David Ricardo - Cut those losses. Ride those profits!

I am not the first person who will comment on David Ricardo being a great speculator, but it is good to remember that basic principles of good money management have not just been discovered recently. There are few new secrets to good money management. Our math has gotten better, and we have learned some new tricks, but the basics have been in place for centuries. As long as there has been tradable markets and volatile prices, there has been speculation that has only been successful based on simple ideas like cutting loses and riding profits. 

For David Ricardo, he had two golden rules as noted by James Grant in his book, The Great Metropolis Volume 2. 

Ricardo made his wealth through being a stockjobber or specialist mainly in government consols, bonds. He often focused on arbitrage between the cash and more liquid forward market and some view him as an early quant.

A contemporary wrote of Ricardo: “He is said to have possessed an extraordinary quickness in perceiving in the turns of the market any accidental difference which might arise between the relative price of different stocks [government bonds].” His transactions would tend to be short-term and he would “realise a small percentage upon a large sum,” typically £200 to £300 a day. He wrote a friend, “I play for small stakes, and therefore if I’m a loser I have little to regret”. from "How David Ricardo Became The Richest Economist In History" by Mark Skousen

The civil servant John Lewis Mallet, who knew him well, wrote in 1823 that Ricardo “is said to have possessed an extraordinary quickness in perceiving in the turns of the market any accidental difference which might arise between the relative price of different stocks, and to have availed himself of this advantage, by selling out of one, and buying into another stock, or vice versa.”...Mallet added that Ricardo “is also said never to have carried his stock transactions to any speculative extent; but to have always, or generally, sold out on the turn of the market, so as to realise[sic] a small percentage upon a large sum.” from ECONOMIST DAVID RICARDO — ONE OF THE MOST SUCCESSFUL QUANTS IN HISTORY by Jason Zweig

Time tested risk management and trading rules have preceded most back-testing history used for analysis. Just follow the rules of great speculators. 

Postscript -

Ricardo was not above using information to game the market. A story from Paul Samuelson recounted by the great journalist David Warsh in "Paul Samuelson's Secret" describes Ricardo's skill. (The blog post from Warsh is an interesting history of Samuelson's speculation and the development of Commodities Corp.)

The bond trader had an observer stationed near the battle. Once the outcome was clear, he galloped quickly to where a packet ship was waiting. So Ricardo in London received the early news, and conveyed it to the British government.

Then he went down to his customary chair at the Exchange – and sold! Other traders, suspecting the worst, sold too, the prices of Treasuries tumbling, until at last, Ricardo reversed course and bought and bought and made a killing, his greatest coup ever, one that put even the Rothschild brothers in the shade.

“If not illegal, an ethical purist would have to fault Ricardo for in effect profiting from his own spreading false rumors,” Samuelson wrote. “In this millennium that might be something to criticize or even to litigate.” Even so, the ploy was not unheard of in the present day, he would confide, given that new news, not yet digested, was what sent markets spinning.