Book review: market wizards

November 29, 9:30 AMPhiladelphia Personal Finance ExaminerChris Barton

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Market Wizards by Jack Schwager is an entertaining read about the stories about many of the worlds best traders.  I bought the book eagerly waiting to read about George Soros or Warren Buffet or other household names (ok, in a strange household).  Not so much.  I learned about Paul Tudor Jones, William O'Neil and James B. Ridgers Jr.  Who are these people?  They are private traders who aren't usually interviewed.  They are also very successful, but not all of them were always that way.  Many of them made and lost several large sums of money. 

The book is divided into several sections:

• Futures and Currencies
• Mostly Stocks
• The View From the Floor (pit traders)
• The Psychology of Trading

When reading the book - or any book - I tried to get some take-aways from the experts.  Here is a taste of the trading advice I found:

• Michael Marcus - A leading cause of 'finacial disablement' is the belief that experts can help you.  Don't believe conspiracy theories about the markets.  Good advice from Marty Zweig and Richard Russel.  You can trade anything if you look for confirmation of fundamentals, technicals and market action.
• Bruce Kovner - Risk management comes first.  Whatever you think your position should be, cut it in half twice.  Don't take a 5 or 10 percent risk - it should be 1 or 2 percent.
• Richard Dennis - Don't hold a short position with a loss on Friday if the market closes at a high.  Same for losing long positions on a low.  Trade secrets don't always need to be so secret - if what you're doing is right, it will work even if people have a general idea about it.  Short term holding periods work and long term works - avoid the middle like the plague.  Trade small & learn from your mistakes.
• Paul Tudor Jones - Don't average losing trades.  Don't be concerned about where you get in on a position.  Play great defense, not great offense.  Always question yourself and your ability.  He uses Elliot Wave Theory.  Ned Davis is a good advisor.  Jones is a trend follower and not a contrarian investor.
• Gary Bielfeldt - When starting, don't fall too far behind because it's difficult to get back - don't take too large of risks.
• Ed Seykota - System is trend following with pattern recognition and money management algorithms.  Handles losing streaks by 'trimming down' his activity.  A losing trader cannot transform into a winning trader - a losing trader would not be willing to transform - that is a mark of a winning trader. 
• Larry Hite - If the market doesn't respond to news the way it ought to, that is very important.  When a market makes a historic high, it is telling you something.  Two Rules:  1) if you don't bet, you can't win 2) if you lose all your chips, you can't bet.
• Michael Steinhardt - Hedge Funds these days aren't the same as Hedge Funds back in the day - they used to hold both long positions and short positions that would 'hedge' the market risk out of the portfolio - now they are limited partnerships which offer great flexibility to the general manager who is paid based on his performance.  Good trading is a balance  of conviction in your ideas and flexibility to know when you are wrong.
• William O'Neil - You should not go short on a stock because the price is too high - only if there is a sign of a market top.  Diversification is a hedge for ignorance - you are better off owning a few stocks knowing a great deal about them.  The market is neither efficient nor random (referring of course to the Efficient Market Theory and the Random Walk Theory for stock prices)
• David Ryan - Keep a trading journal - write down why you bought a stock.  His favorite thing about the market is finding the next big winner
• Marty Schwartz - Always checks charts against the moving averages - wants to see them above the MA's.  Stock should be above its most recent low.  Stock should be 'healthier' than the market.  Take a day off after a successful period of trading.  Bottom fishing is an expensive way to gamble.  Before entering into a position, know how much $$ you are willing to lose.  Best advice:  learn to take losses.
• James B. Rogers, Jr. - Compared the 1987 crash to the 1937 bear market.  1937 - 50% drop in Dow over 6 months, but not an economic meltdown like 1929.  Never owns options - he sells calls when he has a bearish sentiment - reason is that 90% of options expire worthless, so selling them is the way to go.  Blaming the 1987 crash on program trading is scapegoating - something that politicians and the public will always want to do.  His reasons - Greenspan & Baker's comments the week before on trade and the dollar, divergence between stock markets and other financial markets which were performing badly.  If the government enacts measures to counteract a trend, fade the rally.  Never trade/invest with conventional market wisdom.  Look for hysteria in markets and see if it is telling you to trade the other way.  Good investing it just common sense - but few people have it.
• Mark Weinstein - Technicals used:  chart analysis, Elliot wave and Gann analysis, Fibonacci numbers, cycles, sentiment and moving averages

There is a great deal of terminology that you need to get used to when reading the book - most of it you can pick up as you work through it.  That aside, I definitely have to recommend this book.