In the effervescent realm of books on business, there are the biographies on industry titans, the how-to's, the books on leadership (or lack thereof), the postulations on the next cycle, or books about "the secret" (the perpetual media premise about visualizing your success).
But there are very few good books about trading capital markets. Two excellent works regarding capital markets that feature highly successful traders / investors are Market Wizards and The New Market Wizards, both written by Jack D. Schwager. These two books may be older titles, but they are still required reading for any serious trader / investor.
Schwager chose an interview format for his books, asking specific and learned questions to very successful traders that made it big from capital markets.
Interviewees ran the gamut from equity fund managers, to derivatives traders, to individuals who quit their jobs and each became a full-time trader / investor. Schwager's goal was to help readers get an understanding of what it takes to become a winning trader in capital markets, encompassing stocks, bonds, commodities, and currencies.
In the books, Schwager interviewed Marty Schwartz who worked as a Wall Street equity research analyst and lost money investing in stocks for a good 10 years. He quit his job, and with his savings, he bought a seat on the American Stock Exchange for $92,500. He had $20,000 left and borrowed $50,000 from his in-laws. Trading for himself and moving to a home office, in three years, he was earning no less than seven figures annually.
Schwartz couldn't make money investing in stocks; rather, he changed his approach to capital markets. He switched to technical analysis and traded S&P contracts.
His most important advice: admit when you're wrong, learn to take losses early, and don't increase the size of your bets until you've doubled or tripled your capital.
James B. Rogers, Jr. offered the following: everything in global capital markets is just a cycle. A paper loss is very much a real loss. Buy change (after a lot of research). Be flexible and invest in anything. Never follow conventional wisdom. Wait for a good trading opportunity to present itself; do nothing in the absence of such an opportunity. (See "Investor's Manifesto: Five Motivations for Beating Market Chaos and Risk.")
Richard Driehaus was in research, but opened an account as a trader / investor in stocks at the brokerage firm he worked for. A person in the office who reconciled his trades saw his picks were pretty good, so she gave Driehaus $104,000 to manage. This was his beginning as a fund manager.
Driehaus said that most people look at stock market action negatively, while not being constructive about the trading. He said,
Synthesize all news in capital markets, but don't follow anyone. Buying high to sell higher is often profitable for a trader. Only through your own research can you develop an investing philosophy that earns. Do what works in the stock market, not what is comfortable.
Among the traders that Schwager interviewed, I noticed a number of commonalities. Here are 10:
- Take losses early
- Hard work and consistent discipline are required to be successful
- Trade infrequently, but trade with conviction
- Winning is more important than being right
- Vary the size of your bets based on conviction and investment risk
- Study capital markets for the action; everything else is noise
- Home runs are essential to keeping you in the game over time
- The equity market is neither efficient nor random
- Learn from mistakes; it is a big treasure hunt
- Remove your ego from the game
Market Wizards and The New Market Wizards are quite old now, but the words still resonate. Most of the traders viewed speculating in capital markets as a zero-sum game. At the end of the day, the only thing that matters is the trading action and how you are positioned.