Timeless Lessons from History's Best Traders | Jack Schwager

[00:00:00] He goes into Soros' office describing his idea and Soros asks him, well, how much money do you have on him? And he says a billion dollars. And George says dismissively, a billion, you call that a position? If you ever want to create a money machine, this is how to do it. Along comes a 2008 or something like that. And these type of, you know, these type of strategies, you know, lose everything.

[00:00:25] A risk management can be put on the page and it could be even less than a page and you get most of it. So it's not overly complex. Just a few simple rules will get you a long way there. Welcome to Excess Returns, where we focus on what works over the long term in the markets. Join us as we talk about the strategies and tactics that can help you become a better long term investor. Matt Siegler is a managing director at Sunpoint Investments.

[00:00:52] No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of clients of Sunpoint Investments. You're watching Excess Returns, episode 300. I'm Matt Siegler, my guest today. I mean, if you don't know this man, you probably never saw The Godfather. You can't quote The Princess Bride. And you're convinced Harry Potter was a better wizard than Bruce Kovner. So he's back. It's our most popular guest ever. 167,000 views and counting.

[00:01:22] Author of the Markets Wizard series of books. Veteran trader. Entrepreneur. Need I go on? Jack Schwager. Welcome back to Excess Returns. Thanks, Matt. So last time we talked, it was about what makes great traders successful. And this time I want to get a little more into the timeless wisdom. These are fairly wild modern times we're in, in the beginning of 2025 here. So I got to, I got to tell you this too. Then go back in a second here. But your first book, Reminiscences of a Stock Operator.

[00:01:51] Those are the first two books when I joined the industry. Those are like the gateway drug to going like, oh, okay. Like this isn't just boring economics classes and lessons. This is real. And then at least for me personally, that was the introduction where the great financial crisis happened right at the beginning of my career. Good point. So you read these things and then the world goes off a cliff and you go, holy crap, I think these guys knew a thing or two.

[00:02:18] And there's one quote that I swear got me through the financial crisis and sticks with me today. And it's from Bruce Covner, or I believe it is. It's always know when you're going in. Or I'm butchering this. It's always, you know, know when you're getting out before you get in. So know when you're getting out before you're getting in. Do you think people, do you see this in markets when you look around just in behavior today? Do you think people still know this? Probably not.

[00:02:45] You know, certainly experienced traders do, but I think the offices certainly don't for the most part. You know, they jump on board. They get, you know, whether it's GameStop or whatever it is. Just get excited about whatever the latest man is and don't really give too much thought to about getting out. You know, one of the things, it's a mentality of being more concerned about how much money you're going to make.

[00:03:13] Not concerned, but anticipating how much money you're going to make as opposed to worrying about how much you might lose if you happen to be wrong, which happens enough, probably more times than not. Inside of that, that's kind of like, that's the evolution of a trader. You almost have to go through that first, right? To realize controlling the losses is that first thing you have to establish.

[00:03:37] I think for a lot, even for people I've interviewed, many of them did have to go through those experiences of painful losses to learn the lesson that controlling risk was actually the most important thing. You know, as long as you have chips, you can play. But, you know, the thing is to make sure you don't lose all your chips.

[00:04:02] So take me back on this for you, because I'm guessing back in the good old days of going to Brown University and doing the studies, did you learn that lesson yet? When did you start to learn that lesson? When I was in graduate school, you know, but I had no involvement in markets really until I actually started looking for a job. It happened to serendipitously fall into a market analyst job. Not that I was looking for that.

[00:04:31] I was just looking for an analytical job. And it happened to be, it happened to be in actually the, wasn't the equity area, it was in futures or at the time, as it was called, commodities. So then I just fell into it. I didn't really know anything about trading at all. And that first job, that was straight out of the wanted ads, right? No, it wasn't out of the wanted ads. It was, I actually took something, I took the initiative.

[00:05:01] So I was only a couple of weeks out of school, but I got very frustrated dealing with employment agencies. I had never actually looked for a job before. I hadn't worked in college, like, I was a waiter. I mean, just that type of job, just earning money to get by. But I never had a real job. I never looked for a real job. So coming out of graduate school was the first time I was looking for a job. And my first thing was, go to employment agencies.

[00:05:29] And I'm sure it's probably as frustrating now as it has been, but I was, you know, I wouldn't go through it all. But even though it was only a couple of weeks, I just, yeah, I didn't feel I was getting anywhere. So I, and I had a good resume, I mean, out of an Ivy League college, you know, degree and stuff like that. So I'm sure they would have come up with a job eventually, but I was impatient. And I expected to maybe realistically get out of graduate school.

[00:05:58] I'd have a job in, you know, two weeks. So I put an ad in the New York Times. I don't know if they still do that, but it was like positions wanted. So I put in literally a one or two sentence ad, just say something along the line. M.A. Brown University, major economics, minor math, looking for analytical jobs, something along that line. Nothing much more sophisticated. I got about 15 to 20 calls on that.

[00:06:26] All but one was where it were just types of calls that they're trying to take advantage of people. You know, trying to- They want to sell you something. They're like, hey, buy a vacuum. Yeah. They want pyramid scheme things. Sure. And one of my books, I think, well, actually, it was, I didn't actually put in my book directly, the most recent book, Unknown Market Wizards. The last chapter was revised in the paperback edition.

[00:06:55] And my son had an idea, hey, Dad, why don't I interview you? I think people would be interested. So I agree. You know, I asked my editor, what do you think? And he loved the idea. So we did it. And that's where I related this whole story. I won't go, it's a long story, but I had an experience of going to one of these places, what that was like. And that, after going to one, I knew, if I knew the basic pitch, I knew what to be careful of.

[00:07:22] So it turned out there was only one legitimate response. And that happened to be for an analyst job. A research analyst in the effort for the futures area, was with Reynolds, certainly no longer exists, but that was how I got in. Who was vacating that position when you started that job? I love the chapter of that book, by the way. That was really great. Kudos to your son. A lot of life is luck, you know.

