Transcript: Jack Schwager

 

 

The transcript from this week’s, MiB: Jack Schwager on Trading Wizards, is below.

You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

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RITHOLTZ: This week on the podcast I get to welcome back the person who was really part of the inspiration for Masters in Business in the first place. Jack Schwager is the author of a new book, “Unknown Market Wizards: The best traders you’ve never heard of,” but this is the fifth or maybe — even if I include the little book — the sixth book of Market Wizards he’s put out.

And when I was a — a young stud on a trading desk back in the 1890’s (sic), Schwager’s book, “Market Wizards,” was — was one of the first books I picked up to learn a little bit about the idea of — of markets. And I found the book to be tremendously formative to me not so much because it said, “buy this, sell that,” but it was very revealing about discipline, and risk management, and mental models, and containing your emotions. And that book really was one of the early books that sent me scampering off to learn more about behavioral economics and — and behavioral finance, not so much because he was channeling Tversky and — and Kahneman or Thaler or any of those folks, but it was pretty clear from the successful traders he was interviewing that consensus was problematic, that examining your motivations was really important, that being aware of — of not only your own emotions, but your own biases, and some of your own cognitive deficits in blind spots was really, really important to individual traders. And, you know, I wouldn’t call “Market Wizards” a behavioral finance book, but it certainly touches on so many of the same issues.

I find these books to be absolutely fascinating as he’s put them out over the years. The — the first book really was just a pure interview book, and — and it’s evolved over all these decades. I think the first book was ’86 or ’89, and the most recent book was 2020. He not only gives you a summation at the end of each chapter, each trading wizard of — of their rules and — and what guidelines you can pick up from them, but at the end, he summarizes it with something like 46 trading rules that you can learn from these people. And really, he’s made it easier and easier to consume the information I know what he’s trying to do, he wants to educate people.

For me, as a young guy on a trading desk, I found it really helpful to sort of — that journey of — of learning what I was doing wrong and why in order to get better was — was really helpful. But I don’t think people have the patience for that these days. I found the book to be really intriguing, and I think you will also.

And if you haven’t read the first one or the second or third or fourth, but go back and read that first trading wizards book. It’s really quite astonishing and has held up over time. You could read it today and it looks like it came out last month.

So, with no further ado, my conversation with Jack Schwager.

VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: My special guest this week is Jack Schwager. He has written five books on Market Wizards. And, in fact, I found his first book — I think it was the 1989 “Market Wizards” book to be enormously useful in my first job as a trader on Wall Street.

He is also the founder of FundSeeder, a platform designed to matched undiscovered trading talent with capital worldwide. His most recent book is “Unknown Market Wizards: The best traders you’ve never heard of.”

Jack Schwager, welcome back to Bloomberg.

SCHWAGER: Hey, good to speak with you again, Barry.

RITHOLTZ: Same, same. It’s — it’s been too long. Let’s — let’s start out talking about your first “Market Wizards” book, which I’ve told you before not only was it enormously influential to me when I was a trader, but it was part of the motivation for this Masters in Business format of talking to people who achieved a level of accomplishment and excellence, which leads me just to my first question, what — what made you decide to write that first “Market Wizards” book?

SCHWAGER: Yeah, so I had the idea actually for several years. At the time, I was a future — Director of Futures Research Department, which is kind of a full-time job on its own. To do a book, you really have to do like commit to nights, weekends.

I had — I had done a — a book before the, you know, “A Complete Guide to the Futures Market,” which was like a 750-page tome. And I didn’t want to do that — anything that — like that again. But I want you to have this idea that, gee, wouldn’t it be fun to go — and I knew some great traders. I said, “Wouldn’t it be fun to just kind of do that as the theme of the book?” But it was just a matter of time, and then I got invited by a — to a lunch by some other publisher who had — who (inaudible) the — get that analytical book I wrote, “Hey, you want to do a bunch of analytical books?” And I said, “No, no interest.”

But, you know, I’ve been thinking of this and I said, “OK, why don’t you that?” And so, that was the catalyst. And I — I guess I just need a little push to — to get going because I thought it was a good idea.

RITHOLTZ: So — so this is now over three decades that you’ve been sitting down with traders, talking to them about their process, their methodology, and where they’ve gone wrong, and where they’ve achieved success. I can’t help, but notice that the world of the 2020’s, at least the trading world, is so very different than the trading world of the 1980’s. How does that impact the — the sort of conversations you have? And how does that affect the methodologies of these different types of traders?

SCHWAGER: Yeah. So, you know, that’s a good point. You’re absolutely right. I mean, there’s been — yeah, enormous, you know, really enormous changes. As — as you well know, you’ve been in the business a while as well.

But, you know, from the time I did the ritual “Market Wizards” book, which was the late 80’s and talking to people at that point about their careers really going back to late 60’s, 70’s and into the 80’s, but that — you know, their — you know, their — their trading history, you know, is pre –, you know, pre-PCs. You know, of course, we had the futures and we’re basically dealing with bits now, electronic trading. But the — the big changes is this computerization element.

And we went from a world where there — where we didn’t have PCs to where not only everybody has a P.C., which is quite powerful and — and has tremendous amounts of data, but you’re also dealing now — well, actually for decades where you have firms, you have taken quantification to the extreme, might have 100 PhDs in math and physics and so forth, you know, trying to — to work in the markets, you know, from — from — from that angle. So — so the — that’s been, I think, the — the really big change plus the electronic trading — the switch from — from bits to electronic trading.

So, you know, how does that change? You know, are they enough? For instance, I end up interviewing mostly discretionary traders. We could talk why that’s true. He has a separate engine if you want, but that tends to be the reality. I mean, they are sub-systematic, but they’re mostly discretionary.

It turns out that, for the most part, a lot of the approaches really do fall into the — to the same categories, and there’s still a place for the individual discretionary trader. And I — I would say the biggest surprise I had to do this — this last book on “Market Wizards” was I didn’t expect to find people with track records who like those in the first book, somebody, you know, people like the Kovners and the Jones and so forth.

And to my amazement, I — I found people — you know, because — and — and I say that because of this great quantification and all this competition, you know, that now exists. And to my surprise, I — I found people whose records were every bit as good, if not maybe as good as any other they found. So that was my surprise, and it basically speaks as evidence that somehow, despite these enormous changes, it’s still possible for the individual creator to — to — who has talent and has a specific methodology to do his works to do enormously well.

RITHOLTZ: Yeah, we’re going to talk about some of the specific traders and some of the eye-popping track records that they’ve amassed later. But you — you mentioned Jones — Paul Tudor Jones. Of all the people I recall from the first book or — or one of the early books, he seems to be the lone standout who continues to be active, who continues to trade, and continues to make money. I mean, he was very early to bitcoin and — and I believe he’s still a holder, you know, 20,000 percent later.

What makes Jones standout and be so different from his peers? He’s — he’s much more open-minded than — I don’t know, you — you can — you can compare him to Druckenmiller or Dalio or — he seems to be a 30-something, not a 60-something.

SCHWAGER: Well, the thing that that struck me about Jones that was different, I guess, is, you know — and I want to say — yeah, I was about to say less cerebral, but that’s not really fair. I mean, I’m sure he’s quite (inaudible), but he is — he was much more sort of active and — yeah, somebody like a — like a Druckenmiller, I didn’t see him trade. I spent a day with him, but, you know, I kind of picture him, you know, more thoughtfully going through in designing and trades of what he traded.

But — but, you know, Paul, I remember sitting in his office that he, you know, screamed, you know, while we’re doing the interview, he’s screaming orders left and right. This is a day where there were, you know, phones down for the bits and, you know, so he’s — he’s — he’s doing these orders. He’s going through the screens. He — he was just very — almost manic in the way he trades. So, I had that — that almost physical image of him, you know, trading more so than anybody I — I guess, that I ever interviewed.

There’s one difference. And there are certain things I still remember at that interview. He’s — he’s kind of insistence that, you know, every day he’s — he — he stalks for blank slate. So just because he has the position doesn’t mean that that position is still something to be held. So, you know, he talked about wanting to evaluate every position while I have this. Would I — would I still want — do I still want it today? You know, that type of thing, so this — this — this constant renewing of his analysis and assessment of the market.

And I think particularly very much attuned, I think, to — to market action — and I’ve been very aggressive all the way. So, I guess those are some of the ways I — at least from my memory of that interview that I — that he struck me as being a bit different.

RITHOLTZ: So — so let’s stick with that first book. I mean, the — the list of people you got to sit down with you for a day is pretty impressive. You mentioned Bruce Kovner. We’re talking to Paul Tudor Jones, Richard Dennis, Ed Seykota, Marty Schwartz, Tom Baldwin, Michael Steinhardt, Druckenmiller, I mean, that’s some …

SCHWAGER: Yeah.

RITHOLTZ: … murderous row of — of fund managers and traders.

SCHWAGER: Yeah, and I — it was. And I was lucky to — I guess I didn’t realize how lucky I was because just about everybody I asked agreed. Now, I had some edge there because I knew some traders personally like Michael — well, Michael Marcus who’s — who’s actually in Chapter 1 in that book is not somebody who would have been known weren’t not for the book, but he — he is one of the greats.

