Interviews Interview with Lex van Dam, Financier of BBC Million Dollar Traders

Lex van Dam stumbled on his first City job almost by accident but there's been nothing accidental about his success ever since. By contrast, he thinks millions of people who believe their money is in safe hands are taking a massive gamble. Now the man whose TV show Million Dollar Traders proved he could teach complete beginners to outsmart the City experts talks to Paul Mullen about all aspects of his trading experience and the launch of his new trading academy.

Paul: = Paul Mullen (Interviewer)
Lex: = Lex van Dam

Paul: How did you get started in the trading industry?

Lex: I was a student in Holland and I really enjoyed student life. I was not in a rush at all to start working full time, but one summer I did some work experience at investment bank Goldman Sachs in London, and they seemed to like me because they offered me a permanent position. I started there as a trader in 1992.

One of the things that really attracted me to trading is that it is such a level playing field. I might have gone to university but I am competing against lots of people who don’t have a degree, yet are really very clever and may be much better traders. That’s the real fun of it - that you are fighting against the others and together you are all fighting against the market. That is why I love trading.

Paul: What exactly did you do when you started at Goldman Sachs?

Lex: I started as a market maker. If a large pension fund wants to buy a stock they might go to a market maker to execute the trade. As a market maker you always need to have a price where you are prepared to buy a stock and a price where you are prepared to sell a stock. You can't get away with saying "I think a stock is going up so I don't want to sell", because you always need to be able to do whatever the client wants you to do. It taught me that no matter how cheap or expensive a stock is, if the flow is in a certain direction, then that's the way the stock is going to go. And that was my grounding.

So it is key for new traders to understand that stocks often move in irrational ways. That is why you need to know who the other participants are in your market and what they are doing and why. In my book How to Make Money Trading I talk quite a bit about this as it is so important.
And if you look at FX markets that’s no different. When the Toyota board decides to hedge its Dollar/Yen exposure the charts will be pretty irrelevant and not many people realise that.

Paul: So how long have you worked in the industry?

Lex: I started in 1992 at Goldman Sachs where I ended up running a proprietary trading desk. That means I invested money on behalf of Goldman Sachs. In 2002 I was headhunted by hedge fund GLG, which is one of the largest European hedge funds. After that I started my own hedge fund Hampstead Capital. So in total 19 years.

Paul: You have mentioned hedge fund management, what is a hedge fund manager and what do you do?

Lex: A hedge fund manager manages money on behalf of clients. He or she is expected to make money when markets go up and make money when markets go down. Making money when the markets go up is easy, but doing it when stocks are falling is much harder for most people.

However, you will not have longevity as a money manager unless you are able to go both long and short. And for an individual investor I would say that being able to bet on a stock going down as well as up is a necessary tool in your arsenal as well, even if it is to protect an investment or trading portfolio during dangerous periods.

I specialise in stocks and run a global long-short fund. However over the years I have also traded fixed income, currencies, commodities and credit.

Paul: What qualifications are required to be a hedge fund manager?

Lex: I think it really depends. There are people from all kinds of backgrounds. A lot have a university degree and a lot have no qualifications at all. Most hedge fund managers have a lot of experience in investing though. It's not very likely that people are going to let you run their money if you haven't got some sort of track record.

So if you want to trade other people's money, it's really important that you start generating your own track record, which means making 1% steadily per month, over long periods. If you can do that every month, then you'll be rich. It is not about making 10 to 20% in a month, the risk you need to take to be able to achieve that is way too high.

Paul: How is a hedge fund manager remunerated? Do you get paid a bonus?

Lex: In general it's based on performance. You get paid a "fixed" amount just for managing the money, so you can pay for your office, computers and support staff. The real money comes if you actually do perform and then you get a percentage of that performance. In general it's 20%. If you generate £100, then £20 is for you and £80 goes to the client.

Paul: What are your hours like? How long is your day and what time does it start?

