Market Wizards
Jack Schwager, 1989
Why do some people make money on the markets for years while most lose? Jack Schwager asked the best traders of his time how they began, how they lost, and what forced them to change. They shared no single way of predicting prices, but they did share rules for dealing with losses and with themselves. You will discover these rules through six traders’ stories and be able to apply them to your own money.
Who it is for
For anyone who invests money or is preparing to and wants to understand why some people make money in markets for years while most lose. And for anyone who recognizes a habit of clinging to a mistake until the bitter end.
Win or lose, everyone gets what they want out of the market. Some people seem to enjoy losing, and they win by losing money.
The secret is not where to buy
Imagine buying shares that fall in price the next day. Selling hurts, because it would make the loss real, so you decide to wait until the price comes back. A week later, it falls further. Now you are waiting out of stubbornness rather than calculation. Almost everyone who has ever invested knows this story, and many people in this book have lived it.
In the late 1980s, Jack Schwager, a futures market analyst, spoke with people who had made money in markets for years rather than for one lucky season. A futures contract is an agreement to buy or sell a commodity in the future at a price agreed today. Grain, cotton, oil, and currencies are traded through such contracts. Schwager interviewed people who traded futures and currencies as well as those who invested in bonds and shares. Each described how they began, how they lost, and what forced them to change.
Something unexpected quickly emerges. These people have no common way of predicting prices. Some look only at charts; others distrust charts and read reports. Some hold a trade for days, others for years. What they share lies elsewhere: in how they handle losses and themselves.
Six stories about six traders lie ahead. Almost all of them once made a major mistake, and each drew a rule from it that can help even someone who will never trade but simply wants to handle their money sensibly. We begin with a man who lost everything more than once.
You will be wrong regularly, and that is normal
Michael Marcus entered the markets as a young man in the early 1970s, without experience or a system. He bought on other people’s advice and on instinct, with predictable results: his account ran out of money again and again. He lost everything, scraped together another small sum, and lost that too.
The turning point came when Marcus became a trader at Commodities Corporation. This company hired traders and gave them its own money to manage. There he met Ed Seykota, whom we will return to, and later called him the person to whom he most owed his trading skills. From Seykota he learned the essentials: close a losing trade quickly, and give a profitable one time.
But the most interesting part of this story is what Marcus taught others. Bruce Kovner, another of Schwager’s interviewees, recalls a lesson he learned from him early on: being wrong regularly is a normal part of the job, and there is nothing terrible about it. You make the best decision you can, and it turns out wrong. You make the next one, and miss again. Then another decision works and pays for the earlier ones.
It resembles basketball. Even the best players miss very often, and nobody leaves the court after a failed shot. A good player does not stop shooting for fear of missing. They simply make sure one miss does not cost the team the entire game.
A beginner’s mistake is treating every losing trade as a verdict on themselves. Admitting it hurts, so they hold on until the end, turning a small mistake into a big one. Marcus, who lost everything several times, learned the reverse. Being wrong is not dangerous in itself; not knowing how to be wrong cheaply is.
There is a subtle point easily missed here. Being willing to be wrong does not mean being careless. It means admitting a mistake immediately, while it is small, rather than a month later when it has become enormous. Someone afraid of making mistakes is not protected against them. They merely admit them later and pay more for them.
If you invest, treat every purchase as an attempt rather than a test of your intelligence. An attempt may fail, and that is a normal part of the job. Then you will have the strength and money for the next attempt, which may pay for all the earlier ones.
About the author
Jack Schwager is an American futures market analyst and investment manager, and the author of books on market analysis. Market Wizards was the first book in his celebrated series of interviews with great traders.
Read in Livria
