I got my hands on the “Market Wizards” book upon the recommendation of my friend.
“IT’S A GAME CHANGER FOR MY INVESTMENT STRATEGIES”
It’s an awesome book which allows you to pick the brain of the best daily traders and investors from the 80s and 90s.
You might think that the market has changed in the last 30 years. Yes, in part is true. Nevertheless, fundamentals of investing and core competencies used by these traders are still valid today.
In fact, I recognize few fundamentals which I deploy successfully in my trades and learn new one which I’m going to implement immediately.
SO, WHY THE MARKET WIZARDS BOOK?
The author interviews the best traders to answer a simple question; Can the market be beaten?
There are been debates during the past century from academics and economist, resulting in an unambiguous answer; The market can’t be beaten unless you count those who are lucky.
Even Buffet, the most successful investor of this century has stated that trading, or namely try to time the market, it’s a losing game.
An extensive study of day trader’s performance showed that more than 90% of day traders lose money in the long run.
The study was published in 2010 reporting hundreds of thousands of day traders from 1992 to 2006: Click Here To read The Study.
WHAT IS THE MARKET WIZARD ALL ABOUT?
Trading is a win or a losing game, with chances to be 50-50. In reality, 20% of the traders suck up 80% of the profit. Meaning that 80% of “common” traders are losing to the top performers.
This book expose the set of skills and habits of successful traders, and you’ll be surprised to see general management skills with strong habits are the essence to become one of the top traders; no magic, no luck.
THE EFFICIENT MARKET HYPOTHESIS
This theory assumes the market can’t be beaten because everyone has the same information so the stock prices should be fixed, sort of. This hypothesis would make sense if computers would trade instead of humans.
Did you watch “Man in Black with Will Smith? Where the most famous and richest people on earth are aliens. This makes me wonder if professional traders are humans… or aliens.
Anyway, going back to the efficient markets, you might know that people tend to panic or be overconfident.
The result? Distortion of the market.
The good news for you and me is that by noticing these market distortions, there is a lot of money to be made. And you know what, it’s happening as often as the time you spend in the toilet. In fact, when a recession hit and the market goes… DOWN, it’s like when you get food poising; countless hours spent in the toilet.
So, by adding a system and discipline to your investment strategy, you’ll be RICH in no time.
Did you notice when some bad story hit the news, the stock undergoes a correction? In the other hand, whenever good news is prevailing, stocks go up and seem everyone can become rich overnight.
Corrections happen often, but the rare occurrence of market crashes (food poisoning) are the golden opportunities. It’s worth remind the “Black Monday” in 1987 which hit the stock markets around the world with picks of -29%. The wise daily traders and long time investors had enormous profits.
Market crashes offer incredible returns, sadly the occurrence is less than one time per decade.
But why markets or stock crash? Anything wrong with the real economy or companies fundamentals? Or… is something else?
I call it the “HUMAN FORMULA FOR STOCK CRASHES” = FEAR + PANIC + TRADING SOFTWARES
Yeap, the market isn’t perfect, and humans even less. Put these three conditions together, and a crash will materialize.
The good news is that it’s possible to identify the conditions before a market crash. The most common are; markets bubble or political/economic decisions which shock the world.
Brexit is a recent opportunity caused by the decision of UK people to leave the European Community. The NEWS stormed global markets for few days, affecting Europe’s markets negatively but offering up trends for US bonds.
However, assessing the length of the trend or when an event will take place is the tricky part.
You can absolutely be correct in determining a fair value for a market or stock, but losing heavily by taking a position too early.
This is the reason supporter of the efficient market hypothesis suggest to diversify the portfolio, use fundamentals to analyze companies, risk management and invest for the long term.
As per the author Jack D. Schwager, the flows of the efficient market hypothesis are both severe and numerous:
- Extreme events have occurred in the past. To cite only one example; on 19 October 1987, the S&P500 futures fell by 29%. The probability of such event by the market hypothesis to occur is every 10 trillion years.
- If the hypothesis would be correct, the traders mention below aren’t real, they belonging to fairy tails.
- Market prices completely out from fundamentals are a common occurrence.
- Price moves often occur well after the fundamentals news.
- Everyone should use the same information with equal efficiency.
- The hypothesis doesn’t take into consideration the human emotions on the stock price.
After these considerations, the answer to the initial question of this article is:
Yes, the market can be beaten although doing so is very difficult.
The level of trading success attained by the “Market Wizards” is possible only because the day traders have got:
- An innate set of skills.
