Insightful Read
The following is from adtrading.com, a favorite site, and the talk was by Jack Schwager, a favorite author:
During the SAFEX derivatives conference, Jack Schwager, the author of the best-selling Market Wizards books gave an interesting presentation live by video link (from what looked uncannily like a Boston hotel bathroom to many participants...but that's another story).
Amongst the many aspects to being a market wizard, Schwager highlighted a number of the most important. One tenet with which this Editor could not agree more was Schwager's exhortation to "Fit your methodology to your personality." Equally important is to have an edge in your trading. If you don't have an edge in your trading rationale, then you won't win. Equally, Schwager noted that almost all of the truly top traders are workaholics. The concept that a mere few hours of research will garner enormous profits is sadly mistaken. Moreover, Schwager was keen to decry the notion that even a fairly mediocre system allied to good risk management techniques will ultimately win the day. Rather, Schwager pointed to one of the folk he has interviewed for his new book, who was formerly a physicist and has now turned his hand to trading markets. Thanks to finding a chink in the Black Scholes model, he has amassed a handy fortune. That's the sort of edge which market wizards commonly possess.
In addition to having an edge, trading ought to be effortless. Here, Schwager pointed to the difference in process and preparation. A good example is between the fit person and the unfit person. While a fit person may manage five-minute miles without great difficulty, it is hard for an unfit person to manage even one 10-minute mile. While accomplishing this 10-minute mile, the unfit person will be going through much greater effort ... it's the same for market wizards. They find trading an effortless regime having mentally prepared themselves for the market's almost limitless number of scenarios.
Risk control is of course paramount to all the market wizards. Indeed, this allied with discipline is pivotal to all of their success. Schwager told the story of Randy McKay who memorably decided to make two final trades. The second was due to net him 50 million dollars and enable him to buy a ball team (baseball I think but alas all ball sports sort of strike the Editor as being the same). Anyway, the penultimate trade was the one where McKay lost his discipline... He decided he could turn his 25 million dollars into 50 million by buying the Canadian dollar. So, he went long of 6,000-7,000 contracts and waited. In the midst of all this, he was also building a house in Jamaica which required him to be on site frequently to monitor progress. Anyway, one evening, hurrying out of the office to his waiting car to take him to the airport for Jamaica, he glanced at his screen and saw that the Canadian Dollar was down 100 ticks. In a hurry, he dismissed it as a bad print and left for the airport.
Naturally, it wasn't a bad print and the next day the Canadian dollar was down another 170 ticks. It transpired that the Liberals had suddenly gained ground on the Conservatives unexpectedly in elections and by the time McKay had finally managed to cauterise the losses (apparently having to telephone from the local hotel payphones because his house under construction wasn't connected), he was poorer to the tune of seven million dollars after the Canadian dollar had endured four to five days of turmoil. So, there you have it, as Schwager notes, a disciplined trader can lose vast sums on even one little lapse of concentration: "Markets will not let you deviate from a regime of discipline."
For those who think that crowd behaviour becomes the market wizards, Schwager was emphatic about the fact that independent thinking is a central tenet of the great traders. Schwager noted wryly that "if you take two approaches and add them up, you get the worst of both of them." He recalled speaking to a wizard who used to call Schwager every couple of weeks and discuss markets. On one occasion, Schwager was resolutely short Japanese Yen until he spoke to this trader who shook JS's confidence in his position until he closed the position and instead of making money from the subsequent drop, didn't make a sou...Meanwhile, to add insult to injury, not only had Schwager rationalised his position to close it out ahead of a trip to Washington, but his correspondent had in fact subsequently gone short in line with his own very short term perspective and made about the same amount as Schwager had foregone... "Whatever you do, you have to follow your own line."
The one question which Schwager always asked of his interviewees was why they are still in business after making such a fortune... Some of the answers he found to be most revealing. In the case of Paul Tudor Jones, he stated that he had "85 per cent of his net worth in his own funds because it was the safest place for it." Monroe Trout has 95 per cent of his assets in his own fund. Truly, a remarkable belief in their own abilities...but then market wizards have implacable faith in their own capacities to profit. Schwager noted that Linda Raschke told him "it never bothers me to lose because I know I will make it right back." Poor traders try to avoid losses and in so doing, they will invariably lose money themselves, Schwager noted wryly. Indeed, in the bigger picture, Schwager notes that "the really good traders know they have won before they even start." Indeed, he also quoted Marty Schwartz who memorably remarked to Schwager that "I became a winner when I knew it was okay to lose." Alas, the rallying cry for oh so many traders is "I'll get out when I'm even." Mediocre traders hate to get it wrong and they can't face their own failings. The best traders can.
Patience is another vital prerequisite for the aspiring market wizard. Schwager quoted from Edwin Lefebvre's "Reminiscences of a Stock Operator": "There is the plain fool for all times and the investment fool who trades at all times." Jim Rodgers described it as only trading when he could see the money sitting in a pile in the corner of the room. After all, the cheetah is the world's fastest animal, yet it will wait for days for its prey, preferably something easy to catch such as a baby antelope. As Lefebvre adds: "It was never my trading that made me money, it was my sitting." Schwager also quoted analysis of maths PhD Bill Eckhard, "amateurs go broke taking large losses, professionals go broke by taking small profits."
Loyalty or rather lack of it to trades, is a key factor of all market wizards. Schwager gave the example of Stanley Druckenmiller, the man managing Quantum Fund. In 1987, on Friday October 16th, Druckenmiller was heavily net short. He took his profits and then bought these back before going net long into the weekend: "You just couldn't invent a worse mistake." Yet by the end of October, Druckenmiller had almost broken even on the month. Over the weekend preceding the crash, Druckenmiller came to the realisation he was spectacularly wrong in his viewpoint that the market would bounce. So, on the New York opening, and pretty much throughout the first hour of trading, Druckenmiller sold the market, to end up with a net short position. This was a classic example of trader's lack of loyalty according to Schwager.
Another interesting facet of the market wizards is how they will often deal with positions they know they have got wrong. For instance, Marty Schwartz, once got a position wrong in the forex market. New York is usually remarkably illiquid post the London close on a Friday afternoon. On this particular afternoon, Schwartz was significantly short of US dollars, when Mikhail Gorbachev at the UN in New York made a significant speech about arms reduction. The net result was an anticipated boon for the US dollar with the economy being strengthened by resulting defence cuts. Schwartz tried to bully the market by selling another 300 million dollars but the market just hoovered it up... Schwartz opted to sit it out over the weekend and wait for the Tokyo open. When the Japanese forex quotes first trickled through on a Sunday evening and US dollar opened a little weaker, Schwartz conspicuously failed to rush for the exit. Rather he waited all day and as the US dollar came down he eventually sold out with a fractional loss compared with his Friday evening position. The moral of the story is that if the market can really scare you with an apparent change in its fundamentals and yet there is no follow through, then there must be very powerful forces placing a cap or floor on that market's movement - i.e. smart money on your side.
Bill Eckhard has an interesting principal that human nature is so badly attuned to trading that in fact humans can naturally manage to do worse than a monkey throwing darts randomly at a dart board. This is because humans have always been conditioned and indeed have evolved, to always seek comfort while in markets this is invariably the wrong thing to do. For example, delaying getting out of a losing position is quite common as it involves putting off the pain of taking a loss. Such escalation is ultimately fatal to all traders' well being...
The final point Jack Schwager made in his presentation to the SAFEX conference was that market wizards trade because they love doing it...not because they do it to make money...
Reporting by Patrick Young |
