Lessons From Stock Market Wizards

One of the first books I read in this business oh-so many years ago was Stock Market Wizards. It had a profound impact on my thinking about trading, psychology, risk, capital preservation, etc.

Sometime ago, I came across a good discussion of the lessons from the book at Simply Options Trading. What follows is my edited adaptation of those rules he derived from Stock Market Wizards:

1. All successful traders use methods that suit their personality; You are neither Warren Buffett nor George Soros nor Jesse Livermore; Don’t assume you can trade like them.

2. What the market does is beyond your control; Your reaction to the market, however, is not beyond your control. Indeed, its the ONLY thing you can control.

3. To be a winner, you have to be willing to take a loss;  (The Stop-Loss Breakdown)

4. HOPE is not a word in the winning Trader’s vocabulary;

5. When you are on a losing streak — and you will eventually find yourself on one — reduce your position size;

6. Don’t underestimate the time it takes to succeed as a trader — it takes 10 years to become very good at anything;  (There Are No Shortcuts)

7. Trading is a vocation — not a hobby

8. Have a business/trading plan;  (Write This Down)

9. Identify your greatest weakness, Be honest — and DEAL with it

10. There are times when the best thing to do is nothing; Learn to recognize these times (Nothing Doing)

11. Being a great trader is a process. It’s a race with no finish line.

12. Other people’s opinions are meaningless to you; Make your own trading decisions  (The Wrong Crowd)

13. Analyze your past trades. Study what happened to the stocks after you closed the position. Consider your P&L game tapes and go over them the way Vince Lombardi Bill Parcells reviewed past Superbowls

14. Excessive leverage can knock you out of the game permanently

15. The Best traders continue to learn — and adapt to changing conditions

16. Don’t just stand there and let the truck roll over you

17. Being wrong is acceptable — staying wrong is unforgivable 

18. Contain your losses  (Protect Your Backside)

19. Good traders manage the downside; They don’t worry about the upside

20. Wall street research reports are biased

21. Knowing when to get out of a position is as important as when to get in

22. To excel, you have to put in hard work

23. Discipline, Discipline, Discipline !

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The links in parentheses are part of The Apprenticed Investor series I did for the Street.com.

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Stock Market Wizards: Interviews with America’s Top Stock Traders

Hat tip: Simply Options Trading
 

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What's been said:

Discussions found on the web:
  1. dblwyo commented on Nov 11

    Marvelous compression. Thanks.

    It strikes me that there’s a lot more here than how to be a good trader. There a lessons for any walk of life. Even for living in general. In fact there seemed to be echoes of Epictetus, now known to us all from Tom Wolfe’s novel, “A Man in Full” of course :).

    For example:
    Some things are in our control and others not. Things in our control are opinion, pursuit, desire, aversion, and, in a word, whatever are our own actions. Things not in our control are body, property, reputation, command, and, in one word, whatever are not our own actions.

    Try http://tinyurl.com/yssvs5 for a collection or see the Wiki entry.

  2. Florida commented on Nov 11

    I also highly recommend that book. The biggest thing I learned from it is to have a strict risk management discipline, so as to always stay in the game. Some people hear that and interpret it as being bearish, but really it is just playing smart and living to see another day.

  3. Winston Munn commented on Nov 11

    I believe it was Keynes who said, “When the facts change, I change my mind.”

    The money, it seems, goes neither to the permabull, nor the permabear, but to the permarealist who has the patience to wait until reality and perception begin to merge and then acts accordingly.

  4. rickrude commented on Nov 11

    Its hard to follow all the commandments since some of them are contradictory, some of the decisions processes are subjective.

    I do know one thing for now, the commodity bull will go on, and the USD bear will go on.

  5. Werner Merthens commented on Nov 11

    All of the 23 rules are worth contemplating. For me the first rule is the final key to becoming profitable. I like to phrase it differently, in order to clarify its meaning for me.
    In order to succeed you need an edge that differentiates you from the competition. This edge you must trade.
    You do not get an edge by imitating somebody else, even if it is a Warren Buffet or Jesse Livermore or George Soros…

  6. rickrude commented on Nov 11

    All of the 23 rules are worth contemplating. For me the first rule is the final key to becoming profitable. I like to phrase it differently, in order to clarify its meaning for me.
    In order to succeed you need an edge that differentiates you from the competition. This edge you must trade.
    You do not get an edge by imitating somebody else, even if it is a Warren Buffet or Jesse Livermore or George Soros…

    Posted by: Werner Merthens | Nov 11, 2007 10:07:03 AM
    ???????????????????????????????????

