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Schwager on trading Michel Pireu     | Business Day Tuesday, December 4, 2018
One of my favourite one-liners on the markets is Jack Schwager’s, “There are a million ways to make money in the markets. The irony is that they are all very difficult to find.” Schwager, probably best known as the author of the Market Wizards series of books, started out trading on fundamentals before he transitioned to being a technical trader. In an interview with Nithin Kamath, the co-founder of Zerodha, he was asked if this was because the technical traders he has interviewed for his books have tended to do better than those taking a fundamental approach.

“I've seen traders who have done tremendously well with fundamentals so I am not going to knock fundamentals,” replied Schwager, “but the problem I’ve always had with fundamentals has to do with risk management. Inherently the more wrong you are the more sense it makes to add to a position. If you think something is under-priced at say at $6 and it goes to $5.50 and nothing has changed then logically it’s an even better deal and you should buy more rather than get out. So, not only does a fundamental approach not have any intrinsic risk management, but by its very nature is anti-risk management. I believe my approach should allow me to ask, “Where am i wrong?” and allow for a risk management stop. So, that's the main reason that I transitioned away from fundamentals. But what I have also realised is that, the number of people who followed fundamental analysis or technical analysis and made money or not did not matter and does not prove anything in the long run.”

“It’s really a matter of finding a method that is right for the person,” Schwager went on to say in an interview at Seeking Alpha. “It varies because there are people like Jim Rogers who have complete disdain for technical analysis. He’d say that the only people he’s met that make money in technical analysis are those that sell their technical analysis services. That’s his take on it. On the other hand, you’ve got people like Martin Schwartz, who said, “I spent a decade as a fundamental analyst, but I got rich as a technician … I’ve come to believe that the idea that either one is right or wrong, is wrong and each approach works for different individuals. Believe me, Rogers could never make money using technical analysis and Schwartz could not make money using fundamental analysis. Yet, they both do terrifically well. Novices tend to believe there’s some answer out there to investing, that it’s a matter of finding the right formula, the single right technique. The truth is it doesn’t work that way. There is no single way that works continuously. If it did, it would stop working anyway because everyone would follow it. I get emails from people who ask: “What trading method would you recommend?’ The question is a lot like ‘I’m going to buy a suit. What size should I get? The very first thing to get across to people is you’ve got to figure out what’s right for you. It’s not just fundamental versus technical. Nor is it short-term versus long-term. Do you want to trade stocks? Do you want to trade futures? Do you want to trade currencies? The variations go on and on. It’s a discovery process. Nobody else can tell you.”

When asked what he thinks separates those who succeed from those who don’t Schwager says it’s all down to some people having a natural talent. And, again, that talent is going to be different. “Michael Marcus is an intuitive trader whereas somebody like Ed Thorp is a pure quant guy, a mathematical genius, he would just figure out inefficiencies in the market that nobody else had realised and that is why he has such an incredibly lopsided win to loss ratio, something like 290 win and 3 losses. It’s not a trading talent the way we traditionally think of it, but it is a talent that can be exploited in the markets. The people who succeed have that kind of talent - a special talent – which is why not everyone is going to be a great trader or even a moderately good trader.”

“I discovered that you can’t train people how to trade by just imparting knowledge,” says Schwager. “The key to trading success is emotional discipline. Making money has nothing to do with intelligence. Think of all the bright people that choose careers on Wall Street. If intelligence were the key, there would be a lot more people making money trading.”

“Nevertheless,” he says, “If people understand the right thing to do, with experience and risk management, most people will end up being profitable. “There still will be only a small percentage that will be really great but doing everything right will get you to profitability.”

What does Schwager mean when he talks of “doing everything right”?

“You can break down successful trading into two parts: knowing what to do and doing it. Part of the planning process has to be risk management. You never want to be at the mercy of having a few mistakes knock you out of the game. You need discipline. Both knowing what to do and the discipline to do it are skills that can be improved with effort. But there is an important distinction: The limits on improving knowing what to do are much more restrictive than the limits on improving discipline …You can't win without an edge, even with the world's greatest discipline and money management skills. If you don't have an edge, all that money management and discipline will do for you is guarantee that you gradually bleed to death … One of the pieces of advice I always give people is that you don’t want to be influenced by other people, even if they’re smarter than you, even if they know a lot more than you. I can’t think of anybody that I interviewed who sat at somebody’s knee, and learned an approach, and did it so well that they became really great at it.”

“Incidentally, if you don't know what your edge is, you don't have one,” says Schwager.

What does the word “trader” mean to him?

“To me, trader means, first of all, someone who is as likely to go short, as to go long.” he tells the CFA Institute. “It takes away this automatic long bias. That’s one critical element to the word, ‘trader’. Another key element is a willingness to change position with maybe more frequency than someone you might term as a ‘long term investor’ … someone who says, ‘I want to have 50 percent of my money in equities. I’m going to buy an index. I’m going to stay for 40 years.’ Not that there’s anything wrong with that, but that’s not a trader.”
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