[00:07:50] So people think that success gets, I think a lot of people think they're successful because they're wonderful and great and all that. But if you are successful in life, I believe a lot of it is due to luck. And in this particular case, the job was being vacated by Michael Marcus, who, you know, he was leaving to become a trader. It turns out Michael Marcus did go on to be a trader and became a phenomenal trader and

[00:08:19] went to, became social with Commodities Corp, which was maybe the first, very early on, prop shops. And they gave him something like $30,000. In the 10, 12 years he was with them, he turned it into $80 million plus. So it turns out, so what I was going to do it later in life, when I decided to do this book, Market Wizards, he was kind of the first person I thought of.

[00:08:48] So I had that direct in. And he was, he was someone who was completely unknown and still would be, I believe, would always have been unknown had I not written the book because he certainly didn't seek any publicity. On the contrary, he was a very, very shy, private person. And it was only because of the book deck that he became whatever renown he has through that book.

[00:09:16] So that was my first chapter of the first book. And he, again, ironically, while he was a Commodities Corp, hired a trading assistant, that trading assistant happened to be Bruce Covenor, who was another one of the great traders of modern times, formed the firm Caxton, now retired, but had a long career as a very successful trader, another brilliant guy.

[00:09:43] And so I got to, and Bruce rarely, rarely, I mean, he may have given a couple of interviews in his life, but very, very rare. And so at the time I interviewed him, he wasn't giving any interviews. So I was only able to get there because he personally knew me and I, and he pretty much said to me, he said as much, he didn't trust anybody else to do it. He just was willing to do it because he trusted that I would be doing an honest portrayal of him.

[00:10:14] So I, and, and I think, yeah, they may have recommended other people, I don't remember for sure. But in any case, having those types of connections made that first book possible. And a lot of it is chance just because the first job I took made that contact for me. So when you get in that job, I'm just curious, what, what's that job actually like? Are you putting money on the line? What's, are you just doing research? So I'm working into a job and I know, I literally know nothing.

[00:10:43] Um, and, uh, I mean, I have my education, I know some economics, statistics, stuff like that. So I approach it, um, just analytically, uh, you know, for the analysis, uh, uh, simple models, uh, trying to, you know, project prices, reading whatever I could, uh, whatever I was assigned for a market. So I, I read whatever I could. It wasn't really a lot.

[00:11:08] Um, and just by, by experience sort of teaching myself the job, uh, uh, it was, I liked it because, uh, it was a job that takes care of always changing. It wasn't that there was, it is being about in the markets has an element of interest and excitement to it, I guess. So I did find it appealing and challenging. And, you know, so one thing I do remember, which was kind of ironic.

[00:11:37] It was about, that was probably no more than two or three weeks into the job, complete and opposite nothing. And getting into it, getting a call for, uh, one of the paper, one of the newspapers, uh, wanting to know something about why the sugar marker was going up or down. I forget which one it was, but just, so getting quoted as an expert where I had literally my next participant was about two weeks old.

[00:12:03] What was the first like market, uh, event, uh, up or down? The first thing that you were like, what the heck just happened? I started, uh, I started in 71. I believe was, you know, 70, late 71 is when I began, which also was kind of the very beginning of the inflationary seventies and commodities taking off. So, um, in the, in that first decade, it was my job.

[00:12:32] I saw things like a sugar market that when I started working, I don't know if it was three or four cents or something like that. I saw it go to 66 cents within, within the decade. So, so these incredible price moves. And that was also when gold, gold went from sub $100 to a thousand dollars in the decade. So there were those types of moves that were ongoing. Unfortunately, I didn't have enough experience to, to take, you know, to know what to do with

[00:12:59] that, but, uh, it was an extraordinary timing in terms of market moves. And you start to see these giant moves. Now, do you get, do you start to gain an awareness of the people around you who are really good at this? Do you start to get an interest for who's seeing stuff that you're not seeing? Back then I wasn't so much involved in trading as, as just doing the job and making a transition after a couple of years.

[00:13:25] I was hired as an analyst and, um, after two years I was offered a raise, which I was making less than my secretary, the department secretary who I shared with the research director. And after, you know, I thought I was doing a good job. And after two years they gave me a 20% raise, which maybe put me up. I mean, that was like a 10,000 to 12,000. Yeah. Maybe it put me up at this, at the secretary's level. I don't remember. Uh, but I thought I could probably do better.

[00:13:54] So I, so then I did stick my head out and I went to a head hunter and within, within a week or so, he had me, he had an interview for me for a research director at a mother's shirt. And, uh, and I got that job. So, uh, after a couple of years I moved on and became a research director. So I was more involved than as a research director. And you have other people working for you. Uh, when I was pretty young at the time, obviously, since it was only two years after graduate school.

[00:14:24] Um, and so I was in a situation where I was the people working for me were always older than me for, you know, for first decade or two. Well, I was a research director for about 20 years. So during that time, uh, you know, almost all the people that worked for me were usually older, which was a little bit of a non-situation. Uh, anyway, but I was more involved in that job than I was in trading. Trading was a gradual process that came on later.

[00:14:52] Never became, never, for me, never became a, a key thing other than in writing books, uh, about it and interview great traders. But I, I never was a, a trader by vocation, uh, and never thought I had the skill to do that.

[00:15:12] So I felt comfortable in, you know, the analysis part and particularly, uh, in writing, but, uh, never felt I had that, uh, particular skill in trading. And I think this is kind of, I think important just as a general life lesson. Uh, you know, people, some people say, uh, you want to, uh, you know, follow your passion and, uh, and that's advice to some extent.

[00:15:42] But I think there's, it's only half the equation. I think you need to combine your, your passion or a reasonable passion with what you're good at. And, uh, and for me, that was not trading, you know, for me, that was writing. And that's what I ended up gravitating to eventually.

[00:16:03] When you start to take notice of people who are good at this and you start to take notice of people who have this skill set and you want to, I don't know, you want, you want to learn more. You want to dive in a little bit more. Cause you write the first book you write is the futures trading book, right? Or the futures analysis book. Right. Yeah. See, you write that book. That's explaining the market. I mean, just give a quick overview. Like what was that book? Cause it's nothing like the market wizards book. No, it's a much more analytical book.

