Jack Schwager, American trader and writer, has spent the last 30 years interviewing some of the world's best investors and traders, and his latest book, Unknown Market Wizards, features investors who (despite not having made a name for themselves in the investment world) have a better track record than some of the best professional investors. And since they are normal people like us, we thought about analyzing the 10 lessons to continue enriching our trading training...
What are the 10 lessons that make a difference?
1. There is no winning formula.
The main takeaway is that investing success is not about finding the right approach to investing, but about finding the right approach for us. That is, one that is compatible with our preferences and our personality. One trader, for example, started out using technical analysis, but didn't understand why basing investment decisions on chart patterns should work. So he decided to improve his trading training and switched to fundamental analysis, and was much more successful.
2. Keep a record of our operations.✍
A trading journal can provide us with two types of critical information, both what we are doing right and what we are doing wrong. This is valuable information that we must review to constantly improve our process, reinforcing what we do well and learn from what we do wrong.
To improve our trading training we must review our operations record.
One of the traders interviewed in Schwager's book discovered in his trading log that his biggest profits came from trades that shared several common characteristics. That helped him discover what his advantage was, which led him to achieve stratospheric investment results. And speaking of advantage...
3. Knowing our advantages and maintaining them.♂️
For our trading training, it is essential to know what our strengths and weaknesses are. The goal of investing is not to be an expert in every asset class and every market. The goal of investing is to make money, and if that means getting an edge in something as ambiguous as small-cap consumer stocks, then of course we should hold our positions. If our advantage is to identify stocks poised to benefit from major thematic trends, once again, don't be tempted to trade outside your area of expertise just because you "should" do so. Following the masses is not always the right thing to do, and it often leads us to make mistakes.
4. Try to find operations with asymmetric benefits.⚖️
The best trades are those in which the potential profit is several times greater than the potential loss. For example, one of the traders interviewed in the book constantly searches for "tenbaggers«, that is, operations that manage to multiply their value by ten. That potential profit of 1.000% is much greater than the theoretical maximum loss of 100% that we can suffer when investing in a single operation.
Tenbaggers are operations with a minimum growth of x10. Source: Tradingview.
On the other hand, no good trader would hold on to a trade that is on track to lose 100%, as virtually all successful traders apply strict risk management policies to limit their losses. The easiest way to do this is through stop-loss orders, which limit our maximum loss on a trade and improve profit asymmetry. But remember that we don't always have to wait for our stop to activate. If, for example, we believe that our investment thesis is no longer valid after opening a trade, we simply close it to reduce long-term losses.
5. Risk management in our portfolio.
This is not a lesson, we must focus as a law within our trading training. It is not enough to have stop-loss orders on the individual positions in our portfolio, we must also think about the correlations between our individual positions. If the different positions are highly correlated, it won't matter if each position has a stop order.
Risk management can take away many unnecessary headaches. Source: TRC Capitals.
That's because the different trades could lose money all together. If that is the case, we need to consider reducing the size of each position or adding inversely correlated positions to our portfolio. It is very important to maintain active management of our portfolio in order to ensure profits and minimize losses.
6. Take a break if we experience a great loss.
Many of the traders interviewed in the book took a complete pause if their portfolios experienced a 10-20% loss, and there are two reasons why this is a good idea:
- A large loss could mean that what we are doing is not working and that we need to reevaluate the investment process.
- Our emotions tend to get in the way when we experience a large loss, and we begin to make investment decisions in an attempt to recoup the losses. This can become a bottomless pit that leads to even greater loss, something we can avoid by taking a break to clear our minds.
7. If we open a trade out of pure FOMO, it is better to close it.
Let's say we see that an action or cryptocurrency random one we've never heard of goes up. The fear of missing out (better known by the acronym FOMO) kicks in and we end up buying. Then we sit around waiting for the stock or cryptocurrency to go up in price, instead of really understanding why it should go up in value. If you find us waiting for a trade to just work, it is a clear sign that we are gambling rather than trading based on a solid process. And if that's the case, we'll do ourselves a huge favor in the long run by getting out of that deal.
FOMO cycles can help us determine when a trend is in place. Source: Basque Chronicle.
8. Distinguish between the results of operations and the decisions taken.
A bad result of an operation does not necessarily mean that it was a bad operation, and vice versa. If we end up closing an operation that we have carried out impulsively and without following a process with a profit, it is not a good operation. Likewise, if a trade ends in a loss and we are good traders, there are only two explanations. Either we followed our process and the losing trade was within the percentage of inevitable losing trades, or we made a mistake. That happens, and we assume it if we are good at what we do. Bad traders, on the other hand, will always have some excuse to justify their losses.
9. Be patient.臘♂️
As the saying goes: patience is the mother of science. This is a trait that all good traders and investors possess. A difficult trait to cultivate considering that it requires us to overcome our natural instincts and desires. There are two types of patience that are essential for investment success:
- The patience to wait for investment opportunities that are within our area of expertise and fit our specific criteria and processes. We must try not to fall into the temptation of making bad trades just because nothing has appeared in a while.
- The patience to maintain winning operations. When a trade is profitable, it is tempting to exit prematurely to close with a profit. But a better strategy is to patiently follow winning trades, and simply close out some of the profits by selling small amounts along the way.
10. Constant profitability is not a realistic goal.
Investment opportunities are sporadic, and aiming for constant profitability in periods of low activity can be counterproductive, leading us to make operations that end in losses. That's what makes trading so difficult for a living. Profits are volatile, with occasional periods of losses, even when we need to pay rent. So if you are thinking about leaving your job to dedicate yourself to trading, perhaps the best thing would be to think carefully and continue improving your trading training...