Just a compendium of personal favorite lines from none other than the best Master Chronicler of our times, Jack Schwager’s “Hedgefund Market Wizards”
1.) Exceptional traders versus multitude of pedestrian market participants
2.) Too many big fish make it more difficult for other big fish to thrive.
3.) Markets change and good traders adapt. Traders who are successful over the long run adapt. If they do use rules, and you meet them 10 years later, they will have broken those rules. Why? Because the world changed.
Part One: Macro Men
Chapter 1.) Colm O Shea: Knowing When It’s Raining
1.) Mr. Partridge in “Reminiscences of a Market Operator” states all that matters “It’s a bull market.” That’s a fundamental macro person. Partridge teaches Livermore that there is a much bigger picture. it’s not just random noise making the numbers go up and down. to use a sailing analogy, the wind matters but the tide matters too. If you don’t know what the tide is and you plan everything just based on the wind, you are going to end up crashing into the rocks.
2.) I think the biggest mistake people make is to assume that there is an answer when in fact, there may not be a good answer.
3.) The willing disbelief of people can carry on for a long time, but eventually it is overwhelmed by the market. The genius of Soros was recognizing the turning point when things change – the ability to not only know that a position was right, but that it was right now, and that now was the time to have a big risk on the trade.
4.) So you are selling the market on the way down, not on the way up. Because in a bubble, who is to say how far a market can go. Even though something might be a good idea, you need to wait for and recognize the right time.
5.) I am not particularly original. If you read the Financial times, it’s all there. You don’t have to be a brilliant economist. You just have to recognize when something matters.
6.) All markets look liquid during the bubble, but it’s the liquidity after the bubble ends that matters.
7.) Markets don’t think just like mobs don’t think. The market simply provides a price that comes about through a collection of human beings.
8.) I didn’t need to know why. Once you realize something is happening, you can trade accordingly. Trades don’t have to start based on fundamentals. If you wait until you can find out the reason for the price move it can be too late. “Invest first, investigate later” You don’t want to get fixated on always needing a nice story for the trade. I am an empiricist at heart. The unfolding reality trumps everything.
9.) Fundamentals are not about forecasting the weather for tomorrow, but rather noticing that it’s raining today.
10.) Really good money managers don’t get attached to their ideas. There is this false impression that what you need to do to make lots of money is to be really smart in economics and understand fundamentally what is going on. I don’t really believe that is true.
11.) You need a method that suits your personality. What I actually believe is that I recognize the world as I find it and that I’m flexible enough to change my mind. To construct a portfolio, I need to build a set of hypotheses that I can test in the market.
12.) Gold is worth exactly what people think it’s worth.
13.) Characteristics of the late stages of a bubble – they break and they can collapse rapidly. There is a gap risk. Because tops are messy and reversals in bear markets are horrendous, it’s very rare to find comfortable shorts in bear markets. Postbubble dead cat bounces can be vicious. (sounds more like a dead tiger bounce)
14.) Find a much calmer way to play the idea than a direct trade in equities.
15.) Trading is a skill that cannot be taught but it can be learned.
16.) A good friend of mine, who sat next to me for several years, is now managing lots of money at another hedgefund and doing very well. But he is not the same as me. What he learned was not to become me. He became something else. He became him.
17.) Perseverance and emotional resilience are traits that are important to be successful because as a trader, you’ll get beaten up horribly. Frankly if you don’t love it, there are much better things to do with your life. You cannot trade because you think it’s a way to make a lot of money. That won’t cut it.
18.) Use risk guidelines, but over the long run adapt. Use volatility adjusted leverage. Decide where the market has to go for you to be wrong. That’s where you place your stop.
19.) The disciplined use of stops that are set too close could lead to the proverbial death by 1000 cuts.
20.) The edge is not forecasting what will happen, but rather recognizing what has happened.
21.) You don’t need to forecast anything, but you need to recognize the significance of an event that many ignored.
22.) How a trade is implemented is more important than the trade idea itself.
23.) Flexibility is an essential quality.
24.) Best way to trade a market bubble is to participate in the long side to profit from the excessive euphoria, not try to pick a top, which is nearly impossible and an approach vulnerable to large losses if one is early.