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Hedge Fund Market Wizards: How Winning Traders Win Hardcover – May 29, 2012
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Guest review of Hedge Fund Market Wizards, by Stanley Druckenmiller
Jack Schwager's newest book, Hedge Fund Market Wizards, like his previous works, is yet another solid contribution toward how to effectively manage capital. The book will have strong appeal to three main audiences; those managing capital professionally, those evaluating professional money managers, and those readers who want to manage their own money more effectively.
The fact that markets and the money management industry have gone through tumultuous change makes the central message of the book all the more powerful...that the key ingredients to successful performance are timeless and true in radically different environments. Those ingredients, an appreciation for the balance of risk versus reward in a trade, discipline, adaptability, an open mind, and intellectual honesty that enables one to learn from mistakes, come to life in Schwager's riveting interviews with a number of managers.
The characters' stories highlight their very different personalities and lifestyles and are interesting in and of themselves. But it is Schwager's unique ability to illustrate their winning strategies and interweave their personal backgrounds and emotional highs and lows that makes Hedge Fund Market Wizards both a highly entertaining read and learning experience. What most jumps out at the reader is how radically different styles and approaches all share the common traits mentioned above. By exemplifying these traits in a number of managers with seemingly different investment philosophies, whether it be short term vs. long term trading, large capital or small, or technical vs. fundamental analysis, Schwager is able to better highlight their essential importance to successful investing. By highlighting their differences, the common thread of their similarities is much more evident. Schwager reinforces the message with succinct summaries of what these commonalities are throughout the book.
Whether a reader is a professional money manager or simply managing their own capital, I have no doubt they will find Hedge Fund Market Wizards both entertains and enhances their ability to grow their capital.
Stanley Druckenmiller founded Duquesne Capital Management, which compounded at 30% per annum without a single losing year from its inception in 1981 to its closing in 2010. From 1988 to 2000, he also served as Lead Portfolio Manager of the Quantum Fund and Chief Investment Officer of Soros Fund Management (1989-2000) where he had overall responsibility for funds with a peak asset value of $22 billion.
1. There Is No Holy Grail in Trading
Many traders mistakenly believe that there is some single solution to defining market behavior. Not only is there no single solution to the markets, but those solutions that do exist are continually changing. The range of the methods used by the traders interviewed in Hedge Fund Market Wizards, some of which are even polar opposites, is a testament to the diversity of possible approaches. There are a multitude of ways to be successful in the markets, albeit they are all hard to find and achieve.
2. Don't Confuse the Concepts of Winning and Losing Trades with Good and Bad Trades
A good trade can lose money, and a bad trade can make money. Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money.
3. The Road to Success Is Paved with Mistakes
Ray Dalio, the founder of Bridgewater, the world's largest hedge fund, strongly believes that learning from mistakes is essential to improvement and ultimate success. Each mistake, if recognized and acted upon, provides an opportunity for improving a trading approach. Most traders would benefit by writing down each mistake, the implied lesson, and the intended change in the trading process. Such a trading log can be periodically reviewed for reinforcement. Trading mistakes cannot be avoided, but repeating the same mistakes can be, and doing so is often the difference between success and failure.
4. The Importance of Doing Nothing
For some traders, the discipline and patience to do nothing when the environment is unfavorable or opportunities are lacking is a crucial element in their success. For example, despite making minimal use of short positions, Kevin Daly, the manager of the Five Corners fund, achieved cumulative gross returns in excess of 800% during a 12-year period when the broad equity markets were essentially flat. In part, he accomplished this feat by having the discipline to remain largely in cash during negative environments, which allowed him to sidestep large drawdowns during two major bear markets. The lesson is that if conditions are not right, or the return/risk is not sufficiently favorable, don't do anything. Beware of taking dubious trades out of impatience.
5. Volatility and Risk Are Not Synonymous
Low volatility does not imply low risk and high volatility does not imply high risk. Investments subject to sporadic large risks may exhibit low volatility if a risk event is not present in the existing track record. For example, the strategy of selling out-of-the-money options can exhibit low volatility if there are no large, abrupt price moves, but is at risk of asymptotically increasing losses in the event of a sudden, steep selloff. On the other hand, traders such as Jamie Mai, the portfolio manager for Cornwall Capital, will exhibit high volatility because of occasional very large gains-not a factor that most investors would associate with risk or even consider undesirable-but will have strictly curtailed risk because of the asymmetric structure of their trades. So some strategies, such as option selling, can have both low volatility and large, open-ended risk, and some strategies, such as Mai's, can have both high volatility and constrained risk.
