by Jack D. Schwager, published 1989
Written by acclaimed financial writer Jack D. Schwager and first published in 1989, this book profiles the most successful traders and money managers of the late 20th century – figures such as Richard Dennis (who turned a mere $400 into over $200 million over a 17-year period), Paul Tudor Jones (who compiled a record of five consecutive triple-digit return years with very low equity drawdown), Michael Steinhardt (30% annualized return over a 21-year period ending Spring 1988), William O’Neil (founder of Investor’s Business Daily), and Jim Rogers (co-founder of the Quantum Fund with George Soros). This book is a compilation of interviews conducted by the author – covering the beliefs, trading styles, and the successes and failures of all these traders. A truly timeless work and well worth reading by anyone who trades in our financial markets today.
The New Market Wizards
by Jack D. Schwager, published 1992
The second in a three-book series of interviews with the greatest traders of our time. First published in 1992, the book begins with a timely, short introduction by comparing the moves of Saddam Hussein leading to the Gulf War with a bad trader who made all the common trading mistakes:
Hussein’s trade was the invasion of Kuwait. Initially, he had solid, fundamental reasons for the trade … He also stood a perceived good chance of permanently annexing part or all of Kuwait’s oil fields, as well as gaining direct access to the Persian Gulf. And, last but certainly not least, the invasion provided a wonderful opportunity for Hussein to feed his megalomaniacal ambitions.
In exchange for all this upside potential, the initial risk on the trade seemed limited. .. the State Department’s initial response to Iraq’s invasion-threatening pronouncements and actions could essentially be paraphrased as “It’s not our problem.”
However, as so often happens, the market changed. President Bush committed … to the defense of Saudi Arabia by sending in troops and spearheaded the passage of UN resolutions aimed at convincing Hussein to leave Kuwait. At this point, Hussein could probably have negotiated a deal in which he would have withdrawn from Kuwait in exchange for some disputed territorial gains and port rights – a quick profit. However, although the trade had started to deteriorate, Hussein decided to stand pat.
Next, Bush sent a stronger signal … an action indicating not only that the United States was ready to defend Saudi Arabia but that it was also establishing the capability for retaking Kuwait by force. Clearly the market had changed. Hussein ignored the market signal and stood back.
President Bush then set a January 15 deadline … the market moved further against the trade. At this point, the profit potential was probably gone, but Hussein could still have approximated a breakeven trade by offering to withdraw from Kuwait. Once again, he decided to hold the position.
Once the … deadline had passed … the original trade was clearly in losing territory. Moreover, the market was moving down sharply every day, as each day’s procrastination resulted in more destruction in Iraq … Much like a bewildered trader caught in a steadily deteriorating position, he pinned his hopes on the long shot: If only he held on long enough, perhaps fear of casualties would prompt the United States to back down.
The trend continued to go against the trade as the United States issued another deadline ultimatum – this time linked to the initiation of a ground war against Iraq. At this juncture, Hussein was readily consenting to conditions contained in the Soviet peace proposal, an agreement that probably would have been perfectly sufficient earlier but was now inadequate. Hussein’s behavior was very much like that of a trader holding a long position in a steadily declining market who says, “I’ll get out when I’m even,” and then, as the situation grows more desperate, “I’ll get out at the last relative high,” with the relative high moving steadily down with the passage of time.
Ultimately, with the ground war well under way and his army largely decimated, Hussein finally capitulated. He was like a trader who held on to a losing position until his account has been virtually destroyed, and then, in complete desperation, finally exclaims to his broker, “Get me out of the market. I don’t care at what price, just get me out!”
The Hussein analogy was the perfect introduction – the difference being that the trader typically has more options and flexibility – such as dollar-cost averaging, hedging, and the ability to get out whenever he or she wants. The format of this book is very much like the first book – in that it tries profile traders in all the different markets with various trading styles. Some noteworthy mentions include Bill Lipschutz (one of the biggest traders in the biggest market of all – the currency market), William Eckhardt, Stanley Druckenmiller, Richard Drieheaus, and the Turtles.
Stock Market Wizards
by Jack D. Schwager, published 2001
The last in a three-book series by Jack D. Schwager dealing with the greatest market traders of our time. Initially published in 2001, this book consists of a set of interviews with stock traders only – which were conducted from mid 1999 through early 2000 – when stock traders were generally doing very well. Some would even say that the traders profiled in this book cannot measure up against the traders in the first two books, given that these traders compiled their favorable performance numbers during the greatest bull market of our time. Schwager dismisses that notion somewhat with a revised edition of the book published in 2003 – giving his readers an update of what has happened to these same traders ever since the bear market began in early 2000. Most of them did fairly well in the subsequent bear market, but some did not. Notable mentions include Dana Galante (who compiled a record 15% annualized return by managing a short-only fund during the period from 1994 to 1999) and Steve Cohen (with an annualized return of 90% over a 7-year period – and who is now in the Forbes Top 400 List). The final chapter of the book contains numerous market lessons that Schwager has learned – which is a very valuable piece of work on its own.