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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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During this entire time, he had no serious thoughts about trading. Gil Blake: The Master of ConsistencyGil Blake: The Master of Consistency Gil Blake calls his management company Twenty Plus. This name ties into the logo on his business card and stationery, which shows a probability curve with a +20 percent return falling two standard deviations to the left of the mean. For those not statistically inclined, the implication is that he has a 95 percent probability of realizing an annual return of at least 20 percent. The sketch of the probability curve does not extend to a 0 percent return, let alone into negative returns-which says a great deal about Blakes confidence. Blakes confidence is obviously not misplaced. In the twelve years since he began trading, he has averaged a 45 percent annual return. Although this is an impressive figure, the most striking element of Blakes performance is his consistency. True to his logo, he has never had a year with a return below 20 percent. In fact, his worst performance was a 24 percent gain in 1984. But even in that subpar year, Blake had a consolation-he made money in all twelve months! To really appreciate Blakes consistency, you have to look at his monthly returns. An amazing 134 months (ninety-six percent) in his 139-monm track record were either breakeven or profitable. He even had one streak of 65 months without a loss-a feat that would qualify him as the Joe DiMaggio of trading (Joes streak ended at 56). Blakes confidence in his approach also permeates his unique fee arrangement. He charges his clients 25 percent of total annual profits, but and heres the unusual part-he also agrees to pay 25 percent of any losses and 100 percent of losses incurred in a new account during the first twelve months. Obviously, he has not had to pay out on these guarantees yet. By now you probably want to know where to send your check-Save your stamp. Blake stopped accepting client funds five years ago. He has made only two exceptions since then; both times for close friends. Blake is a mutual fund timer. Generally speaking, mutual fund timers attempt to enhance the yield return on a stock or bond fund by switching into a money market fund whenever conditions are deemed unfavorable. In Blakes case, he doesnt merely switch back and forth between a single mutual fund and a money market fund but also makes the additional decision of which sector in a group of sector funds provides the best opportunity on a given day. Blake uses purely technical models to generate signals for the optimum daily investment strategy. His holding period tends to be very short, typically ranging between one and four days. By using this methodology, Blake has been able to show consistent monthly profits even in those months when the funds in which he invested registered significant declines. Blake prides himself on being a Wall Street outsider. After graduating from Cornell, he served three years as a naval officer on a nuclear submarine. He subsequently attended the Wharton Business School, graduating with highest honors. Following business school, Blake spent three years as an accountant with Price Waterhouse and nine years as chief financial officer for Fab-field Optical. During this entire time, he had no serious thoughts about trading. Indeed, he still generally believed in the truth of the random walk theory, which he had been dutifully taught in school. (This theory basically implies that trying to beat the markets is a futile endeavor.) Blakes life changed when he strolled into his friends office one day and was presented with some evidence of nonrandom market behavior that he assumed must have been a fluke. In doing the research to prove this point, he instead convinced himself that there were indeed substantial pockets of nonrandom behavior m the markets that provided unbelievable profit opportunities. Thus, fifteen years after graduating from college, Gil Blake became a trader. Are great traders born or made? In Blakes case, the following note from his nursery school teacher, which his mother proudly saved, provides some insights: His claywork, painting, and carpentry all show an amazing meticulous precision. He enjoys working with small things, and is a perfectionist about it. Hverything he does is made up of many small parts instead of one, big splashy form that is more usual for a child of his age. He has an extraordinary interest and grasp of numbers, and shows a real talent toward things mathematical. I interviewed Blake at his suburban Massachusetts home on a Saturday afternoon during the peak of the fall season. I arrived there shortly after hmchtime. Thoughtfully, assuming that I would not have eaten, he had picked up sandwiches. I found Blake to be very low-key and unassuming. He seemed genuinely flattered that I considered him worthy enough to be included in a book of top traders. In terms of return relative to risk, Blake has few. if any, peers, but you would never guess that from his demeanor. ==== You became a mutual fund timer long before it became popular. What was your original inspiration? ==== Well, I really owe it to a friend. I remember the day as if it were yesterday. I wandered into a colleagues office, and he said, Hey, Gil, take