Ask financial traders anywhere in the world to name the book that has influenced them the most…
Chances are they’ll name Jack Schwager’s 1989 classic, Market Wizards: Interviews with Top Traders.
(In second place, you’d have Edwin Lefèvre’s Reminiscences of a Stock Operator, which I have also written about.)
Schwager went on to write a handful of other Market Wizard books, including Unknown Market Wizards: The Best Traders You’ve Never Heard Of.
But 30 years after its publication, Schwager’s first book still sets the standard by which all similar books are judged. And it remains one of the best books about investing.
Schwager’s format is deceptively simple.
The book consists of interviews with many of the world’s top traders, including Paul Tudor Jones, Bruce Kovner and Stanley Druckenmiller.
Each trader offers his own idiosyncratic “market wizard” investment philosophy. No two approaches are the same.
But here’s what is most surprising…
As diverse as the market wizards’ philosophies are, it’s remarkable how much they have in common.
Market Wizards Are Addicted to Financial Markets
Several of the market wizards went on to become billionaires.
Surprisingly, none of them did it just for the money.
Instead, each was compelled by the excitement of solving the puzzle of the markets.
Jones loved to play competitive games as a kid.
Kovner, a quintessential intellectual, loved to put himself in the shoes of the world’s central bankers while analyzing currency trends.
Druckenmiller was such a gambler that he would place bets on which raindrops would slide down the window first during a rainstorm.
Trading was a passion for each of the market wizards.
The money was an afterthought.
Market Wizards Are Loners
See that loudmouthed broker hanging around the party punch bowl bragging about his trades?
The chances are slim that he’s a top trader.
Market wizards are loners. They are independent and contrary – to an extreme.
After all, to be successful, they have to continually go against the crowd.
But being a loner is not enough. You also need to be a creative and imaginative independent thinker.
There’s no point in going against the consensus just for the sake of being contrary.
Market Wizards Develop Their Own Investment Philosophies
Making the most money is the way traders keep score.
But the rules by which they play that game are unique to each trader.
All roads lead to Rome. But each road starts at a different place.
As trading coach and market wizard Van Tharp says, there are an infinite number of ways to make money in the financial markets.
But each successful trader has to find his own way.
To be a successful trader, Tharp says, you must “design your own game and make your own rules.”
Market Wizards Are Both Disciplined and Patient
Discipline means constantly gathering new facts… as well as sticking to your own rules.
This sounds simple. But it’s not easy.
And it’s a commitment few traders can make for decades.
Market wizards also need great patience.
One market wizard compared his approach to that of a predator.
A lion waits patiently for its prey – and pounces only when the time is right and when the odds are in its favor.
As Jim Rogers put it, “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.”
Market wizards do not trade purely for the sake of trading. They wait for all the right conditions to align before they act.
Market Wizards Ruthlessly Admit Their Mistakes
Once most traders enter a position, they become emotionally attached to it.
After all, it’s their baby. And they want to stick by it through thick and thin.
In contrast, the market wizards don’t attach themselves to any single idea.
A market wizard will recognize when conditions change and the original rationale for holding the position no longer exists. They are never married to a trade. And they are not afraid to admit their mistakes.
As George Soros put it, “I’m only rich because I know when I’m wrong… I basically have survived by recognizing my mistakes.”
Market Wizards Constantly Generate Alternative Scenarios
Most investors live under the illusion that a prevailing trend will continue forever.
In contrast, market wizards regularly generate – and mentally rehearse – alternative scenarios.
They ceaselessly question the status quo to anticipate when it could cause the prevailing trend to reverse.
They examine all possible situations and adjust their investments accordingly.
So what’s the most critical lesson from Schwager’s classic?
The market wizards are like world-class athletes or musicians. They are the Michael Jordans and Tom Bradys of their professions.
And they operate on a level few of us will ever reach.
But studying what these masters of their craft have in common can make us all better investors and traders.
Trading is a tough game.
As one market wizard put it, “If [trading] were easy, meter maids would be doing it.”