The Game Is The Game

Cutty-“A lot has changed”

Avon Barksdale-“No doubt. But I mean you know…**** some things just stay the same man. I mean the game is the game. And the thing is since the towers is gone I’m gonna need to take my thing to some new places…feel me?”

In the great TV show “The Wire”-a show dealing with the drug trade in Baltimore-they refer to the drug industry as “The Game”. In the quotes above you have Cutty, a guy who is at the end of his 14 year prison sentence and Avon Barksdale a west side drug king pin. Avon has only been in prison for a while and he knows he is getting out soon and goes to Cutty to recruit him back into the drug trade as muscle.

Since Cutty has been in for so long they talk about how many things have changed. Some of the buildings and blocks that Cutty knew 14 years ago have since been torn down and renovated changing the landscape. For Avon however the goal was never to be in this building or on that corner but instead to dominate the area and move product. Hence his response to Cutty with “the game is the game.”

The most successful investors, business people, athletes, etc. are always reinventing themselves. Sometimes it is all at once but more often the changes are incremental.

The less successful investors on the other hand are not trying to reinvent themselves. Instead they get into a fixed mindset of “I am a value investor”, “I am a trend follower”, “I am a XYZ investor”, etc. and fixate on the version of value, trend, or whatever that first made them money.

Let’s take Warren B the king of “value investing.” If you actually go through and read his letters AND look at what he has actually done over time you will find that about the only thing he does the same as he did in the beginning is make money. Yes, he seems to anchor his thinking in the “look for value” but his definition of value has changed several times and is now almost indistinguishable from what he was looking at 50 years ago. He has changed as the market has changed and consequently he still makes money.

Another group of market beaters would be the long term trend followers. Here too the basic idea remains the same…but the exact methods have changed. If you look at the Turtle Traders exact strategy you would see that the strategy printed money in the 70s, 80s, and the early 90s…and then it went flat. Successful trend followers on the other hand have continued to make money. Like almost any strategy, and Warrren B would be included in this they have some bad years as well, but over time they continue to make money. How could this be? Well it turns out that at some point using 20 and 55 day breakouts and breakdowns might not capture the essence of the trend as well as they used to. The best shops are always trying to figure out if there is a better position sizing algo, a better way to capture “trend”, etc.

Steve Cohen is another great example of this. He started in the game trading options at Gruntal. According to Andrew Redleaf a lot of their early trading was doing options arbitrage. In the late 90s we know that SAC had the look of a big prop shop where traders timeframes were anything from a few minutes to days and weeks. They traded anything but mostly stocks and stock options. SAC then started organizing their traders into sector groups. Then as the capital base grew the timeframes started to be lengthened as Cohen saw the game and his place in it changing. Now they are doing everything with a heavy dose of quantitative methods. Cohen has basically reinvented the shop every 5-10 years…and has continued to make money.

Finally, at least for now, we have the shop with the holy grail. Renaissance Technologies has the Medallion Fund which has been putting up 35%+/year since the late 80s. The word consistency has nothing on Medallion. They are the kings of quants. But guess what? Yeah they play the game and adapt along the way. How do we know this? Simons has said that they are always finding new things and new ways to improve their systems. They also continually hire top scientists. Presumably these scientists are actually researching and looking for ways to refine and improve their trading strategies. If Simons could run the entire shop off a bank of computers he would probably have 2-3 employees and not a few hundred.

We can go on forever looking at people who have continually reinvented themselves like Soros, Druckenmiller, Neff, Steinhardt, Robertson, Tepper, and literally every single investor who has made above average returns across decades. But here is the big takeaway: If you are not continually trying to improve your process you will be left behind.