Quotes to trade by: 16 investors share their rules for success | Market Wizards


Equity Mates Book Review #3 | Market Wizards – Jack Schwager

In Episode 14 of Equity Mates, Daniel Want recommended the book Market Wizards. Here we pull out some of the best lessons from the book for you.

Published in 1989, this book has stood the test of time and remains a must-read for anyone starting out their investing journey. The author interviewed 15 of the world’s top traders and published the transcripts of each of them. These traders have all seen above average returns, but have all achieved these returns using different strategies. This gives a good understanding of the different ways to make money in the markets, while allowing the reader to identify similarities between the different traders.

Rather than write a normal book review, we thought we’d pull out one or two quotes from each interview to give you a taste of the lessons the book offers.

Michael Marcus
What basic advice could you give a beginning trader or a losing trader? The first thing I would say is always bet less than 5 percent of your money on any one idea. That way you can be wrong more than twenty times; it will take you a long time to lose your money. I would emphasize that the 5 percent applies to one idea. If you take a long position in two different related grain markets, that is still one idea.

Bruce Kovner
You have to be willing to make mistakes regularly; there is nothing wrong with it. Bruce taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.

Paul Tudor Jones
What are the trading rules you live by? Don’t ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations where you don’t have control. For example, I don’t risk significant amounts of money in front of key reports, since that is gambling, not trading.

[EM Note: ‘Averaging losers’ is where you keep buying more of a company as the share price drops, giving you a lower average purchase price]

Gary Bielfeldt
Why do most traders lose? They overtrade, which means they have to be right a lot just to cover commissions

Ed Seykota
What are the elements of good trading? The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.Ed had some cracking sayings that we had to include as well:

There are old traders and there are bold traders, but there are very few old, bold traders. Be sensitive to the subtle differences between “intuition” and “into wishing”

Larry Hite
What makes this business so fabulous is that, while you may not know what will happen tomorrow, you can have a very good idea what will happen over the long run.

Michael Steinhart
What are the elements of good trading? Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognise when you have made a mistake. You need to believe in something, but at the same time, you are going to be wrong a considerable number of times. The balance between confidence and humility is best learned through extensive experience and mistakes.

William O’Neil
Risk control obviously plays an important role in your overall strategy. Can you talk a little bit more about that element of trading? My philosophy is that all stocks are bad. There are no good stocks unless they go up in price. If they go down instead, you have to cut your losses fast. The secret for winning in the stock market does not include being right all the time. In fact, you should be able to win even if you are right only half the time. The key is to lose the least amount of money possible when you are wrong. I make it a rule never to lose more than a maximum of 7 percent on any stock I buy. If a stock drop 7 percent below my purchase price, I will automatically sell it at the market – no second-guessing, no hesitation.

The final item on my list of your most prominent conventional wisdom targets is diversification. Diversification is a hedge for ignorance. I think you are much better off owning a few stocks and knowing a great deal about them. By being very selective, you increase your chances of picking superior performers. You can also watch those stocks much more carefully, which is important in controlling risk.

David Ryan
All those books are good, but you learn the most from the market itself. Every time I buy a stock, I write down the reasons why I bought it. Doing this helps cement in my mind the characteristics of a winning stock. Maybe even more important, it helps me learn from my mistakes.

Do you think people should only use market orders? In a dull market that is just trading back and forth, you could put in a limit order. But if you really think the stock is going to make a big move – and that should be the only reason you are buying the stock to begin with – then there is no reason to haggle over an eighth of a point. Just buy the stock. The same thing applies to the downside; if you think the stock is going to drop, just sell it.

[EM Note: ‘Market Order’ is when you buy a share at whatever the market price is at that moment. This is opposed to ‘Limit Order’ where you can set a certain price you want to buy or sell a share at]

Marty Schwartz
Why do most traders lose money? Because they would rather lose money than admit they’re wrong. What is the ultimately rationalization of a trader in a losing position? “I’ll get out when I’m even.” Why is getting out even so important? Because it protects the ego. I became a winning trader when I was able to say, “To hell with my ego, making money is more important.”

Jim B Rogers Jr
One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people – not that I’m better than most people – always have to be playing; they always have to be doing something. They make a big play and say, “Boy, am I smart, I just tripled my money.” Then they rush out and have to do something else with that money. They can’t just sit there and wait for something new to develop.

Generals always fight the last war. Portfolio managers always invest in the last bull market.

Mark Weinstein
What do you think is the public’s biggest misconception about the markets? That people who trade the markets gamble. I know floor traders that have made money for twenty straight years. You can’t call that gambling. Another major misconception is that people always expect the market to react to news. For example, when John F. Kennedy was assassinated, the market initially broke very sharply, but then quickly rebounded to new highs. This price action baffled many people. Investors who sold on the news only to watch the market reverse blamed the institutions for pushing the market higher. What they failed to realize is that a market that is fundamentally and technically poised to move higher is not going to reverse direction because of a news item—even a dramatic one.

Brian Gelber
How do you handle a losing streak? I instinctively trade smaller and sometimes I just take a break. It is a good habit to wipe the slate clean and start fresh.

There are some traders who have the skills, but who don’t succeed. What is it that keeps them from becoming successful? Most traders who fail have large egos and can’t admit that they are wrong. Even those who are willing to admit that they are wrong early in their careers can’t admit it later on. Also, some traders fail because they are too worried about losing.

Tom Baldwin
From your perspective, what does the average trader—that is, public trader—do wrong? They trade too much. They don’t pick their spots selectively enough. When they see the market moving, they want to be in on the action. So, they end up forcing the trade rather than waiting patiently. Patience is an important trait many people don’t have.

Tony Saliba
What is the biggest misconception the public has about the marketplace? The idea that the market has to go up for them to make money. You can make money in any kind of market if you use the right strategies.

Dr Van K Tharp
Winners typically differ from losers in their attitude about losses. Most people become anxious about losses, yet successful speculators have learned that an essential ingredient to winning is to make it OK to lose. Since most people in our culture are taught that only winning is acceptable, most investors must change their beliefs about losses to become successful.

One of the basic problems that most traders face is dealing with risk. For example, two primary rules to successful speculative trading are: Cut your losses short and let your profits run. Most people cannot deal with those two rules. For example, if making money is important to you—as it is to most people who play investment games—then you will probably have trouble taking small losses. As a result, small losses turn into moderate losses, which are even harder to take. Finally, the moderate losses turn into big losses, which you are forced to take—all because it was so hard to take a small loss. Similarly, when people have a profit, they want to take it right away. They think, “I’d better take this now before it gets away.” The bigger the profit becomes, the harder it is to resist the temptation to take it now. The simple truth is that most people are risk-aversive in the realm of profits—they prefer a sure, smaller gain to a wise gamble for a larger gain—and risk-seeking in the realm of losses—they prefer an unwise gamble to a sure loss. As a result, most people tend to do the opposite of what is required for success. They cut their profits short and let their losses run.

A bonus quote, from the author – Jack Schwager

A common error traders make is to judge whether a trading decision was right or wrong based on the outcome. Suppose I offer you 2:1 odds on a fair coin toss; if you take the bet and lose, it may be a losing bet, but it is still a correct bet because, on balance, making the same decision repeatedly will be very profitable. Similarly, a losing trade can still reflect a correct trading decision. A losing trade that adheres to a profitable strategy is still a good trade because if repeated many times it will win on balance.


To help you understand some of these concepts, we’ve put together a standalone, back-to-basics podcast series ‘Get Started Investing with Equity Mates’. In it, we cover off everything you need to get started on your investing journey. Start listening below and subscribe in your preferred podcast feed to never miss an episode.

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