MARKET WIZARDS Interviews with Top Traders JackD. Schwager HarperBusiness A Division of HarperCoWinsPubltshers learn to You've to learn how to fall,beforeyou fly. got Contents \342\200\224PaulSimon One man's ceiling is another man's floor. \342\200\224PaulSimon Preface, ix If I wanted to become a tramp, I would seek information and advice from the mostsuccessful I could find. If I wanted tramp Acknowledgments, xi to becomea failure,I would seek advice from men who had neversucceeded.If I wanted to succeed in all things, I would Prologue, xiii lookaround me for those who are succeeding and doas they have done. Marshall Own xv \342\200\224Joseph Wade My Story, Wall Street Wisdom (as quoted in a Treasuryof edited by Harry D.Schultzand SamsonCoslow) PART I FUTURES AND CURRENCIES Out 3 TakingtheMystery of Futures, The Interbank Currency Market Defined,7 Michael Marcus: Blighting Never Strikes Twice,9 Bruce Kovner:The World Trader, 51 Richard Dennis: A Legend Retires, 85 Contents vii vi Contents PART III A LITTLE BIT OF EVERYTHING Paul Tudor Jones: The Art of Aggressive Trading, 117 Yes, They Do Trade T-Bonds Gary Bielfeldt: James B. Rogers, Jr.: Buying Value and Selling in 141 Peoria, Hysteria, 283 Ed GetsWhat Want, 151 Seykota:Everybody They Mark Weinstein: High-PercentageTrader,321 Larry Hite: Respecting Risk,175 PARTIV THE VIEW FROM THE FLOOR PARTII MOSTLY STOCKS Brian Gelber: BrokerTurned Trader, 345 Tom Baldwin: The Fearless Pit Trader,367 Michael Steinhardt: The Concept of Variant Perception, 193 TonySaliba:\"One-Lot\" Triumphs, 387 William O'Neil: The AH of StockSelection,219 PART V THE PSYCHOLOGY OF TRADING DavidRyan:Stock Investment as a Treasure Hunt, 23? Dr. Van K. The 257 Tharp: Psychology of Trading, 411 Marty Schwartz: Champion Trader, The Trade: A Personal Experience, 431 Postscript: Dreams and Trading,437 Final Word,439 Preface and Appendix1:Program Trading Portfolio Insurance, 441 There are some amazing stories here: the 443 Appendix 2: Options\342\200\224Understanding Basics, \342\200\242A trader who, after wiping out several times early in his career, turned a $30,000 accountinto $80 million 447 Glossary, \342\200\242 A fund manager who achieved what many thought impossible\342\200\224fiveconsecutive years of triple-digit percentage returns \342\200\242A trader from small-town America who started out on a shoestring and has become one of the world's largestbond traders \342\200\242A former securities analyst who, during the past seven years, has realized an average monthly return of 25 percent (over 1,400percentannualized), primarily trading stock index futures \342\200\242An electrical engineering graduate from MTTwhose largely computerized approach to trading has earnedhis accounts an astounding 250,000 percent return over a sixteen-year period These are but a sampling of the interviews contained in this book. In his own way, each of the traders interviewed has achieved incredible success. What sets these traders apart?Mostpeoplethink that winning in the markets has something to do with finding the secret formula. The truth is that any common denominator among the traders I interviewed had more to do with attitude than approach. Some of the tradersuse fundamental analysis exclusively, others employ only technical analysis, and still others combinethe two. Some traders operate on a time horizon measured in hours or even minutes, while others typically implement X Preface that intend to hold for months positions they or evenyears.Although the trading methodologies varied widely, the forthcoming interviews reveal certainimportant commonalities in trading attitudes and principles. one of the last Trading provides great frontiers of opportunity in our economy. It is one of the very few ways in which an individual can start with a relatively small bankroll and actually become a Acknowledgments multimillionaire. Of course, only a handful of individuals (such as those interviewed here) succeed in this but at turning feat, least the opportunity exists. While I all of this book hardly expect readers to transform First and foremost, I would like to thank Stephen Chronowitz, who pored themselves into super-traders\342\200\224the world doesn't work that of just way\342\200\224I over everychapter in this book and provided a multitude helpful believe that these interviews will most to thought-provoking help serious suggestions and editing changes. I am indebted Steve for both the and readers their I open-minded improve personal trading performance. quantity (hours) and quality of his input. truly believe that whatever the It may even a select few help becomesuper-traders. merits of this work, it has benefited significantly from his contributions. I am grateful to my wife, Jo Ann, not only for enduring nine months \"book but valuable board\342\200\224arole JackD. Schwager as a widow,\" also for being a sounding Goldens Bridge, NY she performed with brutal honesty. Sample:\"This is the worst thing you May 1989 ever wrote!