a look at these numbers. He had invested in a municipal bond fund to take advantage of the prevailing high interest rates, which at the time were about 10 to 11 percent tax free. Although he was getting a high interest rate, he discovered that his total return was actually declining rapidly because of the steady attrition in the net asset value [NAV]. He handed me a sheet with about a months worth of numbers, and I noticed that the trend was very persistent: the NAV had declined for approximately twenty-two consecutive days. He said, Fidelity allows you to switch into a cash fund at any time at no charge. Why couldnt I just switch out of the fund into cash when it started to go down and then switch back into the fund when it started to go back up? My reaction was, Nick, I dont think the markets work that way. Have you ever read A Random Walk Down Wall Street? I pooh-poohed his idea. I said, The problem is that you dont have enough data. Get some more data, and I bet that youll find this is not something you could make any money on over the long run. He did get more data, and, amazingly, the persistency of trends seemed to hold up. I quickly became convinced that there was definitely something nonrandom about the behavior of municipal bond funds. ==== How did you perceive that nonrandomness? ==== In fact, it was the simplest approach that proved the best. We called it the one penny rule. In the two years worth of data we had obtained, we found that there was approximately an 83 percent probability that any uptick or downtick day would be followed by a day with a price move in the same direction. In the spring of 1980, I began to trade Fidelitys municipal bond fund in my own account based on this observation. ==== And that worked? ==== Yes, it worked exceedingly well. ==== Thats almost hard to believe. I know that in the bond market, switching a position each time theres a daily price change in the opposite direction is a disastrous strategy. ==== That may well be true. However, you have to keep in mind two things. First, there were no transaction costs involved in switching in and out of the fund. Second, there seemed to be some sort of smoothing process operating in the NAV numbers of the municipal bond fund. For example, there was one three-month period around early 1981 when there were virtually no upticks in the NAV of the fund-the days were all either down or flat-while at the same time, the bonds were certainly having some uptick days. In fact, this price behavior was exhibited by virtually all municipal bond funds. ==== How can you explain that? ==== I dont know the answer. Maybe someone can explain it to me some day. ==== Of course, you couldnt directly profit during the declining periods, since you obviously cant go short a ftmd. ==== Thats right, during those periods we were in cash. ==== Given that you could be only long or Hat and the bond market was collapsing, were you still able to come oat ahead? ==== When I started in March 1980, the NAV of the fund was approximately $10.50. By the end of 1981, the NAV had steadily eroded to about $5.65-a drop of nearly 50 percent. Nevertheless, using the above method, I was able to achieve gains m excess of 20 percent per year, not counting interest income, which added another 10 percent. The odds appeared to be so favorable that I started to seriously think about how I could get more funds to trade. I ended up taking out four successive second mortgages over a three-year period, which I was able to do because housing prices in the Northeast were rising at a fast clip. ==== Werent you at all reticent about doing that? ==== No, because the odds were so favorable. Of course, I had to overcome the conventional wisdom. If you tell someone that youre taking out a second mortgage to trade, me response is hardly supportive. After a while, I just stopped mentioning this detail to others. If it took only a one-day change in the direction of the NAV value in order for you to get a signal, it sounds like you would be switching an incredible number of times during the year. Actually, it only worked out to about twenty or thirty times per year, because the trends were so persistent. ==== Wasnt there any limit to the amoiint of times that you could switch? Even twenty to thirty times per year sounds like a high number. ==== Fidelitys guideline was four switches per year, but they didnt enforce that rule. m fact, I even discussed me excess switching with them, and they said, Just dont abuse it too much. I asked, What if I make twenty or thirty trades per year? The reaction was, Well, dont tell too many people about it. My impression was that the rule was there as a fallback provision but that they didnt worry too much about it-at least they didnt in the beginning. As the years went by, I got an occasional letter from Fidelity stating: It has come to our attention that you are switching more than four times a year, and we would appreciate your cooperating with the guideline. ==== Did you just ignore these letters? ==== No. I would use the municipal bond fund for four trades, then the high-yield municipal bond fund for four trades, and then the limited-term municipal bond fund for four trades, and so on. ==== So, technically, you did adhere to the four-trades-per-year-rule; you merely switched to different funds. ==== Thats right. |
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