    OK, so you have it down pat Werner,
    so What should one do monday ??

    Go short financials ?? go long gold ??
    Go long USD ?? or go short USD ??

    A simple answer would suffice rather than
    longwinded philisophical discussions

  7. Anon commented on Nov 11

    Rule 12. Other people’s opinions are meaningles to you. Make your own trading decisions

  8. Grodge commented on Nov 11

    Rickrude,
    The entire post is intended to be philosophical. My only addition:

    #24. Being nice to others can be consistent with being a good trader.

  9. will rahal commented on Nov 11

    These are all very true.
    I have had my best year ever and lately
    I am making 5 times my original objective.
    Key: Prepare mentally to “know” when you are wrong ad exit your position immediately.

  10. Suge Knight commented on Nov 11

    Will rahal, so you made $500 dollars this year instead of your original objective, $100? LOL Sure, don’t tell me you’re another millionaire hedge fund manager who spends his/her time blogging instead of ‘enjoying’ the millions made. Please, let’s be realistic here.

  11. Bob A commented on Nov 11

    Rick Rude… guys like you should watch Cramer. (good luck)

  12. Finn commented on Nov 11

    Rickrude:

    Interesting that you could read point 12 and then ignore it. Seeds tossed into the rocks I suspect.

    I guess point 10 was lost as well.

  13. gorobei commented on Nov 11

    Suge,

    I think you’re being a bit harsh and probably a bit naive.

    I’ve been on Wall St for twenty years, run a hedge fund, etc. When someone starts “enjoying their millions” I figure they’re two years away for retiring or being forced out.

    Most of the great traders and managers I know would be at the office or hanging out in bars at 11pm discussing trading and strategies. The up and comers are more likely to be doing the same, but on blogs, etc.

  14. john commented on Nov 11

    Vince Lombardi coached in the first two Superbowls; there were no previous Superbowls for him to watch films of.

  15. michael schumacher commented on Nov 11

    Too bad that none of those rules (at least most of them) are not applicable to the traders that work for the big brokers.

    The only word they need to see, hear and feel is: UP

    Nothing else matters…..those rules are for us retail slobs who do not have the benefit of several things available to the non-retail traders. Most readers here are well aware of what those things are so I won’t go into them.

    2,3 and 4 are about all one needs to contemplate…..the rest comes in as you are able to deal with those.

    Ciao
    MS

  16. Suge Knight commented on Nov 11

    Sure Gorobei, I believe you. Sounds like just about every one here is a hedge fund manager or a millionaire. Let me guess, you’re also up 300% this year so far. Well, let me join the crowd, I’m also a hedge fund manager, my account is not that big, half a billion dollars and I’m up 150% for the year, LOL…I thought you only find millionaires on Yahoo’s message boards, silly me ;-)

  17. SINGER commented on Nov 11

    That’s the WRONG BOOK….

    The one you posted on is the new book…The one you meant to post about is MARKET WIZARDS…The older one with Kovner, Steinhardt, etc…

    http://www.amazon.com/gp/reader/0887306101/
    ref=sib_dp_pt/104-7797875-0606341#reader-link

    Either way all of those books are good but the oldest, first one is the best of a good series…In my opinion…

  18. gorobei commented on Nov 11

    Suge,

    I quit the hedge fund biz ten years ago, and never made more than 100% or so ROC. The day I quit and joined a big IB was one of the best days of my life – I got to dump client relations, position management, budgeting, etc, and concentrate on what I enjoy doing.

    I passed up the chance at $500M, but I’m living comfortably, work with a great group of people, and sleep well at night.

  19. Suge Knight commented on Nov 11

    Why did you quit the hedge fund biz?

  20. gorobei commented on Nov 11

    Suge,

    1. Couldn’t see how to scale up the biz honestly. At one point, we were trading 3% of the NYSE volume. Scaling up meant more slip, or changing our risk profile signifantly. Changing our risk profile meant loking for a different class of investors or lying to our current ones.