And he — you know, so I know him personally. You know, we were friends. I actually took his — my first job on Wall Street was vacated by Michael. He was cleaning out his desk when I came in my first day. We talked a little bit. He was going, in quotes, “off to become a trader and, yeah, leaving his analyst job. And I took his analyst job, but he was in New York for two years before you went out to — to Malibu and, you know — and, you know, well, moved permanently there. But while he was in New York, we used to get together for (inaudible) just every couple of weeks, so we had a relationship. So, he — he agreed to do it. We have — not easily, he’s a shy guy, so it took a bit of convincing, and I had a mutual friend who kind of pushed a little bit.

But, you know, then he felt satisfied with — with our interview after I spent a day or two there at this — that was the one — that I did actually while he’s out — out in California. And said, “You know, you should” then he — you know, he said, “You should interview Seykota, and I never heard Seykota, but (inaudible) Seykota was his mentor and somebody who he considered the best trader and he knew. And so, he set that up, and then I flew out to — to Seykota.

Kovner I knew because Michael had hired Kovner and so I met him through Michael, and I had actually worked because of Michael. He hired me to be an analyst from — you know, remotely why (inaudible) or commodities are going making all that money. And — and so, you know, I — so there were these — I had a bit of a jump because I do some and trade some. And then some of them recommend other traders, yeah.

RITHOLTZ: Interesting, really interesting.

(COMMERCIAL BREAK)

So — so last question — on — on the early book, some — some of these guys have been trading for decades, and the risks that you run into relates to what one of my colleagues described as the — the paradox of experts. People who are experts have their expertise in the way the world used to be in an earlier version of the world that doesn’t exist.

When you look around at — at these traders who’ve been at it for a long time, do they have a difficulty in adapting to the new world? I noticed most of the guys you interviewed for the newest book are fairly young.

SCHWAGER: Yeah. So — well, of course, you know, if you go back to the original book, you know, a lot — well, most of them, you know, one of these ones I know continued — continued on for — for decades, you know, like the Kovners and — and the Druckenmillers, and so forth, and did — you know, did quite well, and Joe (inaudible).

In the case — you know, but I can’t think of an exception, somebody like — like Richard Dennis who was — who had won in the most incredible stories ever, you know, turning literally a sub $1,000 stake. When he was trading in the MidAm Exchange, he’s (inaudible) contract and, at some point, amassing a couple hundred million dollars that got to be one of the great multiplication pitch (ph) of all time. But — but in — subsequently, years after our interview, had — had — had some — some — had problems and — and never continue — besides not continuing, I think had — had losses probably.

So not everybody — you know, not everybody necessarily continued forever, but — but I think the majority, you know, continued — continued to adapt the markets. And — and in Dennis’ case, I think it may be an issue of — of the markets, I think, did change. Trend following back, you know, in Dennis’ hay day, which I would say late 60’s through late 80’s, those were kind of glory days for — for trend following.

You — you had — had a couple of things working together first because it was before technical analysis became so popular.

RITHOLTZ: Right.

SCHWAGER: It was before — most of that period was before a lot of the computerization. So, people who were early on — on trend following kind of didn’t have a lot of competition. And also, you have the inflationary 70’s, the U.S. on the giant trends and futures, currencies, and so forth. So, you know, times were very good.

When the times became more difficult or — and many more people, yeah, it was just (inaudible) amount of — (inaudible) increase in the number of people using these — those type of approaches, the approach naturally degraded. So, I think it — that was the issue there and — and could explain why somebody like Dennis didn’t continue the way he did, while some of these more discretionary traders like Kovner and Jones did.

RITHOLTZ: My big takeaway from the — the early Dennis chapter was all about training traders the way they raised turtles on farms in Singapore. That — that concept that, hey, you could teach anybody how to trade if they’re disciplined and we’ll follow these sets of rules. I was — I was really impressed with that, and that was — I don’t know 25 years ago. Do you think someone like a — a modern version of Richard Dennis could still train traders the way he did?

SCHWAGER: I — I have some skepticism there, and — and that’s developed over the years. I kind of — trouble is you — you train somebody — the person you’re training has to be kind of adoptable and amenable, and be a good fit for whatever the methodology you’re training.

And, well, my perspective is that to be successful, the method you use is not (inaudible) being trained by somebody, you have to — has to be a method that’s compatible with who you are and how you’re thinking, what’s comfortable? So, if you are — you know, you’re somebody who, let’s say, doesn’t feel comfortable delegating decisions to a systematic approach, somebody can teach you a system, but it’s going to be very difficult for you to follow because you’re always going to want to be second guessing it or — or jumping the gun or not taking signal. So, it has to be compatible with — with — with what’s — what works for you. And — and I think that’s the problem. I don’t think you necessarily can train everybody.

Now, at that time that Dennis did it, you have trend following being a — a very effective methodology. So, if people follow the rules, they could be successful, but I think that’s more the exception than the rule. So, you can’t — you surely can learn from a mentor if the mentor is compatible with — with the methodology that fits who you are.

RITHOLTZ: Makes a lot of sense. Jack, I was kind of struck by this book, and I’m curious how did you go about it. Was it — was it different versus your prior wizard books? Did — did your methodology change or did you interview process change? Or was it — you know, you have a — a process and you stuck to it?

SCHWAGER: Yeah. No, I’ve had — I’ve had the same methodology from the — from the first “Market Wizards” books, so — and it works, so there’s no — if something works, you know, nobody is going to change it. So, my process — but first of all, the actual — as far as the actual, you know, interviews and — and turning into text, when I do the interview — and this is kind of important — is any — I’m sure you could relate to this very well, Barry.

I — I try — I — I do what you do really, which I — which I sense you do is have a conversation. So, I don’t go in with a list of questions. And, you know, I’ve been interviewed by people, and that you can tell they have a list of questions. And no matter what you answer (inaudible), you know, there’s no follow-through and it goes …

RITHOLTZ: Right.

SCHWAGER: … to the next question, right? And it sells very stiff in board, and it is. So, what I try to do in these things is really just literally have a conversation.

And there are times there have been interviews where I literally — it could be two hours before I get the first thing that’s of any value. You don’t have that luxury, but I do. There’s a book, not a live interview.

RITHOLTZ: Right.

SCHWAGER: But — but that’s — that’s — so that’s very important. And — and I — I do have like a list of questions that I know I want to make sure I hit those topics. And after I spend any number of hours, which could be — which could be as little as a few hours in — in a short interview to — to as much as a day or more, then I’ll just check the list and see if I missed anything. But — so that’s one important thing.

And the other part of the process that doesn’t change is just the way the interviews are transformed into text. And there — you know, obviously, I’m doing so much so many hours. You know, you couldn’t — any — a lot of these interviews could be a book-long by themselves.

But besides that, if I used everything, it would be deadly boring. So, you — you really — what I’m really trying to do is basically extract out everything that it has — is one of two things. One, as something meaningful to say about trading or two, it’s interesting. You know, so it’s one of those things. So — and that’s the material that — that forms the chapter. And then — and then you do a fixing up of, you know, people. The way people speak doesn’t translate well into …

RITHOLTZ: Right.

SCHWAGER: … into written text as you — as you well know, I’m sure. And you may talk about the same topic in eight different places, and that’s fine if you’re talking, but it’s not fine if you’re eating.

RITHOLTZ: Right.

SCHWAGER: So, you know, that’s — that’s the basic process.

The difference in this book though was the focus. And in prior books, I guess, they’ve been more — more heavy in well-known professional traders, although not necessarily all the time. There’s always been individual traders as well. And the — the most recent wizard book before this one back in, I guess 2012 or so, was “Hedge Fund Market Wizards,” which you can tell by the name is, you know, obviously not individual traders, right? They’re — they’re traders and organizations.

So, this — this one was the exact — was — tended to be the exact opposite. It was literally to try to find those people who are trading in a home office, doing extraordinarily well and nobody knows they exist, nobody knows who they are. And — and so that was a difference in this book.

RITHOLTZ: So, one of the differences I suspected when I went into reading this book is all of the subjects of your prior books, all the various traders, you know, you could do a search on them. You could — you could read about them. There’s newspaper articles in the days before Google and certainly since search engine has been around, you can find a ton of stuff on each of the people that you interview.

I got the sense from each of the chapters in this book that you had a bunch of — of arrows in your quiver, but you didn’t know, which ones you’re going to use because you’re kind of going in a little — a little in the dark. Is that a fair assessment or am I — am I projecting too much?

SCHWAGER: You’re projecting too much because, especially since I was doing these individual traders and, you know, it sounds like there’s a public fund out there or something like that …

RITHOLTZ: Right.

SCHWAGER: … so I — I had to really, really be careful this time about, well, I (inaudible). But I — I had to get the track records. And — and so I knew — you know, I knew what their track records were before I went in.

RITHOLTZ: Right.

SCHWAGER: And, you know, I — like I’ll give you one example. One of these traders, I got an email. This is about a year before I did the book, you know, saying something like, you know, “Hey, I’m — you know, this is my name and so — you know, and I turned a few thousand dollars into $50 million, whatever,” you know. So yeah, your initial reaction would be, “Sure,” right?

