ENG heavy - team 5

Pavel Krejci: The

Bellhop Who Beat the

Pros (p.310)

Made by: Max L, Matthew

Who is Pavel Krejci

Pavel Krejčí is a long-only equities trader with a 14-year track record that trounces 99% plus of
long-only professional managers. His account consistently shows up in the top 10 and often top five
traders on the FundSeeder.com leaderboard, and his returns are verified by a prominent brokerage
firm. He explains his success by researching and developing a methodology, and by mid-2006, he had
more than doubled his account. Krejčí has achieved exceptional performance over the past 11-1/2
years, with an average annual compounded return of 35.0% and a maximum drawdown of only 13.2%.
His return/risk metrics are outstanding, with an adjusted Sortino ratio of 3.6, a monthly Gain to Pain
ratio of 6.7, and a daily Gain to Pain Ratio of 0.81.

He has the smallest account of anyone ever included in a Market Wizards book, and uses his trading
profits to pay for living expenses. He was interviewed during the 2020 pandemic, and the main subject
of the interview was how he was able to achieve his exceptional performance using a long-only equity
strategy.

Poll

Do you think a high level of education is necessary to become successful ?

• No

• not quite

• a little ?

• yes

Early Trading Life

Pavel was not a very good student, and his high school economics teacher told him he would never do
any job that had anything to do with economics. When he worked at a hotel, he saw many
businessmen reading The Wall Street Journal or the Financial Times and thought that trading for a
living would be a great life. In 2005, he opened a stock account and traded US stocks from the very
beginning. He lost half the money and stopped trading for a little over half a year, but saved some
money to add to the account and borrowed another $5,000 from his brother to have enough money to
place at least three day-trades a day. He developed a methodology in the interim.

Pavel was still working as a bellhop during this time, and that he used sure betting, a type of arbitrage,
to bet on both sides of a match. He also made a little money at the beginning, but when they knew
what he was doing, they kicked him out. He did it for about a year and a half until they stopped taking
his bets and closed his account.

Poll

What motivates you to invest in the stock market?

• The potential for high returns

• Diversifying my portfolio

• To grow my wealth for the long-term

Earnings Report Methodology

Pavel developed his trading methodology over one year, while still working a full-time job. He looked
for stocks that moved a lot in one day and discovered that these price moves were caused by earnings
reports. Most of their trades occur in the approximate month-long period each quarter in which most
earnings reports are released. He review his previous trades to see how he could have done better and
do those trades research manually. His job is 95% analyst and 5% trader, and He follow 200-300 stocks
that have very high daily volume. High volume is the most important characteristic. The reason for
that is, many years ago, he thought he might one day be a trader, so he switched from trading any
stock to just those stocks with high liquidity.

He does not take both long and short trades after earnings reports, only being a buyer. 80% of their
trades and 90% of their profits are in stocks in uptrends with bullish reports. Will he ever buy a stock
that has a bullish report but is in a downtrend? Yes, but such trades are infrequent.

The rationale for buying after a bullish earnings report is that the markets don't fully discount the
report at the opening and that if you time your entry correctly, there is still a profit opportunity. Some
stocks that are in downtrends and have a large short interest can be so oversold that they will have a
positive reaction, even if the earnings report is bearish.

Poll

Which factor do you consider to be the most important when selecting stocks to invest in?

• Company financials and fundamentals

• Market trends and analysis

• Recommendations from financial experts

Terminology

Long-Only Equity Strategy

●A long-only equity strategy is an investment approach that involves buying and holding stocks
with the expectation that their value will increase over time. Investors only take long positions
and avoid short selling. The goal of this strategy is to generate capital gains from the
appreciation of the stock prices over the long-term.

Multiple Choice

Which of the following best describes a Long-Only Equity Strategy

• An investment strategy that involves buying and holding only long-term stocks

• An investment strategy that involves buying and holding only short-term stocks

• An investment strategy that involves both buying and selling stocks, with a focus on short-term gains

• An investment strategy that involves buying and holding stocks, without any short-selling or options trading.

