Market Wizards - Interviews with Top Traders PDF
Preview Market Wizards - Interviews with Top Traders
MARKET WIZARDS Interviews with Traders Top JackD. Schwager HarperBusiness ADivision of HarperCoWinsPubltshers You've got to learn howtofall,beforeyou learn to fly. Contents \342\200\224PauSlimon One man's ceiling is another man'sfloor. \342\200\224PauSlimon ix Preface, If I wanted to becomeatramp,Iwould seek information and advice from the mostsuccessful I could find. If Iwanted xi tramp Acknowledgments, tobecomeafailure,Iwould seek advice from men who had neversucceededIf. I wanted to succeed in all things, Iwould xiii lookaround me for those who are succeeding anddoasthey Prologue, have done. \342\200\224JosephMarshall Wade My Own Story, xv (as quoted in a Treasuryof Wall Street Wisdom D.SchultzandSamson edited by Harry Coslow) PART I FUTURES AND CURRENCIES the Taking Mystery Out of Futures, 3 The Interbank CurrencyMarket Defined, 7 Michael Marcus: Blighting Never Strikes Twice,9 BruceKovner: The World Trader, 51 Richard Dennis: A Legend Retires, 85 Contents vii vi Contents PART III A LITTLE BIT OF Paul Tudor Jones: The Art of Aggressive Trading, 117 EVERYTHING Gary Bielfeldt: Yes, They Do Trade T-Bonds James B. Rogers, Jr.: BuyingValue and Selling in Peoria, 141 283 Hysteria, Ed Seykota:EverybodyGetsWhat They Want, 151 Mark Weinstein: High-PercentageTrader,321 Larry Hite: RespectingRisk,175 PARTIV THE VIEW FROM THE FLOOR PARTII Brian Gelber: Broker MOSTLY STOCKS Turned Trader, 345 Tom Baldwin: TheFearless Pit Trader,367 Michael Steinhardt: The ConceptofVariant 193 Perception, Saliba: Tony \"One-Lot\" Triumphs, 387 William O'Neil: TheAH ofStockSelection2,19 PART V THE PSYCHOLOGY OF TRADING DavidRyan:Stock Investment as a Treasure Hunt, 23? Dr. 411 Marty Schwartz: Champion Trader, 257 Van K. Tharp: The Psychology of Trading, TheTrade: A Personal Experience, 431 Dreams and Trading,437 Postscript: Final Word,439 Preface 1: Appendix Program Trading and Portfolio Insurance, 441 There are some amazing stories here: Appendix 2: the Basics, 443 Options\342\200\224Understanding \342\20A0\24tr2ader who, after wiping out several times early in his career, 447 turned a$30,000 accountinto $80 million Glossary, \342\20A0\242fund manager who achieved what many thought impossible\342\200\224cfoivnesecutive years of triple-digit percentage returns \342\2A00\24t2rader from small-town America who started out on a shoestring and has become one oftheworld'slargestbondtraders \342\20A0\24f2ormer securities analyst who, during the past seven years, has realized an averagemonthly return of 25 percent (over 1,400percentannualized), primarily trading stock index futures \342\2A00n\242electrical engineering graduate from MTTwhoselargely computerized approach to trading has earnedhisaccounts an astounding 250,000 percent return over a sixteen-year period Thesearebut a sampling of the interviews contained in this book. In his own way, each of the traders interviewedhasachieved incredible success. What sets these traders apart?Mostpeoplethink 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 moretodowith attitude than approach. Some ofthetradersuse fundamental analysis exclusively, others employ only technical analysis, and still otherscombinethe two. Some traders operate onatime horizon measured in hours or evenminutes, while others typically implement X Preface positions that they intend to hold for months orevenyears.Although the trading methodologies varied widely, the forthcoming interviews reveal certainimportant commonalities in trading attitudes and principles. Trading providesoneof the last great frontiers