'Hedge Fund Market Wizards - How Winning Traders Win' - Interview with Jack Schwager author of the Market Wizard's books.

Interview by Steven Goldstein

This week sees the publication of ‘Hedge Fund Market Wizards - How Winning Traders Win’, the long-awaited addition to the brilliant and hugely influential 'Market Wizards' series of books written by Jack Schwager.

There are few traders around today who have not read or are not familiar with the 'Market Wizards' series in which Schwager carries out in-depth interviews with some of the world's top traders.  

The original 'Market Wizards' was first published in 1989 and took the financial markets by storm. ‘The New Market Wizards’ published in 1992, and the ‘Stock Market Wizards’ in 2001 followed, adding depth to Schwager's original book. The interviews provided a fascinating mixture of insights, thoughts, anecdotes and perspectives about the trading careers of a number the world top traders from various fields within trading and money management. It captured the mood of the time; the late 1980s was the time of the ‘Liar’s Poker’, the Stock Market Crash and Tom Wolfe’s 'Bonfire of the Vanities'. The traders of the day were regarded as aloof untouchable ‘Masters of the Universe’ who seemed to have the midas touch, they were people who seemed different and distant from the rest of us. The beauty of Schwager’s work was his ability to present these traders as real people, like the rest of us, with the same insecurities and fears, prone to the same errors and foibles, and facing the same adversities and common enemies as the rest of us - ourselves.

Today, I have the opportunity to turn the tables on Jack Schwager. Jack has very kindly agreed to play the part of interviewee for the ‘Trader, Trading & Risk Psychology Blog’.  

SG - Jack a lot of water has flowed under the bridge in the 20+ or so years since ‘The Market Wizards’ and ‘The New Market Wizards’. What significant changes in attitudes or philosophies around trading have you noticed? And if so what do you think has been the most startling difference between working on the original interviews and the latest set of interviews?

JS- The original Market Wizards was written nearly 25 years ago. Certainly, the markets have undergone many changes since then. However, the process and experience of working on Hedge Fund Market Wizards was really quite similar to that of the original Market Wizards. Of course, there are differences, but these differences are primarily a consequence interviewing a different set of traders rather than changes in the markets. Some of the lessons that come out of Hedge Fund Market Wizards are similar to those in the original Market Wizard books, but others provide new insights. The so-called “new” lessons are not new in the sense of emanating from changes in the markets, but are simply a consequence of additional perspectives provided by a different group of traders.

SG - In terms of the interviews, attitudes and perspectives expressed in the new book versus the original books, has there been anything which has remained pretty constant and in particular which has surprised you?

JS - There has definitely been a constancy in many of the underlying common denominators in trading success. I could easily name 20 or more of these. I will just offer one as an illustration: Flexibility. In Hedge Fund Market Wizards, as well as the original Market Wizard books, there are clear examples of how flexibility—the ability of a trader to completely reverse a market view—was instrumental to success and sometimes turned potential disaster into profits. I was hardly surprised that these traits remained constant. In fact, I would have been quite surprised if they had changed.

SG - How would you say the current breed of Traders and Money Managers compare to the original Market Wizards? 

JS - The traders in Hedge Fund Market Wizards are quite different from the traders in Market Wizards and New Market Wizards. The traders in the new book, however, are also strikingly different from each other. What I am saying is that the differences are not due to changes over time, but rather are a reflection of a different group of people being interviewed. One of the traders interviewed in the new book, Ed Thorp, actually began trading before many of the traders in the original Market Wizards, and he could just as easily have been included in the original book.

SG - How difficult was it to write a fourth copy of the book, considering the successes of the previous versions? Was there any pressure to come up with something slightly different, and were you careful not to deviate too far from a successful formula? 

JS - I could see why at first glance it might seem difficult to do a fourth book focused on trader interviews without an element of replication. It turns out, however, that this is not a problem because each of the traders is a very different personality, has a different story, and uses a completely different trading approach. If you like classical music and have a collection of symphonies from a number of different composers, you would probably still be interested in listening to symphonies of other composers and not find it at all repetitive. As for the format, I very definitely stayed exactly with the original format, which I have found works very well—namely, a narrative introduction, a conversation core, and a concluding section highlighting what I personally thought were the essential lessons and insights provided by the trader.

SG - Almost every trader I know at one stage or another has read at least one of your earlier books: As a performance coach working with traders in banks, hedge funds and proprietary trading firms, I find that many of my clients regularly quote or refer to some aspect of one of your books. What is it about your books which you think so captured the interest and attention of traders and money managers and continues to this day to stand the test of time? 

