Jack Schwager Market Wizards Seminar Review

Over the last weekend, Jack Schwager, author of the very famous Market Wizards books, was here in Singapore to conduct a series of seminars. I had the opportunity to attend one of the sessions and would be sharing here some of the ideas that Jack spoke about.

For those who do not know, Jack interviewed numerous successful traders and compiled them into a few books. These books are excellent reading for those who dabble into trading as it gives you an insight of a wide variety of traders. What worked for them, the mistakes they made, etc.

There’s more material in these books than anyone can teach you in a 3-day seminar and you would probably be able to learn something by rereading the books over and over again at various stages of your trading journey.

Market Wizards: Interviews with Top Traders

The New Market Wizards: Conversations with America’s Top Traders (Wiley Trading)

Hedge Fund Market Wizards (His latest book)

During the seminar, Jack D. Schwager shared with us various tenets of trading that he had picked up from all the interviews he had done over the years. He was extremely familiar with the subject matter, and could back up all his ideas with concrete examples without missing a beat. He handled questions the same way. This made the entire session very stimulating and engaging.

I managed to take down a lot of notes from barely two hours of sharing, so this post will be quite long. Enjoy!

No Secret Formula

There is no holy grail and single true path to help you succeed in trading. Consider two traders who use completely different methods, Jim Rogers and Martin Schwartz.

Jim Rogers is a macro (long term) fundamentalist. Back when he was interviewed in the 1980s, he could forecast (correctly) the trend of gold and Japaneses stocks. He does not believe in charting. When asked what he thought about technical analysis, he said that he had never met a rich technician, other than those who sell their services/systems.

Martin Schwartz was formerly a fundamental analyst on Wall Street. After he become a trader, he managed to achieve an (audited) average return of 25% over a ten year period. Don’t let your jaws drop, it’s 25% a month and not 25% a year. This he did using purely technical analysis.

There were only two months that he lost money, once when he lost 2% and another when he lost 3%. However, Martin always took his profits and invested into treasury bills, so you do not see an astronomical compounding of returns.

Martin Schwartz had this to say about fundamental investing : “What a stupid idea it is. I spent ten years as a fundamental investor and lost money every year. I got rich as a technician.”

If you can make money using vastly different ways, it should tell you that there is no single true path to money making. You can money as a technician, as a fundamentalist or a combination of both.

It’s not about finding a secret. It’s about finding a style that suits your personality.

It’s also the reason why buying a trading system won’t work. 99% of people who buy a black box trading systems will lose money. You don’t really know what makes them work and whether it suits you. Every trading system will eventually encounter some bad patch and when that happens, most people will simply abandon it.

The Idea of Edge

The idea that even a poor system will make you money with proper money management is wrong.

If you don’t find an edge, by definition you can’t make money.

What’s the strategy that would give you the highest chance of making money in a casino?

Make one bet on red or black at the roulette wheel and then walk away. Your odds are slightly less than 50% but it’s the highest chance you have. As the casino have the edge, the more you bet, the lower the probability of you making money.

If you don’t have an edge, the highest chance of making the most money is to bet it all at once and then go away.

On the other hand, if your system has an edge, the reverse is true. you want to make many small bets. Proper management will help you be profitable in the long run.

Succeeding in Trading

Everyone who succeeded had a very specific methodology and not some murky approach.

Hard work is a common denominator among all the successful traders. Some of the market wizards were hardworking to the point of being obsessive.

[important]Many people are attracted to trading because they think that it is an easy way to make money. The irony is that the ones who actually succeed are people who put in the most amount of work.[/important]

No sane person will go to a bookstore, buy a medical book on brain surgery, read it over the weekend, and then wake up on Monday morning thinking he can perform a brain surgery.

Yet many people will think they can read a book or attend a 3-day seminar and then be able to trade profitably and beat the professionals.

Why is there such a paradox in this thinking? There is a reason for this.

Trading is the only profession in the world where the amateur has a 50-50 chance of getting it right. Because there are only two things you can do – buy or sell.

So, even if you have no idea what you are doing, you might be able to make money. And it happens all the time. Many people make money in a bull market and mistake it as their brilliance.

[important]Trading is tricky because it can fool people into thinking that they have the skill when they don’t. [/important]

Good Trading is Effortless

This might sound contradictory because I just told you earlier that it involves a lot of hard work .There is a difference.

The hard work is in the preparation, but the actual execution and process should be effortless.

Consider an unfit runner trying to run 2.4km under ten minutes. He will find it extremely tiring and almost impossible to do it.

On the other hand, a professional runner would find it effortless to do that actual run. The hard work has already been done in the hours and hours of training.

When you are doing archery, if there is any effort, force, strain or struggle, it’s probably wrong.

In trading, there are times when things just don’t work. And you can’t work harder or force it during the trade. You just have to walk away.

