Book Review: Market Wizards
Although this book came strongly recommended, I was skeptical that it would be of much interest. I figured there was little to learn from futures, commodities, or currency traders given the difference in my investing style. After all, what could the noble long-term investor learn from a barbaric trader? Plus, I sort of scoffed at the title and the cover art. As I was assured, I was incorrect, and the book was full of timeless wisdom straight from the mouths of risk-takers themselves.
There is really no substitute for the source material found in the interviews in this book (which became a whole series of books). Many investing books are opinionated derivatives of classic lessons, but the interviews in Market Wizards are real accounts of what it feels like to lose, how you get back in the game, how to manage risk, what makes for a great trader, etc.
I came away with the thought that most investors, especially some of today’s archetypes like the long-term compounder bros, the never-sell crowd, the hyper-growth-at-any-cost crowd, the value/buffettologist crowd, etc., could use a dose of the wisdom in this book. My guess is that most long-term-oriented investors have a similar initial reaction to mine, but I found the lessons to be surprisingly universal.
I gained a new level of appreciation for the complexity of the craft of investing and a more open mind about applying cross-discipline insights and not falling victim to dogma
A few lessons that stuck out as recurring themes among the interviews in Market Wizards:
Investing, trading, speculating - participating in the markets in general - is a probabilistic game. It may make sense to take frequent small losses if you are making convex bets that will pay off immensely in a rare scenario. You are dealing in the realm of predicting the future, which is inherently governed by randomness. Attempting to perform with a high degree of accuracy over any length of time is a fool’s game, but setting up a system that involves rich rewards when you are right and mild punishments when you are wrong is what determines long-term success. Some refer to this as process over outcome, and the subjects of this book were intense about their process.
Related to playing a probabilistic game, the traders in Market Wizards are all far less concerned with being “right” than they are with making money. I see this frequently among investors today, especially the loudest ones - the desire to be “right” and to figure it all out is at odds with the nature of the game. The intellectual competition and continuous learning attract some of the smartest people in the world to the markets, but the smartest people may actually more easily make the mistake of prioritizing being right. As this book highlighted, the best investors are able to change their mind on a dime when presented with new information, and they don’t subscribe to any -isms that limit their thinking.
Respecting risk. All of the book’s subjects had a healthy respect for risk and recognized that the market is bigger than any one participant, leading to a sort of deference to the power of the market. No matter how mighty the individual or stellar their track record, none of the interviewees thought they could outsmart the market. Those that don’t respect risk don’t last long enough to be interviewed for a book. Most had rules - a stop loss at a given point, a certain percentage of their account they could risk on any one trade, or defining the time they’ll get out when they put the trade on. Being a long-biased, long-term equity investor who doesn’t use leverage, the risk of ruin is not something that is often on my mind. But in many markets, ruin is commonplace and the primary motivator for respecting risk. Hearing from traders who are effectively survivors was a good reminder that while reward may draw people to become traders, risk (and its management) is what keeps you in the game.
You need to be obsessed. Most of the traders in this book were downright fanatical about their craft. Some sacrificed sleep, family, and everything else to trade global markets as they were open throughout the day and night. Many were on the phone on and off during the interviews. Some had elaborate setups in their home so they could monitor markets around the clock. Greed doesn’t motivate this level of obsession - it has to be an innate passion.
Accessibility is a double edge sword in the investing world. Anyone can open an account (or buy a seat on an exchange) and start trading, there is no board of traders that requires certificates and test scores. On one hand, even the beginner can enter the arena and test their wits against the best in the world. On the other hand, the traders in this book are your competition from day one. They are not in a separate league; you compete directly. Many interviewees had dramatic stories about starting out, borrowing money from friends, losing it all, going back for more, and fighting their way out of the hole to eventual success. They simply couldn’t do anything else. No other “job” would do. It’s a good reminder that if you are not passionate about this pursuit, someone that is will eat your lunch.