But I’m always — I — I think that — you know, people made claims, they now they even — even don’t have to prove it. So anyway, so look, I’m not planning another book at the time I wasn’t planning to do this book. And I said, “But your story sounds very interesting. And if you can confirm it, you know — you know, it would be sounds like it would be a really good fit. And if I do another book, I’ll get back in touch.”

It turns out that nine months later, I do decide to do — to do another book and I get back to them. And — and so, you know, a guy, he started trading back, I think, around 2006 and literally got every monthly stakes (ph) improving 2006 forward. So — so I knew — while the story sounds unbelievable, I knew it was — and I — and I — actually, they were — in this particular case, there were — there are Ameritrade accounts, and I have an Ameritrade account. I — even though with the — with the account, you know, (inaudible) look like. So, there was no — there was no surprise there. I — I kind of knew what I — I knew what his track was. I didn’t know what it’d be like or what he’d have to say or anything like that. That’s always the case, but I knew the track record is real.

RITHOLTZ: So — so let’s jump into some of the details of — of various traders starting with the first chapter and pretty much the only person you interviewed who has a — has been trading for — for decades, and that would be someone I follow on Twitter who I’ve always been intrigued by named Peter Brandt. What — what drew you to him as a trader? And what makes him so unique?

SCHWAGER: Yeah. So, as you said, Peter has a long career. He actually has — his career is broken into two segments. He — and each one is — I — I forget the exact number is, but that’s …

RITHOLTZ: Eleven years apart …

SCHWAGER: … (inaudible). Yeah, 11 years apart, but each one — each of the segments is, let’s say, 16, 17 years. So, he’s got over 30 years of trading experience. He went co (ph). He stopped trading totally for 11 years in between because, at the end of the first period (inaudible) and gone out of it, and he just — he just decided didn’t want to do it anymore. And then out of the blue, 11 years later, he decided to do and had a — had a second phase rated very well. So — so again it’s over three decades of, you know, of experience and — and so forth.

OK. That’s — that’s part, that’s — that’s beginning. The thing that Peter — and — and I should — I should — I should say that — that Peter actually is a friend. Well, I — I knew him personally.

One thing that always struck me about Peter was he just had a lot of what I thought valuable things to say about the markets and trading. And I remember him being on — on a — on another podcast and listening to it. And the questions will be asked and I would mentally answer him, and it was striking how similar his answers were. But it’s not just bad, you know, it’s just — I just really relate it to the way he — he looked at — at markets and risk, and had so many — so much good advice and just — just wisdom that — that — that I felt I wanted to capture.

Now, Peter is — you know, in his early 70’s. And I — I literally — and he was kind of a catalyst to do the book. At the time, he was in Colorado as I am, and I (inaudible) thought, well, I’ll say to myself, you know, I knew — I knew if I didn’t have a “Market Wizards” book, I wanted that Peter in it. So, he was going — he was going to be moving. I think, well, I might have say to myself (inaudible). I might as well do his chapter.

Now, it turns out (inaudible) that around to — to doing it. He had moved and then I — so I end up flying out, you know, to Arizona anyway. But the — the thing about Peter just — just to capture, I wanted to capture his — his market wisdom, the posterity. It’s probably the most straightforward way I can put it.

RITHOLTZ: And it’s notable that several other wizards in the new book reference Brandt’s approach to risk management.

Forget stock selection, they are just completely impressed with how disciplined he is and how he manages risk, first and foremost. “The — the stocks — the trades that are working out, we’ll take care of themselves,” he says. It’s ones that don’t work out that — that require all your attention.

Somebody else said something that really intrigued me. The — the chapter on Jason Shapiro, the contrarian, I love this quote. “There aren’t good traders you can make money on by doing what they’re doing, but there are terrible traders you can make money on by doing the exact opposite of what they do.” Tell us a little about Jason Shapiro.

SCHWAGER: Yeah. So yeah, Jason is the — the contrarian in the book, and that’s his nature. I mean, he — if you beat him, he’s just — he has to be, I would say, he has to be argumentative, but he always has to be on the upside. And he admits freely like he — he goes to a party and — and it’s mostly liberal, so he’ll argue the conservative side. It was mostly conservatives, he’ll argue the liberal side. He’s fine doing that. And his — his premise is that because just no absolute black and white, there’s truth on — on some truth on both sides, and — and people who insist everything is, you know, one side of the other (inaudible) is arguing with. But that his nature is always to be arguing and to be counter, so it’d be natural that he evolves into trading methodology that — that — that’s contrarian.

And that’s what he’d literally does. He — he uses the commitment of traders as his primary source of trying to establish market sentiment, but also, you know, who also watch, you know, CNBC and shows like that to — to more contrarian ideas. And — and his dreams come across people that are just invariably wrong.

And, in fact, he kind of picked the exact bottom of the — you know, the — the pandemic bottom in March because he was in a sort of this call between some ex-colleagues, and — and this one guy who was always bullish on the market was bearish and — and he was looking for the bottom anyway because of sentiment they were seeing in — in the — in the numbers. And that was a trigger (inaudible) begun just on that to start establishing a position.

So — and he — to be fair here, I don’t want to make it sound like he’s just, you know, kind of, you know, bragging on people. He says basically — I mean, when you first (inaudible) — and we did this chapter in pseudonym. This chapter was done — the only chapter I could remember that I did in pseudonyms he’s — and he’s requested. And people who read the chapter is quite obvious why pseudonyms are used because it’s not all very complimentary.

RITHOLTZ: It’s a (inaudible).

SCHWAGER: So, he — but he says — and look, it’s — it’s not that this — you know, when I see — you know, let’s call it Mr. X, I see myself, you know, through those years when I was losing. I see him making all the same mistakes.

RITHOLTZ: Right.

SCHWAGER: And so, it’s because he recognizes — something that he himself had done, he recognizes the mistakes that he has done that these people are falling prey to, which are — which are emotional and — and — and not having the risk management and so forth. He can see himself and he knows how that turned out, and he knows, therefore, that the opposite side is — is — is the way you should be.

RITHOLTZ: Right. That’s a very fair way to describe it. When — when he is ragging on financial television or market consensus, he very specifically said, “I see the errors I made early in my career. I recognize that consensus.”

And — and for people who are not familiar with the commitment of traders’ report, it shows the commercial hedgers’ relative to the speculators. And historically, the commercial hedgers have a whole lot more insight than — than the — the jobbers and the — and the speculators who are just taking a flyer. And that’s why he likes the — the commitment of traders’ report. Is that a fair way to assess that?

SCHWAGER: Yeah, yeah, that — that’s — that’s a good way to summarize it.

RITHOLTZ: Let’s talk a little bit about mindset. I was impressed with the discussion with Richard Bargh talking about things that most people don’t think have anything to do with trading — state of flow, optimism, confidence, managing your emotions. Tell us a little bit about Bargh.

SCHWAGER: Yeah, Barth is a — a quite interesting fellow. So, actually, he grew up in a farm in England, sort of got this trading job as his first job. And he’s — I guess, his approach — the thing that struck me about Bargh was how — how much he weighed psychology into the whole — into all of trading and everything he did. And he was very meticulous.

So — for — he — he like would bring out a binder. He’d have like literally thousands of pages of just keeping — kept — keeping notes on everything. I can — not just the trades he did, why he did them, and how he did them, but what his emotions were, you know. And even though he even showed me a spreadsheet, like I don’t know, well, it could become spreadsheet where he has all these different types of emotions. And every day, he will check if he was subject to any of those. At the end of week will review it. And if there’s too many checks in a certain column, he knows that’s something he has to work on. So, he’s — he’s — he’s always kind of combined an analysis of his own psychology as integral part of — of trading.

And yeah, so — and — and this — this whole psychology thing not only comes up with Bargh, but it comes up with a number of the other traders, as well as being sort of highly critical to their approach. Someone like Sall talking about how — you know, the payers would trade mentally and getting in — you know, getting himself calm and — and getting totally focused, and — and …

RITHOLTZ: Is that the former marine you’re referring to?

SCHWAGER: No, no, Sall isn’t the Marine, but that — the Marine is John Netto.

RITHOLTZ: John Netto, that’s right.

SCHWAGER: But Salzmann, he have — yeah, Salzmann, we have U.K. traders. Actually, he was the — who — who actually was partially a mentor to — to — to Bargh because it turned out that three traders at one time worked at the same …

RITHOLTZ: Right.

SCHWAGER: … top trading firm, so they — they knew each other, you kno.

RITHOLTZ: So — so Sall and Netto both discussed doing something that I was kind of intrigued with and reminded me of some former traders I worked with who are in the military, which was envisioning the trade, envisioning what could go right, what could go wrong, not just working out a Plan B and a Plan C and all the contingencies, but imagining what your emotional state would be if something is going good or going bad, and prepping yourself so that when those emotions bubble up, you can sort of shove him off to the side and remain objective and focused on the task at hand. It’s a very military-trained methodology.

