Jack Schwager

[00:02:35] Sean: Jack, welcome to What Got You There. How are you doing today?

[00:02:37] Jack Schwager: I’m doing great. Thanks.

Lessons Applicable Across Other Domains

[00:02:39] Sean: I am so excited about this one. Your work has impacted me for a number of years. You’ve spent decades, three-plus decades now uncovering some of the most insightful wisdom and lessons learned from incredible traders, but is this applicable across other domains in life? If there’s someone who has no investing background, doesn’t invest at all, do you think they can apply some of the lessons that you’ve uncovered in their own lives?

[00:03:06] Jack Schwager: Yeah. I really like the question because it’s not what I usually get or maybe I’ve gotten. And I guess the core answer is that when you get down to it, what is really behind a lot of these points is what’s important to success overall, not just in trading or investing. There’s a lot of overlap. I have given a lot of talks in my life. I remember one I gave somewhere out in Illinois, some rotary club or whatever, and the talk I gave is kind of lessons I learned from talking to these people. 

And a fellow comes up to me, he says, he’s a pastor. And he says a lot of the points you used were exactly the types of things I did to build my congregation. I don’t know how much further you could get away from trading to a pastor building his congregation. The point is the elements of success have a lot of overlap, almost whatever you do. I’ll just throw out one example. One of the key things that you find repeatedly in these interviews is a passion, a love for what they’re doing and you see it in the language.

I remember Bruce Kovner talking about it being a three-dimensional chessboard. Jim Rogers talked about a jigsaw puzzle, 10,000 pieces as throws, taking out some pieces, and throwing in new pieces. Those things are game-like analogies, which is kind of conveying that for these people, what they’re doing is like a game, something they enjoy. And so that’s like a common denominator and goes to your original question.

[00:04:53] Sean: How would you convey your passion? Do you have this game-like approach and quality about what you do?

[00:05:00] Jack Schwager: Yeah. My main thing is not trading, believe it or not. I trade, but I wouldn’t consider it in any way core to my life. It’s just a hobby. It’s something I do. Of course, it’s been the focus of most of the books I’ve done. But I guess I probably feel something close to passion about the writing than I would be trading, definitely. It’s not the trading sphere where I get that satisfaction out of. If I write something, and it seems to resonate, and then I think it’s good myself there’s a satisfaction there. 

The Distillation Process

[00:05:46] Sean: I’m wondering then what element of what you get to do, do you get the most amount of joy in? Is it sitting down with the conversations? Is it coming across new ideas? Is it actually when you write the book? I’m just intrigued by this.

[00:05:58] Jack Schwager: Yeah. I’ve had conversations that have been great and spent some time, and they can range widely. They can range from as short as an hour or two which is on the low side to two to more in a day. And when you’re talking to some really interesting people and kind of getting to know them, just that conversation itself is really enjoyable. Certainly, that’s part of it, but that in the process of producing a book is literally, maybe 1% of the time, 2% at a time. 

So really most of the book is a matter of taking and you can appreciate that, you do interviews, right? But imagine you were doing an interview for, let’s say eight hours long. It wouldn’t work, listening to it, and it wouldn’t work even worse if you transcribed it. What you have to basically do is distill it. And then write narrative introductions, some resection, kind of make it molded into a chapter. So that’s really where the whole writing process goes in. That’s 98, 99% of the work. 

It’s taking something that as a transcript is kind of like overwhelming and sort of all over the place, and boiling it down into something that reads smoothly and captures the essence of that whole conversation. So it’s that process that if you do it if it works you’re going to enjoy.

[00:07:40] Sean: That captures the essence, that distillation process, I’m fascinated by this. I don’t know if you’ve ever looked at other people’s highlights or notes on different talks and transcripts, and then you’re reading it, and you realize the key elements that you looked at were entirely different from theirs. And what I’m saying is I appreciate the key insights and lessons that you’re able to extract out. I’m just wondering how you’ve developed that ability, to get to the essential nuggets and wisdom. Is that just something you’ve developed over time or is that a trait you’ve always had?

[00:08:13] Jack Schwager: I think everybody has certain talents. I’m bad at so many things, but I think one thing that I just seem to have a natural ability for is taking something and molding it in a way that kind of even a layman can understand. And that extracting process, people often say, Hey, you’re a great interviewer. And I tell them really, I’m a lousy interviewer. I’m a great editor. What I’m doing that is good is really getting the good stuff and mold. When I say mold it is because the way we speak does not transcribe to the written page. 

