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There are many paths to success in the stock market.
While some think that long-term value-based investing, a la Warren Buffett, is the only way to go, there are billionaire active investors, such as Carl Icahn and George Soros, who derived their fortunes using very different methods.
In his seminal 1989 investing book, Market Wizards, Jack Schwager picked the minds of the world’s best traders, in order to find what wisdom they had learned through their financial successes (and failures).
Market Wizards has become a classic text for both aspiring and experienced traders, so much so that Schwager has written several sequels, such as The New Market Wizards and Hedge Fund Market Wizards.
Core Concepts From Wall Street Wizards
While the specific methods used by the top active investors interviewed in the book vary quite a bit, their core concepts, knowledge and beliefs have timeless appeal to active investors of all stripes.
Here is some of my favorite wisdom from each of the 17 traders interviewed in Market Wizards:
Michael Marcus: “To be a competent trader and make money is a skill you can learn. Perhaps the most important rule is to hold on to your winners and cut your losers. Both are equally important. If you don’t stay with your winners, you are not going to be able to pay for the losers.”
Bruce Kovner: “Don’t personalize the market. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Whenever a trader says, “I wish,” or “I hope,” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.”
Richard Dennis: “If you think about it, rigid long-term views are the kind of thing most likely to lead you to the mistake of missing a profit opportunity. For example, if I believe the dollar is going to weaken, and because of this I ignore a sell signal in the foreign currencies, I might risk missing a large profit.”
Paul Tudor Jones: “Don’t ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations where you don’t have control. For example, I don’t risk significant amounts of money in front of key reports, since that is gambling, not trading.”
Gary Bielfeldt: “You should have the attitude that if a trade loses, you can handle it without any problem and come back to do the next trade. You can’t let a losing trade get to you emotionally.”
Ed Seykota: “A) Cut losses. B) Ride winners. C) Keep bets small. D) Follow the rules without question. E) Know when to break the rules.”
Larry Hite: “There are really four kinds of trades or bets: good bets, bad bets, winning bets, and losing bets. Most people think that a losing trade was a bad bet. That is absolutely wrong. You can lose money even on a good bet. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, enough of those trades or bets, eventually you have to come out ahead.”
Michael Steinhardt: “Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake. You need to believe in something, but at the same time, you are going to be wrong a considerable number of times. The balance between confidence and humility is best learned through extensive experience and mistakes.”
William O’Neil: “Just as a doctor would be foolish not to use X-rays and EKGs, investors would be foolish not to use charts. Charts provide valuable information about what is going on that cannot be obtained easily any other way. They allow you to follow a huge number of different stocks in an organized manner.”
David Ryan: “The single most important advice I can give anybody is: Learn from your mistakes. That is the only way to become a successful trader.”
Marty Schwartz: “Before taking a position, always know the amount you are willing to lose. Know your “uncle point” and honor it. I have a pain threshold, and if I reach that point, I must get out. The most important thing is money management, money management, money management. Anybody who is successful will tell you the same thing.”
Jim Rogers: “You should be willing to buy or sell anything. So many people say, “I could never buy that kind of stock,” “I could never buy utilities,” “I could never play commodities.” You should be flexible and alert to investing in anything.”
Mark Weinstein: “Limit losses quickly. To paraphrase from Reminiscences of a Stock Operator, most traders hold on to their losses too long because they hope the loss will not get larger. They take profits too soon, because they fear the profit will diminish. Instead, traders should fear a larger loss and hope for a larger profit.”
Brian Gelber: “Some traders fail because they are too worried about losing. I’m not afraid to lose. When you start being afraid to lose, you’re finished.”
Tom Baldwin: “Don’t force the trade rather than wait patiently. Patience is an important trait many people don’t have.”
Tony Saliba: “Clear thinking, ability to stay focused, and extreme discipline. Discipline is number one: Take a theory and stick with it. But you also have to be open-minded enough to switch tracks if you feel that your theory has been proven wrong.”
Van Tharp: “The successful investing profile has 5 areas. These include a well-rounded personal life, a positive attitude, the motivation to make money, lack of conflict [such as psychological hang-ups about success], and responsibility for results.”