Jack Schwager's newest book, Hedge Fund Market Wizards, like his previous works, is yet another solid contribution toward how to effectively manage capital. The book will have strong appeal to three main audiences; those managing capital professionally, those evaluating professional money managers, and those readers who want to manage their own money more effectively.
The fact that markets and the money management industry have gone through tumultuous change makes the central message of the book all the more powerful...that the key ingredients to successful performance are timeless and true in radically different environments. Those ingredients, an appreciation for the balance of risk versus reward in a trade, discipline, adaptability, an open mind, and intellectual honesty that enables one to learn from mistakes, come to life in Schwager's riveting interviews with a number of managers.
The characters' stories highlight their very different personalities and lifestyles and are interesting in and of themselves. But it is Schwager's unique ability to illustrate their winning strategies and interweave their personal backgrounds and emotional highs and lows that makes Hedge Fund Market Wizards both a highly entertaining read and learning experience. What most jumps out at the reader is how radically different styles and approaches all share the common traits mentioned above. By exemplifying these traits in a number of managers with seemingly different investment philosophies, whether it be short term vs. long term trading, large capital or small, or technical vs. fundamental analysis, Schwager is able to better highlight their essential importance to successful investing. By highlighting their differences, the common thread of their similarities is much more evident. Schwager reinforces the message with succinct summaries of what these commonalities are throughout the book.
Whether a reader is a professional money manager or simply managing their own capital, I have no doubt they will find Hedge Fund Market Wizards both entertains and enhances their ability to grow their capital.
Stanley Druckenmiller founded Duquesne Capital Management, which compounded at 30% per annum without a single losing year from its inception in 1981 to its closing in 2010. From 1988 to 2000, he also served as Lead Portfolio Manager of the Quantum Fund and Chief Investment Officer of Soros Fund Management (1989-2000) where he had overall responsibility for funds with a peak asset value of $22 billion.
Hedge Fund Market Wizards is ultimately a search for insights to be drawn from the most successful market practitioners. The last chapter distills the wisdom of the 15 skilled traders interviewed into 40 key market lessons. A sampling is provided below:
1. There Is No Holy Grail in Trading
Many traders mistakenly believe that there is some single solution to defining market behavior. Not only is there no single solution to the markets, but those solutions that do exist are continually changing. The range of the methods used by the traders interviewed in Hedge Fund Market Wizards, some of which are even polar opposites, is a testament to the diversity of possible approaches. There are a multitude of ways to be successful in the markets, albeit they are all hard to find and achieve.
2. Don't Confuse the Concepts of Winning and Losing Trades with Good and Bad Trades
A good trade can lose money, and a bad trade can make money. Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money.
3. The Road to Success Is Paved with Mistakes
Ray Dalio, the founder of Bridgewater, the world's largest hedge fund, strongly believes that learning from mistakes is essential to improvement and ultimate success. Each mistake, if recognized and acted upon, provides an opportunity for improving a trading approach. Most traders would benefit by writing down each mistake, the implied lesson, and the intended change in the trading process. Such a trading log can be periodically reviewed for reinforcement. Trading mistakes cannot be avoided, but repeating the same mistakes can be, and doing so is often the difference between success and failure.
4. The Importance of Doing Nothing
For some traders, the discipline and patience to do nothing when the environment is unfavorable or opportunities are lacking is a crucial element in their success. For example, despite making minimal use of short positions, Kevin Daly, the manager of the Five Corners fund, achieved cumulative gross returns in excess of 800% during a 12-year period when the broad equity markets were essentially flat. In part, he accomplished this feat by having the discipline to remain largely in cash during negative environments, which allowed him to sidestep large drawdowns during two major bear markets. The lesson is that if conditions are not right, or the return/risk is not sufficiently favorable, don't do anything. Beware of taking dubious trades out of impatience.
5. Volatility and Risk Are Not Synonymous
Low volatility does not imply low risk and high volatility does not imply high risk. Investments subject to sporadic large risks may exhibit low volatility if a risk event is not present in the existing track record. For example, the strategy of selling out-of-the-money options can exhibit low volatility if there are no large, abrupt price moves, but is at risk of asymptotically increasing losses in the event of a sudden, steep selloff. On the other hand, traders such as Jamie Mai, the portfolio manager for Cornwall Capital, will exhibit high volatility because of occasional very large gains-not a factor that most investors would associate with risk or even consider undesirable-but will have strictly curtailed risk because of the asymmetric structure of their trades. So some strategies, such as option selling, can have both low volatility and large, open-ended risk, and some strategies, such as Mai's, can have both high volatility and constrained risk.