When I’m using these interviews if I can get verbatim, that’s a freebie. That’s great. I get a verbatim of something that’s good that I want to use, that’s good. Word for word is excellent, but most people do not speak, and I’m talking about even brilliant people, do not speak in a way that looks good on the written page. We’ll go off on, and myself, I’m a part of that as well. We’ll go off on multiple tangents. We won’t finish sentences. We’ll sometimes use the wrong word. Sometimes I have the wrong facts. 

I’ll give you a good example. In one of the interviews I did, Michael Platt is a Hedge Fund Manager. Basically, he gave us an interesting example about psychology. He was trying to make a point how what we remember is faulty and it’s so well studied in psychology. And there’s a famous experiment where people look at something and in some cases, there’s a stop sign and in some cases, it’s not. Basically, he was using this as an example of how people misremember what they see and how we remember them and applied them to trading in this case. 

But as I went back after the interview, I actually went and read the paper and he had certain facts wrong. I don’t expect him to know verbatim, so I fixed those. That’s a simple example of where I’m deliberately not using exactly what he said, because I knew what he wanted to say. But in this particular case, some of the numbers were wrong, some of the facts were wrong, but the basic point was correct. Things like that come up all the time, besides the grammatical issues, besides the same type of topic comes up. 

I may talk to somebody talking about a topic and two hours later in a conversation, the same topic comes up. It’s really messy. If you kind of had all separated, you want to consolidate it. How you discussed things, sometimes doesn’t work well. It works much better if you shuffle it. Anyway, that’s all part of the process. I think what makes it work, and this goes to those people who are interested in writing overall, and this is my advice, sometimes people ask me about writing. 

My advice basically is you do your first draft. I use an analogy, it’s like, you have to clear a field. First, you clear the big boulders. And once you clear the big boulders, you see, Hey, there’s a bunch of rocks here and you got to go through it again. You clear the rocks. Once you clear that, oh, there are some smaller rocks and you clear them. And then there are pebbles. 

You got to get the field completely clear, but you don’t see the pebbles the first time you’re doing it. You’d have to trip over it. And you only trip over it once you get rid of more obvious things that don’t work. I think what makes it work is just multiple drafts, each time fixing what wasn’t obvious before until you could read a whole chapter aloud and not trip over anything.

Curiosity

[00:12:23] Sean: Your ability to convey ideas comes to light right there. I take it you’re just this explorer. You seem to be voraciously curious based on what I’ve discovered within the books. I’m wondering, does this process come out in your everyday life, even when you aren’t working specifically on a book? How are you extracting out key lessons in other domains as well? And other things you’re reading or listening to.

[00:12:45] Jack Schwager: Well, I think curiosity, that’s a good point. And I think I am just by virtue of I’ll read books on science, I’ll read books on the math, I’ll read books on politics, I’ll read books on lots of different areas. I think that’s part of curiosity. I’m trying to remember where I heard it or read it. It’s just not coming to me immediately, but someone made a good point. And hopefully, I’ll remember the conversation, made a good point about how curious people react differently.

The question was you are given four topics on, let’s say, climate change. And it’s a question of in one case it’s for climate change and it just supports a conventional, one case it’s against climate change and it has the opposite up, but there are cases where your view doesn’t match what the article is, its like surprising. There’s an article that sounds like some scientific reason let’s say or argument of why the climate change argument is overstated. 

I was asking which article would you be most attracted to or most likely to read? And in my case, I’m a total believer in climate change and I’ve been for a long time, but the article that reports some scientific explanation of why that may not be as bad or some counterforce, I’ll read that to see, Hey, is there something here that I don’t know? So when I heard that, and I wish I could remember the source, I said, Hey, yeah, that’s right.

I would go to that article. Now I might read an article also that conveyed the same way as my thinking as to why the problem is, I might read that. But what’s most interesting to me is a purportedly scientific article of why or even the opposite thing. I think, and to the point that this person was making was that curious people will do that. They’ll be attracted to an argument that is counter to their belief. And so I took that as well. I guess maybe I am on the curious side.

