THE MARKET WIZARDS CONVERSATIONS WITH AMERICA'S TOP ...

THE MARKET WIZARDS
CONVERSATIONS WITH
AMERICA'S TOP TRADERS
jack D. schwager HarperBusiness You've got to learn how to fall, before you learn to fly.
-Paul Simon
One man's ceiling is another man's floor.
-Paul Simon
If I wanted to become a tramp, I would seek information and advice
from the most successful tramp I could find. If I wanted to become a
failure, I would seek advice from men who had never succeeded. If I wanted
to succeed in all things, I would look around me for those who are
succeeding and do as they have done.
-Joseph Marshall Wade
(as quoted in a Treasury of Wall Street Wisdom
edited by Harry D. Schultz and Samson Coslow)
Contents
Preface 4
Acknowledgments 6
Prologue 7
My Own Story 8
Part I-Futures and Currencies 10
Taking the Mystery Out of Futures 11
The Interbank Currency Market Defined 11
Michael Marcus - Blighting Never Strikes Twice 13
Bruce Kovner-The World Trader 27
Richard Dennis-A Legend Retires 39
Paul Tudor Jones-The Art of Aggressive Trading 50
Gary Bielfeldt-Yes, They Do Trade T-Bonds in Peoria 58
Ed Seykota-Everybody Gets What They Want 62
Larry Hite-Respecting Risk 70
Part II-Mostly Stocks 76
Michael Steinhardt-The Concept of Variant Perception 77
William O'Neil-The Art of Stock Selection 86
David Ryan-Stock Investment as a Treasure Hunt 93
Marty Schwartz-Champion Trader 99
Part III-A Little Bit of Everything 108
James B. Rogers, Jr.-Buying Value and Selling Hysteria 109
Mark Weinstein-High-Percentage Trader 122
Part IV-The View from the Floor 129
Brian Gelber-Broker Turned Trader 130
Tom Baldwin-The Fearless Pit Trader 137
Tony Saliba-"One-Lot" Triumphs* 143
Part V-The Psychology of Trading 150
Dr. Van K. Tharp-The Psychology of Trading 151
The Trade-A Personal Experience 158
Postscript-Dreams and Trading 161
Final Word 162
Appendix 1-Program Trading and Portfolio Insurance 163
Appendix 2 - Options-Understanding the Basics* 164
Preface There are some amazing stories here:
A trader who, after wiping out several times early in his career,
turned a $30,000 account into $80 million A fund manager who achieved what
many thought impossible-five consecutive years of triple-digit percentage
returns A trader from small-town America who started out on a shoestring
and has become one of the world's largest bond traders A former securities
analyst who, during the past seven years, has realized an average monthly
return of 25 percent (over 1,400 percent armualized), primarily trading
stock index futures An electrical engineering graduate from ??? whose
largely computerized approach to trading has earned his accounts an
astounding 250,000 percent return over a sixteen-year period.
These are but a sampling of the interviews contained in this book. In
his own way, each of the traders interviewed has achieved incredible
success.
What sets these traders apart? Most people think that winning in the
markets has something to do with finding the secret formula. The truth is
that any common denominator among the traders I interviewed had more to do
with attitude than approach. Some of the traders use fundamental analysis
exclusively, others employ only technical analysis, and still others
combine the two. Some traders operate on a time horizon measured in hours
or even minutes, while others typically implement positions that they
intend to hold for months or even years. Although the trading methodologies
varied widely, the forthcoming interviews reveal certain important
commonalities in trading attitudes and principles.
Trading provides one of the last great frontiers of opportunity in our
economy. It is one of the very few ways in which an individual can start
with a relatively small bankroll and actually become a multimillionaire. Of
course, only a handful of individuals (such as those interviewed here)
succeed in turning this feat, but at least the opportunity exists.
While I hardly expect all readers of this book to transform themselves
into super-traders-the world just doesn't work that way-I believe that
these thought-provoking interviews will help most serious and open-minded
readers improve their personal trading performance. It may even help a
select few become super-traders.