Lex: I need to be behind my screen at 7.00am and normally leave the office at about 5.30pm. I then go home and switch on my screens until about 9.00pm when the US market closes. At night, my BlackBerry has Bloomberg on it next to my bed. When I wake up at night it's hard to resist having a quick check at how the S&P futures are trading overnight. It's never-ending.

Paul: It sounds like it's a 24-hour activity for you, with some set times during which you are thoroughly involved in it, and other times where you're just interested in what's happening, even if it happens to be in the middle of the night.

Lex: Well, we do trade Asian stocks as well, so we might leave orders and if something happens the broker would call from Hong Kong or Tokyo to let us know what is going on. It is 24/7, and I guess that's what it takes.

Paul: Do you have people working under you? You said it's your own company so presumably you're the top person there. How many people do you have working for you?

Lex: I've got two other partners in the business, so there are four of us. There are about another 10 people. The people we're responsible to are our investors and the main thing for our investors is not to have any nasty surprises. They're happy to give up some of the upside as long as we never lose too much money. We need to make sure we are very defensive, even conservative, just try to make a little bit of money. Obviously with interest rates now at like 0%, even if you can make 8 to 10% per year, you haven't done a bad job.

Paul: Can you talk me through your typical day?

Lex: I start at 7.00am and I read the overnight news and I look at the hundreds of messages I've received overnight. I look at what's happened overnight in equities, fixed income, in credit and commodities. I look at all the markets to give me a little bit of an indicator about what's going to happen in Europe that day. I look at company earnings, at economic data that will come out that day, and how it might affect the portfolio. Between 8.00am and 4.30pm I monitor my portfolio, I talk to brokers, I watch the markets, I analyse trade ideas. I put on new trades or positions, so it's work on the portfolio, managing the risk and changing it. Between 4.30 and 5.30 there might be some meetings or research and I go home and watch the markets and have some dinner. Having said that, it is amazing how boring it can be as well. Sometimes there is just absolutely nothing happening. And that is quite hard to deal with as well.

Paul: How has the credit crunch affected your sector of the industry?

Lex: I think it's not so much the credit crunch that's hit the industry, even though it obviously has. The main issue is that trading has changed. The computer algorithms dominate and it doesn't really matter if you trade stocks or currencies or commodities; everything seems to trade the same way these days. The correlation between asset classes is much higher than it used to be. So obviously this requires new strategies, and I think that's a much more complicated thing to deal with on a day-to-day basis than the credit crunch.

Paul: You said that the algorithms are doing much of the trading now. What rough percentage would you say of trades is going through algorithms?

Lex: I think it's probably about 60% if not more. They totally distort the market. They front run buyers and sellers, and are the parasites of the system. The liquidity they provide is fake.

Paul: Presumably the algorithms can end up trading against each other?

Lex: Yes, for example let’s say a large institutional fund manager wants to buy a stock at the average price over a day which is common practice. The broker normally puts that into an automated machine which executes a little bit of that order every 15 minutes for example. But this then gets detected by a parasite algorithm that buys it at minute 14 and sells it to the average price algo at minute 15. In the end the institution pays more than they otherwise would have. And for institution read the man on the street whose pension is managed by that institution. Again you can’t make money trading if you don’t understand these market dynamics. This is the real world, you can’t read about it in a text book.

Paul: I understand, so what in your view is the end game going to be in this situation?

Lex: I think the end game will be much more regulation because it's not sustainable. You have lots of exchanges at the moment that actually pay computers to get extra orders in the order book. It's crazy because the prices that you see on the screen are not real prices and to have the actual stock exchanges encourage this is ridiculous. It's gone out of control. It must end up with the regulators saying that this must end.

Paul: So how long has this been the situation and how long have the algorithms been having this level of impact?

Lex: This has been going on for a very long time. In 1987 people were already saying that the crash at the time was partially caused by program trading. And it only has gotten worse. A few months ago you had this flash crash, where suddenly there was no bid in the market. That brought it home again how dangerous these things are. Of course for every computer there is a person who runs the program. So this is not something that can’t be stopped.

Paul: So from what you're saying this sounds like this is the typical intra-day issue. Does this still apply for people who are holding positions longer term, overnight, or even for days or weeks?

