David is a private, almost secretive individual, who has been running a very successful hedge fund for many years now. Basically, his fund is a very sophisticated form of arbitrage. Over the years, it has posted excellent results.

Key Concepts
Arbitrage: The simultaneous buying and selling of a security to take
advantage of temporary pricing anomalies, such as from one exchange
to another. For instance, a stock could be selling on the NYSE at 20
1/8, but on the Pacific Exchange for 20. Though temporary, arbitrage
is designed to take advantage of this pricing difference as soon as it
occurs, and before it is corrected. Arbitrage can be used with domestic
stocks, foreign exchanges, currencies, commodities—anywhere that
these price differences can be found and exploited for profit.

David’s arbitrage fund is literally trading all the world markets, sometimes all at once. They are monitoring all the equities and all their derivatives around the globe. To do this, he has developed a series of approximately 20 different mathematical formulas and models, all of which are running simultaneously, that search the globe for the tiny pricing anomalies that make arbitrage what it is. All of these formulas and models are interrelated, and as you can imagine, require an amazing amount of computing power to keep going, hour after hour, around the clock. In order to do this, David has created some of the most extraordinarily sophisticated and complex systems in his field. To make this happen, and to keep his systems running, he has had to hire scores of the finest Ph.D.s in the fields of mathematics and computer science, all dedicated to making sure the system is capable of producing the results he wants.

You’d think that just monitoring and supervising this incredibly complex system, watching all the world’s markets all the time, would be more than enough for any person.

But not for David Shaw.

Over the years, David has also been developing a number of different companies, which he brings along and nurtures, and then spins off and sells. One of the most recognizable of these companies was the internet service provider Juno. He also created and sold a company to Merrill-Lynch that expanded their computer trading department.

In addition to that, one of his hobbies is discovering ways to apply computer science to the development and creation of new drugs that could hold promise for the treatments of various ailments. He has two distinct companies involved in that. In order to stay up to date on all the latest news and developments in these two different fields, he reads all of the trade journals and papers dealing with each field. Just keeping up with the literature of one of these areas is a Herculean task, let alone two. But he does it, and makes it look almost easy. I for one get a little tired just talking about him.

As if that weren’t enough, David also served as an advisor to Bill Clinton while he was president, and chaired a committee on education and science. He was also appointed to the President’s Council of Advisors on Science and Technology by President Obama in 2009.

Not your average work load, by any means. When I asked him if he ever takes a vacation, he said, “Not really. And if I do, after three hours—I have to get back to work.” That’s just David Shaw, and that’s how he works. But he is by no means atypical. In fact, his kind of work style is actually very typical of all the folks I’ve interviewed over the years.

John Bender

Another trader who also had this intense professional schedule was John Bender. John was an options trader who I met during the process of writing my last book. For John, trading options was definitely not a part-time proposition. He traded options in both the United States and the Japanese markets, and he kept a constant eye on both. That vigilance enabled him to be ready to make the right move when the opportunity presented itself. The problem would seem, if you haven’t already figured it out, is that these two markets are on opposite sides of the globe, and operate on a time schedule that is twelve hours apart. This means that John had to watch these markets and his trades almost 24 hours a day. As far as I could tell, John Bender never slept, which seemed to be the way he liked it.

So this should give some kind of idea of the seriously hard work required to become one of these master traders. There is no such thing as a regular day at the office, at least not for these folks. The clock is only there as a way of distinguishing from one trading day and the next.

Key Concepts
Option: An option is a contract giving the buyer the right, but not
the obligation, to buy or sell an underlying asset at a specific price on
or before a certain date. Options fall into a class of securities known
as derivatives, which are financial instruments that derive their value
from the value of some other financial instrument or variable. For example,
a stock option is a derivative because it derives its value from
the value of a specific stock.

The Trading Paradox

Now that you see the intense dedication it takes for these people to have become as successful as they did, you can also see that none of it has happened by accident. This brings us to one of the unique ironies about the trading world that is not found in any other field of expertise.