As a related point, investors often make the mistake of equating manager performance in a given year with manager skill. Sometimes, more skilled managers will underperform because they refuse to participate in market bubbles. The best performers during such periods are often the most imprudent rather than the most skilled managers. Martin Taylor, the portfolio manager of the Nevsky Fund, underperformed in 1999 because he thought it was ridiculous to buy tech stocks at their inflated price levels. This same investment decision, however, was instrumental to his large outperformance in subsequent years when these stocks witnessed a prolonged, massive decline. In this sense, past performance can sometimes even be an inverse indicator.
"A must-read for all would-be traders...while the book's focus is clearly on trading and investing, there is more than enough human interest on offer for the general reader.... Like Schwager's other works...Hedge Fund Market Wizards looks set to become a classic." (Money Week, June 2012)
"Offers valuable guidance and timeless insights for both investment professionals and market enthusiasts looking to improve their trading abilities by learning from the best." (trade2win.com, July 2012)
"This book is destined to be a classic just like the others by Jack. But the latest goes one step further, these traders aren't just at the top of their game, they have defined it. What can I say? This book was so good it almost made me want to get back into the game again!"
―Paul Wilmott, mathematician and ex-hedge fund manager
"Brilliant! Brilliant! Brilliant! Another book about true traders by a true trader. Jack Schwager has become the official author of traderdom for this and future generations. Not only does Hedge Fund Market Wizards deserve a spot in every respectable trader’s book collection, but the entire series should be read annually by both professional and aspiring traders. Timeless wisdom, priceless concepts!"
―Peter Lewis Brandt, Futures Trader, Stableford Asset Management, and Author of Diary of a Professional Commodity Trader
"I read Jack Schwager's first Market Wizards book when I was just starting out as in investor more than 20 years ago. It put into brilliant focus the importance of trading psychology and knowing thyself. His latest work is yet another masterpiece. It brings to light new concepts in the world of investing that apply to all investors in today's markets. Anyone who reads this work will immeasurably enrich themselves on many levels because trading is life and life is trading."
―Dr. Chris Kacher, Founder of www.SelfishInvesting.com, and Author of Trade Like an O'Neil Disciple
Author Jack Schwager seems to have built his career on the market wizardry of others. Based on this fourth wizard book―interviews with 15 hedge-fund managers who recount their careers and strategies―Schwager's long experience with wizardry has served him well. Readers captivated by the hedge-fund mystique won't be disappointed. Readers looking for insight into exactly how successful hedge-fund managers achieve success will have plenty to chew over. Schwager attempts to boil down the interviews into 40 "Market Wizard Lessons." Examples: Value investing works. Position size can be more important than entry price. Sometimes it's useful to do nothing. But the one that may ring truest is this: There is no Holy Grail in trading. What works for one may not work for another, or for you. Fortunately for us, there's a wide enough variety of portraiture in Hedge Fund Market Wizards that at least a few lessons should resonate.
“Determining how great traders acquire and use their special skills has been an elusive quest. We have no shortage of cookbooks on how to trade, but only a limited number of books describe the decision processes of those who speculate as a profession. Trader confessionals exist often as testimonies to egos, but few focus on the details of decision making. Material that does successfully capture the essence of how speculators think is the Market Wizards series by Jack D. Schwager…. Even in the interviews of well-known traders, Schwager’s probing questions extract many new insights.”
―FAJ Book Review
“Even in the interviews of well-known traders, Schwager’s probing questions extract many new insights. The Ed Thorp interview, which is the longest, is almost worthy of a book in itself.”
―CFA Institute review
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Like the previous Market Wizards books, and indeed just like in the market, the trading methods or philosophy applied by the wizards could not be more different from one another. Some even directly contradict one another, with surprisingly good results for each of them. This, of course, remains the underlying message of the Market Wizards books: bottom line, we need to figure out who we are and what kind of strategies could work with our temperament and world view.
One interesting remark made by Jack Schwager when people were asking him to introduce them to one of the wizards, to work under their apprenticeship and learn about their methods/system that bring success, in which he answers that it will be useless because the main point is to develop our own trading system that cater to our character. Just like Colm O’shea said “If I try to teach you what I do, you will fail because you are not me. If you hang around me, you will observe what I do, and you may pick up some good habits. But there are a lot of things you will want to do differently.”
Nevertheless, as different as these Wizards can be, they all share some similar traits that become the foundation of their trading approach.
First and foremost, they're all very dilligent about risk management, minimizing risk is almost the most sacred part of each one of these traders. They also trade only the size they're comfortable with. To them the market is always right, Steve Clark commented that the market is not about facts but people's opinion and positions that reflects their opinions, and they aren't afraid to cut losses when they're wrong. In a similar tone, Scott Ramsey said that there is one principle that you cannot violate: know what you can lose.
Meanwhile, as one wizards believe that price is not actually important (instead the size of your position is more crucial, to determine whether or not you can get out quickly), Edward Thorp complement this view by saying don’t bet more than you are comfortable with (and just take your time until you’re ready). Moreover, Jamie Mai highlighted that finding answers is much easier when you know in advance what the questions are, and another wizard gives the simplest wisdom of all when he said do what you do best, and so less of what you do badly.
