Hedge Fund Market Wizards MP3 CD – Unabridged, June 24, 2014

I have been wanting to write a review of the new Market Wizards book for some time, but it took me a few weeks to slog through it in my spare time. I'll come right to the point: I think I got more out of this book than any of the prior Wizard books. All of them are good, starting with the first back in 1989 (side note: years ago, I worked for one of the Wizards in the original compilation...........err, don't ask).I think the quality and sophistication of the information in the book is a cut above the others, probably because the individuals featured in this volume tend to be seasoned managers of very large funds. If you're a serious trader, I urge you to buy the book; I heavily highlighted my copy, and I've retyped some of the favorite segments below. The quotations are from different parts of the interview, so please read its paragraph as an independent snippet. The only organization I've provided is to precede each block of quotes with the name of the person who was being interviewed:Colm O'Shea:We recognized that we would underperform the bulls by quite a bit because in a bubble the true believers will always win. That's fine. you just need to make decent returns and wait until the market turns. Then you can make great returns. What I believe in is compounding and not losing money. We were quite happy to be part of the bubble, but to do it in positions that were highly liquid, so that we could exit the market quickly if we wanted to.The great trades don't require predictions. The Soros trade of going short the pound in 1992 was based on something that had already happened - an ongoing deep recession that made it inevitable that the U.K. would not maintain the high interest rates required by remaining in the ERM. Afterward, everyone said, "That was incredibly obvious." Most of the great trades are incredibly obvious. It was the same in late 2007. In my mind, it was clear that the financial system was imploding and that most market participants hadn't noticed.Never underestimate the ability of people to be optimistic and believe that everything is going to be okay. Historically, what is important to the market is not whether growth is good or bad, but whether it is getting better or worse.Gold is the only commodity where the amount of supply is literally about 100 times as much as the amount physically used in any year....there is never any shortage of gold. So gold's value is entirely dependent on psychology or those fundamentals that drive psychology....I always found it ridiculous when other analysts would write lengthy reports on gold analyzing such things as annual production prospects and jewelry usage. Annual production and consumption of gold are always a tiny fraction of supply, maybe around 1 percent, so who cares how much they change. It has nothing to do with price.Ray Dalio:People think that a thing called correlation exists. That's wrong. What is really happening is that each market is behaving logically based on its own determinants, and as the nature of those determinants changes, what we call correlation changes.One of the greatest problems that plagues mankind is that people are always saying, "I think this, and I think that," when there is a high probability they are wrong. After all, to the extend that there is strong disagreement about an issue, a lot of the people must be wrong. Yet most of them are totally confident they are right. How is that possible? Imagine how much better almost all decision making would be if people who disagree were less confident and more open to trying to get at the truth through thoughtful discourse."Scott Ramsey:The reality is that I'm not being paid to be right; I am being paid to make money. You have to have a degree of flexibility. Whenever I talk to investors, I make it clear to them that whatever I say today about the markets may or may not reflect the positions I have tomorrow or the next day. I recently reviewed a presentation I gave about six months ago, and I realized that everything I predicted didn't happen - and yet, I made money in almost every month since then.The market doesnt' care if you lost money on a trade. It doesn't matter. Think about your next trade. You have to get past the idea that just because you lost money on a trade, it means you failed. Every trading decision you make it subject to some randomness. It doesn't matter whether you win or lose on any individual trade, as long as you get the process correct.Michael Platt:I always regarded financial markets as the ultimate puzzle because everyone is trying to solve it, and infinite wealth lies at the end of solving it. When you are solving any puzzle, you have to start off from the perspective, "What do I know for sure? Do I have any bedrock to start off my analysis?" It's shocking how little you know for certain in financial markets.There are three things you need to make money in a market. You need a decent fundamental story, a good trend that looks like it will carry on, and the market handling news the way you think it should. Bull markets ignore any bad news, and any good news is the reason for a further rally.Steve Clark:Let me tell you the trouble with trading. There is no career in trading. You are only as good as your last trade, and that is it. You build nothing; you just trade. The day you stop trading, it's gone. So what you have spent doing for X hours every working day of your life has ended, and there is nothing left to show for it, except for money. You have to keep trading because you don't want to stop and look back. Because what have you done? You have built nothing. You have achieved nothing.Nearly all successful traders I have known are one-trick ponies. They do one thing, and they do it very well. When they stray from that single focus, it often ends in disaster. In the hedge fund world, you will see traders who do one thing very well, make a lot of money at it, and then think, "This one thing is rather boring. I can do other things because I am a genius." So they start doing other things.Really good traders are also capable of changing their mind in an instant. They can be dogmatic in their opinion and then immediately change it. If you can't do that, you will get caught in a position and be wiped out.