    2. Our edge was statistics and compute power. The writing on the wall said this would go away in time — compute was getting ever easier to bring on line, and quant was getting paid ever more in the big banks.

    3. Staying competitive required I become more specialized, but I’m a generalist at heart.

    4. My wife said I was turning into an asshole. I agreed.

    5. My skills (serious CS, 800-sat math, market knowledge) were rapidly increasing in value at the IBs. Also, my negatives (no college degree) were becoming rapidly unimportant at an IB.

  21. rickrude commented on Nov 11

    12. Other people’s opinions are meaningles to you. Make your own trading decisions
    (The Wrong Crowd)
    ???????????????

    UH?? Duh??
    why make up these rules and then contradict yourself by saying rule # 12 ??

    OK folks, do a masters/phd in Trading rules
    for the next 4 yrs, and I will watch Cramer.

    The reason I like to challenge you guys is that I have my neck on the line in the market. I don’t know about you guys, but all those rules, I can’t put into practise.

    Will some one show me how just to excute even one of the rules ??

  22. Barry Ritholtz commented on Nov 11

    Rickrude — you cannot “execute even one of the rules ?”

    Taking losses? Use Stops? Ignore other chatter? Smaller position sizes when cold? Avoid too much leverage?

    I don’t believe you cannot follow these . . .

  23. Brian B. commented on Nov 11

    BR,

    I have tried to post 2 comments lately and it tells me I am comment spam.. have I been banned by your site?

  24. DavidB commented on Nov 11

    Know your sell point up and down and be prepared to execute it before you trigger your buy order. That takes a lot of emotion out of your decisions

  25. rickrude commented on Nov 11

    the point is Barry, all these rules are subjective….
    so a stop loss should be set at what level ?? (don’t tell me it should be at my own comfort level)… or should I be using a
    sophisticated quant software to determine the level ??

    What is too much leverage ??
    10X like some hedge funds ??
    I don’t have any leverage/ margin.

    I am just an avg joe investor and these rules are rather hard to follow
    and meaningless.

    I’ve read market wizards years ago, got nothing out of it.

    I’ll leave the sophisticated trading to guys like you.

    I follow the greats like Boone Pickens,
    Jim Puplava and can’t stand the crap on cnbc, esp Kudlow.

  26. Suge Knight commented on Nov 11

    RickRude, you should leverage yourself 10X like some hedge funds, give it a shot, it’s only money. Thank me later. By they way, a former friend of mine once had a portfolio worth $1M, he rode it all the way down to $50K. He’s a true believer in “buy and hold”.

  27. Brian B. commented on Nov 11

    Br, not to sound like an idiot, I can only post small quips… it seems anything longer than a sentance i get the ‘spam’ message.. any help anyone?

  28. Suge Knight commented on Nov 11

    Brian B., no disrespect but you do sound like an idiot. I suggest you stop posting and enjoy my posts instead.

  29. Brian B. commented on Nov 12

    Suge,

    funny, i guess for now, i have no choice, any posts longer than this, and i get spammed..

  30. Suge Knight commented on Nov 12

    Barry,

    Can you please send me that link also? The one of the midget and the donkey.

    Suge

  31. nicktheknucklehead commented on Jan 20

    I am another hedge fund manager and I agree with many of these rules, except I am not as interested int he stop loss concept as the futures traders because I am a deep value guy. To me, when a bargain stock drops a ton, it looks much cheaper and more attractive as a long term investment. That said, I rigorously attempt to mitigate risks, ie using puts, covered calls, pair trades, etc…. For example, Ruby Tuesday (RT) dropped from $40 to $4 and I bought a ton at $4 and now its at $6…. book value per share is around $9 and the restaurants are profitable… I guess what I am getting at is that these trading rules do not really apply to equities as much as futures and do not apply to LBO or private equity at all…. these are not businesses where buying high and selling higher makes any sense — you are trying to buy dollars for 50 cents, period. That usually means adding to your losing positions at some point — a very very psychologically difficult task.

    best,
    nick aka iceveins

  32. Albert commented on Jan 27

    It is all said in 23 Discipline, Discipline, Discipline !

  33. Richard Wilson, Hedge Fund Consultant commented on Mar 22

    Thanks for the book review and tips. I love these, I don’t have time to read many books so I want to make sure it is a good investment of time when I do.

    Cheers.

    – Richard

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