Peter Brandt – CEO, Factor LLC

Peter Brandt entered the commodity trading business in 1976 with ContiCommodity Services, a division of Continental Grain Company. From his start in the commodity industry, Peter’s goal was to trade proprietary funds; however, he first needed to learn the business. From 1976 through 1979, Peter handled large institutional accounts for Conti, including Campbell Soup Company, Oro Wheat, Godiva Chocolate, Swanson Foods, Homestake Mining, and others.

In 1980, Peter founded Factor Trading Co., Inc. In his capacity as CEO, Peter was primarily engaged in trading proprietary capital. Factor Trading also produced market research and managed the trading activities of several large institutional clients. Among Peter’s institutional trading clients was Commodities Corporation (“CC”) of Princeton, New Jersey, at the time one of the world’s largest trading houses.

In May 1995, Peter retired from full-time involvement in the commodity business to pursue not-for-profit interests. He remained inactive from the commodity trading business until January 2007 when he, once again, began trading proprietary capital.

In 2011, John Wiley and Sons published Peter’s book, Diary of a Professional Commodity Trader. The book became Amazon’s #1 ranked book on trading for 27 weeks. His first book, Trading Commodity Futures with Classical Chart Patterns, was published in 1990, and is considered a classic by many traders. In 2011, Peter was named among the 30 most influential persons in the world of finance by Barry Ritholtz’ website, The Big Picture.

1. How do you define success?
The old saying about beauty being in the eye of the beholder applies to the measurement of success in my business. My business is market speculation. I am a gambler. The most obvious answer would deal with how much money I might make, or worded in a slightly different way, what my rate-of-return will be. I get all kinds of traders who come to me wanting to work for my company, claiming huge rates-of-return. So what! ROR is not a very good measure of trading success. I dismiss out of hand young traders who tout their rate of return. ROR is meaningless.

In my own opinion, the best statistical measure of a trader’s success is the “gain-to-pain” ratio. GtPR is calculated by adding the monthly rates of return and dividing the figure by the absolute value of the sum of the negative monthly rates of return. Thus, success must be measured by comparing upside profitability to downside volatility. A GtPR above 1.0 is good, above 1.5 is excellent, and above 2.0 is world class if it covers many years. The best traders in the world have GtPRs of 2.0 and above.

By the way, the investment industry is consumed by the Sharpe ratio, which in my opinion is worthless because it penalizes upside volatility. A trader wants upside volatility—it is downside volatility that is unwanted. There is yet another measure of success that is important to me. As a discretionary trader, I constantly battle the emotional pulls of the market. Over a period of time, I can grade myself by comparing how I have traded versus how I should have traded. Experienced discretionary traders instinctively know when they are making a questionable trade. There have been years with low net profits during which I have been very proud of my trading activity. There have also been highly profitable years during which I traded like an idiot. So, I am very critical with myself and have developed a number of metrics to grade myself.

2. What is the key to success?
Again, success is relative, so the question is highly loaded. For me, success is simple. I trade long-duration classical chart patterns. In any given year, I can look back and identify in hindsight the best 10 to 20 examples of classical charting. Three questions follow:

1. First, what proportion of these “best dressed” patterns did I trade?

2. Second, how well did I trade them (following my rules on sizing and entering and exiting trades properly)?

3. Third, how many trades did I execute on patterns that in hindsight were inferior from a classical charting perspective?

I know exactly what I want in a trade, and I know how I should trade the setups I get. The key to success is improving my patience and discipline. This is a never-ending process for a discretionary trader.

3. Did you always know you would be successful?
Absolutely not. In fact, I had a Plan B in case I did not make it as a trader. I did not know if I was going to be successful. I only knew what my game plan was. I did not know if my game plan would work though. It takes three to five years for a trader to make enough mistakes to learn how to correctly trade in a manner that fits their personality and capitalization. Most traders do not make it out of this trial period. In a sense, then, it takes three to five years for traders, if they are honest with themselves, to anticipate their chance for eventual success.

4. When faced with adversity, what pushes you to keep moving forward?
Adversity is a way of life for a trader. There are good days and bad days, good weeks and bad weeks, good months and bad months, and yes, even bad years. I have had a few negative years. There are two things that can push a trader forward during adversity. The first is solid risk and money management that can contain a drawdown to under 20% of assets. Traders who go through losing periods of 30% or more of their assets will eventually tap out.

The second is to stick with sound trading principles, even when such principles are not working. Sound principles will eventually have a payoff if combined with solid risk management. Unsound principles are destined for failure. Sound trading practices would include not taking bets that are too large and trading a market in the direction of its trend.

5. What is the greatest lesson you’ve ever learned?
That I have absolutely no idea where any given market will go. I may think I know what a market is going to do, but in the final analysis, markets will do whatever they will do. A related lesson is that I must anticipate that my next trade will be a loss. This should be a trader’s default expectation.

6. What do you enjoy doing in your spare time?
Markets, markets, markets, pursuing my Christian faith beliefs, my family, and “geek” TV.

7. What makes a great leader?
Vision and self-confidence. The ability to see the sweat spot in an employee’s ability and exploit it (I mean this in the best way).

8. What advice would you give to college students about entering the workforce?
1) Understand your strengths and weaknesses. Be honest with yourself. You will be very good at certain things and very bad at certain things. Come to an early understanding of what you can do well.

2) If you are not graduating with a specialized professional skill (physician, engineer, etc.), your education is worthless. You have just bought time in your life, which is okay, but if you are a history major, a journalism major, an international business major, a philosophy major, etc., know that your future will be in some profession you cannot even imagine at the present time.

3) Do not go into the world thinking about all you can offer. The world has made it without you and will continue to make it with or without you. Instead, go into the world ready to be a student of the generation that has gone before you. Be a sponge.

4) Know that 10% of what you will learn will be truly beneficial to your future and 90% of what you learn will be worthless. Your job is to develop the discernment to recognize the 10% that will help you.

5) During your life, you will have two or three really great ideas. These great ideas, if pursued correctly, will bring you wealth in a fulfilling way. All other things you do will be just staying busy until the great ideas come.

This interview is an excerpt from Success: 30 Interviews with Entrepreneurs & Executives by Jason Navallo.