[00:16:30] And, and that, uh, the motivation for that was that I didn't think there was a good textbook out, a good book on market analysis for futures, right? Books on stocks and stuff. And there were some futures books, but I, I didn't particularly find what there was. I didn't think there was one that was particularly, uh, comprehensive and good. So I thought I could do better.

[00:16:52] And, uh, I took a sabbatical and I, I wrote what was called, you know, a complete guide to the futures markets, which was ended up being nearly an 800 page book. And, uh, this is pre PCs and, you know, so no spreadsheet availabilities, none of this stuff. I mean, literally having to do, you know, regressions by a calculator and stuff like that. So, uh, and, you know, you couldn't generate nice graphs or, uh, you know, you know, software.

[00:17:21] You had to actually almost hand draw them and then the publisher would have to redo them. So everything took a, you know, the same thing with, you know, you type everything out. We just didn't have all this technology. So, uh, it took a lot more time and effort to do that type of a book back then. And, uh, my goal was not to sell, was not to sell a lot of copies. That my goal was just to write the best analytical book on the futures markets. And that was, you know, specifically focusing on that.

[00:17:50] And I even knew because I ended up, uh, I was, I figured I had to put, you know, a section in on regression. And I had to do a book. Because the book was both half of it was fundamental analysis, half was technical, roughly speaking. And some was on trading as well. And, uh, I knew I had to include, you know, to do fundamental analysis. I felt I had to include regression analysis as an approach. And so my intention was to do a chapter.

[00:18:18] But when I sat down to do that, I started writing. I said, well, I can't assume people even know what these terms are. So I had to do first a chapter in statistics. They had not simple regression. Then it went on from there. But then simple regression is not enough. There's multiple regression. And then there's more. I ended up with like six chapters on regression. And I knew when I was doing it that the more chapters I wrote on this six in regression, the less the book would sell. But that was not my goal.

[00:18:49] I say half joking that the sales of a book like that are inversely proportional to the numbers of questions. So I knew I wasn't doing myself any favors by putting all that stuff in. But that was not my goal. Not in that book. Within that book, though, is part of the goal to just help? Is this the education that you wish you had coming out of school into the jobs again? Yeah, I wrote the book that I wish it. I wrote the book that I would have liked to have had. Yeah, I didn't think of it in those terms.

[00:19:17] But yeah, literally, there's a line. I'm paraphrasing here. Rick Nelson's song. You can't please everybody. You just got to please yourself. And so when I write, I'm only I'm just trying to please myself. So, you know, if I'm satisfied, fine. That's all I can look to do. I'm not trying to get targeted for anybody specific. I was looking. I thought I had it. I have a Rick Nelson guitar pick that lives on my desk here somewhere.

[00:19:47] I know the song you're referring to. Yeah, so he went to the phase where people don't even know. I mean, but I mean, originally, you know, kind of like that museum. But he had a phase where he came back and he did like a little bit of folk rock. I was wanting to solve it. It was a good song. Hey, you had some good stuff fixed in there. Always evolving that Rick Nelson. So you write the book. And I think this is really important. This is kind of where I wanted to get inside of this book, too, is the technology, because

[00:20:17] I don't want to relate it exactly to today. But you come out of school, you come out into this environment and you realize, I mean, what, over a decade and a half, like all this information that from the college textbooks that you left into this working field that aren't there and all this stuff that you're interested by. I mean, to write that many chapters on statistics and regression and whatever else, you're like trying to assemble this toolbox that took you a long time to cobble together.

[00:20:45] Just your tools to describe what you were seeing out there, what you were doing. Yeah. Yeah. And it was back in those days that I was when I was young, I was extremely focused. That was one of my strengths. So and you had to be to do a book like that. So, again, I took a sabbatical, but I would I mean, there were plenty. And I would work through the night because I would get when I would get focused, I would just keep on going.

[00:21:12] And so you get a lot done in a day's time just because I shut everything out. I was totally focused on that particular element. And also, if I would ever get stuck, I remember this specifically, and this is good advice too, is one way if you're stuck, particularly for writing, but it probably works for other things. But I was, you know, a runner in those days.

[00:21:38] And I would just go out for a run and think about, you know, just while I was running, think about how to approach, how to describe, how to work out this thing. And, you know, so I got a lot of my ideas then and then would come back and I would just kind of work, you know, do it. So it kind of, you know, it worked and it was a lot of hours and a full year, but a full year, very intense concentration.

[00:22:07] I feel like that kind of dedication, and even though the dedication wasn't to the act of trading, that type of dedication is something that shows up in a lot of the people that you would go on to cover later. Yeah. That, I mean, I don't have a lot of traits of being a good trader. For example, I'm very patient. Patience is really important to be a good trader. But the hard work side of it, certainly when I was young, I did have that.

[00:22:37] And that is a common denominator of a lot of traders. For them, it's their success in trading turns back to that. But it's their nature. They tend to be hard workers. So that happens to be one element of a good trader that I have. But there are other ones that I don't. What do you think the relationship is between hard work and the technology that you have at your disposal? I don't know. That's, you know, that's just a function of the time you're in.

[00:23:07] It just makes certain things easier. But even if you have the technology, I think it makes you still, you know, people who are good traders and hard workers in times now of greater technology doesn't mean they can then do less work. They just use the technology to become more efficient and do more stuff. So I don't think it changes the work equation. Yeah, it doesn't change. Changes the efficiency of it. Right.

[00:23:35] Changes the efficiency, not the amount of time necessarily that you put in if you do this stuff. So when you get from, just tell the story really quick, from the first book to actually getting the idea of you're going to write this series and start to go back and interview some of these traders. You know, as I, you know, as I get involved in the markets, at some point you obviously get involved in trading. And I, at some point I had the idea, gee, it would be a good idea. And I remember I knew some great traders.

[00:24:02] So I said, gee, it would probably be a good idea for a book to go around the country and just interview the world's best traders. And, but at the time, as I said, I was a research director. And that is more than an hour a day job. It's a really more than full-time job by itself. So I just had the idea, but realistically, I see how I was going to do it. Then I got invited to a lunch by some, by an editor from another publisher, was familiar

[00:24:32] with that complete guide to the futures markets and said, you know, one, he sort of pitched me on the idea of becoming sort of an editor in chief type of thing where they want to do a whole series of books, you know, one book on each, you know, a book on analyzing goal, a book on analyzing week, whatever, you know. And I could be the head editor on that thing and writer and whatever. And I said, look, I've done this before. You know, I wrote my analytical book.

