I mentioned the new Tony Robbins book out “Money: Master the Game” in our prior post “The All Seasons Portfolio“. I think it is a good book, especially for the newbie wondering what to do with their money. It is really long, but market pros could probably skip to the last 25% of the book for the interviews, and honestly the Paul Tudor Jones one made the entire book worthwhile. I would buy it for that alone. As you know I’ve always been a trend guy, and Paul talks quite a bit about trends below. (Likely I will update our 2006 trendfollowing paper again in January.)
While I would like to post the entire interview here, a few highlights are below (TR=Tony Robbins, PTJ= Paul Tudor Jones)
PTJ: So the turtle wins the race, right? I think the single most important things that you can do is diversify your portfolio. Diversification is key, playing defense is key, and, again, just staying in the game for as long as you can.
TR: Following up on diversification, how do you think about asset allocation in terms of playing defense?
PTJ: There’s never going to be a time where you can say with certainty that this is the mix I should have for the next five or ten years. The world changes so fast. If you go and look right now, the valuations of both stocks and bonds in the US are both ridiculously overvalued. And cash is worthless, so what do you do with your money? Well, there’s a time when to hold em and a time when to fold em. You’re not going to necessarily always be in situation to make a lot of money, where the opportunities are great.
TR: Okay, any specific strategies for protecting your portfolio?
PTJ: I teach an undergrad class at the University of Virginia, and I tell my students, “I’m going to save you from going to business school. Here, you’re getting a $100k class, and I’m going to give it to you in two thoughts, okay? You don’t need to go to business school; you’ve only got to remember two things. The first is, you always want to be with whatever the predomianat trend is.
TR: So my next question is, how do you determine the trend?
PFJ: My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: “How do I keep from losing everything?” If you use the 200-day moving average rule, then you get out. You play defense, and you get out.
TR: That is considered one of the top three trades of all time, in all history (1987 Crash)! Did your theory about the 200-day moving average alert you to that one?
PTJ: You got it. It had done under the 200-day moving target. At the very top of the crash, I was flat.
TR: What’s the second thought for students?
PTJ: 5:1 (risk /reward). Five to one means I’m risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I’m still not going to lose.
TR: Since asset allocation is so important, let me ask you: If you couldn’t pass on any of your money to your kids but only a specific portfolio and a set of principles to guide them, what would it be?
PTJ: I get very nervous about the retail investor, the average investor, because it’s really, really hard. If this was easy, if there was one formula, one way to do it, we’d all be zillionaires. One principle for sure would get out of anything that falls below the 200-day moving average.
There you have it folks – trendfollowing advice from one of the greatest traders of all time…
Lots more great stuff in the interview on giving back, charity, kindness, etc….Money: Master the Game is worth a read!
In a follow on post we will examine the two allocations in the book, David Swensen vs. Ray Dalio….