There is an erroneous perception by the general public that making money in the markets is somehow easy. Of course, the people who are exceptionally successful as traders are also tremendously hard working souls. The irony is that a lot of the people in the general population are attracted to the markets because they want to make easy money. This paradox of the trading world leads so many to misunderstand the kind of work involved in successfully understanding and playing the markets. People tend to think that even the simplest understanding of the complexity of trading will automatically lead to the ability to make phenomenal amounts of money with very little effort.

Look at it this way, and see if you don’t agree with me. Imagine a person walks into a bookstore, and walks over to the medical and health section. After browsing through the stacks for awhile, the person sees the title he’s been looking for: How to Perform Brain Surgery. He buys the book, studies it intently over the weekend, and on Monday morning, walks into a hospital operating room, believing that he is ready to perform his first successful brain operation.

No sane person would ever do such a thing. In fact, I doubt such a thought would even enter into the mind of any one, ever. It is a ridiculous, fantastical, and deliberately exaggerated scenario. But consider this: how many people—perhaps you’ve known some of them—would think nothing about walking into a bookstore, buying a book called How I Made 2 Million Dollars in the Stock Market Last Year, and after spending an entire weekend reading it from cover to cover, think that they could now go into the marketplace and beat the big boys at their own game?

Well, it really is kind of the same thing. Yet most people don’t see the second scenario as being at all odd, deranged, fantastical, or deliberately exaggerated. It seems like a practical way to learn about trading; read a book and go do it. No harm, no foul.

Which brings us face to face with the paradox:

Trading is the only profession in the world where the rank amateur
who knows virtually nothing—without any experience or real understanding
of the methods or machinations of the professionals—can
enter into the marketplace and right away make a success.

No matter the skill level or the learning of the novice, he will always have a 50/50 chance of winning, at least at the beginning. In the beginning, there are only two kinds of trades you can make, and

only two things you can do. You can BUY, or you can SELL. So some people, despite their best efforts, are going to get it right the first time out of the gate. It’s simply laws of probability working in their favor. If you only have two ways to go, the chances are pretty good that half the time you will make the right choice. Sometimes even more than once. Maybe two, three, maybe even four times in a row, you’ll be on the winning side of the trade. This early winning streak can seem very beguiling to most people. They see that they have made some really wise trades right off the bat—without much experience—and they’ve won. Heck, they begin to think, those Wall Street hot-shots have got nothing over me. This thinking can lead many people to the erroneous and misleading conclusion that being a trader is easier, much easier, than it looks. Simply because they saw some early successes based on pure luck.

It absolutely fools people into thinking that they have found the way, and that they know enough to always be able to have these successes. And it can’t happen in any other profession. If you’ve never trained as a surgeon, you will never be able to walk into an operating room and perform any kind of surgery. If you’ve never played the violin, the odds are quite good that you will not be able to walk onto the stage at Carnegie Hall and give a flawless performance. It is most likely never going to happen. In any profession, the chance of achieving even short term success without training is about zero.

However, it is this single quirk unique to trading that allows for short-term successes without really knowing anything. A lot of people get fooled into thinking that they can do what they’ve seen the experts do, with the same kind of consistency and results, with little real insight or training. Which can lead to some rude awakenings down the line for a lot of folks.

For tips on how to make money—without relying on luck—log onto
www.traderslibrary.com/TLEcorner.

Chapter 2 Review

Like most things in life, the people who work hardest at trading become the best and most successful at it.

A strong work ethic—some would call it workaholism—is one of the strongest and most consistent traits among the Market Wizards.

There is a misperception among the general public that trading the markets is an easy way to make money.

The paradox of the markets is that even a rank amateur, with little real knowledge or training, can achieve short-term success simply because the laws of probability are with him, at least in the beginning. This leads to the aforementioned misperception about trading being easy.