Terminology

Arbitrage

●Arbitrage refers to the practice of exploiting price differences between two or more markets to
make a profit. Traders who engage in arbitrage seek to buy an asset in one market where the
price is low and sell it in another market where the price is high. The goal of arbitrage is to
capture risk-free profits by taking advantage of inefficiencies in the market.

Multiple Choice

What is Arbitrage?

• Buying and selling the same security to take advantage of price differences

• Borrowing money to buy stocks

• Buying a stock and holding onto it for a long time

• Investing in a company to receive dividends

Terminology

Earnings Reports

●An earnings report is a quarterly or annual financial statement that provides information on a
company's financial performance. The report typically includes information such as revenue,
expenses, net income, and earnings per share. Investors use earnings reports to assess the
financial health of a company and make investment decisions based on the information
provided.

Multiple Choice

What is an Earnings Report?

• A report on the total sales of a company

• A report on the profits earned by a company

• A report on the price of a company's stock

• A report on the number of employees in a company

Terminology

High Daily Volume

●High daily volume refers to the number of shares of a stock or other security that are traded
during a single day. It is an important metric for traders and investors because it provides an
indication of the level of interest in the security. High daily volume can signal that there is
significant buying or selling pressure, which can have an impact on the stock's price.

Multiple Choice

High Daily Volume

• The amount of money a company makes in a day

• The number of shares of a company that are traded in a day

• The number of employees a company has

• The amount of debt a company has

Terminology

Uptrends & Downtrends

●Uptrends and downtrends refer to the directional movement of an asset's price over a period of
time. An uptrend occurs when the price of an asset is consistently rising, while a downtrend
occurs when the price of an asset is consistently falling. Identifying and understanding trends
is important for traders and investors who seek to make informed decisions about buying and
selling assets.

Multiple Choice

What do 'Uptrends' and 'Downtrends' refer to in financial markets?

• The increase or decrease in the prices of goods and services over time

• The rise or fall in interest rates set by the central bank

• The upward or downward movement of a security's price over a period of time

• The increase or decrease in the supply of money in circulation

Terminology

Bullish & Bearish

●Bullish and bearish are terms used to describe the sentiment of the market or a particular
asset. A bullish market is one where investors are optimistic and expect prices to rise, while a
bearish market is one where investors are pessimistic and expect prices to fall. Bullish and
bearish sentiment can be influenced by a variety of factors, including economic data, news
events, and geopolitical developments.

Multiple Choice

Which of the following statements best describes a bullish market?

• The market is experiencing a general decline in stock prices.

• The market is experiencing a general increase in stock prices.

• The market is characterized by low trading volumes.

• The market is characterized by a high level of uncertainty.

Terminology

Oversold & Overbought

●Oversold and overbought are terms used to describe the condition of an asset's price in relation
to its perceived value. An asset is said to be oversold when its price has fallen to a level that is
below its intrinsic value, while an asset is said to be overbought when its price has risen to a
level that is above its intrinsic value. Traders and investors use oversold and overbought
conditions as signals to buy or sell assets.

●Uptrends and downtrends refer to the directional movement of an asset's price over a period of
time. An uptrend occurs when the price of an asset is consistently rising, while a downtrend
occurs when the price of an asset is consistently falling. Identifying and understanding trends
is important for traders and investors who seek to make informed decisions about buying and
selling assets.

Multiple Choice

What does the term "oversold" mean in technical analysis?

• A market condition where there is excessive buying pressure

• A market condition where there is uncertainty and volatility

• A market condition where there is no buying or selling activity

• A market condition where there is excessive selling pressure

Pavel’s 4 Categories of Trade

1. stock uptrend, bullish report

2. stock uptrend, bearish report

3. stock downtrend, bullish report

4. stock downtrend, bearish report

Terminology

Shrug Off

●Shrug off is a phrasal verb that means to dismiss or disregard something
as unimportant or insignificant. It is often used to describe a person's
attitude or behavior in response to criticism or negative feedback. To
shrug off something is to show a lack of concern or interest in it.

