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The most classic illustration I can think of is one of the soybean bull markets in the late 1970s. At the time, soybeans were in extreme shortage. One of the things pushing the market up was the weekly government reports indicating strong export commitments and sales. I was holding a heavy long position in soybeans and someone from Commodities Corporation called me with the latest export figures.
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He said, “I have good news and I have bad news.” I said, “OK, what is the good news?” “The good news is that the export commitment figure was fantastic. The bad news is that you don’t have a limit position [the maximum permissible speculative position size].” They were expecting the market to be limit-up for the next three days.
Actually, I wound up being a little depressed that I didn’t have a larger position. The next morning, I entered an order to buy some more contracts on the opening, just in case I got lucky and the market traded before locking limit-up. I sat back to watch the fun. The market opened limit-up as expected. Shortly after the opening.
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I noticed a lot of ticks being recorded, as if the market was trading at the limit-up. Then prices eased off limit-up just as my broker called to report my fills. The market started trading down. I said to myself, “Soybeans were supposed to be limit-up for three days, and they can’t even hold limit-up the first morning.” I immediately called my broker and frantically told him to sell, sell, sell!
They personalize the market. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Whenever a trader says, “I wish,” or “I hope,” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.
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In my conversation with Kovner, I was struck by the immense complexity and scope of his analysis. I still can’t figure out how he can find the time to follow and analyze intricately the economies of so many different countries, let alone integrate these various analyses into a single picture. Clearly, Kovner’s unique synthesis of worldwide fundamental and technical analysis is hardly translatable to the average trader.
Nevertheless, there are key elements in Kovner’s trading approach that have direct relevance to the more mundane trader. Kovner lists risk management as the key to successful trading; he always decides on an exit point before he puts on a trade. He also stresses the need for evaluating risk on a portfolio basis rather than viewing the risk of each trade independently.
This is absolutely critical when one holds positions that are highly correlated, since the overall portfolio risk is likely to be much greater than the trader realizes. Jones has succeeded in every major venture he has tried. He started out in the business as a broker and in his second year grossed over $1 million in commissions. In fall 1980, Jones went to the New York Cotton Exchange as an independent floor trader. Market Wizards PDF Book
Again he was spectacularly successful, making millions during the next few years. His really impressive achievement though was not the magnitude of his winnings, but the consistency of his performance: During his three and a half years as a floor trader, he witnessed only one losing month.
In 1984, partially out of boredom, and partially out of fear of eventually losing his voice—an occupational hazard for a pit trader— Jones again abandoned his successful career for a new venture: money management. He launched the Tudor Futures Fund in September 1984 with $1.5 million under management.
At the end of October 1988, each $1,000 invested in this fund was worth $17,482, while the total amount of money he managed had grown to $330 million. In fact, the amount under management would have been higher, but Jones stopped accepting new investment funds in October 1987 and has also made cash disbursements since that time. Market Wizards PDF Book
If one believes in cycles—as Jones does—it appears that he is due for another career change. It is hard to imagine what he can do for an encore. How did he do it? Bielfeldt does not believe in diversification. His trading philosophy is that you pick one area and become expert at it.
For much of his trading career, the soybean complex and, to a more minor extent, the related grain markets provided that focal point of attention. Although Bielfeldt had the desire to become a full-time trader from the beginning, his tiny capital base restricted his trading to a part-time endeavor. In those early years, he earned his living running a small brokerage office.
The problem he faced was how he, a trader without any independent funds, could develop a sufficient capital base to become a professional trader. Bielfeldt’s strong desire to make this leap in his capital base prompted him to take a large, if not imprudent, risk. By 1965, Bielfeldt had painstakingly built up his initial $1,000 stake to $10,000. Market Wizards PDF Book
Based on his fundamental evaluation of the soybean market, as well as the concurring opinion by his former agricultural economics professor, Thomas Hieronymus, Bielfeldt strongly believed that prices would go higher. In an all-or-nothing play, he bought twenty soybean contracts, an extremely highleverage position given his $10,000 account size.
A mere 10-cent price decline would have completely wiped out his account, while a considerably smaller decline would have been sufficient to generate a forced-liquidation margin call. Initially, prices did move lower, and Bielfeldt came perilously close to that damaging margin call. But he held on, and prices eventually reversed to the upside.
By the time he liquidated the position, he had more than doubled his equity on that single trade. That trade launched Bielfeldt toward his much sought after goal of becoming a full-time trader. I don’t judge success. I celebrate it. I think success has to do with finding and following one’s calling regardless of financial gain. Market Wizards PDF Book Download
Don’t be fooled by the humor in Seykota’s comments; there is a great deal of serious wisdom in his pithy replies. For me personally, the most striking comment was: “Everybody gets what they want out of the market.” When Seykota first made this remark, I thought he was merely being cute. But I soon realized he was deadly serious.
