Trading Strategies of the Rich and Famous: John W. Henry

Unless your a Red Sox fan, you might not have heard of John W. Henry. When it comes to the lexicon of great traders, John W. Henry doesn’t hold a candlestick chart to guys like Warren Buffett and Richard Dennis. But he should be there.

One thing you notice about great traders is there’s no such thing as a “pedigree.” They don’t all come from Ivy League schools. They don’t all start investing early. A lot of traders don’t even have a financial background.

Henry was from a farm family. He went to Victor Valley College and spent a stint at the University of California. What was his major? Finance? Economics? Nope. Philosophy. He didn’t graduate, by the way.

Despite this unconventional background, in the late 1970s, Henry began to trade. First, he traded something he was familiar with–soybeans and corn futures. But, Henry eventually created and tested a systematic trend trading strategy for multiple assets, mostly commodities.

The tests proved successful. That’s an understatement.

If you could reduce Henry’s trading strategy to its core principals, the two most significant would be:

1. Always be in the market.
Hold a basket of assets and either be in short or long positions, depending on the trend. (That last bit is key. You have to develop a systematic measure for determining the trend.)

2.  No emotions.
This is a mechanical system It’s not based on hunches. Or intuition. Or gut feel. Etc.

3. Fundamentals are not fundamental.
It may seem counter intuitive, but the analysis of fundamentals can be subjective. Like a child seeing shapes of cartoon figures in the clouds, a trader can see patterns in fundamentals that simply don’t exist. He or she is imprinting emotions on the numbers. All analysis must be objective and  devoid of emotions.

We believe that an investment strategy can only be as successful as the discipline of the manager to adhere to its requirements in the face of market adversity. Unlike discretionary traders, whose decisions may be subject to behavioral biases, our traders apply a disciplined investment process. By quantifying the circumstances under which key investment decisions are made, our methodology offers investors a rational approach to markets, unswayed by judgmental bias–from John W. Henry & Company website.

A more thorough summary of Henry’s methodology is available at his company’swebsite.

The system works apparently. If you remember the Barings bank debacle when Nick Leeson, a supposed rogue trader, made ridiculous bets on the Nikkei, Henry was on the winning side of that trade. The key was finding the trend.

“There are trends that tend to exist, whether they are capital flows or interest rates. So you can call trend following a blackbox, I guess, because some people refer to disciplined, mechanical-type trading as blackbox. But if you have enough discipline, or you only trade a few markets, you don’t need a computer to trade this way. It just makes it much, much more convenient for us.” – John W. Henry, Future’s Industry Association.

Henry fluctuates between billionaire and multi-millionaire status. (His net worth is currently estimated at $840 million.) A lifelong baseball fan, he owns the Boston Red Sox. He also owns the Liverpool Football Club.