of opportunity in our economy. It is oneofthe very few ways in which an individual can start with a relatively small bankroll and actually become a Acknowledgments 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 allreadersof this book to transform First and foremost, Iwould liketothank Stephen Chronowitz, who pored themselves into super-traders\342\200\224the world just doesn't work that way\342\200\224I overeverychapter in this book and provided amultitude of helpful believe that these thought-provoking interviews will help most serious suggestions and editing changes. Iamindebtedto Steve for both the and open-minded readersimprove their personal trading performance. quantity(hours) and quality of his input. I truly believe that whatever the It may even help aselectfewbecomesuper-traders. merits of this work, ithas benefitedsignificantly from his contributions. Iamgrateful to my wife, JoAnn, not only for enduring nine months JackD.Schwager asa\"book widow,\" but also for beingavaluable sounding board\342\200\224arole Goldens Bridge, NY she performed with brutal honesty. Sample:\"This is the worst thing you May 1989 everwrote!\"(Needlessto say, that item was excisedfrom the book.) Jo Ann possessescommonsensein abundance, and Iusually followed her advice unquestioningly. Of course, Iwould liketoexpressmy thanks to all the traderswho agreed to be interviewed, without whom there would benobook.Byand large,thesetraders neither need nor seek publicity, as they trade only for their own accounts or are alreadymanaging 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 ofsuccessfultradersparticularly helpful, and I would liketoplay asimilar role in helping new traders.\" Iwish to express my sincere appreciationtoElaineCrockefror her friendly persuasion, which made someof the chapters in this book possible. For advice, leads, and other assortedfavors,Iwould like to thank Courtney Smith, Norm Zadeh, Susan Abbott, Bruce Babcock, Martin Presler, Chuck Carlson, Leigh Stevens,BrianGelber,MichaelMarcus, and William Rafter. Finally, Iwould liketothank three traders who were gracious enoughtogrant me lengthy interviews, which werenot incorporated into this book: Irv Kessler, DougRedmond, and Martin Presler (the formertwo because, in retrospect, Iconsideredmy line of question- *\" Acknowledgments ing too esoteric and technical; the latter because publication deadlines did not permit time for needed follow-up interviews and editing). Prologue Thename of the book was TheBigBoard. . . .It was about an Earth- ling man and woman whowerekidnapped by extraterrestrials. They wereput on display in azooonaplanet called Zircon-212. These fictitious peoplein the zoo had abig board supposedly showing stockmarket quotations and commodity pricesalong one wall of theirhabitat, and a news ticker, and a telephone that was supposedly connected to a brokerage onEarth. 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 itsothat they would be fabulously wealthy when they were returned toEarth. The telephone and thebig board and the tickerwereallfakes,of course. They were simply stimulants to make the Earthlings perform vividly for the crowds at thezoo\342\200\224mtoake them jump upand 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 onpaper.That was part of therigging, of course. And religion got mixed up in it,too.Thenews 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. Sothey gave praying awhirl. It worked. Oliveoilwent up. \342\200\224KurVtonnegut Jr. Five Slaughterhouse Ifthe random walk theorists are correct,then Earthbound traders are suffering from the same delusions asthezooinhabitants of Kilgore