I have been wanting to write a review of the new Market Wizards book for some time, but it took me a few weeks to slog through it in my spare time. I'll come right to the point: I think I got more out of this book than any of the prior Wizard books. All of them are good, starting with the first back in 1989 (side note: years ago, I worked for one of the Wizards in the original compilation………..err, don't ask).
I think the quality and sophistication of the information in the book is a cut above the others, probably because the individuals featured in this volume tend to be seasoned managers of very large funds. If you're a serious trader, I urge you to buy the book; I heavily highlighted my copy, and I've retyped some of the favorite segments below. The quotations are from different parts of the interview, so please read its paragraph as an independent snippet. The only organization I've provided is to precede each block of quotes with the name of the person who was being interviewed:
Colm O'Shea:
We recognized that we would underperform the bulls by quite a bit because in a bubble the true believers will always win. That's fine. you just need to make decent returns and wait until the market turns. Then you can make great returns. What I believe in is compounding and not losing money. We were quite happy to be part of the bubble, but to do it in positions that were highly liquid, so that we could exit the market quickly if we wanted to.
The great trades don't require predictions. The Soros trade of going short the pound in 1992 was based on something that had already happened – an ongoing deep recession that made it inevitable that the U.K. would not maintain the high interest rates required by remaining in the ERM. Afterward, everyone said, "That was incredibly obvious." Most of the great trades are incredibly obvious. It was the same in late 2007. In my mind, it was clear that the financial system was imploding and that most market participants hadn't noticed.
Never underestimate the ability of people to be optimistic and believe that everything is going to be okay. Historically, what is important to the market is not whether growth is good or bad, but whether it is getting better or worse.
Gold is the only commodity where the amount of supply is literally about 100 times as much as the amount physically used in any year….there is never any shortage of gold. So gold's value is entirely dependent on psychology or those fundamentals that drive psychology….I always found it ridiculous when other analysts would write lengthy reports on gold analyzing such things as annual production prospects and jewelry usage. Annual production and consumption of gold are always a tiny fraction of supply, maybe around 1 percent, so who cares how much they change. It has nothing to do with price.
Ray Dalio:
People think that a thing called correlation exists. That's wrong. What is really happening is that each market is behaving logically based on its own determinants, and as the nature of those determinants changes, what we call correlation changes.
One of the greatest problems that plagues mankind is that people are always saying, "I think this, and I think that," when there is a high probability they are wrong. After all, to the extent that there is strong disagreement about an issue, a lot of the people must be wrong. Yet most of them are totally confident they are right. How is that possible? Imagine how much better almost all decision making would be if people who disagree were less confident and more open to trying to get at the truth through thoughtful discourse.
Scott Ramsey:
The reality is that I'm not being paid to be right; I am being paid to make money. You have to have a degree of flexibility. Whenever I talk to investors, I make it clear to them that whatever I say today about the markets may or may not reflect the positions I have tomorrow or the next day. I recently reviewed a presentation I gave about six months ago, and I realized that everything I predicted didn't happen – and yet, I made money in almost every month since then.
The market doesnt' care if you lost money on a trade. It doesn't matter. Think about your next trade. You have to get past the idea that just because you lost money on a trade, it means you failed. Every trading decision you make it subject to some randomness. It doesn't matter whether you win or lose on any individual trade, as long as you get the process correct.
Michael Platt:
I always regarded financial markets as the ultimate puzzle because everyone is trying to solve it, and infinite wealth lies at the end of solving it. When you are solving any puzzle, you have to start off from the perspective, "What do I know for sure? Do I have any bedrock to start off my analysis?" It's shocking how little you know for certain in financial markets.
There are three things you need to make money in a market. You need a decent fundamental story, a good trend that looks like it will carry on, and the market handling news the way you think it should. Bull markets ignore any bad news, and any good news is the reason for a further rally.
Steve Clark:
Let me tell you the trouble with trading. There is no career in trading. You are only as good as your last trade, and that is it. You build nothing; you just trade. The day you stop trading, it's gone. So what you have spent doing for X hours every working day of your life has ended, and there is nothing left to show for it, except for money. You have to keep trading because you don't want to stop and look back. Because what have you done? You have built nothing. You have achieved nothing.
Nearly all successful traders I have known are one-trick ponies. They do one thing, and they do it very well. When they stray from that single focus, it often ends in disaster. In the hedge fund world, you will see traders who do one thing very well, make a lot of money at it, and then think, "This one thing is rather boring. I can do other things because I am a genius." So they start doing other things.
Really good traders are also capable of changing their mind in an instant. They can be dogmatic in their opinion and then immediately change it. If you can't do that, you will get caught in a position and be wiped out.
