The New Market Wizards: Conversations with America’s Top Traders
Jack Schwager, 1992
Why does one person have a good system but no money, while another has both? Jack Schwager interviewed people who have made money in the markets for years, and their answers barely concern formulas. You will learn how to find your edge, how much to stake on one idea, how to survive a serious blow, and why a comfortable decision often turns out to be a mistake.
Who it is for
For anyone trading in the markets or considering it who wants to understand what distinguishes people who stay in the game for years. And for anyone who must make financial decisions under emotional pressure.
If you trade for emotional satisfaction, losing is inevitable: what feels good often turns out to be wrong.
The secret missing from the charts
Imagine someone with everything needed for trading: a carefully designed system, fresh news, precise charts. He knows where to buy and sell. Yet he still loses money. When an idea seems right, he stakes too much on it. After two setbacks, he abandons the plan. The trades that bring the most joy later turn out to be the worst.
Jack Schwager spent years studying financial markets and asking people who consistently make money in them the same question: what do you do differently? His first interview collection, Market Wizards, appeared in 1989. In 1992 came a second, with new interviewees. They included a currency trader at a large bank, a mathematician, an engineer, a manager of George Soros’s fund, and a floor trader.
The answers were unexpected. Almost nobody spoke of a magical formula. Their methods varied widely, yet the same questions kept recurring. How do you understand your edge, and how much should you stake on one idea? How do you survive a serious blow and remain in the game? And how do you keep your own emotions from making decisions for you?
This book contains six such stories. A student who lost a quarter of a million dollars on one trade. A skeptic who wanted to prove there were no market patterns. A mathematician who explains why a comfortable decision is often a mistake. And a fund manager told that a billion-dollar position was too small. Let us start with the skeptic.
The skeptic who wanted to prove the market was random
Gil Blake studied at Wharton, one of America’s best-known business schools. There he learned about random walk theory and believed it. The theory says that market prices change unpredictably: tomorrow’s movement is independent of yesterday’s, just as the next coin toss is independent of the last. If so, searching for patterns in the market is pointless.
One day, a friend showed Blake figures for funds investing in municipal bonds and asked his opinion. Blake noticed a recurring pattern. He thought it was coincidence and seriously set out to test the data to prove it. The test revealed the opposite of what he expected: there really was something nonrandom about price behavior.
His method grew from that discovery. Blake trades through mutual funds, which pool money from thousands of investors. When conditions look unfavorable, he moves money into a money market fund, which is almost indistinguishable from cash. When he sees an opportunity, he selects the sector funds, investing in a single industry, that look strongest that day. Schwager especially emphasizes the consistency of his results: losing months were rare for Blake.
What matters in this story is the route to the discovery rather than the discovery alone. Blake accepted neither his former theory nor the new pattern on faith. He tried to break the pattern. A market edge is something that has survived an honest attempt to disprove it. So Blake understands why his method works and can stay with it when the market becomes frightening.
It resembles an online recipe. A beautiful cake photograph guarantees nothing. A cook who has baked it ten times, changing one condition each time, knows why the cake succeeds. Someone who simply trusts the photo discovers the truth only on the day of the celebration.
A common mistake is to adopt someone else’s system or advice wholesale and stake money on it immediately. Blake’s story suggests a simpler, duller step: before investing, formulate your idea as a rule and test it against past data. Test it as though you wanted to prove the idea does not work. If it survives, you will have something to rely on. If not, you will save money.
There is a second half to the lesson. A discovered edge belongs to the person who tested it. Those who have tested their methods know the conditions in which those methods are weak and are less frightened by a bad week. Someone who takes another person’s system on faith sees any loss as evidence the system is broken and abandons it at the worst moment.
About the author
Jack Schwager is an American futures-market analyst and fund manager. He is known for his Market Wizards series of interviews with highly successful traders.
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