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Stepan Lavrouk
Stepan Lavrouk
Articles (391) 

The Investment Philosophy of Paul Tudor Jones

Words of wisdom from the legendary macro trader

January 17, 2019

Paul Tudor Jones (Trades, Portfolio) is a renowned hedge fund manager famous for his global macro trades. Although this domain may seem distant to the average retail investor, his basic philosophy and attitude toward risk management, control of his emotions and flexible thinking have wide-ranging applications to value investors. We seek to condense and explain Jones’ investment outlook, as laid out in Jack Schwager's "Market Wizards."

On the dangers of overconfidence

In the book, Jones recounted a story from his early days as a cotton trader, in which he got caught in a disastrous trade that almost wiped out his account:

“One learns the most from mistakes not successes...First of all, never play macho man with the market. Second, never overtrade. My major problem was not the number of points I lost on the trade, but that I was trading far too many contracts relative to the equity in the accounts that I handled. My accounts lost something like 60 to 70 percent of their equity in that single trade”.

Although Jones was talking about trading cotton futures, the analogy for the value investor here is clear. Do not allocate more of your equity to any given investment than you are prepared to lose, regardless of how good you feel about it. Conversely, do not let your losing investments alter your mental state and adversely affect your decision-making.

On market manipulation

“[The most prominent fallacy in the public’s perception of markets is] that markets can be manipulated. That there is some group on Wall Street that controls price action in the markets. I can go into any market and create a stir for a day or two, maybe even a week. If I go into a market at just the right moment, by giving it a little gas on the upside, I can create the illusion of a bull market. But, unless the market is really sound, the second I stop buying, the price is going to come right down. You can open the most beautiful Saks Fifth Avenue in Anchorage, Alaska, with a wonderful summer menswear department, but unless somebody wants to buy the clothes, you will go broke”.

Although Jones probably had a vested interest in downplaying the extent to which large traders such as himself can manipulate markets, the fundamental point should be familiar to investors: markets can be irrational or even rigged in the short term, but over the long term, value will win out. Furthermore, such mismatches between price and value can present good buying opportunities for bargain hunters.

On mental flexibility

“I think one of my strengths is that I view anything that has happened up to the present point in time as history. I really don’t care about the mistake I made three seconds ago in the market. What I care about is what I am going to do from the next moment on. I try to avoid any emotional attachment to a market. I avoid letting my trading opinions be influenced by comments I may have made on the record about a market”.

There are two points to be gleaned here. The first relates back to the importance of emotional control. This is easier said than done. We would all like to believe we can act as perfectly rational investment machines, but the truth of the matter is most of us fall prey to a variety of cognitive biases and blind spots, from having "pet" stocks we wish to see do well to poor decision-making in situations when we are losing money. Emotional disclipline is like a muscle - it must be exercised to make it stronger.

The second point is do not get married to opinions and positions that you may have held in the past simply because you want to be right or consistent. Always being right is not why investors play the game - being rich is. The ability to be humble and open to new information is of critical importance in the investment field, regardless of whether one is trading exotic instruments like currency options or just plain old-fashioned stocks.


Although the asset classes and strategies Jones employs are outside the range of most value investors (he employs primarily short-term swing trading strategies), there is a remarkable commonality between his basic principles and that of sound investing. Both call for robust risk management, mental dexterity and an ability to keep emotions in check. You don’t have to deal in complex interest rate derivatives to have these qualities.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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