Trout's novel. (Kilgore Trout isthe ubiquitous science fiction writer in Kurt Vonnegut's novels.)Whereas the prisoners on Zircon-212 thought their decisions were being basedonactual price quotes\342\200\224they were not\342\200\224real- life traders believe they canbeatthe market by their acumen orskill. If xiv Prologue 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 amatter ofluck. After interviewing the traders for this book, it ishard tobelievethis view of the world. Onecomesaway with a strong belief that it is highlyunlikely that some traders can win with such consistency over vast numbers oftrades and many years. Of course, given enoughtraders, My Own Story some will come out aheadevenafter a long period of time, simply as a consequence of the laws of probability. Ileaveit for the mathematicians to determinetheoddsof traders winning by the magnitude andduration that those interviewed here have. Incidentally, the traders themselves Right out of graduate school, I landedajobas a commodity research have not aglimmer of doubt that, over the long run, the question of who analyst. Iwaspleasantly surprised to find that my economic and wins and who loses is determined by skill, not luck. I, too, sharethis statisticalanalysis correctly predicted a number ofmajor commodity price conviction. moves. It was not long thereafter that the thought of trading came to mind.Theonly problem was that my department generallydidnot permit analysts to trade. Idiscussed my frustration over this situation with Michael Marcus (first interview), with whom Ibecame friends while interviewing for the research position hewasvacating. Michael said, \"You know, Ihad the sameproblemwhen I worked there. You should dowhat I did\342\200\224openan account at another firm.\" He introduced me to abroker at his new firm, who waswilling to open the account. At the time, I was earning less than the department secretary, so I didn't exactlyhave much risk capital. I had my brother open a$2,000 account for which Iacted asanadvisor.Sincethe account had to be kept secret,Icould not call in any orders frommy desk. Every time Iwanted to initiate or liquidate a position, I had to take the elevatorto the building's basement to use the publicphone.(Marcus'solution to the same problem isdiscussedin his interview.) The worst part ofthe situationwas not merely the delays in order entry, which were often nerve- wracking, but the fact that Ihadtobevery circumspect about the number oftimesIleftmy desk. Sometimes, Iwould decidetodelayan order until the following morning in order to avoid creating any suspicion. I don't remember any specifics about my first few trades. All I recall is that, onbalance,Idid only a little better than break even after paying commissions. Thencamethe first trade that made alasting impression. I had done a very detailed analysis of the cotton market throughout the entire post-WorldWar II period. I discovered that because of a variety of government support programs,only two seasons xvi My Own Story My Own Story xvtt cwgsioonecvureeelrdnm1db9eee5nt3eturmsceiopndureolinddgrfaotrmrubelyyc]a.stinsgubIpecployterrrmepercdiacnteldsy.fcreodeeUnmncmaflonuardrtdkueneadtsrttheaalttyh[,meroanlrytkIhaenfttahsielsineethdewtthwoicpohrreevsaaeiplcairnshigcoetnhses bttthhhaeatatto,fhmaiaytsnylemianvasiatrtiluakelfe.otracmWsasyeollsrsskseimnwlgfe,netrfuencdolafomoteesnfnetalltyecrihgwhnti.tihcaanSlaEltyvaesevinnsetau,laylhlsyao,ilsownweevaIewsbra,ewscrIoanbgim.neseguaffcniIoctoinreevannlioitzntieccdefeodr