Multiple Choice

Which of the following is the closest in meaning to the phrase "shrug off"?

• To increase

• To decrease

• To ignore

• To emphasize

Terminology

Commentaries

●Commentaries are written or spoken interpretations or explanations of a
text or event. They are often used in literature and journalism to provide
analysis and context. Commentaries can help readers or listeners to
understand the meaning and significance of a work, as well as to form
their own opinions and interpretations.

Multiple Choice

What is a commentary in literature?

• A fictional story

• A list of references used in a research paper

• A critical analysis or interpretation of a text

• A summary of the plot of a book or movie

Terminology

Stop Losses

●A stop loss is a risk management tool used by traders to limit their
potential losses. It involves placing an order to sell a security at a
predetermined price below its current market value. If the price of the
security falls to the predetermined level, the order is executed, helping to
minimize the trader's losses.

Open Ended

How do stop losses work in managing investment risk, and what are some potential benefits and drawbacks of using this strategy?

Executing The Trade

Pavel’s 90% of profits come from category 1 trades, which have the highest return-to-risk, and that the
best trades are when the general market is sideways to down, and the stock is in an uptrend and has a
bullish report. Price patterns such as uptrends versus sideways markets or downtrends, and the
ability of the stock to shrug off bearish news are also important factors in deciding whether to take a
trade after an earnings report. Additionally, the decisions of whether there is a trade depends on the
stock's minimum percentage price response to the earnings report, and he uses the same type of
analysis for all stocks. He also has a protective stop on every trade and will place it about 4% to 5%
below the entry price.

He will trade until the official opening. He will also pay attention to the commentaries and the revised
targets by the analysts following the stock, and keep a notebook of what all the analysts have said in
the past about a stock. Finally, He will wait for a pullback to get in, or get in shortly after the open.
Different stocks behave differently, when deciding where to get out, it depends on the price action. His
percentage of winning trades is 65%, and the average win is 1.5 times as large as the average loss!

Poll

How would you stay informed about the stock market and investment opportunities?

• I read financial news and analysis regularly

• I follow investment influencers and experts on social media

• I rely on recommendations from friends and family

How to Deal With Failure

The mistakes Pavel has made as a trader, are not having a stop on the trade that caused
the big loss, not being aggressive enough, and spending all the money they make on
living expenses. He also believes that any success he have had is due to their
willingness to work hard when he is losing, and that his losing periods are actually
beneficial to their future trading. Finally, he is happy with his life as a trader and is
happy fishing, taking walks in the forest, working on their garden, and trading by
himself.

Poll

How important do you think it is to have a clear trading strategy when investing in the stock market?

• Extremely important - a clear strategy is essential for success

• Somewhat important - having a strategy is helpful, but not necessary

• Not important - I prefer to rely on intuition and market trends

• I am not sure.

Overall

The most important details in this interview are that it is still possible for individual traders and
investors to succeed, despite the growth in quantification of trading in the past two decades. Krejčí, a
sole trader with no education beyond high school, no mentors, and minimal funds, has achieved
performance characteristics that far surpass those of long-only equity managers and hedge funds. He
chose trading as a career path because he sought an endeavor in which he would be responsible for
his success or failure. He also found a methodology that fit his personality, focusing on trading stocks
only on the day after earnings reports. The lesson is that to succeed in the markets, you have to find a
methodology that you are comfortable trading.

Krejčí attributes his long-term success to his strong work commitment and his restrictiveness in the
trades he places. His approach avoids the risk of holding positions overnight and places a stop on
every trade, limiting his loss on any single trade. Risk management has made it possible for him to
continue to profit from his methodology, as without stops, his percentage of winning trades would be
higher, and his returns would be about the same, but his drawdowns would be deeper.

Open Ended

What lessons can you learn from Pavel Krejci's approach to trading and how can you apply them to your own life and trading strategies?

Schwager, J. D. (2020). Pavel Krejci: The Bellhop Who Beat the Pros. In Unknown Market
Wizards - The best traders you’ve never heard of (pp. 299-311). Harriman House.

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