[00:15:17] Sean: I could be off on this, that story, I almost feel like it might’ve been written in Adam Grant’s recent book, Think Again. I feel like he might’ve brought up that specific example.

[00:15:26] Jack Schwager: It might’ve been. I may have listened to a podcast, might have been Grant. I’m not sure. I forget which one it is, like I say, I listen to multiple podcasts and it may have been. I don’t remember.

Ability To Change One’s Mind

[00:15:39] Sean: One of the things you bring up though, is that ability to change your mind. I’m wondering how you’re able to explore your own deepest held assumptions. And then if there’s better information, how do you change based on that? That’s not easy being able to change our deepest held assumptions.

[00:15:54] Jack Schwager: Yeah. I like to believe that I am willing to change my mind. I’m trying to think of examples. If I have evidence that contradicts what I believe, I like to think I’m willing to accept that, it’s okay, I had this wrong. I’d like to believe that I’m somebody who will go by evidence, not by what I want to be true. In fact, one of the other scores of trading lessons that I have in my books, one of the things that came up in one of the interviews, paraphrasing, the person said, to be a good trader, you have to react to what you know to be true, not what you want to be true.

And the idea there being that, if you’re really good at the game of trading and you have lots of experience, there’ll be situations where your experience tells you that something, the market is more likely to go in a way, or maybe a position is wrong. Now it may be. And if you’re holding the opposite position, is that what you want to believe? But you have to go with, as he said, what you know to be true, not what you want to be true. And I’d like to think that I have that philosophy just in general.

Market Wizards 

[00:17:24] Sean: If you’re making a trade on hope, I don’t know, if that’s the best strategy, you might want to question it. I’m just wondering overall, 30 plus years, how did the first book come to be in the late eighties?

[00:17:35] Jack Schwager: Yeah. That first book I actually had the idea for several years before I ever wrote it. 

[00:17:43] Sean: Why didn’t you act on it?

[00:17:45] Jack Schwager: Well, there was a catalyst. What happened basically is most people think my first book was the Market Wizards book. That made a big splash, the first, the original one and became a best-seller, all that, but I’d actually written before I wrote that book. About five years earlier, I took a sabbatical. I was a Director of Research in derivatives and I felt it wasn’t a good book on futures markets. And I thought that I could write something better than what existed. 

I took a sabbatical, and it took a tremendous amount of work. It was like a 750-page book, and this was pre-PC-days. On Insurance, I had to do a graph paper and it was like a really tremendous amount of work. If I was doing calculations like regressions, I was doing them through a calculator. It was a lot of work besides the writing. I never wanted to do that again. I ended up, unfortunately, not listening to myself, but that was my first book. And for an analytical book, it did pretty well.

I got approached by a publisher, who invited me to lunch. And he said, we liked this book and we want to do a whole series of analytical books, one in each market. We want you to be the editor-in-chief of the project. I said, no, thanks. You’ve done it, been there. I just want to do more mass audience books. I didn’t want to do another book that requires a lot of work and you really have a built-in small audience, to begin with. I said I have this idea. I had the idea that wouldn’t it be fun to go across the country and interview the best traders? Kind of pick their brains and it’d be a fun project. 

It’d probably be an interesting book. And I told them I had even the title. I don’t remember where I had the title from. I don’t know. I came up with it, my wife came up with, I don’t remember but there was a title. I said to him, here’s this idea. And he’s like, great. Why don’t you do it? At the time, I’m a research director, which is more than an eight-hour job. And so in a full-time job, a wonderful full-time job itself. That’s why I hadn’t done it, but I had the catalyst and I did want to do it. I ended up doing it nights and weekends and that’s how the first book came about. 

Jack Schwager Goal In Writing Market Wizards

[00:20:06] Sean: Well, I mean, taking on this massive project to write a book, it had to be more than this is going to be fun. What were you trying to understand? And just accomplish, even with that, to put in that amount of effort and work?

[00:20:19] Jack Schwager: I had a couple of basic goals. One goal was to understand what is the difference between these people, and all the other people, the masses who you were totally unsuccessful and these few, this handful enormously successful. What is it about their thinking, their traits that make up, what separates them from everybody else? That was kind of the core thing I was trying to get at. And I thought I’d learn, prove myself by talking to them. 