[00:24:57] I don't want, I have no interest in doing another one, which ended up, I ended up breaking that, that battle later on, but I did do all the analytical books. But at the time I had no intention of doing it. And I said, you know, but, you know, if I was going to be doing another book, I want to be a more mass audience book. And there would be something, what, and I described this market wizards book that I had the idea for. So he said, well, great, why don't you do that? And so there was the catalyst.

[00:25:28] And that book was written nights and weekends. So it was a crazy, the first market wizards book was a crazy period because besides the job. And it was also true of the, of the next, well, yeah, new market wizards as well. It was the same situation. But it was a crazy, crazy type of couple of years in terms of writing those books, working

[00:25:56] such a long, so many hours on a job and then doing the books like in their, whatever, mania or so. You give up a lot of sleep. You give up recreation. You give up a lot of stuff. So you see this stuff come together. You start to have access to some of these people and you still don't get that bite. You don't get that itch. Do you know right away when you're talking to these people, do you already know that you're not wired to be a trader?

[00:26:19] No, I mean, I, I, I was trading like as a, and also the other thing is, um, I think the trade you need time. And one of those years I had no time. So that was part of it. But I also didn't feel like, you know, I had tried trading. I, and yeah, I was, I had learned enough. So I was net profitable, but I wasn't, I being exposed. I was really good trading is I knew I wasn't one.

[00:26:47] And, uh, and I remember, you know, and I, I did one thing. I've always done one thing. I did one thing right. Um, is that I always start from a small amount of money. And if I would lose it, I'd stop trading. I did this in the very beginning. In the beginning, I did it because I didn't have any money. So it was by definition. I mean, if I had like scraped together, like $2,000, it stays like the maximum I could, you know, and if I lost that, that was it, you know, and I wouldn't have another two,

[00:27:16] three thousand, sure, whoever it was. Uh, but then I just, that set a pattern, you know, for the future that whenever I came to trading, I was always a small amount. You know, it could be 5,000. Maybe later on it was 10,000, but always a small amount. And if it, if it worked, you know, if I kept on making, I made money to find, you know, I have to eventually pull out the initial stake and that was it. So, um, I remember like, you know, taking that first five, 10,000 day after losing two

[00:27:44] or 3,000 a number of times, I remember like taking a 5,000 stake. And I, I still remember the day that I got past the 100,000 because I would take the train, uh, to meet the, uh, Croton, Horman, uh, which is about an hour outside of New York. I would take the train and there was a guy there sometimes, I don't know if it was a Salvation Army or something. And it was that particular day and, uh, and I just passed the 100,000 and, you know,

[00:28:13] instead of putting a buck or two in, I, I don't know, I, I, I think I'd put whatever $700 in or whatever. And, and the guy came running after he said, you know, thought I made a mistake. I said, no, it's okay. So I do remember things like that, but I wasn't a good trader. I mean, I, yeah, I may not get, I never really was able to go anywhere real further, nor did I take the time to do it.

[00:28:38] Um, so, uh, it never became, and yeah, here's, this is the other thing. It's not just that. It's that I, when you really get down to it, if I was honest with myself, I didn't really net net enjoy trading because for me, when I was losing, that was, and it's probably true for a lot of people, it was way more painful than it was making money. And when I made money, I didn't really, okay, yeah, it didn't give me a great job.

[00:29:07] It didn't add a lot to my life. Um, but when I lost, it really made me miserable. So the equation, so I, by my very nature, uh, I didn't have the attitude that I see in a lot of great traders who they can leave money and they, they're immune to it. They, they kind of could take it because they know it's just part of the process. I didn't just, my, my instincts just didn't work that way. That's just who I am.

[00:29:35] So, um, I, I just never felt that, Hey, this is something I was cut out to be. Uh, yeah. And that was fine. It was fine. So I've always traded a little bit on and off. Sometimes I don't trade at all. Sometimes I'll trade a little bit. So it's like a, it's like a little hobby, um, that one that's working. Okay. You do it, but stop. And that's why it's another thing. So if I start losing money, I stop trading. It just, Hey, I don't need it.

[00:30:04] I think it's important. It's, it's almost like, you almost make me think of, of sports or, uh, or music or anything where you've run into that ceiling and you go, Oh, there's people who are really, really good at this thing. Yeah. And just because they're good doesn't mean you're necessarily going to be them, but it doesn't mean you can't be fascinated by them and learn stuff from them. Yeah. And also I can't tell you how many people, particularly as I do the later books.

[00:30:32] Now it becomes almost unusual when I write a new market business book that the people I interviewed haven't read my, haven't read my books since in their early career. And very many times they, they really literally say it was one of those books that got them into the, you know, got them into trading. And they've thanked me somebody, you know, say it really made, it made, made their whole life different.

[00:31:00] And, and so for them, they, they read these books that I wrote and they, they made, you know, billions, tens of millions, sometimes hundreds of millions, um, where I didn't, but that's, you know, it's like a coach, right? Uh, you could be a good coach, but not be great at that particular, you know, uh, activity. So there's lots of good coaches who weren't great athletes themselves. It doesn't mean that they can't deport some very important knowledge.

[00:31:29] Apparently, apparently whatever I wrote did work in terms of, uh, in terms of, uh, a lot of those traders because they, they got value out of it. And they, and I didn't say that even to this day, they still reread the book. So, uh, it's ironic that I, who was never a good trader could write books that the world's best traders read and got a lot of value out. So that's the way, that's just the way it is.

[00:31:58] I think it's a, there's something in there about being a, being the editor that you are of these conversations to pull out. And I don't even want to call them common denominators, but to pull out stuff that helps map sort of the psychology of these people. So what about on that note? What about just on any key lessons of just the psychology of these people that sets them apart or any people in particular that just stand out? I mean, the psychology is, is critical.