Risk Control & Money Management

There are many books written on risk control but to sum it up in a single sentence, it is to know what is the maximum you can lose in every single trade.

You must know your exit points in every trade. This must be determined before you enter any trade. Once you enter a trade, you lose your objectivity.

Risk management should be determined by how much the market disproves your theory, not by how much pain you’re willing to stand.

Make your decision where the markets should not go (if you are right) before you enter the trade. If the market hits that point, you will know it is time to get out because your call was wrong. Then determine your position size based on that price.

A mistake would be to determine your exit point in the reverse way – by deciding how much you can lose in each trade, then work out the exit price based on that.

This is a very successful hedge fund (made up of individual traders) that has an average mid-tenths returns but has a worst maximum draw-down of less than 5%.

The money management rule given to these traders is that if they lose 3% of their capital in any year, half their capital will be taken away from them. If they lose another 3%, they are out of business. This forces them to trade very conservatively in the start of every year to avoid that 3% loss. However, once they are profitable, they are able to take on more risk to get higher returns.

Discipline and Patience

If you ever drop your discipline, the markets will get you. Jack Schwager went on to give an example of a trader who had a lapse of discipline and lost $7 million in a single trade.

Music is the space between notes, successful trading is the space between the trades.

There is the plain fool who does wrong all the time and there is the Wall Street fool who thinks he must trade all the time. Have the patience to wait until it is so obvious its like picking money off the floor. Wait for the right opportunity.

It was never the thinking that made me the money, it was my sitting. When I was right, I stayed with the position.

Independence and Confidence

Good traders are independent and don’t follow other people’s opinions, no matter how smart they might be.

If you put two traders together, you will end up getting the worse of the two.

Good traders also have this element of self-confidence (not necessary ego).

Paul Tudor Jones keeps 85% of his money in his own (futures trading) fund because he feels it’s the safest place.

Losing is Part of the Game

Good traders understand that losing is part of the game and are able to take losses.

[important]The need not to be wrong is why many people lose money.[/important]

If you try to avoid losses, it will guarantee you lose money.

Don’t trade beyond your comfort level or fear will dominate your decisions.

No Loyalty in Trading

You can be loyal with your friends, family and pets but not for trading.

A good trader must be able to abandon his trade idea (and even take the reverse position) as soon as his trade call starts going against him.

No loyalty and no hoping for the position to become better.

Risk and Volatility

Risk and volatility are not the same and should not be used interchangeably.

You can have a risky strategy with low volatility and low risk strategy with high volatility.

Consider an options selling (naked) strategy. The equity curve will show a steady increase over time. You might be fooled into thinking it is a low risk strategy because of the low volatility. But when the blowout occurs, the portfolio can suffer a huge loss.

The Losing Trade Dilemma

When unsure what to do in a losing trade, cut the position in half. This has a psychological effect because it commits you to be “wrong” no matter what direction the market takes after this. You will not be able to “hope” to be right anymore.

I’m going to list out some of the other points that were covered by Jack Schwager:

Mistakes provide a path to improvement. Keep a trading log and learn from mistakes.
Don’t trade to meet a profit target.
Systems that work on many markets are stronger and more robust. If it only works on one market, it might be over-fitted.
Betting more on high probability hands can transform even negative edge.
Options prices assume equal probability of prices going up or down. Identifying when this is wrong can lead to opportunities. Adopting a long only or short only options strategy all the time is not likely to work.
One under-appreciated reason for avoiding large losses. It might mentally impede the trader and result in missing a good subsequent trade.
Do more of what works and less of what doesn’t.
Mindset of a good trader. Flexible and no loyalty.

The next segment covers some of the questions asked by the audience.

Is Trading an Art or a Science?

It is a bit of both but is probably more art.

Two person looking at the same set of data and information can come to vastly different conclusions. You can have 100 different facts but choosing which one to use is an art.

Of Trading Intuition and whether it can be Trained From Young

Interestingly, many of the market wizards had a keen interest in trading or something related even when they are very young.

It’s not everyone but it’s a much larger percentage than the general population.

There’s nothing mystical about intuition. Intuition is experience, you’ve seen the same thing over and over. You’ve got a feeling that the market is going to go up, you don’t know why, but something in your experience and memory at a subconscious level triggers your intuition.

Contrarian Investing

As a broad principle, buying when there’s fear and selling when there’s greed works.

However, you have to pair it with risk control.

It’s not so dangerous when you are buying, but if you are shorting, a stock can go up much higher and longer than you expect. A perfect example is the technology bubble.

Overall, I felt that the sharing by Jack Schwager was excellent. A pity we run out of time and Jack could not cover all the material that he wanted to. The organizers should have extended the session!

I have decided to go back to re-reading his books.