SCHWAGER: Yeah. Well, Netto, of course, is the Marine, but the one who probably most epitomize, which you’re describing, is Sall because he would literally — or — and — and I should — we should explain his background that is primary trading methodologies to look for special situations like a central bank announcement or something — some event and do enormous preparation for that, and — and think of every contingency and know. So, he would literally plan out what do we do under — no matter what was said, how it was said, and just — just would have in his mind every possible fork in the road on that trade and be totally prepared. So that was — that is actually the essential part of the way he approach — approaches market.

RITHOLTZ: It’s really interesting. When …

SCHWAGER: Yeah.

RITHOLTZ: … when I was a newbie on the desk, I sat between these two monsters. One guy was a former Marine, general combat instructor; the other guy was a former Ranger. And after work, we would have these conversations about what it was like.

P.S., you go to a bar with these guys and I could be the biggest wise as I wanted. Nobody was — people would look at me and then they look at these two monsters with me, and I will be like – yeah, we’re not going to get involved in that. But what I was — these guys weren’t just big and fit, they were really savvy and smart.

And I recall hearing some of the Army Ranger prep discussions where you map out literally every step along the way, here’s where the helicopter is going to pick us up, here’s what happens if the chopper is late, if it doesn’t ride, if this happens. Here’s what happens when we’re flying to the target. Here’s what happens if we have to make an unscheduled landing.

And they literally sort of — I guess, the right word is wargame. All the various scenarios that could happen, that might go wrong, that what — what your plan B, C, D, E is. But what I was so taken by and I sort of reminisced of it going through the book is how they think about what is your emotional reaction going to be if you show up here and your gun is jammed then it doesn’t work, or if whatever the task at hand, we’re missing a piece. How do we improvise? Like the preparation for a mission and the prep of some of the traders in anticipation of a giant trade very, very parallel.

SCHWAGER: Yeah. And actually we — you mentioned, you know, the Marine in the book, Netto, you know, his approach actually ended up spending years systematizing, you know, computerizing it. But — but his approach is exactly that so that the reports could be coming out kind of figuring where the probabilities are, where it might happen, you know, what if it falls in this range, what if it falls in this range, what if it falls in this range. And for every contingency having that, you know, like systemized so if you will — will what to do no matter what — which — which of those things happen, and it is that anticipating all different types of scenarios as part of the trading plan.

And — and it does sound very much like what you’re describing your personal experience with these Army Rangers or Marines. And there’s — one of the element of it, I should say, Netto wasn’t the first Marine. I — I think according, of course, to the “Market Wizards” book, this probably have been a thing about former Marines that I interviewed and — and ex-Marines.

And it’s — it’s not an accident, and I think it’s not just planning, but I think it’s a discipline. And, you know, because — because to be successful, you really need rigorous discipline. That’s something that’s inbred in a — in ex-Marines generally. So, I think that (inaudible) …

RITHOLTZ: Yeah, I’m going to tell you right now that — that would all tell you the same thing. There’s no such thing as an ex-Marine. One a Marine, always a Marine.

SCHWAGER: Well, that’s true, too.

RITHOLTZ: And that …

SCHWAGER: That’s true, too. But I — yeah.

RITHOLTZ: … I — it wouldn’t surprise me if — if they said the same thing. And — and it really shows up in the description. I — I was flashing back to my days on the desk because that’s the exact description. So, let me ask you these three concepts that really struck me from the book. The first was know your edge. Tell us a little bit about why you have to know what your edge is.

SCHWAGER: Yeah, because there’s two things you need. This maybe oversimplifying, but not really. There’s really two things you need to be successful in trading. One, you need a methodology of the management, and two, you need risk management. So how — and people sometimes go too far by saying, well, mismanagement is — is absolutely critical, tremendous (inaudible).

But bottom line, if you don’t have a methodology that has some edge, there’s no reason why you — you should win. You know, it’s just …

RITHOLTZ: Right.

SCHWAGER: … simple probability. So, you do need to have some edge and you need to, obviously, know what it is, meaning, (inaudible) actually from the hip. You’ve got an approach and — and you’ve got to follow that approach. And — and presumably, that approach has some edge. And you have to obviously know what it is. You can’t — you can’t just sit at a — onto your screen and say, “Oh, I think this is going up, I’ll buy it.” That’s — that’s not a methodology, so essentially that’s as simple as that, but — but knowing where your edge is.

And it could be — it could be — it could be anything. It could be, you know, in any realm, but it has to be something specific to your approach.

RITHOLTZ: And — and let’s stay with the idea of the methodology. You have to — number two, you have to make sure your trading style and methodology fits your personality. Let — let’s talk about that for a moment.

SCHWAGER: Yeah, so that’s — that’s one of things I kind of alluded to earlier. It’s really — everybody I think has, you know, a natural affinity for certain types of ways of doing things, right? When it comes to trading, there are certain types of trading. And — and whatever you do, it has to be compatible.

If you were — if you are inpatient, it’s not going to work that has to do with long-term trading approach. If you’re oriented to — to wanting — you believe everything has to have economic reasons and you’re disdainful of — of things like charts, you know, and trying to do charts (inaudible) this would be compatible. It doesn’t mean those approaches don’t work, it just means they — they won’t work for you.

So, this — it’s a discovery process. You have to find — you have to find what — what fits — what fits for yourself. For example, I started out trading based on fundamentals. Why? Because I had an economics degree, you know, and I — and then you’re just natural to — to think in those terms.

But I discovered that, hey, you know, fundamentals didn’t work for me, and I had problems, you know, doing the fundamental approach and combining with — with proper risk management, which is a separate tension. But — but to me, the — the two were almost in conflict sometimes. But I found that technical analysis were — were much more naturally risk — risk management.

So, I ended up evolving from somebody who started with purely fundamentals for trading, and then end up being somebody who and — who just uses technical for trading. So, you have to find what’s compatible with — with your philosophy, what feels right, what you’re comfortable. This is important. You have to use an approach that’s comfortable for you to trade.

So, for example, at one point, my — back a number of decades, once I, you know, had gone to technical analysis, I thought, gee, you know, I — I don’t they’ll like emotion trading, I’ll go systematic. And so, for a while I traded systematically, but I discovered that I just — actually, that was more — that was more uncomfortable. I didn’t have to make decisions, but I have to wait for an advanced system to change signals, which I just didn’t like. So, I felt uncomfortable relegating the ability to act and to count losses to assist them. So, I eventually just went back to discretionary technology trading.

RITHOLTZ: And — and …

SCHWAGER: So, you have to be something that you’re comfortable with.

RITHOLTZ: Makes sense. And then the third one that I thought was kind of interesting is understanding the market narrative and recognizing the consensus. Tell us a little bit about that.

SCHWAGER: Well, that — that come — you know, that — that applies to certain traders — not everybody necessarily, but for somebody like we talk about as somebody like a Shapiro. You know, understanding, you know — you know, how the market is thinking wide, in this case, eventually going against it is integral to the approach. But it’s a — but — so it really depends on the trader — well, some traders that is how they — they look at markets and they need to — they need to — to know what story.

Then there was another where that comes in. You — you know, he wants to understand that’s part of his approach. He wants to understand what — what is the story that’s driving the market. And that — understanding that is — is critical just being able to trade the markets.

RITHOLTZ: Quite, quite interesting. Let’s talk about some of the people you interviewed in this book. I like the guy whose name is the Unicorn Sniper. His track record you alluded to earlier, up 337 percent for 13 years. And I want to clarify that. That’s not a cumulative return, that was his annual return over 13 years.

Before we get into what he does, you have to explain how you’re verifying that those are real numbers because those are just, you know …

SCHWAGER: Yeah. Well …

RITHOLTZ: … insane, insane sorts of returns. There’s a guy who started out …

SCHWAGER: (Inaudible) …

RITHOLTZ: … with a few thousand and turned it into $50 million.

SCHWAGER: Oh, no, that’s Jeff Neumann.

RITHOLTZ: Oh, really?

SCHWAGER: That’s — yeah, yeah.

RITHOLTZ: So, this is somebody else, the Unicorn Sniper?

SCHWAGER: The Unicorn Sniper is actually Sal.

RITHOLTZ: Oh, okay, gotcha. That was …

SCHWAGER: That was Sal, yeah.

RITHOLTZ: … so let’s talk a little bit about his track record. What did he start with and what did 337 percent a year for 13 years compound into?

SCHWAGER: Oh, it was — so the thing about these percent returns is — is you have to keep in mind that they’re not — they’re not letting — he’s not keeping the money in and compounding at 300 percent.

RITHOLTZ: He’s pulling it out.

SCHWAGER: (Inaudible) he would get — yeah, he’s pulling it out. So, he’s — he’s always trading a few million dollars or whatever it is, and he keeps them pulling it out, you know, best thing or whatever and other things. So, you — I think he couldn’t do — he couldn’t get those type of returns if you will try — you know, if you’re just compounding the money.

RITHOLTZ: This doesn’t scale up …

SCHWAGER: So …

RITHOLTZ: … to a — you couldn’t trade hundreds of millions, forget billions …

SCHWAGER: No, no …

RITHOLTZ: … to this methodology.