hcppmsoiegeterothmoarerneirtsjpouamnomTpssuehei,odganevnnedIiirfni,iingcnaifwftunfraoiolutealmldprererpidoa2mcdr8mottahnoarttvckooeloefutf3scthio1meothtanoicngnofheoanerlnertyc,httaphssssriatis.ictn.beTsue,aBthxpsiaerpisonwsnetvgeieahnltddehkigechoanwrdacoduowaeanvrdetareanckeocr.mceewptaTrtieh3seoha2rnn-sei3as3ccicnlotesraulatfedtftriieccoanieesgtnwennttdtitsphr.alrlyaitcthea2ensw5stedoeascdetgwnteosd tscslmoiuoumsacerlcckuieenscmtsgeefunvTslesrhoyfvfwtueiheliwtansrts.grtaaredaditcdnhgeeio;nsg.no.rnedalkiaeIzyIaastildoisnnoeegcleilnmdeeeeentdrtdatdheea\d3tth4a2t\2trt0hio0sa\2kIt2i4nwnoccofmoiounanlrtdattpelrrlooylrnaehtwvpeoeuwarttsecmacahobgnenasviioinicnnltcaouealtdalnelaolltyhyswiesIewsmswaeiysnnfnsootereirf'alsmtfhlytteoo mtsuamcalathceontisouactnrvanroencfirlbeouhcemckurnlnmt.teoeteiydtntdgttloohceyoTpmiuqonghubrmohtmiiloetnttesyroooeyp:jvyneresicscdeaottewhnemeve3eeasiimdne2pnltsueyelacdtsslioctdlegipoyhnes,n\hneoo".tpwttosnusleeuy,srtMrryI,fe'dth3seIhybIsai3coogwcyoautprhpolgcseurayhedrenonstremn,fsnvdfiaitttaaodsuiesrnto,yaeordalduc3rntaohesaedn4thndaddencnvIettoriwoeeaendthnlceelmqbairrtqcuhteesueiiic,iid,dgdoke3alihyentnbaseu5dsnloeiwmctInapoeebeonelrnrtrxgdethoaeovekptnoftsestee.hhs.poFlcmreihotnt-yonablseiolvliafyedtr,cdim9,oltkum.n\9ocTa".rkhCktvecieoreelteenoswsatNfsdtstith\tee3her4o,h2ot\2w2b0ehmte09oanr\v-v2eycoei2near4ug,nkmgttsohhr,ee bcspoaltShionamoneewreussvl.itvtemaitmnmdieyeotpoIaorInrurrrsartaklaoeymndoelntatduaeiaasrtcystkosapeanllaeptalecylvlsieud,lnnamempggttreahrirmcynta,hwetaalhetllteyaeatlshdsobitiegfstraasrc,oaastIsudeomdai..wdnllelaTygiI-hakrtekistbehIlealet-trwcalrigiaagraeennseIshnagvcttltcteatoeoe,orsldnnlstlets.ehtoefdiheddtonhi.enalAIgtlrgmfnoatlwaliwrtnhtktigiwhehstnemhettieganoyspptDaistatmetsuahon,uhdnratrotesnhdtuc,eeihtlenIhdtaxehirgfwstcteejeoaunnpnsrtDosyosdimontpItsteleeaitbwddfuoraakepttlaodilalspofnsoecnedwts,wctodhratleaosniothmodnneeupaetfewrekop.rwBrooeemlcffooedaiohnwmmunuatstd,glyyesd.d HCafoinmuehstrotwooannurocnnewtb,ysbitezTTcel.woaahuowarIsetsesI,tralttIrhortiseana&tdgdogAsfetawWiawenktrfheniisetteneorhianicklrelgkeytsndilelm,eoaadmntetdyib,lmvarmoerhIukIgleaeyhcneidwhroesultdtammohsaistsaooSstfhltr.tehprleeiaag.Mttvthhdetyehreinacnnogmtpboomronico$lxfeayd2io!lil,f0tcy0fo0ofacauroilsnpulasorloeteal.wnardoteaishosfenFaiettlriivhcermehse.nt,OteduvwesearI.alpdlIsmyianrreetettchhtmetaowaScretinhtnpeettehx'veadtste hhmcItuoahplnaydworvlaysegesrefeieosawNt-rkptmacoioobinineonatpltdgetneeltoo-dortncnuoamtatologecytgnetppoetct1lfhootarhu5ceastnae;trhitcwieitactcpitaaaiooknsafylistltnsiptoyeepno.pTarw,rshd,ioeeit,hbttiIrueollcibcnsmohntIetattihrhrvaacksecteetfu\at3af4mfr2fcac\oe2csln0treott0sonesoo\b2eedlou2ivptld4hleita.soaerthdoitaoaWnaylny,hr,Isliltloeoyfpoe\o3k,a4lnIeI2t\dm2fhr0iIteni0ehlnp\dd2enaobr2oor4saravomJliclitoadoknwapnihll.enaeoladaygsnbArseldlt.ohsyomfeutgeaoaihtmhbmbeyptloeleeeelcnatmiopo,neuIenvitdnwneteehtrngfieaiocdnfdhtcehneuadttlsa preciousmetals analyst. Steve and I shared the sameoffice, and we long enough to triple my small accountsize.That was the start of my qanuailycskt,ly bSetecvae'mesagpoporodafcrhietnodtsh.eInmcoanrtrkastetswtoasmstyricstelylf, taechpnuicrael. fundam(eTnhtael sanudccfeunsdsamatenttraalding. anaOlyvseirs tchoemnbeinxetdfewwith yeriaskrs,cothnterolsynatlhloewseids omfetechtnoicabluild fundamental analyst uses economic data to forecastprices,while the my small stake into wellover$100,000. technical analyst employs internal market data\342\200\224such as price, volume, and Then the streak ended. I found myself trading more impulsively, sskeenptitmiceisnmt\3.U42n\2tI0i0l\t2e2n4tdtoheadtprtoitjemocted,ouIpbrhticaetsdh.a)tviaenwytheingdtechnicaals simplaenalysaiss chawrtithreagdrienagt could