The book Stock Market Wizards has to rank up there as being one of my favorite all-time books on trading. The entire book is set up as interviews with some famous as well as some unknown trading “wizards.” Throughout each chapter, Schwager extensively questions each trader about their background, their trading style, and most importantly (or most revealing), their biggest failures and successes.
Its got so much information packed into it– over 300 pages long and full of in-depth interviews with trading legends as well as some people you’ve never heard of (who usually run their own money). There are some really interesting people in here, and some pretty big names: Steven Cohen, who runs SAC Capital (one of the biggest hedge funds), generously gives his time to do an interview right from his trading desk; David Shaw, who runs the ultra-secretive D.E. Shaw & Co (a major quant hedge fund), discusses his background in computer science and how it led to his starting a hedge fund. Even a few insights from either of these two guys would be worth the price of the book alone.
Beyond that, however, there are interviews with much less well known traders, one example being Mark Minervini. According to the book, from 1994 through 1999, he had an average compounded annual return of about 220%. Regardless of whether it was a bull market during this period or not, those kinds of numbers are pretty enviable. Again, he goes through some of his stock selection techniques, and how his style has changed over time. Not everyone in the book is a born-and-bred trader. Minervini, as one example, dropped out of college to become a musician. He later realized there wasn’t much opportunity there, and so tried his hand at trading, and was unsuccessful at first. After a decade of research and practice, he finally was able to find success, and now runs his own hedge fund.
Below is a list of some of the traders profiled in this book:
• Ahmet Okumus
• Mark Minervini
• Steve Lescarbeau
• David Shaw
• Steve Cohen
Beyond these relatively well-known traders, Schwager also interviews Dr. Ari Kiev (d. 2009), who worked as a trading psychologist at hedge funds and with individual traders. Kiev has some pretty timeless insight that, again, is worth more than the price of this book.
Application
At the end of the book, Schwager gives a list of 64 characteristics which are found in all or most of the worlds most successful traders. Some of these seem predictable, such as “Hard Work,” or “Failure and Perseverance.” Others, perhaps, are more surprising: “Risk Control,” Successful Investing and Trading Has Nothing To Do With Forecasting,” and “Never, Ever Listen to Other Opinions.” That last one is a key tenet of a Part Time Investor, and I always encourage you to make sure you do your own homework before buying any investment. It’s okay to listen to other opinions, but in the end, you must come to your own conclusions and be able to defend it to someone else. A good way to do this is to pretend that you are a potential client who is possibly going to buy the stock. As a client, you will want to know everything that might possibly be risky or unsuitable about this stock; and it is your job to ask your financial adviser all these questions before you put your money at risk. . Some of the questions might include:
Is this company in a good financial position? Is it anywhere near the risk of insolvency (i.e. bankruptcy)?
Are there any upcoming events which might significantly affect the price of the stock (examples could be earnings statements, a competitor’s launch of a new product, executive officer change, etc.)?
Does the market have strong barriers to entry? Will it be costly for the company to get (stay) ahead?
Is there anything that I’m worried about with this company?
These are just some examples. If you can ask all the relevant questions about a stock, and still be satisfied that it is a safe investment, then it is most likely okay to move on.