JS - The truth. Markets are always changing, but certain essential concepts and principles remain the same. This element of stability probably emanates from the fact that markets reflect human nature and human nature doesn't change. The comments of the traders I interviewed nearly 25 years ago remain entirely relevant today, despite the market changes in the interim, because the elements that made them successful as traders are still applicable today. The fact that traders today still find the older interviews insightful is a testament to a certain constancy in basic principles that delineate successful and unsuccessful traders.

SG - I notice that the foreword to the books is by Ed Seykota. There is one comment of Ed’s from the original book which stands out in my mind and I believe the minds of many others; ‘Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money’. This quote has been debated many times over, would you be able to shed some light on what you think Ed meant by this. 

JS -Yes, I love that quote. I too was quite surprised when Ed said it, and I remember asking him, “Do you literally mean that people who lose, want to lose?” And, Ed answered by repeating the quote, “Everyone gets what they want out of market.” And, indeed he meant that, at some level, losing traders were fulfilling some other need. I will give you a personal example that while not about trading is nonetheless a perfect illustration of Ed's basic premise. My daughter was a very good ice hockey goalie—good enough to be the starting goalie at the collegiate level in her freshman year. However, while she loved playing hockey, the intense pressure of being a goalie at the collegiate level and the all-consuming nature of playing college sports began to drain some of the enjoyment out of the sport for her and also interfered with the pursuit of other interests. In her sophomore year, she wasn't as good as in her freshman year, even though logically her capabilities were probably even better. I remember thinking about Ed's comment when watching my daughter play that year—even though she wanted to excel and tried her best, I believe that, at some level, she didn't want to continue playing college hockey, and that is what she got.

SG - I am sure there are many fine interviews and quotes and comments in this new book, would you be able to provide any teasers for us or interesting insights from some of your interviewees?

JS - There are many such quotes. One quote I particularly like that has an Ed Seykota-like ring to it is the advice that Steve Clark gives to the traders in his organization: “Do more of what works and less of what doesn't.” Although this may sound like obvious advice, Steve's point is that he has seen many traders go wrong precisely because they stray from this common sense guideline. It is quite common for traders to be good at one type of trade and then do other types of trades because they get bored waiting for their opportunity. I'll give you one more example of a quote I particularly like. This quote, which was a comment made by Colm O’Shea, offered an insightful perspective of how some traders go wrong in applying money management: “Traders often make the mistake of choosing stops as pain thresholds rather than price levels that disprove the trade.” Of course, I could go on and on.

SG - My own take from the original books were that they were more about the philosophy, psychology and attitude of trading and risk than about trading advice and recommendations. Many of the questions you asked seemed to open up the minds of the people being interviewed and enabled the readers to learn from those who have ‘walked the walked’. How easy or difficult did you find this process considering you were probably interviewing some of the most secretive, discrete and guarded players in the financial markets? 


 JS - Judging by reader reviews and direct feedback, the vast majority of readers find the advice in the Market Wizard books very helpful. In fact, I can't tell you how many professional managers have told me that these books were instrumental in their careers. There are, however, a minority of readers who are disappointed that the advice in the books is not more specific. It is as if they were expecting the book to provide some precise formula that would signal trades that they could follow, which would lead to financial success. Besides being unrealistic, such expectations reflect a naïveté about markets and trading success.

Although most of the advice could be termed “general,” it can nonetheless be very helpful in specific trading situations. I will give you one personal example. Last summer, I had been scaling into the short side of equity indexes in the belief that the market was overextended and vulnerable to a slide. Then an unemployment report was released that was unquestioningly bearish. It was so negative that commentators couldn't even pick out one element of it that was a mitigating factor, as they usually do. As expected, the equity market sold off. I thought I was perfectly positioned. But then, as the day progressed, the market started rebounding, and by the close, which was also the close for the week, prices had recovered within striking distance of their highs. I thought this was terrible price action for my position. Over the weekend, I decided that given this action, I would have to cover most of my short position. On Sunday evening, however, prices were actually weaker. I very clearly recalled Marty Schwartz's advice that if you are very worried about a position, particularly over the weekend, and then the market lets you off the hook easily, don't get out. Because of this advice, I stayed with the position, except for covering a token amount after the market sold off a bit, and prices subsequently broke sharply. Now you can certainly call Schwartz's advice “general,” but this didn't keep it from being very useful to me in a specific trading situation.

