On being right Michel Pireu     | Business Day Tuesday, October 23, 2018
From insecurityanalysis.com

The year 1987 made Paul Tudor Jones famous as the man who had predicted the crash. Jones had started his firm Tudor Investment Corp. three years earlier after years as a commodity pit trader. In the summer of 1987, he was profiled by Barron’s and discussed his bearish outlook on the U.S. stock market. Jones thesis rested on two key ideas. First, Jones used an “analogue model” that his research director Peter Borish had developed. The model was an overlay chart of the stock markets of the 1920’s and the 1980’s and showed an “astonishingly robust” correlation. Jones also pointed to a chart showing the Dow Jones Industrial’s deviation from its trend. Prior spikes had occurred in 1836, 1929, and 1966 - all followed by bear markets. He observed that there was exuberance in other markets (for example, in fine art), and noted some troubling debt and economic statistics.

“I feel that you have to start getting short now because the panic, when it comes, will be so violent and sudden that the longs won’t be able to get out nor the shorts get aboard,” Jones said in June 1987.

In the Barron article, Peter Borish admitted to “fudging the exercise somewhat by juggling the starting periods”. Nevertheless, the bearish outlook paid in spades on October 19.

On the day of the crash, Jones covered his short position and went long bonds, expecting the Fed to ease financial conditions.

That month he made 62%.

“I believe the very best money is made at the market turns,” says Jones. “Everyone says you get killed trying to pick tops and bottoms and you make all your money playing the trend in the middle. Well for years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.”
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