SCHWAGER: And — and his approach essentially is — is highly selected as picking certain events very tremendously, just being super expert on — on that — on those situations. And that’s why he calls — he’s — but he — he — you said people have described him as Unicorn Sniper the — the point being that he looks for the rare event that provides tremendous opportunity with — with much less, you know, highly asymmetric very big opportunity that can be realized without taking commensurate risk, you know, pretty much smaller risk.

RITHOLTZ: And I think …

SCHWAGER: So, while …

RITHOLTZ: Go ahead, I’m sorry.

SCHWAGER: Yeah. No, that’s okay. So — so while — while he may have these, you know, really high returns per year and very high — very individual trades to make a lot of money, he cuts his losses very quickly so he doesn’t have really large losses. You can go through his record. You can probably find 30 days where he’s made, you know, 30 percent or more, I mean, like a lot of days he just made like his very large returns, but you won’t find any days where he’s had at the reverse.

RITHOLTZ: And the — the line that really stuck — stuck out from Amrit Sall, right, if — if I’m getting his name …

SCHWAGER: Yeah, Amrit Sall, yeah, yeah.

RITHOLTZ: … is 90 percent of the time the market is not providing any opportunities, I make 90 percent of my money the other 10 percent of the time. That — that’s pretty astonishing. Talk about waiting for your pitch.

SCHWAGER: Yeah. So that’s — that’s it — that’s the critical, critical. And a lot of people — a lot of people make that mistake, and — and it — it relates to human nature is we’re just not patient, right? So …

RITHOLTZ: Right.

SCHWAGER: … people want to — people can’t — couldn’t stand around, you know, a few months not to holding anything and then wait for that month, but that’s what Sall does it. Even if there’s no opportunity, I mean, he made trade and no bid. But the — but the trades where he takes these big positions on, they’re isolated and they’re not that many. And he makes most of his money, you know, probably less than a half a dozen trades a year, but he has the patience to wait for, that — — that’s kind of the sniper thing, you know, you’re just — you’re waiting for the shop. And the unicorn, if it’s not that — it’s — it’s — it’s — it’s rare. So that — those two words really describe him extremely well.

And it’s difficult to do. People don’t have the patience. And one of the points that I made, and I — I forget if it was Sall or one of the other traders, but he makes the point that trying to be consistent — and this is again very counterintuitive, but the point he makes is that people who try to make — try to make money every month saying, you know, a certain amount of money every month the same way, he — he — he says in his experience, those traders will fail because their — you know, the — the markets will not provide opportunities every month.

And if you’re trying to — if you’re trying to make the same target every month when the opportunities are there, you’re actually going to end up losing money, not making money. So that’s actually a negative — a negative trade, not a positive trade.

RITHOLTZ: Really quite, quite interesting. Somebody who had a very different approach than a lot of other people was Chris Camillo …

SCHWAGER: Yeah.

RITHOLTZ: … who — who specifically — I love this quote, “My trading is dependent on my ability to identify meaningful off-radar information — early information that’s either not recognized or underappreciated by the investing public,” very reminiscent of the Peter Lynch methodology, as you point out of the book. Tell us a little bit about Chris.

SCHWAGER: Yeah. So, Chris — I mean, this is a truly kind of almost remarkable. I — I’m — I’m going for a career that spans from the early 70’s in the markets. And through all those years, through all those decades, I — I — I just actually assume that we’ve got two general approaches. You’re either really, you know, using some sort of fundamental analysis or you’re using some sort of technical analysis, or you might be combining the two like somebody you’re — like what Kovner does. But what else is there, right?

And the amazing thing about Camillo was — it turns out here’s a guy who’s done phenomenal, I mean, or done $80,000 to $20 million plus. And he — he did that, and he doesn’t use fundamentals and he doesn’t use technical. And …

RITHOLTZ: Right.

SCHWAGER: … people listening to this is probably scratching their head. Well, what do you mean? What — what is to you?

Well, he uses social media. And he actually started out just by observing, as you say, Peter Lynch is the perfect example. And he talks about as a kid that — I forget what was the — (inaudible) — the Arizona Stone or whatever it was, but he had the soda that he — that he like, and he would go …

RITHOLTZ: It was Snapple.

SCHWAGER: … (inaudible) …

RITHOLTZ: He wanted to get Snapple and …

SCHWAGER: Snapple, Snapple, that’s it. Snapple, OK.

RITHOLTZ: … and they consolidated it, and here’s this new company Arizona Iced Tea.

SCHWAGER: Yeah. So yeah, so he goes one day. Maybe they — he — during the weekends he would go to auctions trying to buy stuff that he could resell, and he was very — like, as a teenager, very (inaudible).

RITHOLTZ: Garage sales, stuff like that.

SCHWAGER: So — and he would get — and he would get a — he would go to get a Snapple (inaudible), that was his treat. And one day he goes and there’s no — you know, the Snapple columns are replaced by all these other things (inaudible). And he asked the — you know, the proprietor and he says, “Well, you know, that’s — this is new — this is a new brand and we’re having more of this.” And then he asked his brother, “Hey, is there any way” — his brother was a stock broker, he said, “When do I could take advantage of this?” You know, his brother explained the options to that, and that was first trade. So, he was — he was — you know, he wasn’t (inaudible) naturally went to this Peter Lynch approach.

And this is an example. He talks about sort of …

RITHOLTZ: The Wendy’s Pretzel Bacon Cheeseburger. I never even heard of this.

SCHWAGER: Yeah.

RITHOLTZ: That just cracked me up.

SCHWAGER: Yeah, I didn’t — I don’t either, but this is the type of stuff he did — he does. And eventually, he ended up building a company that can utilize his all approach. But he — so he would go to one of the seasonal specials, but the one you just mentioned. And he — he — when he would go to the managers at these stores and how were they selling it, talk to customers. And he found this was the — and they were telling him, this — this isn’t the most popular sandwich we ever had. I think that was a (inaudible) …

RITHOLTZ: We’ve never seen anything like this before, it’s just …

SCHWAGER: Yeah, yeah, yeah.

RITHOLTZ: … and even though everybody else does a seasonal thing, this one really had track — it was that. It was Wendy’s. It was Under Armour’s new ColdGear. Netflix Stranger Things, National Beverage Corporation’s …

SCHWAGER: Yes, Stranger Things so — yeah, so …

RITHOLTZ: … LaCroix, tell us about some of those.

SCHWAGER: Yeah. So Stranger Things is a good example. So yeah, everybody knew it was a popular show, but — but that point, he had kind of — he was using primarily Twitter but as a social media, but — and he had also like — you know, so he built a company to do all these tags and stuff like that, well, were tags combination (inaudible) to search for things that are coming up a lot.

But in this particular show, what he noticed was not just that it was popular, but he had the data. So, he would see that it stayed popular for a very, very long time and other big hits on Netflix. Yeah, they were popular for a few weeks and then it sort of died down. But he could see that this chatter was like — that — that he had this data on (inaudible) this Twitter chatter was staying at a super high level for a long time. And I told him, “This was different.”

And so, we anticipated the earnings will going to be, you know, much better. And he was sort of a — you know, he anticipated this before. Anything showed up very early on. It was basically just a matter of this social media analysis.

RITHOLTZ: So — so this raises some really interesting questions because Camilo learned from his Snapple put purchase, and that was a winning trade. But — but when you read through the chapters, it really seems that losing trades are far more instructive than — than winning trades, how — how important is failure as a feedback mechanism?

SCHWAGER: Extremely important, and that — that’s a theme that comes up — that comes up repeatedly in, you know, in every “Market Wizards” book. And — and I think the — the one I would highlight the most because I think it’s so core to his philosophy and the firm he built would be Ray Dalio. And Dalio’s whole philosophy is — is to learn from mistakes, and that’s — and — and — and his whole, you know, Bridgewater with that philosophy. And I — I think Dalio would himself say that its successes would lie in his ability to — to learn from mistakes.

And — and in this book, you have — you have traders like (inaudible) we talked about Bargh and, you know, as an example. So — and he’ll record every trade and, you know, whatever mistakes he’s made, and mistakes in trading, mistakes in emotional state like trading when he’s (inaudible) emotional state. So — so recognizing the stakes is really important. It’s how you can improve as a trader is by being able to recognize the mistakes you make and to minimize or ideally eliminate, but at least minimize repeating those mistakes in the — in the future. I mean, that is probably the most effective way anybody can improve as a trader.

RITHOLTZ: Really quite interesting. One of things that comes up pretty consistently is when you’re — when you’re having a losing trade, you’re looking to do two things — conserve capital. But the thing that really struck me was how often people said I need to conserve my mental bandwidth. Tell us a little bit about how — how a trader conserves mental bandwidth as opposed to either being distracted or just exhausting your bandwidth on — on a losing trade.

SCHWAGER: This is sort of, you know, I think there are a number of traders, but Bargh is a good example because he does this. He — if he — if he’s — something goes wrong or he gets — he gets knocked off his equilibrium by the markets, he’ll — he’ll just stop. He’ll — he’ll take a breather, you know, go away for the day, for a few days, whatever. He breaks that — he breaks that cycle.

