asked me, "Larry, how can you know more about coffee than me? I am the largest trader in the world. I know where
the boats are; I know the ministers." "You are right," I answered, "I don't know anything about coffee. In fact, I don't
even drink it." "How do you trade it then?" he asked. I told him, " I just look at the risk." Well this great meal lasted
for several hours. Five times he asked me what I did, and five times I told him that I managed the risk.
Three months later I heard that he had blown $100 million in the coffee market. He obviously didn't get the
message. And you want to know something? He does know more about coffee than I do. But the point is, he didn't
look at the risk.
So the very first rale we live by at Mint is: Never risk more than 1 percent of total equity on any trade. By
only risking 1 percent, 1 am indifferent to any individual trade. Keeping your risk small and constant is absolutely
critical. For example, one manager I know had a large account that withdrew half the money he was trading. Instead
of cutting his position size in half, this manager kept trading the same number of contracts. Eventually, that half of
the original money became lOpercent of the money. Risk is a no-fooling-around game; it does not allow for mistakes.
If you do not manage the risk, eventually they will carry you out.
The second thing we do at Mint is that we always follow the trends and we never deviate from our methods.
In fact, we have a written agreement that none of us can ever countermand our system. The trades are all the same.
That is the reason why we have never had a bad trade at Mint. There are really four kinds of trades or bets: good
bets, bad bets, winning bets, and losing bets. Most people think that a losing trade was a bad bet. That is absolutely
wrong. You can lose money even on a good bet. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk,
that is a good bet even if you lose. The important point is that if you do enough of those trades or bets, eventually
you have to come out ahead.
The third thing we do to reduce risk is diversify. We diversify in two ways. First, we probably trade more
markets worldwide than any other money manager. Second, we don't just use a single best system. To provide
balance, we use lots of different systems ranging from short term to long term. Some of these systems may not be
that good by themselves, but we really don't care; that is not what they are there for.
The fourth thing Mint does to manage risk is track volatility. When the volatility of a market becomes so great
that it adversely skews the expected return/risk ratio, we will stop trading that market.
Essentially, our approach has three lights in determining the acceptance of trading signals. When the light is
green, we take all signals. When the light is yellow, we will liquidate an existing position on a signal, but we will not
put on a new position. Finally, when the light is red, we liquidate existing positions automatically, and we do not take
any new positions.
For example, in 1986, when coffee went from $1.30 to $2.80 and back to $1.00,
we got out of our long
positions on the way up at $1.70 and didn't trade the market for the rest of the price climb and subsequent collapse.
Now, while we may have lost some additional profits, being out of markets like that is one of the ways we are able to
achieve such rigid risk control.
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