Jack D. Schwager
Goldens Bridge, NY
May 1989
Acknowledgments First and foremost, I would like to thank Stephen Chronowitz, who
pored over every chapter in this book and provided a multitude of helpful
suggestions and editing changes. I am indebted to Steve for both the
quantity (hours) and quality of his input. I truly believe that whatever
the merits of this work, it has benefited significantly from his
contributions.
I am grateful to my wife, Jo Arm, not only for enduring nine months as
a "book widow," but also for being a valuable sounding board-a role she
performed with brutal honesty. Sample: "This is the worst thing you ever
wrote!" (Needless to say, that item was excised from the book.) Jo Arm
possesses common sense in abundance, and I usually followed her advice
unquestioningly.
Of course, I would like to express my thanks to all the traders who
agreed to be interviewed, without whom there would be no book. By and
large, these traders neither need nor seek publicity, as they trade only
for their own accounts or are already managing all the money they wish to.
In many cases, their motives for participating were altruistic. For
example, as one trader expressed it, "When I was starting out, I found
biographies and interviews of successful traders particularly helpful, and
I would like to play a similar role in helping new traders."
I wish to express my sincere appreciation to Elaine Crocker for her
friendly persuasion, which made some of the chapters in this book possible.
For advice, leads, and other assorted favors, I would like to thank
Courtney Smith, Norm Zadeh, Susan Abbott, Bruce Babcock, Martin Presler,
Chuck Carlson, Leigh Stevens, Brian Gelber, Michael Marcus, and William
Rafter. Finally, I would like to thank three traders who were gracious
enough to grant me lengthy interviews, which were not incorporated into
this book: Irv Kessler, Doug Redmond, and Martin Presler (the former two
because, in retrospect, I considered my line of questioning too esoteric
and technical; the latter because publication deadlines did not permit time
for needed follow-up interviews and editing).
Prologue The name of the book was The Big Board. . . . It was about an Earth-
ling man and woman who were kidnapped by extraterrestrials. They were put
on display in a zoo on a planet called Zircon-212.
These fictitious people in the zoo had a big board supposedly showing
stock market quotations and commodity prices along one wall of their
habitat, and a news ticker, and a telephone that was supposedly connected
to a brokerage on Earth. The creatures on Zircon-212 told their captives
that they had invested a million dollars for them back on Earth, and that
it was up to the captives to manage it so that they would be fabulously
wealthy when they were returned to Earth.
The telephone and the big board and the ticker were all fakes, of
course. They were simply stimulants to make the Earthlings perform vividly
for the crowds at the zoo-to make them jump up and down and cheer, or
gloat, or sulk, or tear their hair, to be scared shitless or to feel as
contented as babies in their mothers' arms.
The Earthlings did very well on paper. That was part of the rigging,
of course. And religion got mixed up in it, too. The news ticker reminded
them that the President of the United States had declared National Prayer
Week, and that everybody should pray. The Earthlings had had a bad week on
the market before that. They had lost a small fortune in olive oil futures.
So they gave praying a whirl. It worked. Olive oil went up.
-Kurt Vonnegut Jr. Slaughterhouse Five
If the random walk theorists are correct, then Earthbound traders are
suffering from the same delusions as the zoo inhabitants of Kilgore Trout's
novel. (Kilgore Trout is the ubiquitous science fiction writer in Kurt
Vonnegut's novels.) Whereas the prisoners on Zircon-212 thought their
decisions were being based on actual price quotes-they were not-real-life
traders believe they can beat the market by their acumen or skill. If
markets are truly efficient and random in every time span, then these
traders are attributing their success or failure to their own skills or
shortcomings, when in reality it is all a matter of luck.
After interviewing the traders for this book, it is hard to believe
this view of the world. One comes away with a strong belief that it is
highly unlikely that some traders can win with such consistency over vast
numbers of trades and many years. Of course, given enough traders, some
will come out