Anybody here ever make a worse mistake than going from short to long on October 16th, 1987 in the US stock market? — Jack Schwager on Stanley Druckenmiller

Jack Schwager has carefully studied and interviewed easily the Top 50 traders of the last century. He’s the author of multiple bestselling books including Market Wizards: Interviews With Top Traders, Unknown Market Wizards: The Best Traders You’ve Never Heard Of, and The Little Book Of Market Wizards: Lessons From The Greatest Traders.

In Winning Methods of the Market Wizards he distills down all that he’s learned into a handful of common traits, strategies, and maxims that he’s observed studying the best readers and investors.

On this page:

• The best traders find a way to invest that fits their personality. They’re singular. They don’t combine methodologies and generate their own ideas.
• The best traders work incredibly hard. But they work hard in preparing to trade. Their trading itself is effortless.
• The best traders exude confidence. They see investing in their funds as the safest place for their money.
• The best traders are patient. They wait for the right opportunities, are patient getting in and getting out of them.
• The best traders are flexible. They have a tremendous lack of loyalty to their positions.
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The best traders find a way to invest that fits their personality. They’re singular. They don’t combine methodologies and generate their own ideas.

One profound insight Jack Schwager shared is that every successful trader he’s ever interviewed found a style of trading that fits their personality very specifically. He gives two examples in Paul Tudor Jones versus Gil Blake — fast-paced versus slower paced, aggressive versus patient. As he quotes, “There’s a million ways to make money in the markets, and they’re unfortunately all very difficult to find. But there are many, many ways.”

Two of my favorite excerpts from Jack Schwager’s workshop:

I'm trying to give you people here who are phenomenally successful using pure fundamental analysis on one hand and complete disdain for technical analysis, and people who have been enormously successful using pure technical analysis and complete cynicism about fundamental analysis. So you can't get further apart.

It's got to tell you one thing. It's got to tell you there's no single way, there's no single road, there's no single message. If you're looking for that, you haven't even got the right question, let alone the right answer.

So I don't quote myself very often, but I will for one time in this talk. And in one of my books, I use the line because I think it applies to this, and I said, "There's a million ways to make money in the markets, and they're unfortunately all very difficult to find, but there are many, many ways."

So the first thing to realize is you have to find a path and not to find the path. Okay, that leads us to the first principle. If you take nothing else out of this talk, if you just take this out of it, it'll be worthwhile, I guarantee you. And that is every trader I ever interviewed, I could say this about, they found a method that fit their personality.

All great traders find a way to trade that fits their inherent personality like a glove. That fusion of the investor and their strategy is where superior returns come from. Your job is to find the way to trade that fits your personality. You have to find your own singular style.

You constantly have people doing things which are not fitting to their personality. Now, let me illustrate what mean by trading to fit your personality. Again, let's take specific examples, specific people.

First we'll take Paul Tudor Jones, Paul, one of the great future traders of our time, and particularly in his initial years when he was managing small amounts of money, just had 10, 15 years of incredible performance. When I interviewed him, he said, "Come to my office at 2:00." And I knew he's an active trader, so I say, "Well, Paul, I can come after the market close, no problem." He said, "No, come 2:00. It's fine." Okay, come to his office. Big office, screens all the way across the walls. He's got speaker phones that directly connect to the floors. He got regular phones, he got people bringing in messages. He's yelling out, "Sell 300 S&P. Buy 500..."

All during the interview, he's selling and buying and phones are ringing and everything's going on. He's looking at the screens and he's doing the interview. Okay? So I say, watching Paul trade is sort of like watching a professional tennis player on speed or something like that. I mean, he's just really active and aggressive. That's Paul. That's his style, that works for him.

Let's take another picture, Gil Blake. Gil Blake is a mutual fund timer. When I interviewed him, he had a 12 year track record, average returns of about 45% per year, very steady. His worst +35%, his best was about +55%. Never lost more than 5% from a peak to a valley. Very, very consistent trader. What did he do? Actually, interesting way he got into the markets.