As a related point, investors often make the mistake of equating manager performance in a given year with manager skill. Sometimes, more skilled managers will underperform because they refuse to participate in market bubbles. The best performers during such periods are often the most imprudent rather than the most skilled managers. Martin Taylor, the portfolio manager of the Nevsky Fund, underperformed in 1999 because he thought it was ridiculous to buy tech stocks at their inflated price levels. This same investment decision, however, was instrumental to his large outperformance in subsequent years when these stocks witnessed a prolonged, massive decline. In this sense, past performance can sometimes even be an inverse indicator.
Before I get into my thoughts on Hedge Fund Market Wizards, I think sharing the author's own words will go a long way toward establishing expectations for the book as I've found that those few folks who have panned the series have only really done so because they went into reading the books with a mistaken view of what they would get.
"Readers who are looking for some secret formula that will provide them with an easy way to beat the markets are looking in the wrong place. Readers who are seeking to improve their trading abilities, however, should find much that is useful in the following interviews." (from the Preface)
And of course interviews is what the book is all about. There are 15 in this latest variation on the Market Wizards series, each with its own introduction and concluding summary of key takeaways. Again, we have a diverse collection of money managers represented. They are grouped in to "macro", "multistrategy", and "equity" categories. I wouldn't call this as broad a set of discreet categorizations as we saw in the earlier books, but this probably reflects the way trading and money management has evolved in the 20+ years since the first book came out.
I think those who have read one or more of the prior books will find some subtle differences in this new edition. It is clear Schwager is more confident in both his interviewing and his own views on trading and markets. There is more editorializing in this book than I remember from the others. At the same time, the author isn't shy at all about drilling down on subjects and pressing interviewees to get the most out of them. This adds to the quality of the end product.
I was actually somewhat surprised how into the book I got personally. As an experienced traders, I found a kind of affirmation from some of the interviews. There were also a few "I never really thought about it like that" moments to give me new things to ponder, which is a plus.
I think having a significant recent (financial crisis) event central to the interviews helps. It also creates the same kind of contextual linkage the Crash of 1987 had for the interviews in the first book. This common reference point for readers makes it easier to be engaged by the text. It also helps developing readers from an application perspective in terms of allowing readers to have "Oh, yeah. I see what he was doing there" type of realizations.
There are a couple of interviewees in this book who present a challenge to individual investors in that they operate in markets where no individual really can take part (there is plenty of good footnoting to support explanations and definitions of subjects discussed). Most of them, though, operate in ways largely applicable by individuals, and even those who don't still offer insights into how they are thinking about the strategies they are employing and the way they are positioning themselves in the market.
And really that's really the crux of what's on offer in Hedge Fund Market Wizards.
It's about hearing how successful traders think about risk, strategy, research, and everything else that goes into their efforts - getting inside their heads. There are a couple of more systematic traders in the group who don't share much in the way of specifics, but the rest (who I would largely describe as being discretionary types) seem to have no problem at all in talking pretty specifically about the kind of technical and/or fundamental cues they look for to find good trades. If you're after "I buy when the 15-day average crosses the 30-day" type of rules, you're not going to find any. Most of the gentlemen interviewed (it's all men in this one), though, are very open about the way they look for trades, manage positions, etc. For this reason, I believe there is a lot of value to be had here for new and developing traders.
Schwager ends the book with his own takeaways from all the interviews he's done through these books. Those 40 observations alone are worth getting a copy of Hedge Fund Market Wizards, especially knowing from whence they came. There's also a very good epilogue written by his son talking about his own introduction to the Market Wizards concepts and their presentation which is well worth reading.
The bottom line is I think this is a good read no matter where you are on the spectrum of market experience.
Product Details :
Hardcover: 544 pages
Publisher: Wiley; 1 edition (May 29, 2012)
Language: English
ISBN-10: 1118273044
ISBN-13: 978-1118273043
Product Dimensions: 6.4 x 1.6 x 9.3 inches
More Details about Hedge Fund Market Wizards: How Winning Traders Win, 1st edition
or
Download Hedge Fund Market Wizards: How Winning Traders Win, 1st edition PDF Ebook
No comments:
Post a Comment