- A System.
- Work hard to achieve success.
Below, a summary of the best “daily traders” and “stock investors” so we can learn from their innate ability to profit from the stock market.
TOP DAILY TRADER’S INTERVIEWS
Profession; Commodities Trader.
Investment Style; Stay with the trend, if the price goes high than hold instead if the price goes down, then sell and book profits. Follow sector cycles.
Strategy; Intraday chart points, when the volume skyrocket, buy with a close stop loss, something like 2% stop loss. Potential gain can go as far as 10% if the strong trend continues.
Trade when 3 things are happening; fundamental, technical and market tone. The price should be undervalued to the fundamentals of the company. The index is in trend. If the market is bullish should shrug off the bearish news and respond vigorously to bullish news.
Tips; If you see a surprise price move against you that you don’t understand. Get out immediately and look for reasons later.
- Never invest emotionally, analyze everything.
- Bet less than 5% of your money on any one idea.
- Always use stops.
- If unsure about a position, get out and get a good night of sleep. If you are in, you can’t think clearly.
- You want to put down a bet when a market act terribly relative to everything else. Bad news; the market or stock doesn’t go in correction. Meaning the market or stock is in a bottom… Or the stock has strong fundamentals/reports.
Tools; Read the Investor’s Daily comparing the EPS (earning per share) growth of a stock relative to all other stocks.
Being a successful trader also takes courage: the courage to try, the courage to fail, the courage to succeed and the courage to keep going.
Rudy’s Note; Following Micheal’s investment style, at the moment, uranium stock is into a low cycle, which is an opportunity to BUY.
Profession; Currency and future’s trader.
Investment Style; Rational & discipline investing.
Strategy; Trade in technical information and understand the fundamentals. Ask yourself; ‘Why the market should move?” Get into a trade with a stop loss determined by technical analysis.
Risk control; Risk less than 1% of the portfolio on any single trade.
- The first rule of trading; don’t get caught when you can lose lots of money for reasons you don’t understand.
- Breakouts which occurs for reasons nobody knows are usually good risk/reward trades. Breakouts from the news are difficult to sustain.
- Don’t buy more than 10% of daily trade contracts.
- In a bear market, you have to use sharp counter-trend rallies to enter positions (bottom after a global stock crash or lengthy downturn).
- The price for a market on any given day is the correct price, try to figure out what changes are occurring that will alter that price.
- Understand risk management.
- Avoid impulsive trade. You are going to lose money.
Tools; Large following newsletter writers; Prechter, Zweig, Davis, Eliades.
Technical analysis tracks the past; it does not predict the future.
Rudy’s Note; Any time I see breakouts that don’t make sense to me, I enter the position. Very useful in downturn periods.
Profession; Commodity trader.
Investment Style; Going with the trend.
Strategy; Trade following the market up or down with wide stop losses.
- When you have a destabilizing loss, get out, go home and the next day you are ready to take a decision.
- Avoid trying to catch up or double up to recoup losses.
- Minimized losses to preserve capital for those few instance when you can make a lot in a very short period of time.
- The key to success is consistency and discipline.
- Do a lot of reflection on trades that works. Why? How?
- Write a diary and log in trades + observations.
- Expect the unexpected; the impossible happen every now and then.
- If after one or two weeks you are at lost, your trade is wrong.
- Get into the market in trend, example after a good news the market start to go up.
Tools; Good trend-following system.
When you start, you ought to be as bad a trader as you are ever going to be.
Rudy’s Note: Very helpful tips. I’m already implementing a diary for my trade in the last 6 months which is useful to look back and improve upon.
Paul Tudor Jones
Profession; Contrarian trader.
Investment Style; I liquidate half my position below new highs or low, and the remaining half behind that point.
Strategy; Market turns – Try repeated trades over a period of weeks on a market which continues to move lower for the long side up.
- Never over trade and play macho man.
- Get out of a position against you.
- Focus on the money you can LOSE as opposed to making money.
- Never trade in a situation where you don’t have control. For example before a key report.
Everything gets destroyed a hundred times faster than it is built up. Don’t focus on making money; focus on protecting what you have.
Rudy’s Note: I like the point about never focus on the money to make which is a common mistake of investors. Just look at the dividends investors in the S&P500 who focus on making money with dividends and can’t see the huge loss risk in the horizon.
Profession; T-Bone Trader.
Investment Style; Base on fundamental analysis.