He was a financial officer for a firm, knew nothing about trading or investing, and a friend of his came in one day and said, "Look, Gil, I found this. I've been timing mutual funds and I've got this little pattern that I found and it works." And Gil says, "Nonsense. Nothing that simple is going to work, give it to me." And so he took the numbers and he went over it and it worked. He couldn't find anything that was really wrong with it, and that got him intrigued. Then he started really looking at it more closely and he came up with patterns that were really much more effective, and he became so convinced that there was something there that he quit his job and he became a trader, which led to the performance record I told you about.

He didn't even use a computer to do his work. He would go to the library, look through microfiche, look for all these mutual fund prices and look for patterns, and just spend weeks in the library just flipping through these price patterns. And he'd go back and he'd be trading out of his bedroom at home, and that was his style. No other people, no other phones, no computers, nothing. That's Gil Blake.

Now, could you picture Gil Blake in Paul Tudor Jones's office? Could you picture Paul Tudor Jones going through the microfiche? I mean, it just is such a contrast. And if either one tried to do the other, they. would absolutely fail. So you have to find a method that fits your personality.

You can’t combine methodologies or approaches. You have to find and stick to your own singular approach.

Michael Marcus says it very well. He says, "Every trader has to follow their own light" He said, "You can take the world's two best traders and put them together and only get the worst of both traders." And when he's thinking of two good traders, he and Bruce Kovner worked together for a while, and they were indeed two of the world's best traders. And he's saying, "No matter how good the trader is, if you try to combine methodology or try to combine opinions, you'll get much worse results."

And you have to generate your own ideas. Listening to the opinion’s of others is just another way to trying to combine methodologies. You have to follow your own path.

The point is, if you listen to anybody's opinion, no matter how good they are, no matter how smart they are, I guarantee you, it's going to blow up in your face. You just cannot get ahead by listening to other people's opinion. You have to generate your own ideas.

The best traders work incredibly hard. But they work hard in preparing to trade. Their trading itself is effortless.

Another commonality Jack Schwager found among all of the successful traders he interviewed is that they worked incredibly hard.

The next thing we come to is the concept of hard work. It is amazing how workaholic-like these people are as a group. And I can give you lots of examples.

People think investing and trading are easy ways to make money.

Now, the irony here is why is the general public attracted to markets and trading? Because it seems like an easy way to make a lot of money. And the irony is the people who are really successful are tremendously hard workers, and people are attracted to the markets because they want to make money easy.

But the way they worked was unique. All of the hard work was focused on being prepared — on things like research and fine-tuning their system for trading.

Here’s the difference, the preparation is where the hard work comes. The process should be effortless. I'll give you a running analogy.

Picture two runners here, well not two runners, but two people. On one hand, picture someone who's completely out of shape, never has done any exercise, trying to run 1 mile in 10 minutes. Okay, you have that image? And a picture on the other hand, a world-class runner, running 1 mile after the other, easy as can be, five minute miles. Okay, who's doing more hard work? Who's more successful?

Well, clearly the out of shape guy's doing more hard work, clearly the world-class runner is more successful. But the thing is, the world-class runner didn't get there just by getting off the couch one day. He's been training all his life. So his hard work came in the preparation. When he's performing successfully, however, the actual process, that has to be effortless. And when he'll run his best race is when he's really running effortlessly.

When you're writing or when you're an artist or anything that's creative, when you're doing it best, it's almost flowing. In fact, a term flow is really actually a term that's come to be used. It's even the name of a book, which is a book actually worth reading.

And that is true of trading as well. If it's not going right, you can't force it right by working harder. If your trading is just not working, if you're in a bad period, trying harder, it'll probably make it worse.

You can't try harder, you can't work harder. You can work harder in doing more research, you can work harder in trying to figure out what's going wrong, but you can't work harder at trading.

But the actual trading itself should feel effortless. No struggle, no straining, no trying.