\"(Needlessto say, that item was excised from the book.) Jo Ann possesses commonsensein abundance, and I usually followed her adviceunquestioningly. Of course, I would like to expressmy thanks to all the traders who agreed to be interviewed, without whom there would be no book. By and large,thesetraders neither need nor seek publicity, as they trade only for wish to. their own accounts or are already managing all the money they In many cases, their motives for participating were altruistic. For example, as one trader expressed it, \"When I was starting out, I found biographies and interviews of successful tradersparticularly helpful, and I would like to play a similar role in helping new traders.\" I wish to express my sincere appreciation to ElaineCrockerfor her friendly persuasion, which made someof the chapters in this book possible. For advice, leads, and other assorted favors,I would like to thank Courtney Smith, Norm Zadeh, Susan Abbott, Bruce Babcock, Martin Presler, Chuck Carlson, Leigh Stevens, Brian Gelber,MichaelMarcus, and William Rafter. Finally, I would like to thank three traders who were gracious enough to grant me lengthy interviews, which were not and Martin incorporated into this book: Irv Kessler, DougRedmond, Presler (the former two because, in retrospect, I considered my line of question- *\" Acknowledgments ing too esoteric and technical; the latter because publication deadlines did not time for permit needed follow-up interviews and editing). Prologue The name of the book was The BigBoard. It was about an Earth- ling man and woman who were kidnapped by extraterrestrials. They were put on display in a zoo on a planet called Zircon-212. These fictitious people in the zoo had a big board supposedly showing stock market quotations and commodity prices along one wall of their habitat, and a news ticker, and a telephone that was supposedly connected to a brokerage on Earth. The creatures on Zircon-212 told their captives that they had invested a million dollars for them back on Earth, and that it was up to the captives to manage it so that they would be fabulously wealthy when they were returned to Earth. The telephone and the big board and the ticker wereallfakes,of course. They were simply stimulants to make the Earthlings perform vividly for the crowds at the zoo\342\200\224tomake them jump up and down and cheer, or gloat, or sulk, or tear their hair, to be scared shitless or to feel as contented as babies in their mothers' arms. The Earthlings did very well on paper. That was part of the rigging, of course. And religion got mixed up in it, too. Thenews ticker reminded them that the President of the United States had declared National Prayer Week, and that everybody should pray. The Earthlings had had a bad week on the market before that. They had lost a small fortune in olive oil futures. So they gave praying a whirl. It worked. Oliveoilwent up. \342\200\224KurtVonnegut Jr. Slaughterhouse Five If the random walk theorists are correct, then Earthbound traders are suffering from the same delusions as the zoo inhabitants of Kilgore Trout's novel. (Kilgore Trout is the ubiquitous science fiction writer in Kurt Vonnegut's novels.) Whereas the prisoners on Zircon-212 thought their decisions were being based on actual price quotes\342\200\224they were not\342\200\224real- life traders believe they can beat the market by their acumen or skill. If xiv Prologue markets are truly efficient and random in every time span, then these traders are attributing their success or failure to their own skills or shortcomings, when in reality it is all a matter of luck. After interviewing the traders for this book, it is hard to believe this view of the world. One comes away with a strong belief that it is highlyunlikely that some traders can win with such consistency over vast numbers of trades and Own many years. Of course, given enough traders, My Story some will come out after a ahead even long period of time, simply as a consequence of the laws of probability. I leave it for the mathematicians to of determine the odds traders winning by the magnitude and duration that out of I as a research those interviewed here have. Incidentally, the traders themselves Right graduate school, landeda job commodity to have not a glimmer of doubt that, over the the of who analyst. I was pleasantly surprised find that my economic and long run, question wins and who statistical a number of loses is determined by skill, not luck. I, too, share this analysis correctly predicted major commodity price conviction. moves. It was not long thereafter that the thought of trading came to mind. The only problem was that my department generallydid not permit analysts to trade.