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  • “Market Wizards” Advice: Doing the Uncomfortable Thing

    by Jack Schwager

    Excerpted with permission of the publisher, John Wiley & Sons, from “The Little Book of Market Wizards: Lessons from the Greatest Traders,” by Jack D. Schwager. Copyright © 2014 by Jack D. Schwager. All rights reserved. This book is available at all bookstores and online booksellers.

    Jack Schwager interviewed the top traders about their experiences and wrote about his conversations in “Market Wizards,” a 1989 book that became a bestseller and spawned three other volumes. This article is an excerpt from his new book, “The Little Book of Market Wizards,” which distills the valuable insights from these interviews over the years into essential lessons every investor can benefit from.

    William Eckhardt, a long-term successful trader and commodity trading advisor CTA, believes that the natural human tendency to seek comfort leads people to make decisions that are worse than random in trading.

    I want to be clear. You have probably heard the famous quote by Princeton University economics professor Burton Malkiel, “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts,” or some variation of that theme frequently uttered by those deriding the purported folly of trying to beat the market. Eckhardt is not saying that. He is not saying a monkey could do as well as the professional money managers. Eckhardt is saying the monkey will do better.

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    Jack Schwager is principal of PortfolioFit (portfoliofitadvisors.com), an advisory firm that specializes in futures and FX managed accounts, and co-portfolio manager of the ADM Investor Services Diversified Strategies Fund.


    Discussion

    Aaron from KS posted over 2 years ago:

    Ok, so Ekhardt says in his first example say don't buy cheap and sell high. " “the call of the countertrend.” Buying on weakness and selling on strength appeals to the human desire to buy cheap and sell dear." Then in his second example say don't cash in quick profits because it impedes future growth. And finally, in his last example, says markets tend to trade through the same price so you should buy and hold. So if I can't buy low and sell high, take quick profits, or buy and hold, WHAT'S LEFT?


    Aaron from KS posted over 2 years ago:

    Sorry, i meant to say "shouldn't" buy and hold.


    F Paul Brady from CA posted over 2 years ago:

    Buying on weakness does make sense if you know the company fundamentals and longer-term outlook are solid. I did this recently with BA and CAT both solid cos, I thought, and they are now coming back.


    O. Timothy Moore from OR posted over 2 years ago:

    Aaron - Buy high and sell higher. See books by Charles Kirkpatrick II and Michael Carr. It is Relative Strength investing (not RSI).


    Aaron from KS posted over 2 years ago:

    Thanks Tim, will do!


    Paul Senior from CA posted over 2 years ago:

    While this article and its insert section is interesting and may be helpful, I find it confused also. Always, of critical relevance (to me, anyway) is this most basic question: Is there a difference between being a "trader" and being an "investor"? I say, Hell yes! Articles like the above seem to just commingle terms like "investor", "trader", "market participants", "people". We have: "This article is an excerpt from his new book, “The Little Book of Market Wizards,” which distills the valuable insights from these interviews (ed: with traders I take it)...into essential lessons every investor (ed: Investor!) can benefit from. Okay, well enough. It seems to me though that points are drawn based on behaviors of traders, yet conclusions are made as if all people behave like traders do.

    I note that the professor, Eckhard, seems to be giving his opinions only from his view of being a "long-term successful trader". His conclusions, and those relating to the Greenblat section may apply more to traders than to investors.


    MS from CA posted over 2 years ago:

    Based on conclusion, it seems that most individual investors (not traders) are better off buying an index fund (Vanguard or ETF).

    1. Value Investors: Buying on weakness and selling on strength, make sure you understand company fundamentals, or just buy a stok with adequate margin of safety.

    # works always if one does the required due diligence. Lot of work.

    2. Momentum Investors (Popularized by IBD and other books): buy high, sell higher, do not care about PE ratios etc.

    # works only in bull market. Popular press, screening programs and IBD is full of recommendations. The biggest drawback of momentum investing is that you are "hoping" that there are more buyers to bid up the stock after you buy.
    If a stock falls after it breaks out *technical analysis that IBD relies on so much* they come up reasons to justify (base was flawed, third stage base, volume was not convincing, plus 12 other reasons). This is hindsight bias.





    Ralph Hoey from FL posted over 2 years ago:

    It seems to me that the most important thing for investors to do is to research the company that interest them. How have they done in the last five years, are sales and profits increasing at a steady rate-how much debt do they have and how do they handle it- diversify-what do you think about their future plans- if the future looks doubtful sell-Markets change- keep an eye on your portfolio.


    William Briggs from MD posted over 2 years ago:

    MS from CA, You are correct on IBD. I used them for years before coming aware all systems do not work all the time, IBD is more for growth than value etc, [what happened to that cup?, oops dangling participle was in the way LOL] Seems most systems work some of the time to a particular %. I've never discovered systems for various markets that I could change or morph into and have then work. Maybe someone will invent a system that rolls quickly into a market tendancy but when it ends, roll into another system automatically.


    Charles Guenther from PA posted over 2 years ago:

    AAII's last two issues both emphasized the importance of the main drivers of long term success - diversify & rebalance periodically. By using those two powerful tools, an investor will always be in stocks that exhibit:
    - momentum
    - dividends
    - value
    - growth
    Due diligence is required in choosing the individual stocks, but an alternative, as mentioned, is the good old Vanguard total market fund. Those traders mentioned in the articles may have turned small amounts into fortunes, but I am a firm believer in slow & steady wins the race....you will get to the same point without as much 'agida'!


    Bill Mead from OH posted over 2 years ago:

    I never have the time to do the research on individual equities now, but when I was young, I would have been a great example for this article. During that time my father and others i knew started asking me to "tell them what I was going to do" - and they would do the opposite. I was remarkably consistent in doing the wrong thing - eventually learned and went with the managed fund approach.


    Bill Mead from OH posted over 2 years ago:

    I never have the time to do the research on individual equities now, but when I was young, I would have been a great example for this article. During that time my father and others i knew started asking me to "tell them what I was going to do" - and they would do the opposite. I was remarkably consistent in doing the wrong thing - eventually learned and went with the managed fund approach.


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