And it’s important not to let your bad events in the — you know, in trade or a negative — negative outcomes and trading affect your — your mental state. And so, — and Sall makes the same point. You — you — you have to preserve your — your — yeah, kind of mental solidity. And he — you don’t want to get into this cycle where you have a bad trade and another bad trade and you saw it getting negative on, so you don’t want to let that — that — that get out — out of hand. So, you need to break that cycle because to be in the proper mental state is essential — at least discretionary trading, is essential to — to being able to trade effectively as a discretionary trader.

So — so it’s not just the — it’s not just the loss, it’s the impact of that loss on — on — of the trades if you let it happen. And that’s what — that’s something people don’t realize. It’s just not you take a loss and where you make a mistake. It’s not just that trade. But if you — if you’re not careful, it can start affecting other trades. And — and it could result in — in missing traits as well. So that — that — that’s — that’s something that’s come up thematically in many interviews.

RITHOLTZ: One of the traders referenced a quote that I think was French composer Claude Debussy who said music is the space between the notes, and that was their parallel for their trading approach. Tell us a little bit about the space between the notes.

SCHWAGER: This is actually something that I — that I used, that I thought of when I — in — in the case of one particular trade, and this is — this is a trader in — in “Hedge Fund Market Wizards,” and — a fellow by the name of market research and hello my name is Kevin Daly.

Now, he — he’s a — well, he calls himself a long/short, you know, long/short equity trader. I — I kind of put quotes around the short because when I interviewed him, it turns out he’s never had more than a single-digit short position. He’s primary long with a little bit of sprinkling of shorts.

Kevin starts — starts his hedge fund in October ’99, you know, I don’t know. But to me, October ’99 is not the best time to start a hedge fund, which is going to be primarily long. So, I — I needed to do him a decade later — a decade later or maybe 12 years later, I think, (inaudible). And at that point — yes, 12 years later.

RITHOLTZ: So, it’s after the financial crisis.

SCHWAGER: Yes, it was after, yeah. So — so — so — so Daly basically trades through the bear market in 2000-2002 and the financial crisis 2008. You know, when the smoke clears by the time I interviewed him, he — since he started his hedge fund, and I told (inaudible) it was — it was — yeah, you know, there were some — there were six months when the market was still going up early on.

But anyway, during that interim, it turns out the S&P was pretty much close to dead flat. You know, his record cumulatively before fees, so just looking at the training aspect of it. His — his — his record cumulatively, I think, is up 800 and 900 percent.

RITHOLTZ: Yeah.

SCHWAGER: So, the question is — the question is, how does cumulatively make 800, 900 percent at the same time the market is going sideways? And — and — yea, so he — in that chapter, he — he — he really is pretty specific and quite detailed in all those — all the — he’s a — he’s a fundamental guy. And he — he talks like all the things he looks at. And yes, he’s a good stock picker. You know, that’s something (inaudible).

But really, the essence of it is that when the market environment wasn’t good, like 2000-2002, actually during that three-year period, even though he’s mostly long, he trades very little. He’s actually up slightly for that period.

In 2008, he — you know, when markets, you know, down 50 percent, he’s down like single-digits. He’s not trading that much. He recognized that the environment is bad. So essentially, his success can be attributed, in my mind, more by when he didn’t trade than when he did trade because he — he had the right times not to trade. And that’s why I used that quote. That — that reminded me of the Debussy quote that the – that music is the space between the notes. And so, in my mind, the analogy was, you know, good trading is the space between trades.

RITHOLTZ: Makes a lot of sense. You are a trader for a bit. I have to ask, are you still trading or you stepped back in more of an investor these days?

SCHWAGER: Yes, I was never an investor and (inaudible) people I invested in, and he invests in like this basically real estate, you know …

RITHOLTZ: Right.

SCHWAGER: … not as a — just, you know, but that’s kind of always (inaudible) to just that being a safe place to — to keep money.

RITHOLTZ: You don’t get a print every second, so that’s the …

SCHWAGER: No, no, but it’s …

RITHOLTZ: … (inaudible) real estate.

SCHWAGER: … it just makes — just makes it total sense to me. And — and particularly in environments where the markets have — had long runs and — and interest rates are near zero, which seems like — like a — like the best place I could think of to keep money. So, you know, whatever.

But anyway, I — I should clarify that unlike the people I interview, I — I actually don’t consider myself a trader. You know, I consider myself a lot of things before I consider myself a trader.

And trading for me is just a hobby. And it — and it’s something that I — I don’t do continuously and certainly those peers where — those decades where I was working, you know, full-time or whatever, it was always a side issue. And even — even a side of that, it — it depends on a circumstance. It depends on the moods of trade or whatever. So (inaudible) never be periods where I’ll trade and there are periods where you don’t trade.

And strictly, it’s more of a hobby to me than — than anything else. And — and if I start not doing well in my trading, I’ll stop trading and then, you know, a few months later I said, “Oh, you know, maybe I feel like trading again.” You know, so one day the — one day you decide, oh, it feels right again. So that’s — that’s it. So — like again, it’s a — it’s a — it’s a hobby, nothing — not a — not a — not a full-time endeavor.

RITHOLTZ: But — but you clearly picked up some things from — from some of the traders you — you’ve interviewed …

SCHWAGER: Yeah.

RITHOLTZ: … which raises — which raises the question, how different is it this time? You know, there’s — there’s been people scuffing at the markets, I don’t know, for — since ’08-’09.

I’ve — I’ve continuously read about people who are pushing back against the Fed, and ZIRP, and Q.E. and — and pretty much, but for the COVID pandemic, the market’s gone mostly up over that period.

SCHWAGER: Straight up.

RITHOLTZ: How — how do you — how do you respond to people who tell you, “Hey, this is a bubble, you can’t trade it. The Fed is ruined, everything.” What’s the standard response to that?

SCHWAGER: Well, apparently, it’s not the case because there are people trading very effectively and not necessarily — not necessarily because they are long bias. In many cases, you know, a lot of traders in the book are in equity rates at all. So — so their — their success is not coming from the market. And even when they’re equity traders, they — they could be both on the long/short side. So, I think those traders who are in this book — equity traders are — are on both sides of the market.

So, I would say it has nothing to do with the market being a bull market. Being successful in trading is — is more, you know, the matter of the — the individual methodology. And as far as the — the — the whole premise about the — well, at some point, they’re going to (inaudible). But you — you find — well, I find that traders who are successful, the — the forecasting is not the — it’s not the thing.

It — they may think of markets could act in a certain way. They may have plans to — to — to act, you know, to respond to that. And they’ll — and they’ll be out quickly if they’re wrong.

You know, best quote here is — is speed of grant (ph) and — and to use the — I — I — I like his quote so much that I — I used at the — as a title of the — of his chapter, which is “strong opinions weekly held.” So, he puts on a trade, he has a strong opinion, but if he goes, you know, in his words or paraphrasing, “if the market puts his hand in this pocket, he’s out.”

So, you can have a strong opinion, but you have to be very — like Peter says, you know, you have to hold it weekly. And if — if — if they’re not right, you have to — you have to admit you’re wrong and just get out of the way. So, people who have this premise that the market is going to do this or the forecasting is going to that, that’s usually not only not helpful, but it’s usually counterproductive.

RITHOLTZ: I’m with you on that completely. Let me — let me ask you an interesting thing. The — the book is really divided into two halves. The first part is futures trading; the second part is stock trading — stock traders. And then you have rules, and there’s an appendix, and there’s additional stuff. But I can’t help but notice, given how crazy NFTs and crypto and bitcoin and all that stuff has gone, there’s not a lot of — there’s not a whole lot of mention of — of crypto trading in this. What are your thoughts on this space?

It’s pretty clear some people have made hundreds of millions, if not billions. I think the — the Winklevoss Funds is now up to something like $2 billion from what they rolled over a few 100 million in — in Facebook stock. What — what is your thoughts on that space and — and how people might be trading it?

SCHWAGER: Yeah. Well, for — for — here’s one, Jeff Neumann, you know, is the one trader who did mention — who did trade crypto and it’s because it fits into the way he trades markets. He’s — he’s looking just for the early to dissipate when something is going to happen, when the market is just getting interest in something. So crypto was just another thing. It had nothing to do with crypto itself. He just — it is like a new product in a way.

RITHOLTZ: Right, right.

SCHWAGER: So — so it — it’s come up in that chapter. You know, my own feeling, I don’t — you know, I’m kind of old school. I was (inaudible) and comfortable. My — my initial information was the — say the — it looks like, you know, it looks like a bubble. And I — I — you know, the — the — the thing that I’ve — I’ve avoided it, by and large. I don’t — on one hand, I — it looks bubble-like in — in a lot of ways.

But there is a — the one thing, I guess, has kept me away is there — that there — it’s kind of odd, but something like bitcoin, you know, the main — like a bitcoin — like bitcoin because of the main one. There was actually — there is an — there’s two things that — that counter that argument. One, there’s actually a use for it. And the use is not — the use is not all people say. It’s not an alternative currency. No reasonable alternative currency will spring 25 percent …

RITHOLTZ: Right.

