Ed Seykota – Everybody Gets What They Want

Ed Seykota

This article is part of our 'Guru' series - profiles of successful traders, with takeaways for the UK private investor.
You can find the rest of the series here.

Today’s post is a profile of Guru investor Ed Seykota, who appears in Jack Schwager’s original Market Wizards. His chapter is called Everybody Gets What They Want.

Ed Seykota

Ed Seykota

Jack Schwager had never heard of Ed Seykota when he started writing his book.

  • But his name kept coming up in interviews.
  • Michael Markus in particular cited him as his greatest influence.

It emerged that back in the 1970s, he:

Conceived and developed the first commercial computerized trading system for managing clients’ money in the futures markets”.

Seykota appears in Jack Schwager’s original Market Wizards.

  • His chapter is called Everybody Gets What They Want.

In the years before the interview, Seykota had become very involved in psychology.

  • Schwager formed the impression that it was now more important to Seykota than trading.
Performance

Seykota developed that first computer system whilst working for a large brokerage firm.

  • Irritated by management second-guessing the system’s output, he set up on his own, handling just a few accounts.

From 1982 to 1988 he returned 250,000% on a cash basis in an account that was started with $5K.

  • The account made $15M, and after adjusting for withdrawals was up several million percent.

Schwager calls this the best track record by anyone over that duration.

Early days

Seykota has an electrical engineering degree from MIT.

In the late 1960s, he thought that the silver price would rise when the U.S. Treasury stopped selling it.

  • But in fact the price fell (because the market had already discounted the news and was selling the fact).

Seykota read a market letter by Richard Donchian suggesting that a purely mechanical trend-following system could beat the markets.

  • Donchian used a five- and twenty-day moving average crossover system.

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Another influence was the book Reminiscences of a Stock Operator.

Seykota wrote some programs to test Donchian’s work using exponential moving averages.

  • These were easier to calculate and mistakes had less influence over time.

It seemed to work, so he switched to trading full time.

[hr]

His first job was researching egg and chicken futures (which have since delisted).

  • Seykota struggled to introduce computers, with the accounting department seeing this as a turf war.

So he switched to another brokerage where he managed to get computer access at the weekends.

  • His day job this time was refilling the paper on the Reuters machines.

Seykota was lucky that the new management had heard of Donchian, who was still doing everything by hand.

  • And they thought they could sell the concept of a “computer system” to their clients.

But because of interference from management (not following the buy and sell signals), a theoretical return of 60% for the year turned into a small loss.

  • He also came under pressure to modify the system so that it would trade more actively (generating more commission income).

So he gave up on the system and became a broker, and then two years later a money manger (still using his own computer systems).

Clients

Seykota is reluctant to take on new clients.

I do receive requests, but I very rarely accept new accounts, and only after considerable interviewing and screening to determine the motivations and attitudes of the client.

I have found that the people I associate with have subtle, yet very important, effects on my performance.

People who worry about short-term ups and downs get in the way.

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Trend systems

Seykota is extremely quotable, and so most of the rest of this article will be in his own words.

Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.

My original system was very simple with hard-and-fast rules that didn’t allow for any deviations.

I found it difficult to stay with the system. it seemed a waste of my intellect and MIT education.

I didn’t really trust that trend-following systems would work. There is plenty of literature “proving” they don’t.

I consider trend following to be a subset of charting.

Charting is like surfing. You don’t have to know a lot about the physics of tides, resonance, and fluid dynamics in order to catch a good wave. You just have to be able to sense when it’s happening and then have the drive to act at the right time.

Bond prices have a lot in common with the way cockroaches crawl up and down a wall. Unfortunately for cockroach followers, there is usually no one around to take the other side of a trade.

Trading approach

Seykota uses no TV screens.

I get my price data after the close each day.

Each day he runs his program which generates signals for the next day.

Sometimes I trade entirely off the mechanical part, sometimes I override the signals based on strong feelings, and sometimes I just quit altogether.

Systems trading is ultimately discretionary. The manager still has to decide how much risk to accept, which markets to play, and how to increase and decrease the trading base.

Over time, I have become more mechanical, since I have become more trusting and my programs have factored in more “tricks of the trade.

I don’t try to pick a bottom or top.

If I were buying, my point would be above the market, where the market momentum would be strong in the direction of the trade.

I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit.

Pride is a great banana peel, as are hope, fear, and greed. My biggest slip-ups occurred shortly after I got emotionally involved.

I prefer not to dwell on past situations. I cut bad trades as soon as possible, forget them, and move on.

I handle losing streaks by trimming down my activity. I just wait it out. Trying to play “catch up” is lethal.

Gut feel is important. If ignored, it may color your logic. It can be dealt with through meditation and reflection.

It might be a valuable subconscious analysis of some subtle information. Or it might be a dangerous sublimation of an inner desire for excitement.

Trading rules

a. Cut losses. b. Ride winners. c. Keep bets small. d. Follow the rules without question. e. Know when to break the rules. Mostly I follow the rules.

The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses.

I don’t think traders can follow rules for very long unless they reflect their own trading style. Eventually, the trader has to quit find a new set of rules. This is part of evolution and growth of a trader.

Risk management

The key to long-term survival and prosperity has a lot to do with money management techniques. Longevity is the key to success.

There are old traders and there are bold traders, but there are very few old, bold traders.

Keep bets small and systematically reduce risk during equity drawdowns.

I intend to risk below 5% on a single trade.

I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues.

Fundamentals

Fundamentals are useless as the market has already discounted the price. I call them “funny-mentals.”

Good traders

I think it is difficult to acquire talent for trading.

Society works by the attraction of the many. As they are culled out, the good ones are left, and the others are released to go try something else.

A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself.

Winning traders have usually been winning at whatever field they are in for years.

Win or lose, everybody gets what they want out of the market. Some people seem to like to lose.

One of the best ways to increase profits is to do goal setting and visualizations in order to align the conscious and subconscious with making profits.

Other quotes

Inflation is part of the way societies sweep away the old order. All currencies eventually get debased.

Compute one penny invested at the time of Christ, compounded at 3% pa. Then consider why nobody has anywhere near that amount.

Gold tends to be dug up, refined, and then buried again.

Some people were lucky enough to be born smart, while others were even smarter and got born lucky.

I think success has to do with finding and following one’s calling regardless of financial gain.

Conclusions

Seykota may not use a quote machine, but he is a quote machine – funny and serious at the same time.

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Schwager focuses on the “everybody gets what they want” quote because he initially found it very difficult to believe.

  • I’m entirely convinced that people get what they want because the information they need to change their ways is so freely available.1

Seykota’s trading approach is admirable, too – particularly his ability to trade from overnight prices.

  • I did the same during the dot com boom and found it a very useful way of not getting too emotionally invested in a raging bull market.

Whether Seykota’s trend following systems would work so well in the choppy markets we’ve seen over the past decade – the eight-year overall central bank-driven equity bull market notwithstanding –  is another question.

[hr]

His rules are familiar, but good:

  • cut losses
  • ride winners
  • don’t play catch-up
  • focus on risk management
  • develop your own system and rules that you can stick too

We won’t all be as successful as Seykota, but we can at least head off in that direction.

Until next time.

  1. The only caveat here is that since a person’s psychology – though not necessarily their behaviour – is largely fixed, “want” may not be precisely the right word []

Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.

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Ed Seykota – Everybody Gets What They Want

by Mike Rawson time to read: 5 min
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