My reflexive response to this premise was disbelief: It implies that all losers want to lose and all winners who fall short of their goals (like myself) are fulfilling some inner need for a constrained threshold of success—a difficult proposition to swallow. Although my rigidly logical mind would normally dismiss the idea.
My respect for Seykota’s knowledge about markets and people forces me to consider the potential truth of the statement that everybody gets what they want out of the market—a most provocative concept. Absolutely. People think that being a contrarian implies victory. After all, what is a contrarian but someone that goes against the crowd. Market Wizards PDF Book Download
It is almost a cliche that the crowd is always wrong—so the guy who stands against the crowd must always be right. Well, life doesn’t work that way. There were plenty of contrarians who bought bonds when interest rates went to 8 percent for the first time, and 9 percent, and 10 percent. There was a great deal of money lost by people buying bonds at what were then all-time high yields.
There is a very important difference between being a theoretical contrarian and dealing with it in practical terms. In order to win as a contrarian, you need the right timing and you have to put on a position in the appropriate size. If you do it too small, it’s not meaningful; if you do it too big, you can get wiped out if your timing is slightly off.
The process requires courage, commitment, and an understanding of your own psychology. Schwartz spent a decade losing money on his trading before he found his stride as a remarkably successful professional trader. During his earlier years, he was a well-paid securities analyst, who, as he describes it, was always broke because of market losses. Market Wizards PDF Book Download
Eventually, he changed his trading methodology, in the process of transforming himself from a repeated loser to an amazingly consistent winner. Not only has Schwartz scored enormous percentage gains in every year since he turned full-time trader in 1979, but he has done so without ever losing more than 3 percent of his equity on a month-end to month-end basis.
Schwartz trades independently from an office at home. He is proud of the fact that he has no employees. Solitary traders of this type, no matter how successful, are usually unknown to the public. Schwartz, however, has attained a degree of fame through repeated entries in the U.S. Trading Championships, run by Norm Zadeh, a Stanford University professor.
His performance in these contests has been nothing short of astounding. In nine of the ten four-month trading championships he entered (typically with a starting stake of $400,000), he made more money than all the other contestants combined. His average return in these nine contests was 210 percent— nonannualized! (In the one remaining four-month contest he witnessed a near breakeven result. Market Wizards PDF Book Free
In his single entry in a one-year contest, he scored a 781 percent return. Schwartz’s entry into these contests is his way of telling the world that he is the best trader around. In terms of risk/reward ratios, he may well be. I’ll give you two examples; I could give you a dozen. The U.S. government spends $5 billion a year to support the domestic price of sugar so that Americans can pay 22 cents a pound wholesale,
When it is selling for 8 cents a pound in the world market. Five billion dollars! We would be better off if the government told every sugar grower, “We’ll give you $100,000 a year for the rest of your life, a condominium, and a Porsche if you just get out of the sugar business.” We would save billions of dollars a year, and the whole country would be better off because we would all be paying less for sugar.
If you really want to save a big number, do you know what our annual balance of trade deficit is? One hundred and fifty billion dollars. Do you know what it costs us each year to keep American troops stationed in Europe? One hundred and fifty billion dollars. American troops were sent there as an army of occupation forty-three years ago! Most people in this country weren’t even born when the decision was made to send our troops to Europe. Market Wizards PDF Book Free
They are doing nothing there but sitting around, drinking beer, getting fat, and chasing girls. The GAO has said that we don’t have enough bullets to fight even a thirty-day war in Europe. Yet it costs us $150 billion a year to keep those guys there. I would submit to you that if we stop spending that $150 billion a year and bring those troops home, the Europeans would defend themselves.
And the kicker is: Do you know who they would buy their guns from? They would buy their guns from us, because they don’t have a very good defense industry establishment. I met Mark Weinstein through a mutual friend. Although he was very intrigued by the project, his desire for anonymity made him reluctant to tell his story. He would call me and say, “OK, I will do it, let’s schedule the interview.”
Then the next day he would call and say, “I changed my mind. I don’t want the publicity.” This pattern was repeated several times, with each decision accompanied by lengthy phone conversations regarding the merits and drawbacks of doing the interview. Finally, in exasperation, I said, “Mark, we could have done three interviews in the time we have spent talking about it.” Market Wizards PDF Book Free
That was our last conversation regarding the matter until about two months later when, impressed by the caliber of traders who had agreed to participate in this book, Weinstein decided to do the interview. . I never really had a materialistic dream until I started vacationing and traveling in Europe.