Ray Barros talks profitable trading and risk management strategies


by Carolyn Herbert

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Transcription of interview, with expert trader, fund manager and author, Ray Barros, in Hong Kong.

Carolyn Herbert: Hello. I'm Carolyn Herbert from the Finance News Network, and I'm thrilled to be joined here in Hong Kong, by expert trader, fund manager and author Ray Barros, whose fund returned an average of 39% compounded annually over 17 years. Ray, welcome to FNN, and thanks very much for joining us.

Ray Barros: Well, thank you, Carolyn. Lovely being here.

Carolyn Herbert: Ray, you started your trading career more than two decades ago. It wasn't always a smooth journey. Can you tell us about it?

Ray Barros: Anything but smooth. Okay, I first started trading when I was at uni. I got into uni in 1966. First year, it was the Poseidon. You're probably too young to remember that. It was the Poseidon boom, and I lost all my savings in trading, so I gave that away. And I started trading again probably around 1979. My father-in-law got me down to Hong Kong, and I started trading the gold market. It was very small. Gold was trading a tight range in those days. And I thought, "God, I sell the top, buy the bottom, make a fortune."

In fact, I was supposed to be there for two weeks, and I was there for six weeks, and made enough money to buy my wife a fur coat. Kept 30 per cent, lost it all, promptly, because gold broke up, I didn't tell her that. After I bought her the fur coat, I said, "What I'd like to do is sell the legal practice and become a trader”.

So, I did that, and seven years of losses and more. I think seven-and-a-half (years). $750,000 I lost until 1987. So, that was 1980 to '87. And in 1987 I had my first winning year. Yeah. So it wasn't smooth.

Carolyn Herbert: So, Ray, was the main lesson you learned from taking all of those losses?

Ray Barros: It's hard to say, 'cause it wasn't just one lesson. But one memory stands out in my mind where I stopped blowing the account. I kept blowing up my account. "Blowing" means I lost all the capital. And I remember I'd just lost $50,000 and I went to Chrissie. Chrissie in those days was funding me. So, she'd bring money through the door, and I'd throw it out the window. And, that year, that time, I went to her and I said, "I've lost the $50,000 again, for the umpteenth time." And I said, "Just help me. Just once more. I promise. Just once more. I won't do it again." And she gave me $25,000. And I was trading the S&Ps, day-trading in those days. And S&Ps in those days usually had about a 7 or 8-point range.

Well, that Friday night it had a 3-point range. I bought every high and I sold every low, and by the time the evening was over I'd blown the $25,000. And I was sobbing, I was literally crying. I was trading in the library, and we had a two-bedroom apartment in Market Street in Sydney. And she said she heard me crying, so she knew that I'd done it again, and she didn't know whether to come in and console me, or to take a knife and chop my head off. She told me this many years later, I might add. But that was the last time I blew the account.

I think if I've learned something it's we have to be comfortable with discomfort. Because traders and human beings hate loss. Whatever we define as pain loss, losing money is one of them, we have to be comfortable with the fact that we are likely to lose money. And I think that's what causes people not to take losses quickly.

Carolyn Herbert: So from all of those losses at the beginning, how did you become profitable?

Ray Barros: Well. You pick up the lessons. You pick up the knowledge and you pick up the skill. But my first profitable year was 1987 and that was really more good luck than good management. It happen to be short black Friday. And of course Monday, markets totally collapsed so 1987 by definition turned out to be a good year. But I learnt something from there. Somewhere along the way. I started managing my risk much better. I did a course with a guy called Peter Steidlmayer, called Market Profile, that helped me a lot. And then slowly I started to understand that I am not there for the big dollars. I started making 10 and 15 and 20 per cent per annum, which is a really reasonable return.

And then my broker, in 1980, suggested to me that I should start managing funds, because that was about the only way I was going to recover the $750,000 I lost. I said, “that’s probably right”. And so I did. But I didn’t like running around going to the events, asking for CPOs (Commodity Pool Operators) for money, because they were after the established traders, we were beginners. They didn’t want to know us.

I was very lucky I had a wife who had a very wealthy family, I had a family who was well known in Hong Kong, so together we raised $20 million. And from that $20 million in 2010 when I closed the private limited hedged fund, it was $943 million. So it was good. We have a couple of years where we didn’t make too much, in fact we lost. But that was fine. People stayed with me. So that was the profitable times.

Carolyn Herbert: And what would you say is the biggest mistake that people make when either trading or investing in financial markets?

Ray Barros: Yeah, I think the biggest problem is that they don't predefine their loss. They don't exactly at what point they're going to say, "Beyond this point, I'm not going to lose any more." And I've seen so many of my friends make a lot of money and then lose it all and more because they let their loss grow out of hand. So, I think that's the biggest mistake, not knowing when to get out and how much you're prepared to lose on any single trade.

Carolyn Herbert: So, from your own experience, what do you find most challenging about trading?

Ray Barros: I think it's what I mentioned before. You have to be comfortable with the discomfort. You have to know, when you get into a trade, there is a possibility that you're going to lose money, and that if it gets to that level you have to cut the trade. And that is the most challenging thing.

As human beings, we follow pleasure, we avoid pain. We follow pleasure right? And so, when we say, "I'm going to take the pain," people find that difficult, and I find, I still find it extremely difficult. You do it because you know what the results will be if you don't, but that is difficult.

Carolyn Herbert: And what do you love most about it?

Ray Barros: Oh, you're your own man. Think about it. You set your own times. In Hong Kong we don't pay tax if you set it up properly. You can't blame anybody for your success or failure except yourself. And that's what I've been brought up to believe in.

Carolyn Herbert: And, Ray, looking at global financial markets more generally, what's your opinion on market sentiment at the moment, and how does that come into play when either investing in or trading financial markets?

Ray Barros: When you say "markets", let's talk about stocks, because I think they're going to be a driver of things to come. You've got foreign exchange and metals and so on, but stocks. I think stocks are in a precarious point, and my background here in economics is Austrian economics. And what we're seeing is there's been a lot of money that's been printed. It hasn't hit Main Street, because the Federal Reserve is actually paying interest on moneys deposited with the St Louis Fed Reserve, so they're not seeing their inflation rate go up because the money's not getting to Main Street.

When and if that money starts to get to Main Street, inflation is going to rise dramatically, and they're going to have to raise interest rates more quickly than they're anticipating.

That, I think, is the biggest single risk. So, if the stock market in the US starts to collapse, quickly, and let's say 1987 type, you're going to see the rest of the world follow. So that, I think, is the biggest challenge we're facing.

Carolyn Herbert: And finally, Ray, if you could give one piece of advice to those wanting to succeed in trading financial markets, what would that be?

Ray Barros: OK. No such thing as a free lunch. Trading is the hardest profession in the world. You have to acquire the knowledge, which means the theoretical knowledge, and then you have to apply that knowledge. And, as I said, applying that knowledge is probably more difficult than any other profession because you're fighting your emotions.

So, my advice would be, get the knowledge, get the skills, start small, be prepared to work.

Carolyn Herbert: Ray Barros, thank you very much for your insights. It's been an absolute pleasure.

Ray Barros: Thank you so much for having me, Carolyn. I really appreciate it.


Carolyn Herbert

Finance News Network
Carolyn joined FNN in August 2015 as the Head of News and also presented the Market at Midday and the Market Wrap. With more than five years of broadcast journalism experience, Carolyn has worked as a finance anchor on the Sky News Business channel and as an anchor and reporter for ABC News. She is also a qualified corporate lawyer specialising in IPOs, takeovers and mergers and acquisitions.