I owe Jack Schwager. It was the original "Market Wizards," stumbled across in the mid-1990s, that really opened my eyes to trading.I had previously discovered "the Investment Biker," by Jim Rogers, and knew I wanted to forego a life in academia and pursue markets. William J. O Neil's "How to Make Money in Stocks" then convinced me to intern at a stock brokerage (Raymond James) my last two college summers. But it was "Market Wizards," and after that "Methods of a Wall St Master" and "Soros On Soros," that really crystallized the vision.Unquestionably, "Reminiscences of a Stock Operator" stands alone as the far and away greatest trading book of all time. But the Market Wizards series sits, like a leather-bound canon, just a notch or two below.Until Steven Drobny's relatively recent "Inside the House of Money" and "Invisible Hands" - sort of the grad school version of Market Wizards, both mind-blowing in their own right - no one had challenged Schwager's run of brilliance and consistency when it came to trader interviews.Like many others I am sure, I can quote passages from the first three - Market Wizards, New Market Wizards, and Stock Market Wizards - chapter and verse, like a constitutional lawyer referencing supreme court briefings. The books have been absorbed by the trading community so fully that, if you put "MW, NMW or SMW" next to a quote, most serious traders will know exactly what it means.The series has made its mark not because the traders in Schwager's books are infallible, superhuman, or otherwise worthy of hero worship - no one deserves a pedestal - but because the books are so densely packed with wisdom, ideas and insights that the total net value is mind-boggling. Time and again a market situation, an element of theoretical debate, or an aspect of methodology comes up where one of the Wizards had something clear and sharp to say on the matter.There were a number of such "a-ha!" insights in HFMW (as I shall abbreviate), though the book felt a little bit lighter than its predecessors. (I will write up my impressions and key takeaways for each HFMW interview separately, as such would take up too much room here.)The surprising thing, for yours truly at least, was that the most intriguing ideas in HFMW centered around value investing.One wonders how many trading funds the Market Wizards series is intellectually responsible for seeding - Hundreds? Thousands if one counts the failures? - and now I can say HFMW has given rise to another. Here is the gist:It struck me, in reading about the value investors in HFMW, that the active and versatile trader could actually have a powerful and hard-to-replicate edge... as a value investor on the side. This would come about through the traders' ability to leave the value investing portion of his funds in cash (or cash equivalents) for significant periods of time.Let me expound a little...Kevin Daly, one of the value investors interviewed in HFMW, made an 872 percent return over a 12 year period of time, when the S&P returned negative 9 percent. So Daly must have been good at shorting, right? Nope... Daly did it with very little trading (in terms of managing around positions) and virtually no shorting.How? By going to cash for extended periods, of long duration, when conditions were unattractive.This concept - delivering far superior returns by going to cash in adverse periods - dovetails with an interesting theory proposed by Marc Faber in his June 2012 Gloom Boom Doom Report: the notion that long-term investors would do better staying out of markets most of the time, and only investing after a crisis.From an anecdotal perspective it makes sense too. Imagine if a long-only fund manager had had the good sense to sit in cash all through the 2004-2008 madness... then really loaded the boat at the firesale liquidation values of early 2009, when forced portfolio disgorgement put excellent businesses on sale, lock, stock and barrel, for less than cash in the bank!The concept also aligns with the methodology of Tom Claugus, another HFMW interviewee, who is only maximum long invested in times of extreme market dislocation (as defined by outlier standard deviations in the S&P), and with the observation of Joel Greenblatt, the final interview in the book, who wryly observes that "value investing works because it doesn't work" for extended periods of time, thus causing the impatient to abandon it.Sitting in cash - for long-term investors, not active traders! - also seems a natural given the environment we are in, where uncertainty is high and valuations are mediocre-attractive at best. No wonder highly respected value practitioners like Jim Tisch of Loews have been sitting on their hands for years (which they can do as stewards of their own capital).But of course, it would not be logistically feasible for a standard issue value fund to go dormant, sitting in cash, for months or years at a time. Investors would demand their money back, saying they aren't paying the manager to be idle. And the manager himself would have long stretches of nothing to do.A sufficiently versatile trading shop COULD implement such a process, however, assuming the shop was 1) skilled and knowledgeable enough to demonstrate deep value capabilities (with a research team devoted to such), and 2) patient enough to leave the long-term investment cash untouched in mediocre to poor allocation conditions.The ability to actively trade in a SEPARATE fund - where the main activities existed anyway - is what creates this opportunity.In other words: In conjunction with a trading fund, a deep value fund could be treated as a sort of side pocket (with its own standalone track record). During low-to-no activity periods, the cash balance in the fund could be kept at a minimum.During periods of excellent opportunity from a long-term perspective, cash could be swept into the value fund, and investors in the more active trading fund could be alerted to the situationally conditional value investing opportunities at hand.For the first stretch of years, such a fund would likely have to be internal capital only, as telling prospective investors "we might only do something once a year, or sit in cash for 20 months" would not be a great sell. Once an excellent track record developed over time, however - with the power of excellent returns during invested periods overcoming the all-cash periods - investors would see the light and show more willingness to support such a wise and logical approach.I expand on the concept to give example of the thought processes Schwager has so generously brought forth with this most excellent series. We are almost certainly going to do this when the time is right... so I guess I owe Schwager once again. Thanks Jack!