Getting highly successful traders who are naturally secretive about what they are doing to share information that could be useful to other traders is certainly one of my big challenges. I don't foolishly ask for obviously proprietary information, but I do press to get practical advice as close as I can get to the proprietary threshold. Even though, for obvious reasons, the traders I interview don't share the proprietary elements of their strategy, they still provide important insights. For example, Ray Dalio, the founder of Bridgewater, the world's largest hedge fund, is obviously not going to share the details of his firm’s fundamentally based system. However, Dalio did share specific insights about how he believes the markets work. One example was the concept that fundamental variables behave very differently in different market environments. The same fundamental statistic may have very different implications in a deleveraging bear market than in a recessionary bear market. This observation implies that you cannot build a one-size-fit-all fundamental model that will work across different types of markets. If you are a fundamentally oriented trader, this insight is important information.

As another example, Jamie Mai, the portfolio manager for Cornwall Capital, provides many specific examples of situations in which in his view options are mispriced. He was initially reluctant to allow me to use a number of these examples. I ultimately convinced him to allow this information to be included in the chapter based on the following line of reasoning. I said, “Jamie, arbitrageurs are always going to keep option prices approximately in line with their theoretical levels. Do you really believe that your talking about these trading opportunities is going to change the way options are priced?” He agreed with the logic that talking about these trading opportunities was not going to prevent these opportunities from recurring in the future. Even though this chapter does not contain specific trade recommendations, which would quickly become obsolete anyway, it does contain specific information that can be used by traders to look for trading opportunities.

Ironically, the interviews sometimes contain very specific information, but in this case, the point of this information is to illustrate general principles, not to offer a trade recommendation. For example, in one of the interviews in Hedge Fund Market Wizards, Martin Taylor, the manager of the Nevsky fund, makes an extraordinarily compelling case for both being long Apple and being short Research in Motion. By the time the book was released, the price of Apple had nearly doubled and the price of Research in Motion had fallen by about 75%. Does this mean that the discussion regarding these stocks was obsolete? Of course not! The point of this discussion was never about the stocks as specific recommendations, but rather as illustrations of the type of analysis that led Taylor to reach his conclusions about these stocks.

SG - What new aspects of trading do you believe that you have learned from interviewing and putting together the Hedge Fund Wizards, and how does this add to the fantastic compendium of knowledge, thoughts, wisdoms and perspectives that are inherent in the previous three volumes of the Market Wizards? 

JS - Each set of new traders provides new insights. The specific insights that are important will vary from reader to reader. As an example of an insight that I believe affected my own trading, I will use my interview with Jimmy Balodimas, a proprietary trader. Balodimas is a highly unconventional trader who breaks virtually all the trading rules. As I caution in my conclusion to his chapter, it would be inadvisable and dangerous for most people to adopt a similar trading style. Yet there are aspects of what Balodimas does that have more general applicability. One irony is that Balodimas is often profitable even when he is wrong on the position. How can this be? The answer is that he aggressively trades around his positions, taking partial profits when the market moves in his direction and reinstating the liquidated portion of positions when the market retraces. Conducting my interviews with Balodimas helped me better appreciate the advantages and power of trading around positions. Although I did already utilize this approach before interviewing Balodimas, I believe he influenced me to increase this type of activity to positive effect.

SG - If I hear one particular recurring theme in the market these days from participants, friends and clients, it is their concern over the rise of ‘the Algos’ and how they are taking over the market and making the human task of trading so much more difficult. To what extent was this theme in the book, are these concerns about ‘the Algos’ valid in your opinion?

JS - The role of the Algos did not appear as a significant theme in Hedge Fund Market Wizards. As I recall, the only case where it did was for Larry Benedict who was the only very short-term trader I interviewed. He felt that high-frequency trading was distorting some of the relationships in the markets and made trading more difficult. But he was simply adapting to the new situation. I believe that whatever effect the Algos have is primarily a consequence for short-term traders. Moreover, like any other strategy, as market inefficiencies draw an increasing number of players seeking to profit from those inefficiencies, the edge in the approach will gradually diminish—it will be arbitraged away. Bottom line: I don't believe this factor is important in determining either the potential or methods for achieving trading success. 

SG -I want to thank you for taking the time to sit on the other side of the fence for once and be the interviewee. – I wish you all the best of luck with this book.

Steven Goldstein is a Trader Performance Coach and Trader Development Consultant. - To find out more about his work helping traders to improve performance through developing greater self-belief and confidence and overcoming self-defeating hurdles, visit Steven's business website at www.bgtedge.com.  - To find out more about his courses, seminars and trader development programmes check out 'Trader, Development and Learning' at www.traderld-edu.org.