[00:32:25] I didn't, when I wrote the first Marco Rizzo's book, I didn't know I'd be writing a book about psychology so much. It's just about that way because that's what it was. So a lot of it has to do the, you know, the mindset of the traders is critical. Yeah. So I guess one of the people I interviewed, Bill Eckhart, who was Richard Dennis's partner, who was one of the people who trade, this group of traders called the turtles that became a famous story.

[00:32:55] I actually wrote about a chapter in my book. Mike Covell has a whole book on it. But anyway, Eckhart had this line about human nature being so poorly attuned to trading that most people will do worse than random. I mean, literally say that people, human nature is so poorly attuned to trading that will literally do worse than the proverbial monkey throwing darts at the Wall Street page.

[00:33:22] I mean, a monkey says, well, we'll break even minus slippage. But his point is that humans will do even worse because they don't, they don't just make, it's not just a matter of having no edge. It's a matter of having a negative edge because of human emotions. So he phrases in terms of humans seeking comfort and markets don't appear off of being comfortable.

[00:33:46] And it's just all the things we naturally do as humans are just warm. You know, some like simple example, Marcus going, you know, there's some fad. You can use something like GameStop or anything else. Things like that. And people have no value, but they keep on seeing other people making lots of money. The neighbors making money. And then they jump in. So it's not like they buy GameStop at $10 or $20 or $30.

[00:34:16] They buy it at $200 or $300 because they can't stand the idea they'll miss a $100,000. And of course, they end up with a dollar back to $20. So that's the human nature. That's here missing out is one example is human nature. Sure. The idea of getting a tip of putting money into something and it starts going bad and you keep on rationalizing, oh, I'll give it some more time. I'll give it some more time.

[00:34:43] That's because as humans, you don't want to get a hope that you'll get, you can come back, that you haven't made a mistake. And that desire not to be wrong is exactly what keeps people in these losing things. So all sorts of traits that we have as humans make us poorly attuned to succeeding in the markets.

[00:35:06] And the people who succeed have the psychology to overcome these limitations. Or like I mentioned, I'm impatient. So one of the key things about being successful as a trader is you have to wait for the right opportunity. You don't want to be trading all the time. Whatever your approach is, there are times there'll be opportunities and there'll be times there are not.

[00:35:33] But it's very difficult for people, particularly if they are traders, that's what they're doing, to sit there day after day and not do anything. So get tempted into taking trades that really aren't opportunities, but have to have the fortitude to say, no, this is not my situation. I've got to wait. Again, it's a psychological strength that's involved. So yeah, a lot of it has to do with psychology.

[00:36:01] And it seems like the technology changing, back to the efficiency part we were talking about earlier, that becomes a huge part of it too, because the human psychology stays the same. That's the basic thing. But the inputs change. Like I can't help but think. Human psychology, yeah, the technology may be there, but the psychology, but human psychology, emotions don't change. What do you think about that in the newer books?

[00:36:27] And especially what I'm thinking about the people, man, I think about when you could, you might not even have the quotron on the desk or whatever to the person who has Twitter and all the feeds and everything in front of them 24-7 every second of every day. If I'm in the newer books, if I'm a trader today, if I'm somebody who's just dealing with this absolute fire hose of information constantly, they have to take a totally different approach to how they frame their psychology around the information that's coming in to stay independent.

[00:36:57] Not necessarily. Okay, explain why. What it does is it opens up different opportunities. Lots of trading strategies that exist today were impossible back when I was talking business. There were no quote machines. There were no charts. There were charts to handle every chart that we run once a week that you kept up by hand.

[00:37:23] But there was no intraday data back in those days. So, first of all, just think no intraday data. Everybody who's trading on intraday bars, for example, are using intraday information, whether it's by looking at charts or by programming systems using intraday. All of those approaches were impossible back then because the data didn't even exist.

[00:37:49] There were lots of fundamental data just didn't exist, wasn't accessible, that it is now easily available. All sorts of, you know, something like, well, here's a good example. An unknown market wizards. One of the traders I interviewed was Chris Camillo.

[00:38:13] Now, I went through my whole career not even conceptualizing that there's anything else other than technical analysis, namely using primarily price and things like that to develop an approach to trade the markets, or using fundamental economic inputs, or using fundamental economic inputs, or some combination of two. I didn't perceive that there was anything outside of those two big segments.

[00:38:42] Turns out, along comes Chris Camillo, and I titled that chapter Neither, because that's exactly, that's what it is. He didn't use any technical analysis. He didn't use any fundamental analysis, which to me would have seemed a paradox and impossible years ago. I mean, there is nothing else. What else? Well, turns out that he figured out he could use social media to trade the markets.

[00:39:10] And there's a perfect example of something that didn't even exist back when I started. And here it is as the sole source of a trading strategy of a trader who was extremely profitable using that. What about risk management? Do you feel like, is risk management the same always through time, or do you think that's evolved a lot over the years too? No, I think that's one thing that doesn't change very much.

[00:39:38] Like human psychology, risk management is the other part of it. Yeah, so risk management, people want to make it complicated. People have written all books on risk management. I think there might be multiple volumes of somebody wrote on risk management. But anyway, yeah, risk management could be put on a page, and it could be even less than a page, and you get most of it. So it's not overly complex.

[00:40:05] Just a few simple rules will get you a long way there. Now, one we talked about before was no, there's governor's line, no way of getting out before you get in. Now, if you literally do that, you've got a big step towards risk management because you're basically deciding when you have complete objectivity before you put on the trade, I'm going to risk, you know, whatever, let's say $100,000. You say, well, I'm going to risk $2,000 on this trade. Right.

[00:40:35] That's, you know, so you put on the trade and you determine how far away your stop is. So if you're wrong, that's the most true thing you lose. So you predetermine, assuming you enter the stop, or if you don't enter it physically, you have the mental fortitude to act on it if the market gets there. You basically define ahead of time what your actual loss is. So that's a big step towards risk management.

[00:41:03] And then there's, you know, there's other elements like, as I mentioned, once look at it from the portfolio level. If you, if you did a rule, like I said, you take a small amount of money, money that you can easily lose doesn't mean anything. And that's what you start and you trade as long as you don't exhaust that amount of money. You'll never get hurt because you're never putting up that much.