Lex: Anyone who has a pension fund gets hurt because they are all getting much worse executions than they would have if there were no computers around. But there are some computer strategies around that are much less of an issue because they are relatively long term.

Here I am thinking of algorithms based on statistical arbitrage, which are triggered when, for example, mining stock A has gone up 4% and mining stock B has gone up only 1%. They might have a strategy where they sell mining stock A and buy mining stock B because they think over the next three days it is going to mean revert. I think that's totally fine because they have a legitimate reason to put on a trade. It might be because of a computer but it's a real trade.

But let's say I bid £2, and the offer is £2.03, and as soon as they see me bid £2 they bid £2.01, thus spoiling my order - this is the kind of practice that should not be allowed.

Paul: Have you been affected by any of the various rescue packages and new legislation regarding the activities of financial institutions?

Lex: No, nobody has ever rescued me. Luckily I haven't needed it either. If you're invested somewhere with someone who promises you great returns, then when all goes wrong, which it probably will, there is not going to be a rescue package around for you either.

Paul: That's an interesting point; that people who are making very high returns one year tend to disappear the next.

Lex: I trade for a living and I've done so for almost 20 years. I'm a risk averse guy. I just want to make sure that what I have I'm not going to lose. Of course I am unlikely to ever double my money in a single year but I have to be careful and smart about what I do as if I don’t, my career will finish prematurely. I think for people who trade more as a hobby, it's probably not that different. You have to take it really seriously.

Paul: I know a lot of people who trade for a living as individual traders. Like you say, they do take it very seriously and the number one criteria for most of them is capital preservation.

Lex: I think that's always the key. It always goes back to that because everybody goes through great periods and if you have a great year you'll make a lot of money anyway. It's just making sure that when you have that bad period that you just stay in the game. Rule one is stay in the game. Always be able to get back to your trading screen the next day, no matter how bad the previous few months have been; you should still be around so when the market starts going your way you can profit from it.

Paul: Does your role attract much media attention?

Lex: It does and particularly after my television programme Million Dollar Traders that I made for the BBC was shown. More recently I got quite good coverage in the national press when I launched my trading academy which was nice, as it means there is a real need for it.

Paul: I was going to ask you about Million Dollar Traders.

Lex: That did increase my profile massively even though I was not on the screen that much myself because I had to spend my time managing my hedge fund. Investors would not have been happy if I had prioritised a TV career over taking care of their money.

So I did it not so much in a professional capacity but more out of personal interest to see if I could teach novices how to trade, and to show people what the City is really like. From a TV perspective, the producers told me that if I made the programme it made sense to put my money where my mouth is, and that is what I did $1,000,000 of my own money. Luckily it turned out okay and I proved that I can train people in a short time period, at least in the basics of trading, and they outperformed the professionals during that period, which was great.

I guess this gave me a lot of media attention. The feedback I got was in general very positive because I didn't try to make it sensational. I didn't try to score cheap points at the expense of the contestants. I tried to behave like a decent person and I wanted the novices to do well.

I think the interesting thing to come out of the programme was that people in the City said to me "Finally my partner understands what I do during the day, and how much stress I have." People who have never traded before said "Wow, that's a pretty tough job. How do people deal with it?" It gave a realistic insight into what trading is about.

Paul: That's good, and can I ask you how the BBC approached you, or how else did it start?

Lex: It was my idea. I'd been thinking about it for many years because I must admit I enjoy watching reality TV. I am sure I wasn’t the only one thinking about how to make a programme about trading, but to actually make it happen is the difficult thing. It's the same with trading, actually to have the persistence and stamina to see it through, that's the hard thing.

Paul: What did you learn from the experience?

Lex: I guess I learned that making TV is not an easy thing. I understand why nobody has tried to do this before. It is very hard to do. And I also learned that somehow I was able to teach people who have never traded before a lot in a very short time period.

Paul: I watched it myself and I thought it was a good programme.