Strategy; Have discipline and patience is to think about a trade thoroughly before putting it on. That way, you won’t get swayed by every movement of the stock.
- Have the discipline to follow a trend system, will increase your chances to be a successful trader.
- Judgment half on trade software, half on personal judgment.
- Have a method for staying with your winners and getting rid of your losers.
- The biggest mistake is to over-trade, too much commission.
- Traits of successful traders; 1) Discipline – 2) Patience – 3) Courage to go into the market, it comes from adequate capitalization – 4) Willingness to lose 5) Strong desire to win.
- Be selective in taking a risk, don’t trade too big.
Tools; Trend System.
Rudy’s Note: I like Gary’s focus on method and strategy.
Investment Style; Trend following.
Strategy; Follow its trading system.
- Fundamentals are useless because the market factor the news immediately, but sometimes, if you catch on early before others, then you might have a valuable trade.
- When everybody is bearish, we might be near a bottom.
- Set protective stops when you enter a trade, move the lock while the trend continues.
- I risk below 5% of any trade.
- Trading rules; Cut losses – Ride winners – Keep bets small – Follow the rules – Know when to break the rules
- The best way to increase profits is to do goal setting and visualizations.
Tools; Own trading system.
Everybody get what they want. Winning traders have usually been winning at whatever field they are in for years.
Investment Style; Using trading systems.
Strategy; Trade with excellent risk management, stop loss at 1%.
- Markets are inefficient because people develop systems all the time, switch between system and make mistakes.
- Never risk more than 1% of total equity on any trade.
- Calculate the risk; if a trade has a payoff of 2$ versus 1$, it worth it.
- We get out of position after 1% drop, we get into position once the market reaches a new high.
- The ability to step on the accelerator at the right time is certainly one of the elements that separate good traders from an exceptional one.
While you can’t quantify rewards, you can quantify risk.
- An example case against tobacco companies. Tobacco companies have never lost a case, so it’s worth to try trade against the company because if they lose the first case, big money can be made.
- To win as a contrarian, you need the right timing and you have to put the right size.
- When a market has enormous move, most of the time, there are a lot of emotionalism and extremism in that move.
- If you can get 9% in T-bonds, what should you get in stocks? Much higher probably, so what are the realistic chance of achieving it.
- When you buy or sell a stock, you’re competing with people have devoted a good portion of their lives to this endeavor.
All I bring to the party is twenty-eight years of mistakes.
TOP STOCK INVESTOR’S INTERVIEWS
Investment Style; Buy stocks on the rise.
Strategy; Buy stocks that are coming out from of broad bases and beginning to make new highs relative to the preceding price base.
MODEL; Canslim (Only less than 2% of the stocks in the entire market will fit into this formula, only 0.2% will be outstanding).
C; Current earning per share show a 70% average increase for the current quarter over the same quarter in the previous year (Profit increase dictate the change of share price; least 20% to 50%).
A; Annual earning per share. Five-year average annual compounded earning growth rate.
N; Something NEW; new products, a new condition of market or change in industry. TASCO is an excellent example.
S; Share outstanding. Less than 24 million, average 11 million.
L; Leader in their sector.
I; Institutional. Leading stocks usually have institutional backing, so the price gets supported. Too much institution backing isn’t good because would be a source of large selling.
M; Market. Three out of four stocks will go in the same direction as the market. For more, read How to use volume to profit.
- Buying stock with low P/E or low price stock isn’t very sound.
- You don’t want to anticipate a breakout from a base because a stock may never break out.
- If you buy at the right time, the stock usually doesn’t go down more than 7%.
- Don’t buy a stock 10% behind its prior price base.
- How to determine market top; 1) the leading stocks of the bull market are correcting, that is a sign the market has topped. 2) The average moves up to a new high but does so on low volume.
- Deciding to buy a stock merely on P/E makes no sense. There is always a good reason P/E is low, usually under-performing stock. The best stocks have P/E above 20.
- Diversification is a hedge for ignorance.
- When the stock is moving into new high ground, volume should increase at least 50%.
- Volume should dry up when price consolidating.
- A bad habit is to average down in your buying, rather than up.
Quote; It’s impossible to be right all the time, the key to successful trading is to lose the least possible when you are wrong.
Stock are like anything else. You can’t buy the best quality at the lowest price.
Investors will sell a stock with a profit before they sell one with a loss.
Rudy’s Note: I’m using many points of William’s Canslim System. Investing in stock and index coming out from a low base has LOW RISK but potential HIGH REWARDS.