[00:41:27] But if it does work, then you start getting ahead and you're, in the proverbial words, playing with the market's money, but literally doing that. So something like that, it could be very, very effective. Diversifying, diversifying so you're not just doing everything in one trade is obviously important. But that, if you're always limiting your loss to not too much on any given trade, you've already achieved that. So it's not complicated.

[00:41:56] It's just a matter of doing it and never, never breaking that rule. Because it only takes, you only have to break risk management one time to go great. Does everybody have their own flavor of that rule, their own tolerance that's tied to them? Oh, I think there's a lot of common denominators.

[00:42:18] It's, it's hard to, the things I just mentioned, variations in those, or those specifically are ways a lot of traders handle risk. Because it really doesn't have to be very complicated. Just, you have to have the discipline to do it, basically. It's not, it's not rocket science. It's, it's maybe the, it's maybe the simplest thing in trading is risk management. Simple is conceptually simple.

[00:42:48] Not necessarily doing it. I mean, doing what you need to discipline. Do it. But conceptually, it is not complicated. What about position? You don't have your assets on any single trade. That really gets you most of the way there. What about tied to that, position sizing? And I'm just curious, like you've seen some, you've seen some really interesting approaches to position sizing over the studies. Tell some stories. It's completely tied to risk management.

[00:43:16] So, you know, you basically, the way the professional traders differ from most people is people think, oh, I'm going to, you know, even if they're using risk management. They're thinking of, okay, I'm going to enter the market here. And I'm going to let the, you know, trading, you know, whatever their typical size, their typical trade is and say $10,000 on a stock purchase or whatever. You know, I'm going to put $10,000 in.

[00:43:48] And, you know, basically, they don't think about, well, there's a bad way of putting it. Forget the typical size. Let me rephrase that. They decide they want to buy a market. They're going to buy a certain number of shares. And they want to risk up to a certain point. And whenever that comes out, it's a big risk on the trade. That's what, that's the wrong way. The right way to do it is, okay, you want to buy the market here.

[00:44:19] And, you know where you're going to get out. Well, okay. Once you have those two points, then you should never be taking, let's say, more than 1% or 2%, whatever the number is risk of your assets. Then the number of shares you buy is defined by the difference between those two prices. So you don't automatically trade a certain number.

[00:44:42] You don't know how much you're going to trade until you know your entry, which is, let's say, now, and the exit, which is where you realize you're wrong, which you hopefully predetermine at the time of entry. You know where you're getting out before you get in. You have those two points. You know you shouldn't risk, let's say, more than 1% for argument's sake. So that will define the number of shares you buy. So it's, that's the last thing you define is the size of the position that, what you asked about.

[00:45:12] The position size is defined by the risk level that you're taking, which should be small. Who had the most surprising position sizing, either in size or in, like, so big or so small that you thought, that's so weird? Well, for every rule, there's times where it can be broken. It should be broken, ideally, but it's different. You don't want to recommend it because it's not everybody that could do it.

[00:45:39] But somebody like Dorkin Miller, one of his keys to success, and I'm sure he would tell you the same thing, is that when he was really, really strong on the trade, he would put it on in what would seem to be reckless size. So when he was really confident, he would, like, step on the accelerator. And he gives credit to George Soros as being the influence to pushing him in that direction.

[00:46:09] I think he had a natural inclination towards that anyway. But his experience of working with Soros certainly solidified that. And, you know, the story I relate in New Market Wizards is he starts working for Soros, and he goes into Soros's office one day. This is when the Berlin Wall came down.

[00:46:34] He was very, very bullish on the, on the Deutsche Mark versus the dollar. And some people, it was at the time, I think it was concerned that East Germany would be a drag, you know, the West German currency economy. And he kind of saw it differently. He saw that this was like a time of opportunity, you know, opportunity. And so he's very bullish on the theme mark. He goes into Soros's office and describing his idea.

[00:47:02] Soros asks him, well, how much money do you have on him? And he says a billion dollars. And George says dismissively, the billion, you call that a position? The implication being, if you're so bullish, why do you only have a billion? So, I mean, so that's kind of the mentality. So, yeah, there are definitely situations where the standard rule doesn't apply. But this is not applicable to most people.

[00:47:28] I mean, let's face it, 99.99% of the people out there are not going to be Stanley Druckenmiller in terms of trading talent. There's something about that, too, in somebody who can realize that. Both Soros in giving the advice and Druckenmiller in realizing he can not only take that advice but implement it to a degree. What is it about that type of pattern matching, too?

[00:47:53] Because it feels like it's the psychology and the risk management and the read of the markets all coming together into one cohesive pattern. Yeah, I mean, I think it's a fair way to summarize it. Do you think that – and what about how that evolves over time and over markets? Because, like, markets change. So, like, that worked that time for that trade. Yeah. How do you think about people moving through regimes? You know, markets are always changing, but people don't.

[00:48:22] That's the way I would summarize it. So, yeah, markets are always different. I mean, when I came into the markets, let's say futures, you were talking for decades, we had trading pits. Now, of course, it's all electronic. We had no – we didn't even have PCs that, you know, this – well before the time of PCs. And now we've got supercomputers and PCs that are as powerful as mainframe computers.

[00:48:47] Well, that's understating it way, way more – thousands of times more powerful than mainframe computers back in the days I started. So, you know, things like that change dramatically. And you have – you know, went from a time where there were virtually no hedge funds, where there's 10,000, 20,000 hedge funds.

[00:49:06] We went from a time where there were very few quants involved in the markets to now you have multiple firms with hundreds of quants working for them. So, yeah, there's been enormous changes, but the markets don't necessarily – I mean, markets change, but humans don't.

[00:49:29] But somehow I'm still finding individuals who find their niche and somehow are able to still excel even though the competitors now change firms with hundreds of quants. It seems like, well, it shouldn't be impossible for an old guy to come ahead. I'm still finding individual traders who just do their own thing or have gotten an edge and done phenomenally well.

[00:49:56] In that way, are they almost – is it almost entrepreneurial in that sense, like looking for that idea? I think trading is entrepreneurial. And often those things get married. Traders end up – well, if you're – if you start a hedge fund, for example, that is a business, right? Right. And traders also like spin out to do other businesses. It's quite common. But it's that pursuit of new ideas.