The other thing is, there’s a book called Reminiscences of a Stock Operator, which is a famous book. It’s written by Edwin Lefèvre back in the 1920s. The protagonist in the book is Jesse Livermore. I read that book and it’s way back whole times bucket shops. I should say nothing to do with it, but kind of very different than even in the markets back when I first wrote Market Wizards, but certainly way different than today.

But the thing about that book is, I read it 65 years later and it was still very relevant to what was needed to succeed. The lessons were very relevant and timely. And so my goal when I wrote Market Wizards was I wanted to do my book very differently than Reminiscences structure, the format. My goal was to write a book that 65 years later would still be relevant. So those were the two goals I was basically working with.

Objectivity

[00:22:01] Sean: Funny enough, you mentioned a Reminiscence of a Stock Operator. I actually re-read that about three weeks ago. And if you’re reading between the lines enough, there are some incredible lessons that are just as applicable today, obviously much different in terms of how he’s actually executing. But yeah, that was a great, enjoyable read. Was there just one of those interviews early for you that just fundamentally changed you or just had a profound impact?

[00:22:25] Jack Schwager: There were interviews that changed the way I trade or think about trading. But I wouldn’t say there were profound in my life changes. I guess the most important thing that I got was a better sense of how important risk management was to the trading and also to the investment process where I, like most people, we’re just only focused on how you trade or when you trade without really thinking about the risk side. And when I understood, after the first book it certainly got reinforced in every subsequent market book I did, is that risk management is not secondary. 

It’s actually fundamental and primary. And to be successful, you must have that established no matter what your methodology is. There’s one particular line that comes up in the first Market Wizard book. And if you had listened to the Bruce Kovner interview, I often say if I was asked, you can give advice to traders, but you could only use ten words. I know what those 10 words would be. It’s a sentence that Bruce Kovner said, and he said, “I know where I’m getting out before I get in.” Or know when you get out before you get in.

The importance of that in multiple levels, first of all, if you do that, then you establish risk management at the onset of every trade. Moreover, you eliminate the emotionality because you make the decision right at the onset. You don’t have to kind of agonize, oh, this is going against me, do I get out? Do I give it more time? But if you make that decision before you put on a trade, then either you don’t have that emotional turmoil, which usually ends up leading people to make wrong decisions. Because emotions are very poorly attuned to correct decisions. 

There’s one thing you have before you put on the trade that you immediately lose once you put on a trade and that’s objectivity. Before you put on the trade, you can think clearly, where should this market not go if I’m right? What am I willing to risk if I blew up and you make that rationally and you make it logically, not emotionally. So that’s why I consider it as kind of that one line embedded in so much trading wisdom and so much solid advice that I say was important to me. It came up in other interviews, maybe with different words, but the same lesson. But I would say that certainly was altering to me in the scope of trading. Did it change my life? Probably not.

Control of Emotion

[00:25:33 Sean: It might not change your life, but we’ll take it, that’s an incredible piece of advice right there. One of the things you bring up though is around that objectivity and that emotional control. I mean, this is one of the key factors. I’m just wondering how you think about that balance between the mindset of someone, the attitude, the emotional control versus more of the quantitative factors that go into this. How do you think about that and what have you uncovered?

[00:25:59] Jack Schwager: I think this is emotional and psychological overall and various aspects of it. It is so integral to every Market Wizard book I did. And particularly there’s been the latest one I did on the Market Wizards series. It comes up in a sort of almost core themes within these chapters where these traders focus so much on self-examination and control of emotion and focus on calming of their emotions. There is one trader, not only does he keep notes of every trade he does. 

It is not as much as the fact that keeps notes and he brings out a binder, thousands of pages on every trade he’s done, what he thinks, what he thought, and all of that. But he actually records what his emotions were when he took the trade. How does he feel? He keeps a spreadsheet with columns, which have different emotional aspects. And every day he fills that spreadsheet out with X’s on any emotional mistake he made, at the end of the week he reviews it. 

It talks about how before every major trade, he’ll meditate, he’ll calm himself down. He’ll get an extremely focused state. So it’s both physical almost, as well as a mental process and an analytical process, all focused to get emotions under control, understood so they don’t impede with the trading. Like I say, the psychological aspects are critical. I sometimes will say, not facetiously that people think I write books about trading, but they’re really more books about psychology. I think if you go through the chapters, a lot of these chapters you’ll see that occurs over and over.