SCHWAGER: … in a short period of timing, not usable as a — as — in that way. But what it is useful for is actually quite — it’s in (inaudible) usage, but the market doesn’t care. You know, it’s — you know, like ransomware or …

RITHOLTZ: Right.

SCHWAGER: … other things of that nature, black market. So, there is a — there is a use for it, right? So that — it’s not like some other things like — like Internet companies that started out losing money and never made a dime, and just the longer doing business, the more money they lost. There’s no way they could do it. So that’s an example of a bubble when there was just no — no rationale whatsoever.

Here is a rationale. It’s not a particularly attractive rationale, but it’s a rationale. And — and if there’s a use, the market will put a value on it. And then the other thing is a scarcity, so like bitcoin, (inaudible) be only a certain number of a bitcoin. So — so that’s, you know, defined maximum number, so there’s — there are countervailing arguments. And — and that’s what — if it wasn’t for those two things, I think I would have been inclined to — to, you know, to — to look at it as a bubble.

But certain other things like Dogecoin, which starts as a joke and then goes — you know, goes up, you know, God knows how many percent, I think a lot of those MeToo coins over time will eventually — my own feeling — probably go — go to — go to nothing. And, you know, so I think there are certain elements of — of — of a bubble — bubble in this whole sphere that might be some, you know, some that’s surviving, maybe go much higher, I don’t know. But not my expertise, it’s just kind of my thoughts.

RITHOLTZ: Very, very interesting. So what would you need to see you from one of these traders before you handed over your capital to them to manage for you? And really, this is a …

SCHWAGER: No …

RITHOLTZ: … broad — this is a broad question, it’s not so much literal as what do you need to see before you write a check. But you’ve witnessed a ton of different traders and fund managers. I think your perspective would be helpful for those people who wrestle with what do I need to do in order to feel comfortable giving money to a third party to manage for me.

SCHWAGER: Yeah. Well, a few points. First of all, I would focus more on return to risk rather than just return because you do have managers out there that — that will put up spectacular returns, but they also have spectacular losses. And the truth of the matter is even if it — over the long run they turn out OK, but if you have these giant drawdowns, the reality is investors don’t survive. They — they just bail out.

So, you may look at the benefit of hindsight with the track record that look it has a good return with a lot of volatility. And you said, “Oh, well, it all works out fine.” Yeah, it works out fine because you’re looking with hindsight. But believe me, if you’re going fresh and you have that type of track record, you’re going to blow out somewhere in the (inaudible) or — or 95 percent plus of investors will. So, I think it’s important to look at the return of risk, not just — not just the return.

Another element is you want to have a sense that there’s some explanation of why that person has done particularly well, that — that — there will be reason to expect it to continue. (inaudible) always easy to do, but that’s, I think, important.

And — and I guess remember the last time I was making, it’s very difficult like the old cliché and it’s not a cliché for no reason. It’s a — past performance is not a — is no guarantee of future performance, so you could do everything right and the person could still end up not doing well.

And there is a — there is a regression to the mean problem here because when you pick people who’ve done very well, it’s hard for them to continue with that extreme. And there’s — it’s almost natural to have a regression to the mean. And so, I would expect that. I mean, even big people who I find extremely well, I would not — it’d be unrealistic to expect them to continue to do as well in the future. You have to be comfortable saying, well, even if they degrade this much, it’s still fine.

RITHOLTZ: Really, really intriguing. We mention Peter Grant has been around for quite a while, but it comes back to just about everybody else in the book or — or on the younger side, there are few people who have been around for — for a decade or two. Do you get the sense that trading is a — is a young person’s game? How — how does this new crop of traders make you feel about the previous traders you looked at in the past couple of books?

SCHWAGER: I guess you’re right on that. I didn’t think about it, but I guess with a couple of exceptions, they’re — they’re younger as a group. I — I did — I — I do try to get people who have at least a decade or longer of trading. And I think Bargh was the one exception I made at the time I interviewed him only about eight years, but I felt it was so exceptional that it — it merited being in there. So even though they’re young, they still have — I wouldn’t take anybody who was like a three, four-year (inaudible) something like that, so they still have a decade plus in almost all cases.

(Inaudible) I — I, you know, it just ended up being — maybe because I was looking at individual traders, it just turned out that those — that proper traders (inaudible) being on the — on the younger side, this probably may be more interest now among young people trading than — than previously. Maybe that’s another bias.

Just the — it just ended up. It wasn’t — I don’t know if that’s — if that’s representative of — of traders as a whole. It’s certainly hard too small of a sample. And — and they’re only about — they’re less than a dozen traders and a couple of them have been around for quite a while. So even there it’s not — not exclusively young.

RITHOLTZ: Really kind of — kind of interesting. Let’s stick with the current environment. Buy the dip has really — that mentality has really taken hold. We saw the 34 percent pandemic 2020 selloff, and what was that, barely five or six weeks. And — and …

SCHWAGER: Yeah.

RITHOLTZ: … the market, I think, had bottomed into March and the market recovered by August. What — what does this mean? Is — is this suggest relating the cycle or, hey, if it’s been working for the past 10 years, people are going to keep doing until it — doing it until stops. How do you — how do you look at this?

SCHWAGER: See, OK, so that’s almost approach this forecasting so again, something (inaudible), but I will say this. I — I did a book seven, eight years ago called “Market Sense and Nonsense.” And …

RITHOLTZ: Yeah.

SCHWAGER: … in one of the chapters in that book, I basically — and so there I tried to dispel some of the — some of the myths and misconceptions of — and mistakes people make in the markets. And one of them was this idea of — of investing when things are, you know, when things have been good. And I did announce — actually going back as, you know, back in the 1850’s in terms of data and just show that — and I took five-year period, 10, 15, 20, and I showed what happened in the next five, 10, 15, 20 depending on — on the previous.

And I am not surprised (inaudible) at least is, you know, when you invested when they’re — when the last five, 10, 15, 20 years were relatively poor, you did extremely well and vice-versa if you invested (inaudible) really well. So, the fact that now we’ve had a, you know, pretty much as you say that’s minor exceptions here and there, we’ve got a running bull market since 2008. It’s getting a bit old. And so, I would say probability-wise now, investing over the next five, 10 years, 15 years has become at the — at this point is to become much less attractive, just come straight statistics and numbers that — and that’s just the reality, it’s not a forecast. So, I just put — to put that in perspective.

And my advice, especially when you speak to younger people, always is putting part of your money long-term in the market is a good idea, but try to — but it’s best to do it when everybody hates the market. It is much less attractive when you’ve been on a long, long, long bull market like we are now.

So yes, I don’t know, it could end — it could end next week, it could end two years or I don’t know. But I would just say the probability is now much less favorably skewed than they would have been, you know, much earlier on.

RITHOLTZ: So — so you’re — you’re touching on one of my pet peeves, and — and so let’s talk about this. You know, when we look at these long-term bull markets following World War II is ’46 to about ’66 following the inflation and — and oil embargo in the 60’s and 70’s, the new bull market started in ’82 and ran to 2000. But — and — and historically, when we look at these bull markets, we don’t date them to the bottom of the prior low, we — we date them to win the market, breaks out from that prior long trading range.

So, the Dow kissed the $1,066. It didn’t get over on a permanent basis until ’82. We — we don’t date that bull market to 1974 bear market lows. Why is everybody so fixated on March ’09? That’s the low of arguably a 13-year long secular bear market that started in March 2000 and ended in March 2013 when markets got over and above that trading range. Does that make any difference to how you look at markets? Am I my being a little pedantic here or, you know, everybody just seems so hyper focused on March ’09.

SCHWAGER: Well, it has to do with probably, you know, the point I was just making before is — is what the prior record was. So, you know, from — from that point forward, 12, 13 years were now, so you — you have a long period of — of favorable returns, and — and that’s the type of statistic what I’m looking at what the market doing in the past 10 or 15 or 20 years. That’s the type of statistic that — that would be relevant. That’s a type of statistic that’s going to look strong.
It’s not the fact just it was the bottom, it just happens to be that for a long period of time the market is very, very above average returns.

RITHOLTZ: Huh, quite interesting. And then the curveball question I have to ask you before we get to our favorite questions is simply, are we going to see yet another “Market Wizards” book after this or there’s still more traders to be uncovered?

SCHWAGER: Yeah. Well, there’s certainly more traders to be uncovered, but that — not does it correlating for another “Market Wizards” book. So, whenever I finish one of these, I don’t anticipate there’ll — there’ll be another one and so forth, always (inaudible) another one. I just didn’t want — I — and typically, with the exception of the second book, which — which I did a few years after the first one was — because the first one was — was such a big hit, and I still have a quite number of traders I hadn’t gotten to. So, I did those only three years apart. But other than that, the books have been spaced seven or 10 years apart.

And I don’t anticipate to do one anywhere in the foreseeable future, and I kind of am skeptical if I’ll do another one. But I guess, they haven’t been right about that in the past, so I’ll make that an absolute prediction.

RITHOLTZ: Never say never. All right. So — so let’s jump to our favorite questions that we ask all our guests starting with, tell us what you’re streaming these days. Give us your favorite Netflix or Amazon Prime shows or whatever podcasts you’re listening to. What’s keeping you entertained during the pandemic?