[00:50:20] And I'm almost thinking about like the Ed Thorpe stuff where it's just like you're constantly pushing that intellectual curiosity to say, what's something new I can do with what's here? Ed Thorpe is a good example. So, Ed, probably one of the most brilliant people I ever interviewed. You know, background.

[00:50:41] This is a guy who grew up in a poor background, kind of taught himself physics in high school, kind of admitted to want to be, you know, at our California school life. That's which one he went. So, he was going – was in the PhD program, was writing his thesis, his PhD thesis in physics, decided not enough math. Started taking graduate courses in math, got his PhD in math, never heard his thesis in physics. So, technically speaking, he doesn't have the PhD, never got that.

[00:51:10] But he was a brilliant mathematician, came up with what people know as the Black Shoals model. He came up with a similar variation of it years before that paper was published, but traded it instead of making it known. You know, didn't write the paper. So, he became, like, probably the first person on the planet to know how options should be priced. And, you know, made a fortune doing that.

[00:51:38] And when the Black Shoals model became popular, at that edge went away. You know, ultimately, he came up with different strategies to this little arbitrage, deferral object. A number of the major hedge fund strategies he kind of developed, you know, before everybody else did. So, he kept on coming up with new ways to get an edge on the market. And that is part of it.

[00:52:01] Yeah, people, systems that may work, you know, today or at any given time, there comes times where they stop working. So, I have found that successful traders continue to evolve and continue to change and recognize that what works at one point may stop working. And you may have to modify it or completely change it.

[00:52:28] I think of one trader at Unbuilt Market Wizards where it was systematic trader and it worked. But then there came a point where it stopped working. And he decided to, you know, abandon it, redeveloped another approach, which he kept on changing. The approaches as the markets were changing. But I asked him that one approach worked so well that he stopped working.

[00:52:57] What would have happened to it? And he's a computer guy. So, pulls it up on his computer. He programmed everything. So, he pulls it up on his computer. And it's like a mountain. So, it goes up to a peak and then goes straight down. So, had he stayed with that system, it would have just kept on losing money. You know, as good as it was up to that point in time, that's exactly, exactly. It was a symmetrical mountain chart.

[00:53:20] It was, like, frightening to think that if you, you know, the system that works so well for it, if he had stayed with it, just would have been an inverse money machine. Do you see anybody today in any of the new books that gives you Ed Thorpe vibes, for lack of a better term, who's this innovative or this curious, pushing the edge like this to keep evolving? Well, there's always, like I mentioned, Camillo was completely different approach, right?

[00:53:47] I mean, that's about as innovative as anything I can think of because he went outside the norms of fundamental technology analysis. So, yeah, I'm still finding people that come up with completely different approaches. What about any others like Thorpe that you feel were able to evolve over so many different markets and find so many different types of opportunities? Do you think anybody innovated as much as him or is he the top? He might be the most innovative in a corn sense.

[00:54:17] Right, right, right. Yeah, so he was probably the most innovative because he came up with so many different, completely different strategies or edges in the market. So of other people I interviewed, probably the most innovative. You know, other people that were very successful just had a good instinct for the markets in that state or somebody like Drucker Miller,

[00:54:43] just this combination of very incisive fundamental acumen and combining that with tactical to some extent, but mostly at the fundamental. But having that basic, so even as the world changes, still has that skill of honing in on the decisive fundamentals.

[00:55:09] Is there anything when you're, as reflect back on the work, is there anything that you feel like you've taken away from this that a lot of either your peers or your readers or even some of the people featured in the book that they would disagree with? Are there any takeaways that you think stand apart?

[00:55:25] Oh, in terms of, I wouldn't say the people that I, you know, the interviewed, but if the question is more broadly that something that I believe that a lot of people in the financial world don't. Yeah, so that doesn't come, that's not from the training, that's more from my analytical side. You know, the analytical books I wrote, I did write about it.

[00:55:51] I did write about it, particularly in this book called Market Sense and Nonsense, which, which I wouldn't call so much analytical. It's sort of a hybrid. It's layman. I mean, I wrote it for layman. So there's no equation. There's not, well, very few equations in it. So that, but anywhere in there on the subject of risk and volatility. And volatility.

[00:56:18] So, you know, a lot of the financial world has evolved to use the terms volatility and risks anonymously. And this is one of those things where it's sometimes true. When I say true, sometimes it's volatility is a reasonable proxy for risk. But the point is that there are lots of times where it's a dead wall.

[00:56:47] And that's not acknowledged widely, you know, very broadly. So, for example, volatility sometimes you can get low risk traders. I'll give you examples here. You can get low risk traders who are highly, who have high volatility. And you can get low volatility traders who are high risk.

[00:57:16] Let me take each one first separately. So take the trader that I say is really low risk, but it's high volatility. So there are traders that I've interviewed that had an approach where they would look for situations where there was great asymmetry that if they were right, they would make a lot of money. And if they were wrong, they would lose very much.

[00:57:39] So, I mean, the 2008, the people who Michael Lewis profiled in the big short, I mean, that's a type of threat. So people like, well, there's one person, one person who Lewis interviewed that I had one of my books, Jamie May. You know, he produced this type of approach, a classic. Paul said, I don't think it was in either of our books, but Paul said it was the biggest trade ever was written about.

[00:58:08] But those particular trades where people were totally short in that market, it was a situation where they were – I don't want to get into the technicalities of these instruments because it gets complicated. But bottom line, they were selling these bonds that their risk was – the bonds had a very – they were subprime bonds, and it was a very, very poor quality.

[00:58:37] There was all sorts of reasons why mortgages were being granted to people who had no assets, no job, whatever, because they were selling them off to – they were selling them off to the brokerage ships who were repackaging them. So the mortgage – the mortgage providers didn't care about the quality. So everybody's incentivized by their own self-interest. So it was their own self-interest to write as many mortgages as possible, even if they were garbage, to use a polite word.

[00:59:05] And they would pass them off to the brokerages who played dumb and just packaged them into these instruments that the rating agencies, who either through ignorance or complicity, you choose which one you want, and would rate them as AA or whatever. They would give ratings that were very high, even though if you dug down to what they were, they were just – yeah, there was diversification.

