Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: So, coming back to some of these themes of investor versus trader, risk management, et cetera. I know you learned a lot from this guy, Eli Tullis. I love these lessons that were formative for you for what became the trading legend that you now are. What did he teach you and was there any specific episode from your time with him that taught you the biggest or most important lesson?
· Paul Tudor Jones
[00:00:00] S1: God, he was so strong. He was really good at executing at the maximum apogee of fear as well as greed. He was so good at smelling that. Because he traded hardly anything but cotton, he would just sit there and he would just focus. He was just so good at waiting for exactly when there was just too much elation or when there was too much fear. And so that was really helpful. And then I would say the number one thing I learned from him was – we were so long cotton one weekend, and there was a great drought, spectacular drought. And of course it rained all through the belt over the weekend. Walked in, market was limit down. He had gotten absolutely smashed. I thought, oh my God, it's over. That day for lunch, his wife brought in four of her friends. He had the most beautiful office I've ever seen in my life. And he came out and just – oh my God, he had a smile on his face. “Oh, ladies!” And flirting with the wives. I was sitting there going, are you kidding me? This guy's broke, and he's acting like he's Rock Hudson or something. Wow! Boy, I tell you what, I'll never forget that one to this day. When the going gets tough, the tough get going. You wear it here and you have that confidence, you're gonna come back. Hugely important.
· Patrick O'Shaughnessy, Paul Tudor Jones
[00:00:00] S0: Feels like the right time to ask you just what trading means to you. You've said before that the whole world is just this interconnected series of capital flows and part of the job is being on top of that and taking positions based on what's going on in the world. But mostly I interview investors who buy stakes in companies. I very rarely interview someone that is moving and putting on major positions in any sort of asset class or trading instrument. And so I would love to just hear you describe like what, to you, trading is? Like, what is the literal act that you are doing every day with such excellence for decades? [00:00:00] S1: There's a couple of metaphors that come to mind. Let's start with boxing, because you have an opponent – in this case, it's the market. You know, you're going into the ring with this opponent who's after you the whole time. And I'm thinking more of a classic one as opposed to a Mike Tyson one. But you're kind of parrying, jabbing, feeling each other out, looking for an opening. And then every now and then you'll have a great opening, and you take a big shot. And you may land one. If I think about big shots – Bitcoin 2020, a knockout. Two year rates in 2022, knockout. You have these incredible opportunities at times if you just sit and wait. The whole time in the interim, some of it you're just gathering information, looking for those openings. You're always trying to make progress, you're always trying to win the round, but there'll be those few opportunities where you can do something really material.
· Paul Tudor Jones, Patrick O'Shaughnessy
[00:00:00] S1: There's a couple of metaphors that come to mind. Let's start with boxing, because you have an opponent – in this case, it's the market. You know, you're going into the ring with this opponent who's after you the whole time. And I'm thinking more of a classic one as opposed to a Mike Tyson one. But you're kind of parrying, jabbing, feeling each other out, looking for an opening. And then every now and then you'll have a great opening, and you take a big shot. And you may land one. If I think about big shots – Bitcoin 2020, a knockout. Two year rates in 2022, knockout. You have these incredible opportunities at times if you just sit and wait. The whole time in the interim, some of it you're just gathering information, looking for those openings. You're always trying to make progress, you're always trying to win the round, but there'll be those few opportunities where you can do something really material. [00:00:00] S0: I love the boxing analogy. In the examples you gave – Bitcoin, two-year rates, precious metals – so many things you've been through. What is going on in one of those? Like maybe pick one and I'm literally curious what you are doing in the moments – what you're looking at, what you're studying, what supply-demand imbalances you see. What is the literal nature of one of these windows that opens every so often?
· Paul Tudor Jones
[00:00:00] S1: If you think about all the really big moves, it's probably because the market has gotten too carried away, or there's been some imbalance that's gone on for too long, or a central bank does something that they shouldn't be doing, or a government does something they shouldn't be doing. So that's, I think, the genesis of most of the big moves. Typically, it's gonna be inspired by a central bank or central government. A good one right now in the making – it's gonna be interesting, I think – is dollar-yen. The yen's grossly undervalued and it has been for some time. What's the catalytic moment? That's really the point you've gotta ask. And the catalytic moment was just a new Prime Minister that was just elected. And she has all the characteristics of a Ronald Reagan or a Margaret Thatcher, or Donald Trump when he got elected the second time. And if you look at what those local currencies did, they all appreciated pretty quickly, 10% off the bat. I wanna say Japan has four and a half trillion dollars, a four and a half trillion dollar net international investment position to the good with the rest of the world. Probably 60% of that's in the US, and most of that is unhedged. So they just have this massive dollar liability, and all of a sudden we've now got the most dynamic leader in certainly a half a century in Japan, who's Japan first, is gonna have a very entrepreneurial way that she is going to remake that economy. So you're looking for something that's under-owned, undervalued, way out of whack. People have gotten complacent on it and you're looking for that catalytic moment. In the case of the two-year rates in '22, we had way too much fiscal stimulus. And then Powell, he overstayed being easy way too long because he wanted Biden to reappoint him. So as soon as Biden reappointed him, it was go-time to get short two-year notes, because you knew the Fed was gonna normalize. And then in 2020, when you saw, again, all the interventions both by the Central Bank and the Treasury, you just knew that the inflation trades were gonna take off. Of all of them, what was the best one? At that point in time, it was Bitcoin. Bitcoin is unequivocally the best inflation hedge that there is. More than gold. Because Bitcoin is finite, there's only so much Bitcoin that can be mined.
· Paul Tudor Jones, Patrick O'Shaughnessy
The problem with it as an inflation hedge, is if you got into kinetic exchange, there's clearly gonna be cyber warfare. Anything that you have to deal with electronically is going down, including Bitcoin. So strike one. And then secondly, quantum computing. Who knows if and when, with AI advancing as fast as it is, that we may actually have quantum computing. Now with quantum computing, someone can come in and can hack any bank and hack anything they want to. So in terms of it being a great inflation hedge, gold is increasing supply every year by a couple of percent. Bitcoin has a finite amount that can be mined. It's decentralized. And so in that sense, it has the greatest scarcity value of anything. [00:00:00] S0: If you think about the big ones that you've lived through. '87, the global financial crisis, COVID, et cetera. Various bubbles, asset bubbles through history. Maybe say a little bit about those general experiences. You're very famous for what happened in 1987, of course. I'm curious about those ones because I'm curious what you think about today's environment. “Are we in a bubble” is a very popular question. Mostly that's answered by investors, less so by traders. And so I would love your perspective on the big ones that you've experienced historically and how those lessons apply to today.