Recently in Interviews Category

I was privileged to "speak" recently with Tim Rayment, an independent trader and freelance journalist who has written articles for the Sunday Times of London. He has written articles on a wide range of subjects, including a recent one about the nature of hedge fund managers and a fascinating piece of investigative journalism in which he examines a confidence scheme.

I particularly like his ideas about involving former professionals (hedgies and bankers) in journalism to inform and educate the public about the true nature of our financial economy.

By the way of context, the first question relates to an anecdote Tim shared with me about informally advising an actress on when to swap currencies while she sold a house in France and bought one in England, and the moments of euphoria and despair that she experienced while that trade was happening.

And now on to the interview...

To look at the example of the actress that you mentioned, it seems as if there doesn't seem to be much of anything that can get her to look at news rationally except for somehow making her into some form of trader. Is doing this as simple as involving former bankers and hedgers in the news media, or are there other steps that you would recommend be taken?

Turning her into a trader wasn't difficult. I told her how she would feel before she felt it. I explained that the panic she would experience in a few days' time was part of the process by which markets work, and that she had to endure feeling sick with anxiety before she could be rewarded with higher prices -- and that there was another actress, or at least another human being, who was going through the same emotions in mirror image while trying to achieve the opposite transaction, i.e., one who wished to sell a house in England and to buy one in France, while our actress wished to buy a house in England and sell one in France. The actress panicked when she was supposed to, despite being prepared for what would happen. But she trusted the explanation enough to wait. Each day I gave her price levels that would mean all was well, and price levels that would mean all was not. She watched the markets on her laptop, not daring to go out. In the end, I think she actually enjoyed the experience, because it gave her an understanding and a feeling of control. And she got her price.

As a follow up, how might one avoid the "Cramer Problem", where a former hedge fund manager makes the transition to being a journalist, but gives wide-ranging advice that is more designed to entertain than enlighten? Do journalistic organizations seeking to overcome this problem simply need to ignore the "Mad Money" audience? Can they do this and remain solvent?

I can't speak for CNBC, but in British broadsheet newspapers, the desire to entertain has been met in more wholesome ways. The Money section of The Sunday Times, for example, probably gives as much space to publicising the scams of banks and of financial companies as it does to investment themes, so that the reader is "entertained" by being made to feel angry. Arguably there is a strong public-interest justification in these stories. This is not a phenomenon of the credit crisis, by the way: the Money section, which -- unlike the Business section -- is aimed at a general audience, has always been quite sceptical. It's probably one-third to one-half investment advice, and one-third consumer advice, while a sixth of the section entertains readers by, for example, interviewing a celebrity about the most satisfying moments and the biggest mistakes in their personal finances. There's also a columnist who is mean with money, and happens to be married to someone he loves but regards as profligate. He's always saving cash; she's always spending it. It's quite funny.

Coming from the standpoint of protecting investors from hazy information that they might receive, could you support conceptually the establishment of a test to see who was capable of trading individual stocks and bonds (as distinct from vanilla mutual funds)? Can you think of anything that you would want to put on such a test?

Such a test might have perverse consequences. If you require people to pass a test before they can trade, you drive them into the arms of professionals, who might perform no better (but charge fees for the privilege). For those who pass the test, the danger is false confidence. Where would you draw the line? Would you ask a tenant to pass a test before allowing them to buy a house, for example?

I can see a case for requiring a test before trading on margin, however. It's leverage that destroys lives.

Is improving the quality of financial journalism more a question of improving the quality of reportage at the highest levels by involving experts or instead one of improving the level of discourse at the lowest level to educate a greater number of market participants? If you were the editor of a business section and had to choose which of these two to emphasize, which would it be? Why?

It would be both. I'd start by hiring reporters who understand companies, economies and the markets. Without that, you've got no business section and without a business section you don't have a proper newspaper. So, an editor has to give that priority. Then I'd establish a separate section, similar to the Sunday Times Money section, to educate the widest audience. By having two sections, you can publish material for a sophisticated audience in the Business section without intimidating the general audience. The two constituencies are equally important. Finally, I'd save some money from my budget to hire hedgies and ex-bankers as business columnists. These are columnists, not reporters. If there were no money left in the pot, I'd persuade them to do it for nothing (but they would not be allowed to "talk their book"). Their job is to educate the sophisticated audience (in the Business, not the Money section) with real-time analysis from a trader's viewpoint, because traders think differently from reporters.

When you were a "budding" trader, how did you navigate the transition from amateur to professional? What resources did you utilize? Are there ways you can conceive of to make these resources publicly available?

That's a long story. There are thousands of legitimate ways to trade, and would-be traders face a quest to find what is right for them. In the end, I took some academic work from the 1930s, which I came across by chance, and combined it with profit-driven work on technical analysis in the 1990s. Then I adapted both to suit the way my mind works. Much of the trading literature remains useful for generations, because it is not really about trading at all. It's about human nature, which does not change.

Trading is mostly control of your own psychology. And I've spent thousands of hours working out how to reduce the subjective to the binary, so that decisions can be as objective as possible.

I've also been very lucky in that I have good mentors. My advice would be to find good mentors and to do your best to outgrow them. At the same time, try to remove all ego from the trading process.

There's valuable work in the trading literature, but you need to overcome human frailty to use it. That's a lifelong task