[00:59:35] But you diversified a bunch – everything was – all the underlying mortgages were deadbeats, basically. But they were given high ratings because they were so-called diversified. In any case, you had these bonds that priced at only a small premium to truly risk rebounds.

[00:59:57] And so people who sold those, well, they had to pay the difference in an interest rate over time, which was not much. So it went on and on. They would be bleeding small amounts of money. But if they're right, these things go to zero, which is what happened. And so there's an example where they made – where they were leveraged and they made massive, massive percentage of course in a leverage combination because there wasn't much risk. They could leverage.

[01:00:27] And the combination allowed them to, like, make 10 times, 20 times, whatever, even 50 or 100 times that money. So tremendous volatility. But the risk was limited. So, you know, risk – so the volatility is a very poor example of the risk. Now, on the other side, you have strategies where people – let's say the strategy is selling options, selling out-of-the-money options.

[01:00:54] If you ever want to create a money machine, this is how to do it. Just sell out-of-the-money options because if the markets go up or down, you know, a moderate amount, you just keep on making money because the prices don't go to the out-of-the-money strikes. And so over time, it's a true money machine. And it's very low volatility because you're always making another amount of money. And sometimes you're losing the small amounts, but you're just consistently making this money without any big drawdowns.

[01:01:24] Along comes a 2008 or something like that. And these type of, you know, these type of strategies, you know, lose everything. In fact, they could easily lose more than everything, but they basically just completely wipe out. So if you look at volatility of somebody who's an out-of-the-money option seller, very low volatility. So the conclusion is, oh, this is low risk. No, the risk is a sporadic risk.

[01:01:53] It only occurs occasionally. It's like there's a minefield. And yeah, you can walk with a minefield. If you don't step on the mine, it's no low risk. But if you go through again and you step on a mine, it's total risk. So it's exactly that type of situation. As long as there are no mines hit for an entire period using that strategy, it looks like it's low risk. But the risk is hidden, just like a mine is hidden.

[01:02:20] And so, again, if you're using volatility as a measure of risk, you totally miss it totally. Because it's a highly risky strategy. You're just not seeing it in the volatility. So that's one thing that's very widely accepted and used where I would say it's really a dangerous assumption in the world. It's a poetic level of nuance in that conversation that gets left out far too often, isn't it? Thank you. Yeah. Yeah.

[01:02:50] Our favorite closing question that I don't think we've gotten to ask you before. If you were going to teach one lesson to somebody new in the business, to somebody who's trying to learn about this stuff, what one lesson would you want to be the takeaway? Coming full circle, the total irony here is it's exactly the first line you said. You know, so you started this interview asking me about COVID as quote. You know, know where you're getting out before you get in? Well, that's what I would say.

[01:03:18] Basically, if I was giving one word of advice to people coming into this business, you know, coming into trading, that's what it would be. You can almost say we knew where this conversation was going to end before it starts. Yeah. Full circle. Full circle. Jack, I want to thank you so much for your time. New book coming out soon? We're going to get another one? Not soon. But I just started on the, I think, Margaret Wiss's book.

[01:03:45] So just in the beginning stage, just actually not even fully defined on who's going to be in it. Just did the first couple of interviews. At this time around, I'm working with a co-author, which I've never done before. A fellow by the name of George Coyle. So, you know, actually, I wasn't attending to another book. He was the catalyst. I should, if you want to take a moment, I can tell you that. Tell me the story. How's this happen?

[01:04:13] So George calls me, I don't know, five months ago, whatever. And he has this idea of writing. And so he sends me, he says, I've written some books on traders, you know. Would you buy some articles? I'm sorry, some articles on traders. Would you mind, you know, taking a look at them? So he sent me, they were pretty good, you know. So he just pulled from a lot of different sources and wrote these, you know, kind of summaries of different traders. And I thought they were pretty good.

[01:04:43] And I told him that. We talked a little bit. I gave him whatever I had. Anyway, so he told me he had this. He wanted to write a book on origins of traders and other words. What it was like and how did they get into the business. And, you know, what challenges they had in the early years. How did they raise money? All the failures they had. And to a degree, I've always done that in the Mark of Ray.

[01:05:09] But his thought was basically to do that as a primary focus. And then we talked and he wanted me to be involved. And I said, look, you know, you got the idea. You know, I think you could write it on your own. You don't need me for this. And as it went on, you know, I thought, well, okay. You know, so he had this chapter and he said that to me. And he said, look, I'll tell you what. If you want my involvement, what I can do is what you've written. I can do my take on it.

[01:05:38] So I wrote my take on a chapter too. So there I was actually doing something. I thought I wasn't going to be doing anything I didn't want to. I thought I should let it do it on its own. So then when I saw that, when I looked at it in retrospect, it was his chapter on the trade and then my vantage point. And I said, okay, yeah, I can see how it's done. So then I said, okay, I'll tell you what. I'll talk to my editor and see if he wants to do this as a book.

[01:06:08] And here's the free editor feedback that you wanted. Yeah, that's okay. But really I wanted to get the interviews as well. You know, the interview portion as well. So once we did that, I sort of got nothing deeply involved. And so ended up, okay, I'll get involved here and, you know, we'll do it as a co-authorship. So that's how it came about. I just want to back then do it. Then it happened to do it. Well, that's exciting. And it's especially exciting because I love this idea of,

[01:06:38] it goes back to my entrepreneurial question before too. Like there's a lot of bumps sometimes on how these things actually get going as businesses and not just as a, you know, a kid in a room figuring out how to trade something. All right. So sometime in the next couple of years. I'm just starting it. I don't anticipate what will be done until, you know, late, late 25 and the publisher to allow for the, they don't like the printing, but the marketing program.

[01:07:05] So it probably doesn't come out until, until second half of 26. All right. Well, sometime in 2026, we'll be on episode, you know, 627 by then. But even if it's a, not a nice clean round number, it's always a pleasure to have you on Jack. Thanks so much for the time today. Thank you. This is Justin again. Thanks so much for tuning into this episode of XS Returns. You can follow Jack on Twitter at practicalquant and follow me on Twitter at JJ Carboneau.

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