Review of Stock Market Wizards

The first two books in Jack Schwager’s Market Wizards series are often considered to be trading book classics. I read both soon after I first got interested in trading over five years ago. It has thus taken me a pretty long time to get around to reading the third instalment: Stock Market Wizards.

The reason for this delay is probably pretty self-evident from the title of the book. It is purely focused on successful stock market traders while I only trade the currency markets. At the end of the day though, a good trader is a good trader. The choice of markets that a trader focuses on is purely one of the many preferences that are often aligned with the trader’s personality. This means that there are still plenty of golden nuggets to be learnt from traders that ply their skills in a market that is different than the one that I focus on.

There is an eclectic mix of equity traders interviewed in Stock Market Wizards; ranging from the purely quantitative style employed by David Shaw to the intuitive, gut feel used by Steve Cohen.

Any time that I read a book of trader interviews I will often find that I resonate with certain traders while the style used by others leaves me cold. I certainly resonated with the gut feel, almost wildly discretionary approach used by Steve Cohen. This gut feel can often be gained through experience, although some people have it through innate talent. When using such a discretionary approach it is vital that your trading style matches your personality. I feel that is certainly true in my case. I have found a way to approach the currency markets that suits me. I do not find myself fighting my own trading system or second guessing the trading rules I have in place. Instead I am able to exert my energies into diligently following my trading plan. An important component of any discretionary approach is risk control and money management. Often times this means knowing when you are wrong so that you can exit unfavourable trades. Knowing when you are wrong is going to be different for each trader but often consists of either price action moving in the wrong direction, a time stop whereby if a move in your desired direction has not happened within a certain timeframe you exit the trade, or the underlying rationale for why you placed the trade no longer holds true.

Two of the more prominent observations made by Jack Schwager about all the traders interviewed in this book is their unceasing discipline in following their trading plan and the confidence that they have in themselves. Do you gain confidence after being successful for a certain length of time, or do you need to be confident to see that success come true? It’s almost a chicken or the egg dilemma. Which came first? From my point of view you need to have the confidence first. There are many things that you can be confident in that can help you on your way to consistent, profitable success. It’s almost like breaking down the whole trading challenge into simpler, baby steps. You can have an overriding confidence in your ability to see the challenge through. You can be confident that you’ll commit to learning and educating yourself at a steady pace for the foreseeable future. You can be confident in really learning who you are so that you can determine what sort of trading style will best fit you. Your confidence and success in completing these piecemeal tasks on the road to becoming a successful trader will increase the confidence that you have in your overarching goal of being a consistently profitable, standalone trader.

The interview with Ahmet Okumus also resonated with me. Ahmet Okumus is very much a dhandho investor; he buys value stocks. His approach means that he continues to hold trades that are in the red as long as the fundamentals for that trade remain in place. Okumus even details how he held trades open through a 50% unrealised loss drawdown as he was confident in his reasoning for putting on the trades. I wonder how long he would hold bitcoin if he had bought some at a good price.

Jack Schwager comments on how this approach seems to fly in the face of commonly spouted trading wisdom of cutting your losses short. How can Okumus be so successful when he does the exact opposite of what so many other great traders advise?

The apparent paradox is only illusionary. The cut your losses short mantra is effectively just a method of money management and risk control. While all successful traders must incorporate risk control into their trading strategy there are many different way to implement it. Okumus incorporates his risk control through the rigorous selection process that he goes through in picking out which stocks to buy. By doing this he is extremely confident in what he buys and knows if an adverse price moment in a stock he owns violates the rationale that was used to purchase that stock. Okumus’ selectiveness in what stocks he buys is his central means of discipline. He would rather keep his trading capital in cash rather than risk it on an opportunity that does not meet his highly selective criteria.

When I highlight some of the trader interviews and how they seemed to resonate more with me I am acutely aware that this resonance is the confirmatory bias at work. I am gravitating towards things that I already believe in to be true. In essence I’m looking to validate my current beliefs through information and comments that back up those beliefs.

Knowing this I also have to consciously step outside my box and be open to completely contradictory information or viewpoints. I have to be open to continually questioning what I currently hold to be true. If I come across a belief or assumption I hold that does not stand up to scrutiny given new information then I have to have no qualms in replacing that belief with a new one that more closely conforms to the new data available.

Who I am today as a trader is different than who I was twelve months ago. The same will be true this time next year; some beliefs that I have about the market, my trading style, the world around me or even myself will have been superseded by new, better, more informed beliefs.

This constant striving for betterment is another constant seen amongst all the traders interviewed in Stock Market Wizards. Many of the traders detail personality flaws that they had to correct before they saw consistent success. One prime example of this that was quite common was relying too much on the opinions of others. It was only when the traders made a commitment to solely relying on their own judgements and decisions did they experience the sort of success that they knew they were capable of.

I can understand why this book is generally thought to be slightly inferior to the first two Market Wizard books. I think this can be mainly attributed to the narrower scope of focusing on stock market traders, especially at a time when just about anyone could make money trading stocks. The main interviews were conducted in 1999 when the tech mania and internet bubble were in full swing. Follow up interviews for the paperback edition of the book look at how well the various traders have weathered the bear market that unfolded from 2000 to 2002.

Some of the interviews seem slightly shorter than those that appeared in the prior books and many don’t see to contain the wisdom and insight that existed in those prior tomes. The proprietary nature of the trading systems employed by some traders, such as David Shaw, and their complete refusal to talk about them in any depth meant that some of the interviews will have very little benefit to anyone who reads them. It almost seemed like they were happy enough to be included in the book for the fame value but their inclusion rings kind of hollow since they don’t provide enough insight into their methodology and approach to be looked at as someone worth emulating. It is almost as if they were slightly defensive in nature. Becoming a market wizard means opening yourself up to close scrutiny for ever more.

Even with these caveats, Stock Market Wizards can be a useful motivational tool. When reading interviews with successful traders you are reminded that it is possible for you to be a successful trader too. Key ingredients to making it are supreme confidence, hard work and discipline.