Lex: I know a lot of people on Trade2Win watched it as well and the reactions were amazing. It seemed most people could really relate to the program. I understand people look at the City and say "Wow, what's going on there? This doesn't make sense" and I agree with them. I wouldn't try to defend the City at all. It's gone totally out of control and the City is a monster and the monster needs to be controlled. That's my view.

Paul: How did Anton Kreil get involved?

Lex: Well, like I just said, I could not take the time off to make this program all by myself, so I needed to find somebody with trading experience to make sure that the novices were being looked after and taken care of for ten weeks. Most of the people I knew were working so there was no way they could take this time off either. Anton had been travelling around the world so I thought may be he would fancy this. I called him and we went through a process with the BBC and he got the job.

Paul: What advice would you give to somebody who wants to become involved in the industry that you're in?

Lex: First of all, be very careful what you wish for. Trading for a living is clearly very stressful and only a few succeed. If you do want to get into it at all you have to be prepared and work hard and work smart. Also if you do any courses you have to be very careful about which ones you choose and which people you listen to. There are some very high quality honest educators out there who want you to be successful but there are many other people out there who think they can make a quick buck by pretending to be successful themselves and promising to teach you their ‘secret’ insights. I think the investment and trading education market should be properly regulated.

When I was at Goldman I interviewed hundreds of people. And it was staggering to see that most people go wrong even before the first interview. They send resumes and letters with spelling mistakes or incorrect information, even a wrongly chosen word can already be the end. You have to have so much attention to detail if you want to work in this industry. People are ruthless. It's almost like your talent for trading is not even in the top five of what's important if you want to work in this industry.

Paul: What is in the top five?

Lex: Like I just said number one is attention to detail. That's really important. How can you expect to make no errors in trading if you can’t write a letter without mistakes? But you also have to be mentally tough. When things don’t go well you need to keep your head high and not fall apart. Crying is not a great thing on a trading floor. It is also important to be decisive and have killer instinct so that you can take immediate advantage of trading opportunities. There is no point in waiting for the price to show you that you idea was correct. You have to be in it to win it. Endless intellectual debates also wont make you money and that is why it is more important to listen than to talk. And you need to realise when things don’t add up. You need to be street smart, and that is why you don’t need a university degree to be a great trader, you just got to be clever. Luckily most of these skills can be taught or will come over time.

Paul: I see you have recently launched the Lex van Dam Trading Academy, can you tell me some more about this?

Lex: The UK stock market has done nothing for ten years, yet the City pays themselves huge bonuses anyway. The City clearly really understands the game of making money; what I want to do is help individual traders and investors understand that game as well so they have a chance of winning it.

Five-Step-Trading is a course on how to trade. Its aimed at beginners as well as experienced traders. It uses never seen material from Million Dollar Traders’ training program and has interviews with some of the contestants. It uses some actors to make it a really fun way to learn. It took over six months to write and film. I am really excited about it as it is totally unique in the market. Most other courses are taught by people with no credibility. They are a rip-off and sell dreams instead of preparing you for reality. Also I love meeting people and hopefully teach them something or learn more myself. The other day I was presenting to about 200 young people interested in a career in finance at a Benedix event and I found it totally inspirational; if it was possible I would love to spend time with every single one of them. May be you need to have a natural curiosity about people to be a good trader.

Paul: Is this a DVD course or is it a seminar?

Lex: The Lex van Dam Trading Academy is both an online academy and a normal academy. It is starting off with online modules with accompanying physical seminars. It's called "Five-Step-Trading". Even though it focuses on stocks it is also very useful for people who trade FX or indexes.

The first step in Five-Step-Trading is how to generate a stock idea. Most people trade stocks based on rumours or on what their friends say. If it goes right that's fine but often it goes wrong. When they start losing money people don't know if they should hold onto a position or not. It is much better to actually develop your own trading ideas and I teach how to do that.

The second step is company analysis. Let's say you find a good stock idea. Then you need to check and find out a bit about the company you invest in. There are lots of people who read a superficial story and say "fine, I'm going to buy this stock," without doing any background research. I teach that before you buy a stock there are five things you should definitely know about the company. The course explains which ones. It is a bit of work, but it will give you confidence to weather a storm and avoid you running around like a headless chicken when bad news comes out.