Furthermore, as different as they may be, almost all of them point out the fact that profit is nice but it wont teach us anything, and one of the most important parts of trading is to make as much mistakes as we can, learn from them, and create our own system to avoid those mistakes.
And the interviews in this book provide us with exactly that, the raw and honest stories about their hopes, fears, and doubts, and their struggle and journey from nothing to become one of the best in the world. It is also, perhaps more importantly, about the long road on how they come to acquire/develop the skills or tools or principles that they eventually use to make them very successful (like Ray Dalio’s principles, which he then expanded into a very good book). And it’s all very human, and the lessons are also very applicable in any walks of life other than trading.
Just like the format in Dale Carnegie’s books, by the end of each chapter Jack Schwager provides a concluding paragraph to sum up the interviews, which is very helpful. But the real gem of the book is definitely the conclusion chapter, where everything are summarized so neatly, in which Schwager lists the ultimate 40 Market Wizards lessons, which, of course, I won’t spoil in this review.
This would definitely be the 1st book I recommend on anyone asking about trading/investing. An absolutely useful real-life manual for the battle on the financial market ground.
This particular edition is good because it is rather new compared to the other versions. Some of the legends profiled here include Ray Dalio, Jamie Mae, Joel Greenblatt, and the incredible Ed Thorp.
I would recommend this, as well as all the other books that are part of the collection, to any person who is considering starting a career as a trader. There are not many books out there that provide the wide range of strategies presented here. The trader wannabe should pick up these books, read through the interviews, and then select the strategy that best suits his/her personality. Then, use that knowledge to look for other books that explore that strategy in detail. Once they have done all that, they should come back and re read the wizards to extract the real gems.
No matter what strategy you end up following, you should always keep these books close as an invaluable reference.
Of course, there are some flaws. This book is populated with american and british (at least) traders. Mr Schwager does not extend his research further than that and on one occasion even says that he only searches through indications of friends (there is one exception in the book). It is sad, as I personally know of South American and European (and no doubt there are others too) traders who deserved to be here and could add to the book. Even so, this is a interesting group with plenty of insights. Although, as someone who has been solely a full time futures trader for the past 15 years, I don't think he draws necessarily the correct inferences or conclusions on some interviews, but to his great credit, the information is there for you to make your own (in a few instances I would like to have asked other questions, but in general he was okay).
Even when he apparently strays off course, like when he interviews his son's boss (really???)... well, that's what I thought... but after reading the interview I thought it was indeed a good choice and very interesting interview, although Mr. Schwager get asking some wrong questions and insists on how he could "improve" his results, without taking into account what the trader had been saying between the lines all the time, which is his knowledge of his style, his emotional capacity, etc...
Anyway, this book's qualities OUTSHINE these small flaws by a wide margin. And, Mr Schwager has done something few people have... he has written 2 exceptional books about the markets. For authors writing a book like the first market wizards is hard, because following it up is very difficult. But he has done it with this one. If you, like some reviewers, are looking for specific techniques and trading tips, you are already searching for the wrong things my friend, and it won't make a difference which book you buy. But if you are interested in reading about some great traders according to their own words, reading about different perspectives, approaches and a lot of information to digest and reflect on, this is DEFINITELY A BUY!
Let me say it for the record, this is an exceptional book and Mr Schwager is to be commended for the work he has done the "trading community".
Top international reviews
The common denominator of all the market wizards is that they are very hard working and dedicated people. Furthermore, they are flexible enough to adapt to changing market conditions and trade only in ways and sizes which do not exceed their comfort levels.
All in all, the interviews are very inspiring and motivating for everyone who engages in trading and therefore a recommended read.
I have read the other market wizards books but then there was a period of silence.
Now Jack Schwagner has created another fantastic book. This book feels fresh and has new content with a new generation of fund managers. As with the original book I think this one will be remembered for a long time.
It is easy to dismiss the interviews but every time I read one of Jack Schwagner's interviews I learn something new. I find it useful to read every word and make notes in the margin. Sometimes I find a particular issue and refer to the books to think through how others would solve the problem.
Whenever I interview any would be employee one of the first questions I ask is have they read the Market Wizards series and then ask them to discuss their favourite wizard. In my humble opinion anyone looking to work in a hedge fund or in a bank serving hedge funds is not credible if they have not read the entire Market Wizards series.
I miss some recomendations of books to read or advisors to follow that in previous wizzards schawger request to the managers, it looks like they just read Schwager books :)
In addition of learning about best traderz' life, the author also underlines pretty well their way of thinking and acting in certain conditions. This book provides good practical examples of the "winning mentality" every trader needs to beat the market. For general knowledge AND for improving your edge as a trader, this book should be in your bookcase.