Hedge Fund Market Wizards: How Winning Traders Win
Jack D. Schwager, 2012
The world’s best managers are often wrong and still earn more than almost everyone else. Jack Schwager asked them about failures, fears and rules that survived the 2008 crisis. This book shows that their strength lies not in forecasts but in how they place bets, manage risk and change with the market.
Who it is for
For anyone who invests money or is thinking about starting. And for anyone who has to make decisions without knowing how things will turn out.
When they were losing, they kept looking for that one trade that would win everything back at once. I learned early that you cannot do that.
Why the best are wrong and still win
Imagine someone who manages billions of dollars of other people’s money. Surely he knows where the market will go tomorrow. He has the best analysts, the fastest data and years of experience. But ask him and the answer will surprise you. He does not know. He is often wrong. And he still earns more than almost everyone else, year after year.
Jack Schwager has spent years talking to people like this. He published his first book of interviews with great traders in 1989. In 2012, after the 2008 crisis, he turned to a new generation: hedge fund managers. A hedge fund is a private fund for wealthy clients that can profit from falling prices as well as rising ones. Schwager asked his interviewees not only about their best trades but also about their failures, fears and mistakes.
The book’s central idea sounds unfamiliar. These people’s advantage is not an ability to predict. It is the way they place bets. They look for situations in which risk has been mispriced. They control losses every day, as routinely as brushing their teeth. And they change when the market changes. All of these are skills, not gifts of foresight.
Six stories lie ahead. You will meet a manager who does not predict the weather and another who bets a little to win a lot. You will meet a mathematician who beat casinos and a trader who was fired again and again. There is also a former stereo installer and an investor whose method works precisely because it sometimes does not. Even if stock markets seem far removed from your life, their lessons can help anyone who has to decide without knowing how things will turn out. Let’s begin.
Do not predict the weather. Notice when it starts raining.
Colm O’Shea trades global markets: currencies, bonds and interest rates. This style is global macro trading. The bet is not on a single company but on how entire economies behave. You might think forecasting decides everything in this business. O’Shea disagrees.
From 2005 to 2007, many people were anxious. Market risks were high, and predicting that everything would soon collapse sounded reasonable. But O’Shea kept betting on rising prices because the market was rising. Knowing that a risk is large does not mean knowing when it will materialize. Someone who bets on a fall too early can keep losing money for a long time while remaining right in theory.
The turning point came in August 2007. The LIBOR rate, at which major banks lend to one another, jumped sharply. This meant the banks had stopped trusting each other. For O’Shea, this was no longer a forecast but a fact. He switched to betting on a decline. There are always plenty of forecasts of a crisis. Many come true much later or never come true at all. The sharp jump in LIBOR was visible to anyone paying attention.
Schwager’s original chapter about him is called “Knowing When It’s Raining.” You do not need to predict the weather. You just need to notice the first drops and stop pretending they are not there. Someone who spends a week arguing with the weather forecast will get just as wet as someone who ignored it. The person who opens an umbrella when the rain starts will stay dry.
For O’Shea, every idea is a hypothesis rather than a conviction. Before entering a trade, he knows which event would show that the hypothesis is wrong. You want to defend a conviction. A hypothesis is easier to discard.
He has another observation. Meet a trader with rigid rules again ten years later and you will find that he has broken them. Not out of weakness, but because the world changed and the rules that worked back then became outdated. Flexibility here is not a betrayal of yourself but a condition of survival.
What does this mean for everyday life? When making a decision about money, work or investments, separate forecasts from observations. A forecast is what you think will happen. An observation is what is already happening. Name a sign in advance that will tell you the situation has changed and it is time to change your decision.
About the author
Jack Schwager is an American financial analyst and fund manager. He is the author of the celebrated series of interviews with great traders that he began in 1989.
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