Investment Style; Same as William O’Neil.
Strategy; Same as William O’Neil.
- Never buy overextended stock, they should be within 15% of their base price.
- Avoid stocks below 10$.
- Use relative strength in selecting stocks (above 80%). If relative strength weakens, sell the shares.
- Buy stocks with less than 30M shares. 5-10M are optimal.
- 1-20% mutual fund ownership is optimal.
- 0.01% stocks at any given time are optimal for investing.
- Most stocks have already double or triple before.
- You want to see volume dry up during consolidation price.
- When the stock price is bottoming, you want to see high volume combined with the absence of further price correction.
- The best pick stock has P/E double of average index P/E.
- Rallies at low volume are an indication of a reverse market condition, from bull to bear.
Rudy’s Note: I’ve witness stocks take off meeting the criteria underline above.
Profession; Stock and future trader.
Investment Style; Trade fast.
Strategy; Cut losses fast, let run the profits.
- It’s hard to trade stock short.
- Most down Fridays will be down Mondays.
- One of the most suicidal things you can do in trading is to keep adding to a losing position.
- Never freeze in the market.
- Whenever you get hit, you are very upset emotionally. Most traders try to make it back immediately; they try to play bigger. You are doomed to fail…
- Rule 1; Check the moving average chart prior to taking a position.
- If a stock held above its most recent low, when the market has penetrated its most recent low, that stock is healthy and is worth to buy.
- Rule 2; Bottom fishing is one of the most expensive forms of gambling.
- Rule 3; Before taking a position, know always the amount you are willing to lose.
- Money management is the most important skill.
- Always be well diversified; several bank accounts and few safe boxes.
- When your worst fears aren’t realized, you probably should increase your position.
- Take losses quickly; that means, get out from bad tradings.
- Learn how to take losses.
- After excellent trading, take one day off. It’s hard to sustain performance for more than 2 weeks.
2. Try to be profitable every single month.
3. To hell my ego, money is more important.
James B. Rogers
Investment Style; Buy quality stocks for the long run.
Strategy; Invest in any market, bond, currency. Look at a major historical market move and learn from it.
- Trade as little as possible.
- When in the market there is chaos and hysteria, things can’t last. So, if it’s a bull, invest opposite.
- Think for yourself in the market.
- The world is always changing, so buy changes.
- Don’t do anything till you know what you are doing.
- Buy Value; if your timing is wrong, you will not lose much.
- Wait for a catalyst; change of market directions are the way to go. A bottom market can stagnate for a long time.
- Sell hysteria; go opposite madness.
- Be selective; don’t trade for the sake of trading.
- Be Flexible; trade anything.
- Never follow conventional wisdom.
- Know when to liquidate your losing positions.
Do nothing, unless there is something to do.
If you see something, doesn’t mean that everyone sees it.
There are a lot of people in the market that don’t know what is going on.
Rudy’s Note: I love James’ quotes. I’m working on to doubt myself less.
Strategy; Trade in the mid range, fast in and fast out.
- ~ Never have a specific target of what you want out of the trade.
The greatest traders are the ones who are most afraid of the markets.
Profession; Reactive Trader.
Investment Style; Counter-trend trading and trend following.
Strategy; Play small in the beginning of the year, gradually increase.
- Be a great listener; What and how they say it.
- When you don’t care, you do well, when you care, you don’t do well. So, don’t try too hard.
- Change is natural in business and trading.
- Japanese buy in bulk and one way altogether. I think Chinese do the same.
- Never add to a loser.
Make whatever you can
It doesn’t matter if my opinion is right or wrong, all that matters is whether I make money.
Profession; Pit trader – Single trades as large as $200 million.
- Market players do the same thing over and over again. Analyze, understand and trade.
You might have notice that those successful traders and investors share common set of skills and habits. That’s why they are the top 10% making the 90% of all the money in the markets.
To recap, here their similarities that makes the winners:
- They have a system in place before, during and after the trades.
- They set rules to follow religiously.
- Risk/reward analysis.
- Bet less than 10% of total portfolio in any one idea.
- Monitor and adapt their trades constantly.
I’ve used the above points into my trades, and let me tell you the difference made to my trading life.
I went from frustrating irregular wins to a constant income by trading. Not only change my life, but I feel more relaxed, confident of my future and able to make smarter decision in my life.
Yo, what are your thoughts? Are you using any of these top trader’s tips?