that most others are afraid to invest in. He purchases stocks at companies that look hopeless, and then effects radical changes in the management of the companies and help them become profitable again.  Dan cares about making money for his investors, and he does everything possible to realize the goals. Our stakeholders and investors’ interests should have preponderance over our personal interests and motives.

  1. You need to adopt trading principles that work – even becoming philosophical about them. You need to know that opportunities to make money arise from chaos and imbalance in the markets. How do you then make money from that? Look for a good strategy that has high probability setups.

  1. Good trading principles are also helpful in normal life. Traders think and act like traders. For example, a good trader may translate the discipline and emotional control she/he accomplishes in trading to life outside trading as well. Traders ought to be diligent and hardworking, having the tenacity and grit, enjoying what they do with great passion.

  1. When we follow our time-tested rules and lose, that’s better than when we violate our time-tested rules and win. We don’t make mistake when we follow our rules (even if we lose with them), we make mistakes only when we violate our rules. About this Dan says that he wants people with good processes and good outcomes, but he’d rather have somebody working for him who had a good process and a bad outcome in a given year than somebody with a bad process and a good outcome.

  1. Timing is everything in the markets. How often have you opened orders, only to see that the market moves in your favor after you’ve been stopped out? Look for ways to improve you timing. One method is to join an uptrend during a pullback; and vice versa for a downtrend.

  1. When you become really good at trading, you’ll become good at pattern recognition and identification of historical trends/cycles. The ability to do this comes from experience you gain from looking at charts. Some wrongly call this “instinct.”

  1. Super trades aren’t infallible. We can be sure that we’ll make mistakes, since we don’t have answers to everything, nor are we perfect. We should bear this in mind when we make losing trades. Yet, this shouldn’t deter us from being profitable.

  1. Leverage is good when used judiciously, but very dangerous when used illogically. When you make a profit of 20% per annum as a result of risking 0.5% of your account per trade, and another person generates a profit of  40% or 60% per annum out of risking 1% or 1.5% per trade, do you think the other person is a smarter trader? The answer is NO! It’s just that the other person has achieved higher returns by betting bigger per trade, thus increasing her/his risk of higher drawdowns. With that, the person can also suffer about 50% or 70% drawdowns. Therefore the best trading method is to look for ways to optimize profits with as little drawdowns as possible. Dan has made big improvements in this area since 2008.

  1. Traders and investors should look for opportunities the world over. The American markets are still the biggest, most important, and most profitable (with arguably the best companies and capital markets), but there are increasing opportunities in other countries like India, China, Brazil, etc. You miss wonderful opportunities to make profits if you ignore these countries.

  1. For you to make money, you must be willing to take risk. There is no way to tap the riches in the markets unless you become a trader or investor. People go into trading because they think they can become rich quickly, but it’s rather good to be realistic than idealistic. A healthy appetite for risk involves effective risk management.

Conclusion: We mayn’t fully understand all the forces behind market actions. For example, pullbacks in weak markets may be stronger than pullbacks in strong markets, but we can make money in these kinds of price actions.  When gaining more and more experience as speculators, we become more effective at controlling risk… and our rewards also increase accordingly. Please see the quote below. Super traders aren’t infallible gods that predict the markets accurately. They’re rather experts who’re good at taking opportunities. True, trading principles that work are timeless and they don’t change with changing market conditions and the time.

This article is ended by a quote from Dan:

“I have never professed to have a crystal ball that forecasts market direction… The secret to our success is congruence between our investment style and my personal investment style and philosophy, the fundamental elements of which have remained constant over almost 18 years.”

Learn from the Generals of the Markets: Market Generals

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