And I'm going to quote him word for word, the analogy between trading and archery. "Whenever there's any effort, force, straining, struggling or trying, it's wrong." And if you trade, you know those words are true, word for word. Good trading has to be effortless.

All successful traders exude confidence. They see investing in their funds as the safest place for their money.

From Paul Tudor Jones who invests 85% of his money into his fund, to Monroe Trout who invests 95% of his wealth in his fund, successful trades have enormous confidence in their approach.

Now, I don't know what it would be to you, but for me the most obvious question is, "You made all this money. Why risk it? Why not just bank it, put in bills, retire, go home, call it a day?" I mean, it doesn't seem to make any sense to keep on doing it.

And the answer I get in one form or another... Well, let me give you just one answer, so this would be Paul Tuder Jones. He said, "Well, I keep 85% of my money in his own funds. Why? Because it's the safest place for it." This is from a futures trader. So in his mind, keeping money in his own funds, this is safer than T-Bills. I mean, or as safe as T-Bills. What does that tell you? It tells you the guy has a lot of confidence. Monroe Trout, puts 95% of his money into his fund. And now that I'm running fund to funds, and a lot of managers that l'm interviewing, they have a 100% of their money. I mean, one guy had 100% plus his home equity, which is always good to know.

Unless you have deep confidence in your strategy, you should go slowly and be careful.

These people have a lot of confidence in what they're doing. And which comes first? I mean, are they successful because of their confidence? Or are they confident because they're successful? It's a hard question to answer, but I can tell you this, that the one way to gauge whether you're going to be successful, is whether you really have confidence.

And often I'll speak to traders and they are trying to find their methodology or they're unsure, but I could tell them, "If you don't know that you have the confidence, if you're not sure or just about sure you're going to win, then you're not there yet. And you have to be aware and you have to go much more slowly." And only you as the individual can decide or know when you have the confidence. But I can tell you the traders who are really good, they exude that confidence and you just know it.

The confidence you want is feeling like you’ve won the game before it’s already started.

He says all successful traders that he interviewed, "The best ones know they've won the game before they start." Now, if you know you won the game before you start, then there's no problem taking a loss because you understand that that's just part of the way of getting to the ultimate game.

It doesn’t mean they don’t take losses and have losing positions. It just means they see losses as a natural part of the process.

Losing is part of the game. Now let me illustrate that with a comment by Linda Raschke. Linda said to me, "It never bothers me to lose because I know I will always make it back. Never bothers me to lose because I know I will always make it right back."

Now, doesn't that sound like an arrogant comment, an egotistical comment? But if you know Linda, she's a very modest person. She's very soft-spoken. She doesn't make anything about what she does. That's not her at all.

All she's saying is this, "I've got a methodology, it's going to win in the long run. Along the way, there are going to be some losses. As long as I stick with the methodology and keep doing what l'm doing, I'm going to come out ahead. If I lose now, I'll win subsequently and I will come out ahead."

The best traders are so confident they know they’ve won the game before they even start.

And you have to understand that, Dr. Van Tharp, who I interviewed in my first book and has spent his career interviewing traders, and counsels traders, and he's kind of doing professionally what I did in my books. He had this comment about the traders he found most successful. He says all successful traders that he interviewed, "The best ones know they've won the game before they start."

The best traders are patient. They wait for the right opportunities, are patient getting in and getting out of them.

Regardless of a trader’s strategy, they can’t simply trade all of them time. They have to really wait for the right opportunities.

Jim Rogers has a good way of putting it. He says, "just wait until there's money lying there in the corner of the floor and all I have to do is walk up and pick it up off the floor." In other words, until a trade is so obvious that it's like taking money off the floor, he does nothing.

What does that say? It says, patience, Patience is essential to good trading. Another trader had this way of talking about patience. He used an animal analogy. He says, "The world's fastest animal is a cheetah, but what will the cheetah do? It won't just go chase after any antelope. It'll wait in the bush for a week until it sees a baby antelope, and preferably a lame baby antelope. And then it'll strike." And he says, "That's the epitome of a professional trader."

