Legends of Trading: Paul Tudor Jones
April 12, 2018
8 Min Read
Paul Tudor Jones is one of the most famous and recognisable traders in the world. His fund, Tudor Investment Corporation, has around $10 billion in assets under management and Jones himself has an estimated net worth of nearly $5 billion.
He shot to fame in the 80s when he successfully predicted the Black Monday crash in 1987, as shown in the classic documentary called “Trader”.
Jones became a trailblazer in the area of global macro investing and was a big reason behind the meteoric rise of the hedge fund industry.
This is his story…
Paul Tudor Jones was born in Memphis, Tennessee on 28th September 1954. He stayed in Memphis for his early education. His father ran a financial and legal trade paper, which Jones would write articles for while he was at college, under the pseudonym “Eagle Jones”.
It was at this time that he claims to have read an article about Richard Dennis, the successful commodities trader who famously trained the Turtle traders. This article left a big impression on him.
“I thought that Dennis had the greatest job in the world”.
Paul eventually moved to Charlottesville to study economics at the University of Virginia. He graduated with his undergraduate degree in Economics in 1976, as well as becoming the university amateur boxing champion in the welterweight division; an appropriate title for a trader famed for not pulling any punches in the market a decade later.
Early Trading Career
After finishing university, Jones went on to work at the New York Cotton Exchange. His uncle Billy Dunavant was a successful cotton merchant and Jones asked him to help get his career started.
As his uncle was involved in the cash side of the business and Jones had his sights set on trading, he sent him to Eli Tullis, a cotton trader based in New Orleans. Tullis offered Paul a job in New York as a floor clerk at the exchange. Although he was just a floor clerk, Jones says he also spent some time doing analytical work.
“Watching the market to try to figure out what made it tick”
After spending half a year in New York learning the craft. Jones returned to New Orleans to support Tullis with his trading. This is where Paul learned the ropes; understanding how to make decisions and execute trades as a floor trader.
Starting Tudor Investments
In 1980, four years after graduating from university, Paul decided to begin trading on his own. He became an independent floor trader at the New York Cotton Exchange and a very successful one at that… from 1980 until 1984, he only experienced one single losing month!
However, he claims that despite his success and all the money he was earning, he was incredibly bored. At one point, he had been accepted for Harvard Business School and was packed up and ready to go. He reflected on this idea and realised he wouldn’t learn the skills needed to be a trader. Therefore, he decided it was crazy and stayed where he was instead.
He continued trading until 1984, when he then decided, partly out of boredom and partly due to health concerns, that he would go into money management. Launching the Tudor Futures Fund with $1.5 million in assets under management.
“I was really bored because there wasn’t the personal interaction that was something that I craved and having colleagues and being in a clean atmosphere and that was when I started my fund.
All through growing up I’ve been involved in team sports and fraternities and in school I was involved in a whole variety of activities all of which were team oriented and when I was on my own I was printing money every month, but I wasn’t getting the psychic satisfaction from it.”
Tudor Investments has provided an average annual return of approximately 19% since the fund’s inception. The fund has been phenomenally consistent. Tony Robbins (who works closely with Jones) claims he has made money every year since they began working together, two decades ago. However, his most successful and famous period came during the market crash in 1987.
Black Monday October 1987
October 19th 1987 is known as ‘Black Monday’ due to the crash of global stock markets. The Dow Jones Industrial Average lost a fifth of it’s value.
Paul Tudor Jones, along with his strategist Peter Borish, predicted the crash of Black Monday. He tripled his money by holding large short positions (a short position profits when the price of the asset moves down).
By predicting Black Monday, Jones gained a lot of attention from investors. He talks about his predictions in the documentary released in the same year ‘Trader’. It first aired on television, but since then Jones has attempted to buy most of the copies that are available and calls for it to be taken down from the internet and out of circulation.
There are different speculations as to why this is, but one is that the documentary gives away too many of his trading secrets. However, it is still possible to find it online on certain websites.
Global Macro Trader
Jones is considered a global macro investor and trader. This means his decisions are based on a macroeconomic level. He focuses on the overall economic and political situations in countries. Jones will invest in any asset class, but prefers to make use of the futures market.
“I’ve always liked the futures market so much, because you can generally get liquid and be in cash in literally the space of a few minutes.”
The ‘Trader’ documentary shows that he uses a range of techniques for his trading, including the use of Elliott Waves, which he specifically refers to when looking at the stock market rally.
Although the phenomenal returns he makes and the figures he speaks about in the documentary would suggest that he is a big risk taker, Jones actually suggests otherwise.
“I think I am the single most conservative investor on earth in the sense that I absolutely hate losing money. I’d say that my investment philosophy is that I don’t take a lot of risk, I look for opportunities with tremendously skewed reward-risk opportunities. Don’t ever let them get into your pocket — that means there’s no reason to leverage substantially. There’s no reason to take substantial amounts of financial risk ever, because you should always be able to find something where you can skew the reward risk relationship so greatly in your favor that you can take a variety of small investments with great reward risk opportunities that should give you minimum draw down pain and maximum upside opportunities.”
This was also confirmed by Tony Robbins, when talking about the success of Jones. In an interview in 2000 Jones also says:
“You’ve got to look at good traders historically. If a trader can on average annually deliver two to three times their worst draw down, then that’s a very good track record, and I’d say that that’s what I try to do. If I thought that for the funds that I managed that 10% would be the worst that I would tolerate in a given year then hopefully I’d annualize two or three times that and that’s probably what I’ve done. Maybe a little below that in the ‘90’s and a little above that in the ‘80’s.”
As a global macro trader, it’s always necessary to have a grasp on what is going on at a political or economic level, particularly if you are investing over the long term. This is also part of Jones’s investment philosophy, as he praises the need for doing your research and constantly be wanting to learn more.
“The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge. Because I think there are certain situations where you can absolutely understand what motivates every buyer and seller and have a pretty good picture of what’s going to happen. And it just requires an enormous amount of grunt work and dedication to finding all possible bits of information.
It doesn’t make any difference whether it’s pork bellies or Yahoo. At the end of the day, it’s all the same. You need to understand what factors you need to have at your disposal to develop a core competency to make a legitimate investment decision in that particular asset class. And then at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control.”
Spending his Wealth
The huge success and wealth that Jones has enjoyed has led him to having a heavy focus on philanthropy. He founded the Robin Hood foundation in 1988, which helps to target poverty in New York. He is also very involved in providing education for under-priviliged children and takes an active role in keeping them accountable for their success.
However, he does like to enjoy his money too. He actually owned his own islands, the PTJ islands which are shaped like his initials. And in 2015 he bought an estate in Florida worth $71 million where he lives with his wife and four children. He says:
“I have a great wife and four great kids now and that would be my crowning achievement.”