Spotlight On: The Sultan Of Currencies, Bill Lipschutz
There is an allure to trading, for the potential to turn a small deposit into a big fortune with the right moves, with forex particularly popular as a trading market due to how there is action to be had at seemingly every moment of every day.
Of course, success in trading is not a matter of luck but skill, discipline, a willingness to learn and the resilience to take the right lessoprop firm account those who end up losing their portfolio just as quickly as they had set it up.
Success is as much about protecting your assets and your gains as it is about going for the big single trade, particularly as forex is often based around making the most of marginal gains and playing the long game.
One of the greatest masters of these marginal gains is Bill Lipschutz, one of the first notable superstar forex traders and a man so notorious in the markets that he became known as the “Sultan of Currency”.
How did he earn that name and reputation? What were his trading strategies? And what can we learn from both his great successes and notable failures?
How Did Bill Lipschutz Get Into Trading?
Because trading is measured by success above anything else, many traders take rather unusual routes into the financial markets, either finding a knack for it through enthusiasm or curiosity as much as taking a more traditional route to the floor.
For Mr Lipschutz, it was a mix of tragedy and fate that would ultimately lead him to the market.
A prodigious student throughout his school days, Mr Lipschutz opted for a degree in Architectural Design, but whilst he was there, his grandmother died, and he ended up being a party to the will.
This took the form of $12,000 worth of stock in multiple portfolios and locations. In total, over 100 stocks were involved, and liquidating and consolidating this capital was neither a simple nor inexpensive task.
He learned more about risk capital and learned more about the market, and instead of putting the $12,000 in a savings account, a low-yield investment or spending it on something nice, he decided to indulge his interests and invest in the market.
This decision would change the course of his life and arguably alter the future of forex as we
know it. The former would be the decision to seek an MBA, and the latter would be his decision to accept an invitation to join the infamous Salomon Brothers investment bank.
How Did Bill Lipschutz Get Into Forex?
Whilst perhaps more famous today as the subject of Michael Lewis’ famous 1989 memoir Liar s Poker and inspiration for Tom Wolfe’s Bonfire of the Vanities, Salomon Brothers was one of the largest investment banks in the United States, and had an unparalleled reputation for innovation.
They were the first to sell mortgage-backed securities, had involvement in the leveraged buyout of RJR Nabisco that eventually inspired the book Barbarians at the Gate, had an infamously cut-throat culture and were amongst the first major banks to truly see the potential in forex.
Mr Lipschutz was the right person at the right time, joining the company in 1982 and immediately being earmarked for a role in the company’s Foreign Exchange Department.
He had a remarkable consistency whilst at Salomon Brothers, earning $300m per year for Salomon, and at his peak was considered to be one of the five best forex traders in the world. This eventually garnered him the nickname “The Sultan of Currency”.
He ended up becoming the Managing Director and Global Head of the bank’s forex operations before quitting in 1990, rather fittingly getting out at the right time before Salomon Brothers would fall apart due to a treasury bond scandal.
What Was His Most Notable Failure?
Arguably, the trade that made Bill Lipschutz such an effective forex trader was his first stock portfolio, where he learned one of the most fundamental of trading lessons in as brutal a fashion as anyone can learn it.
At the time, he had a working understanding of the market but was not entirely adept at risk management and portfolio diversification. Regardless, he turned $12,000 into $250,000, proving the old adage that anyone can make a lucky investment once.
He essentially was guessing, gambling with his stocks, and very quickly got it badly wrong, wiping out his portfolio.
This kind of brutal loss often causes traders to quit, but Mr Lipschutz learned a vital lesson not only about risk management but also about how traders actually make money.
Instead of making sure you make the right guesses, he learned to develop trading plans that require him to only be correct a fifth of the time in order to still make money. He soon built his finances back up.
What Can We Learn From Bill Lipschutz’s Successes?
He has far more successes than failures, and his biggest advantage is that he was at no point ever weighed down by the pressure of the finances involved in his trades.
He set a record in 1986 for the largest options trade ever when he bought 30,000 put options on the British pound, predicated on the pound remaining stable or increasing in value in two months. He took advantage of an inefficiency and made a huge amount of money as a result.
However, this was an aberration from his typical investment style, which involves scaling into a position as the market becomes clear rather than going big or going home. This is at odds with other traders who try to swim against the current somewhat.
He was also one of the few traders who made money during the 1998 Asian Currency Crisis that led to the demise of Long Term Capital Management and caused other major forex traders such as Stanley Druckenmiller to face huge losses.
He also emphasises the importance of risk management, paying attention to macroeconomic trends and being patient, avoiding the temptation to trade too often.