SCHWAGER: Sure. So — so really strong recommendation here for a U.K. program called Clarkson’s Farm, which I …

RITHOLTZ: So good.

SCHWAGER: … was like sound enormously entertaining. It’s about Jeremy Clarkson who, during the COVID year, he owns a farm — you know, his big farm in the — in the U.K., and he decides, well, why not farm it himself? So, the — the reason I like it, one, he had just a great sense of humor and that underlies the whole show. And second, it gives you an appreciation for just how darn difficult farming is. So, the combination of that, I — I — made that a great series.

And then there’s one I just watched recently, which is — which is of a — one of these eight-series type of single-story things of maybe you call it a thriller or whatever, but really well done, holds consistently way above average of a typical one, and it’s called Clickbait. So, I — I would recommend that.

And — oh, and recently, I — this is decades-old problem, but I finally got around to watching Scorsese’s documentary on — on Dylan. It’s like three and a half hours long called “No Direction Home.” And if — if you’re feeling (inaudible) Dylan, it’s — it’s a high recommendation.

Oh, and one last one on the podcast, I’ve got a new favorite podcast over the last couple of years and it’s called “Cautionary Tales.” And it’s by Tim — Tim Harford who’s — goes by the name of …

RITHOLTZ: Sure.

SCHWAGER: … Undercover Economist. It’s a phenomenal — a phenomenally well-done show. So — so many interesting things he — he pulls up, just the — just not only highly entertaining, but they’re very interesting in — in behavioral economics but really — it’s not — it’s not educational in that way, but it comes out of the story, so to speak. And he does a great job in — in doing the narratives. So, like I say, I highly recommend “Cautionary Tales” …

RITHOLTZ: “Cautionary Tales.”

SCHWAGER: … economics, yeah.

RITHOLTZ: Really interesting. Tell us about some of your mentors, who helped shape your career over time.

SCHWAGER: There really is only one mentor in my case, and he was a close friend. Unfortunately, he died a few year — a number of years ago, named Steve Kronawitz (ph). And — and you won’t find anything about Steve because he never wrote anything. But Steve (ph), when I — back in the day, when I was a Director of Research, he was a — he was an analyst who worked to me. And he — he was the technical analyst. And all the other analysts were fundamental analysts.

And I — and Steve (ph) and I shared this large office space and so we were friends as well. But I noticed that all the analysts, you know, they — they were right, they were wrong, you know, lucky to break even, you know, over the total. But Steve (ph) was the only one who is right more than wrong. And this is back in the day coming out of graduate schools for economics. I was very, very skeptical of — of — of technical analysis.

But I — I was open and open-minded enough, talked to him about it, and so I said, “Tell me what you do.” And, you know, through him, first I — I understood why, the premise of why technical analysis can work. And to put it simply, it’s that when you think about it, everything that happens in the market, everything that’s known about the market, every trade that’s done in the market shows up in price. You can’t hide it, right? So, well, even insider (inaudible), it shows up in price.

So, there’s a logic to it. There’s a reason why price could be meaningful as a reflection of everything that’s known about the market. So, it’s not black mumbo jumbo, it’s — it has the rationale. So that — that was one thing that I understood and learned from it.

And then he showed me just basic, you know, chart analysis and more appreciative of risk management. So, he really — he was the one who kind of it was significant to me to switch over from fundamental to technical. That was where I kind of transition from losing to being that profitable. And I would consider him basically my mentor.

RITHOLTZ: Let’s talk about books. What are some of your favorites? And — and what are you reading lately?

SCHWAGER: OK. Ironically, top of my list here is that — and you had Cialdini on, but not that long. I listened to a nice podcast with him, “Influence,” the book “Influence.” And I would say that “Influence” is not just a recommended book. I would say it is a — a great book, a classic.

I would say, you know, and I’ve read a number of behavioral economics books and he’s more of a psychology, but there’s probably as much information in that book about useful information about human behavior at any volume I could think of, so if you have any interest in psychology or human behavior, strong recommendation on “Influence.”

Then I have two books more of a bank-side recently, which I — which are — one is phenomenal called “In the Kingdom of Ice,” which is about the — the first U.S. expedition in the 19th century to — to find the North Pole by boat where they didn’t realize that you couldn’t do that, and they got trapped in one — trapped in the ice.

And it’s an incredible narrative. It’s a true story. It — it is just a phenomenal agreed. It’s literally one of the best books I’ve ever read. It’s called “In the Kingdom of Ice.”

And kind of another similar historic adventure that I read recently, which I would recommend is called “The River of Doubt,” which is about Teddy Roosevelt after he loses his bid for a third term as president. Actually, it goes off and it’s co-heads a expedition to explore previously unchartered major river in the Amazon. And it’s a — you know, again, a true story and kind of the — the — you read that, it’s amazing the grit of that — of that man. And — and, you know, the risks he took and — and that whole story is a pretty incredible one as well. It’s something I knew nothing about and it’s pretty amazing that it’s true.

RITHOLTZ: So those are some good book recommendations. I literally gave a copy of “Influence” to my nephew who’s in his early 20’s and working as a banker yesterday. So today is — I’m sorry Tuesday, I gave that to him. He was — he was over for days. And I — it’s just a great book to — to share …

SCHWAGER: Yeah.

RITHOLTZ: … with young people.

The “In the Kingdom of Ice” looks fascinating. I’m going to pick that up. Have you ever read …

SCHWAGER: Hey, you’ll — you’ll enjoy it, you’ll enjoy it. It’s a great read, just a great read.

RITHOLTZ: Have you ever read “Endurance” about Shackleton’s voyage?

SCHWAGER: Yeah, yeah. And — and it’s funny you say that because — because people ask me what my favorite book is, and “Endurance” is my favorite book (inaudible) Shackleton.

RITHOLTZ: That’s just — that’s an unbelievable book. It’s — it’s just …

SCHWAGER: It is extraordinary.

RITHOLTZ: … there’s nothing like it.

SCHWAGER: Yeah, but, you know, this is the thing. “In the Kingdom” — “In the Kingdom of the Ice” is the first book I’ve read that stands — can stand at the exact same level as (inaudible).

RITHOLTZ: Really? That’s amazing.

SCHWAGER: You know, it’s that good. It’s that good, yeah.

RITHOLTZ: Well, I’m in. Count — count me in for that. What sort of advice would you give to a recent college grad who was interested in a career as a trader?

SCHWAGER: Sort of — if interested in a clear as a trader, there’s — well, one, I think of a quote that’s the title of one of the chapters in this latest book, which is “Don’t quit your day job.” So, on the other hand, somebody like Jeffrey Neumann went out — he’s graduated college and went straight to trading and became enormously successful. So, there are exceptions. But I think that’s more of the long shot. And the people’s perception of what it — how difficult it is to succeed as a trader are misplaced, and it’s particularly difficult if you don’t have a real stake in — you know, to — to fall back on.

If you’ve got a — if you got to pay your rent or something like that, you’re — depending on making money, that’s — that’s a real big of disadvantage. So — so one piece of advice I would say is – is don’t really get serious about a trading career until you have enough money to be comfortable, taking your basic expenses and — and be able to give it a chance. Otherwise, it’s difficult enough and you just put in the odds too much against you by trying to do it at the same time you have monetary responsibilities that can’t be met unless you’re making money.

RITHOLTZ: And our final question, what do you know about the world of trading today that you wish you knew 30 or 40 years ago when you were first getting started in this field?

SCHWAGER: A couple, well, most important thing probably is that everything risk management is — is the most important thing. And that was certainly something I had — didn’t understand at all. It’s not an add-on. It’s not something that you’ll get to if — if you don’t have some sort of — and it doesn’t have to be difficult. It doesn’t have to be complex, but if you don’t have a rigorous risk management, the odds you’re succeeding are very low. So that’s something I — I fully — that’s burnt into my bones at this point, but I didn’t understand at all when I got in.

And I guess the other thing is — is that no matter how good you do at any point in time, don’t get complacent. The market always has a way of surprising you. So, I’ve kind of learned at this point that I’m doing really well and probably could have a lousy period coming up. But, you know, you got to learn to — to not assume that you’ve discovered it because you never do. It’s always an ongoing thing. And — and like I say, the market will always surprise you.

RITHOLTZ: Quite, quite fascinating. Jack, thank you for being so generous with your time. We have been speaking with Jack Schwager, author of about eight books, most recently “Unknown Market Wizards: The best traders you’ve never heard of.”

If you enjoyed this conversation, well, be sure to check out any of our previous almost 400 prior discussions. You can find that at iTunes, Spotify, wherever you pick up for favorite podcasts from.

We love your comments, feedback and suggestions. Write to us at mibpodcast@bloomberg.net. You can sign up for my daily reads at ritholtz.com. Check out my weekly column on bloomberg.com/opinion. Follow me on Twitter @ritholtz.

I would be remiss if I did not thank the crack staff that helps these conversations come together so nicely each week. Charlie Vollmer and Tim Herro are Audio Engineers because this particular podcast required two engineers. Paris Wald is my Producer. Atika Valbrun is our Project Manager. Michael Batnick is my Head of Research.

I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.

 

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