fbIanielsinctegoadmetootfofootlalockwioncgkthyme.yIrnulploaerstsicsulIawr,hheandlethIaerrenmmeeadmrk.beIetnr remtroaovlesodpsiencgagt,Iatribnaelsidetveemines,oIyIhbaewadnsa.jsussto xviii My Own Story convinced that the decline was areactionin a bull market that I substantiallyincreased my position. The mistake wascompounded by taking this action in front of an important government cropreport. The report came out bearish,andmy equity took a dramatic decline.Inamatter of Parti days, Ihad surrenderedoverone-quarter of my cumulative profits. After cashing in my chips to buy a house and later taking a Futures and Currencies yearlongsabbatical to write abook,*my savings were sufficiently depleted to defermy reentry into trading for nearly fiveyears.When Ibegan tradingagain, typical to my usual custom, I started with a small amount: $8,000. Mostof this money was lost overthe courseof a year. I added another $8,000tothe account and, after some further moderate setbacks, eventually scored afew big winning trades. Within about two years, I had once again built my trading account up to over$100,000I. subsequently stalled out, and during the past year,my account equity has fluctuated belowthis peak. Although, objectively, my trading hasbeensuccessfulon, an emotional level, I often view it with a sense of failure. Basically,Ifeelthat given my market knowledge and experience, Ishould have done better. \"Why,\" I ask myself, \"have I been ableto multiply a sub-$ 10,000 account more than tenfold ontwo occasions, yet unable toexpandthe equitymuch beyond that level, letaloneby any multiples?\" A desire to find the answers was one ofmy motivations for writingthis book. Iwanted to askthosetraders who had already succeeded: What arethe key elements to your success?What approach do you use in the markets? What trading rules doyou adhere to? What were your own early trading experiences? What advice would you give to other traders? While, ononelevel,my search for answers was apersonalquest to help surpass my own barriers, in a broader sense, I saw myselfas Everyman, asking the questions Ithought others would ask if given the opportunity. * JackD. Schwager,ACompleteGuide to theFuturesMarkets(John Wiley &Sons, New York, NY, 1984). the Taking Mystery Out Futures of Of all the markets discussed in this book, the futures market is probablythe one least understood by most investors.It is also one of the fastest growing. Trading volume in futures has expanded more than twentyfold during the past twenty years. In 1988, the dollarvalue of all futures contracts traded in the U.S.exceeded$10trillion!* Obviouthsleyr,e is alot morethan pork belly trading involved here. Today'sfutures markets encompass all oftheworld's majormarket groups: interest rates (e.g., T-bonds), stockindexes(e.g.t,he S&P 500), currencies (e.g., Japaneseyen),preciousmetals (e.g., gold), energy (e.g., crude oil),and agricultural commodities (e.g., corn). Although the futures markets had their origins in agricultural commodities, this sector now accountsforonly about one-fifth of total futures trading. During the past decade,the introduction and spectacular growth ofmany new contracts has resulted in the financial-type markets (currencies, interest rate instruments, and stockindexes)accounting for approximately 60 percent \342\231\2is46aThrisough but conservativeestimate based on246millioncontractstraded and assuming an average contract valuewell over $40,000. (Excludingshort-term interest rate futures, such as Eurodollars, singlecontract values ranged from about $11,000 for sugar at 100/lb. to$150,000forthe S&P 500 atan index value of 300.)
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