The third step is that once you have a great idea and the company looks fundamentally like a good company you still need to make sure your timing is good. Let's say the stock has already gone up 40% in the last three days. Then maybe you've missed it and you should wait a bit.

The fourth module is the psychological part which may be the main difficulty in trading. You need to make sure that you don't invest too much when you are tired and not trading well. Trading psychologist Steve Ward is involved here as well and it’s a great module.

The fifth module is all about controlling your risk. Even when you have just found the most amazing idea ever you still should not put all your money in it.

I'm teaching how to build your own portfolio that you don’t need to immediately liquidate when the stocks go down a little, because you have done your homework. Seems a much better idea than continuously panicking and overtrading.

Five-Step-Trading focuses on stocks and I know a lot of people trade currencies and indexes and not so much individual stocks. It seems that everybody is trying to race cars, but very few people have taken driving lessons. Even If you only trade FX or indexes, you need to go back to basics first. Then you can have some fun and trade more interesting higher octane products.

So my view is that every trader has to understand the stock market and longer term investing and what drives markets first before trading FX and indexes. Currently a lot of people trade all day long based on one moving average crossing another one and they end up making little money, if at all, and build no real know-how. I am focussing on transferring knowledge. There are no short-cuts here if you want to make money long-term.

Other people I want to reach out to are people who have portfolios that are being managed by outside "experts" who charge a few percent every year and all they do is lose money for them. I'm saying you have to invest in your own future. You have to learn, and you have to start with the basics.

Paul: When you say stocks are you talking about UK or US stocks?

Lex: Many UK stocks are global businesses anyway so that when you only look at UK stocks you need to know about what’s going on outside the UK in any case. I trade stocks globally and I think everybody should. These days it can be very easy to buy global stocks.

I'm not recommending certain stocks, like stock A or stock B because there are a million people doing that. Maybe sometimes I'm right and sometimes I'm wrong. I'm not selling myself as the greatest stock picker in the world. I'm selling myself as someone who knows how to run money and who wants to help other people run money as well.

Paul: How about Anton Kreil, are you working with him on your current project?

Lex: No, this has nothing to do with him. Anton has his own unique style and so do I so it seemed better to each do our own thing. There was an article the other day in a newspaper about us going head to head but I don’t see it like that. The market is big enough for the two of us.

Paul: Is there anything else you'd like to add?

Lex: I think I'd like to say that I don’t have a high-spending life style. I would rather spend my time doing what I enjoy and helping people than worrying about more and more money. Also if you think about it when I did the TV programme it wasn’t for money either. Unless you devise a format for something like The X Factor it won’t make you much money. And making the programme itself had a lot of downsides for me as well, but in the end I felt it was really important that people actually got to see what goes on in the City. At the time, people were blaming the City for a lot of things, and what I was trying to show is that for the individual people who trade on a day-to-day basis, it's a really hard job. Nothing more and nothing less.

Finally, the message of my Trading Academy is that you have to be smart about what you do with your money because money is a scarce commodity. Protect what you have, be clever about it and be responsible.

More details can be found at the Lex van Dam Trading Academy
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I read the book not long ago and it offers the rookie an eye opener to basic stock trading/portfolio management principles. It's not something I have much experience in, as I specifically focus on market making WTI, Brent and Gasoil, so for me it a decent read. Not promoting any thing here people, but considering the guy worked at Goldman and works at a good hedge fund he's probably not bad.

I am curious though, what other courses have people liked? Anyone been to a course that was genuinely real/useful by the 'Legendary Member' standards on this forum?

Online Trading Academy gets generally good reviews
Online Trading Academy gets generally good reviews

Thanks for your prompt reply. It looks a bit similar to Knowledge to Action/Trader University no? :( . Anyway I shall search a little deeper on the relevant discussion forums. Thank you again.
I think what did it for me was that when one of the girls was feeling sick he told her to boke in a bucket beside her desk. What a tool.