And once they seize an opportunity, they’re patient at staying in their trades. Money is made by waiting and sitting in your best trades.

Now, closely related to patience and getting into a trade is the idea of patience and staying in a trade, and going back again to Reminiscence of a Stock Operator. He has another quote, he says, "It was never my thinking that made me the money. It was my sitting." Got that? My sitting. What he was saying was, "Look, it's not that I was a genius and was able to figure out all these great trades, but what I was good at is when I was in the right trade, I stayed with it and stayed with it and stayed with it." And that's where the profits came from. That's what was essential. So it's what I would call the importance of sitting.

As the saying goes, “Amateurs go broke taking large losses. Professionals go broke taking small profits.” You have to have patience going in and getting out.

Whatever your methodology is, and whatever it represents, long or short, you have to allow the good trades to work to their reasonable fruition if you want to pay for the losing trades.

The best traders are flexible. They have a tremendous lack of loyalty to their positions.

While loyalty is often a good trait. Loyalty in trading, to the positions you currently own or want to own, is counterproductive.

Next we come to the subject of loyalty. Now, loyalty is a good trait, right? I mean, you want loyalty in friends, family, pets, nice trait. As a trader, it's exactly the opposite of what you want. You don't want loyalty as a trader.

You want to continually operate from a place of strong conviction, lightly held. You want to be able to change your mind on a dime when the evidence suggests you’re wrong.

The best example I can give you concerns Stanley Druckenmiller. Oh, and I'll give you the exact date, the exact date of this example is October 16th, 1987. October 16th, 1987. For those of you who are scrambling, l'll give you a hint, it's a Friday.

He came in that day and he was net short, nice position to be in October 16th, 1987. Unfortunately, if you remember, a lot of people think of where the market broke. They forget that the market was breaking sharply prior to that day, prior to the Monday. And particularly on Friday, Friday was also a very ugly day, the market was down a lot. And he decided, you know what, it's getting down, 2200 I think was the level it was coming down to. He said, "That's enough. The market's going to be near support." So he took his profits. But not only did he take his profits, he decided to go net long.

Now, I used to ask audiences, anybody here ever make a worse mistake than going from short to long on October 16th, 1987 in the US stock market? Okay, the reason I stopped asking that question is because I realized I couldn't make up a worse example, I don't think you can make up a worse example. The amazing thing is if you look at his record for that month, it'll be about breakeven. How is that possible? Well, first of all, first half of the month, he was short, so he made money. Now here's the thing, after he put on a position on Friday, during the weekend, he decided he had made a mistake. He decided he was wrong. Why? Won't get into it. It's not important. You can read it in the book if you want to know why. But he was sure he was wrong. So he decided he was going to get out Monday morning.

To help do that, remember Stanley Druckenmiller being 100% long going into Black Monday on October 19th, 1987 — when the market fell 22% in a single day. And then being mentally flexible enough to go 100% short in the same day.

Unfortunately, Monday morning comes around and the Dow opens over 200 points down to begin with. But what he did that Monday morning was in that first hour of trading, he covered his entire position, and get this, he went back short. Now think of the amazing flexibility, and we're talking about a fellow managing, I guess, probably over a billion dollars at the time, to be able to reverse his position again after the market has gone down that much overnight.

You can’t have loyalty to any single position. Facts change, markets change, and when they do they tend to do it quickly. The biggest risk is always not being open minded and flexible enough to make the most of the opportunities that you’ll see today. Not anchored to the same ones as you were yesterday.

That's a tremendous flexibility, tremendous lack of loyalty. It's a classic example of a professional trader. So if you want to be a good trader, you can't have loyalty to position. There's no hoping, there's no anything. You've got to be able to react immediately. You can't have loyalty to your position.

For more, I highly encourage you to order Winning Methods of the Market Wizards: Common Traits and Techniques of the Super Traders and read the entire book yourself.

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