How Psychology and Emotion can be an Impediment to Successful Trading

[00:28:05] Sean: Yeah. That was certainly prominent in your most recent book, Unknown Wizards. I don’t know if this is something that’s just gotten more attention over the past few years than psychology and a lot of the work that Amos Tversky & Daniel Kahneman have done that have really brought this to light. If you’re going back within your first book, do you think those core themes were present? Were they doing breathing exercises? Were they meditating or was this getting as much thought at the time?

[00:28:34] Jack Schwager: I don’t recall off-head. Like you’re saying in this most recent book, it really comes out very explicitly. I don’t recall necessarily that first book, that that was the case. Although there were lots of elements of psychology that did come into play. I can think of the second book, which I did only two years later. In the first book, I think of one interview in particular, which was very good on this emotional aspect. And that was with Bill Eckhardt who originally was Richard Dennis’ partner, and people may be familiar with the story about the turtles. 

Kind of famous story about they had a bet and Richard Dennis said, you could teach anybody to trade successfully and Eckhart, by the way, who was a kind of a mathematician by background thought that you couldn’t. They had the bet, and they put this ad in the Wall Street Journal at the end of the year, looking for 20 traders and they just said, we’ll train them and whatever. When they were looking at all the resumes they got, they didn’t want people with trading experience. They were looking for chess masters, poker players, and this type of thing. 

There were a lot of people who excelled in things but did not necessarily have familiarity with trading. They picked 20 people and then they did the same thing one more year. And a lot of those people went on at least to initial successes, some still so successful over the long run. And so that was the firm, it was he and Bill. Richard Dennis, everybody knows but Bill was the other half of that equation. He was a teaser CTA in his own right. He had this wonderful point, which I really like. We have behavioral economics now, Kahneman, Tversky, and Faylor, and other people who’ve kind of made these more academic ways, but this was early on. 

And so this was before, I guess maybe it was the beginnings of behavioral economics, but this was early on, but he understood. And he said that we as humans have evolved so that our instincts will lead to worse than random decisions. Evolved to make worse than random decisions. When I give a talk, I use that particular line. I say, well, yeah, you kind of all thinking about, oh yeah, the cliche, a story, you could take a monkey, have the monkey throw darts at a page of quotations, and the monkey will do as well as the professional traders. That’s not what Eckhart is saying. 

He’s saying the monkeys could do better because the monkey is not inhibited by our human emotions, which are all kind of evolved to make the wrong decisions. His point is we’ve evolved to seek comfort as humans and the markets will not pay off for doing the comfortable thing. The comfortable thing is for example if a market’s running up like crazy, and you’ve missed a part of it, you are scared. Oh, this neighbor is making money on this, this neighbor is making money on the internet stocks in the late nineties and finally say, oh, I’m not going to be the only one who doesn’t make money. 

Then you buy it at some particular sprint. And maybe once you buy, maybe it feels good. It goes up a little bit. Of course, the story is like, you end up losing all your money, but at the time you make the decision, it feels good. Or if you’re in a position that is just as raw and you can’t admit it to yourself and you’re just thinking, well, or I’ll give it another day, I’ll give it another day and you keep on losing. But every time I’ll give it another day, it feels comfortable because you still have hope. And so a lot of these things that we do as humans that are instinctive are just wrong. And so that’s like a good example from one of the two early books that were purely about psychology and emotion and how it is harmful to successful trading.

[00:32:44] Sean: Within all the books, was there, let’s call them a cyborg that you walked away and you were like, this person just is not human. How they can control their emotions. Was there anyone like that for you?

[00:32:54] Jack Schwager: Oh yeah, that occurred. I’ll give you a great example of Marty Schwartz. And this is totally unbelievable. He couldn’t make this up. When I interviewed him, he had put together his track record, he was thinking of managing outside money, and ended up not wanting to do it or whatever. Forget about exactly what happened, but he had literally, I know hard to believe, he ended up trading contests during that period. He made like 25% per month, over a 10 year period, which is like crazy. 

And people will say, well, that’s impossible, it would compound to a ridiculous amount. Well, the point was he didn’t compound it. He would take $400,000 and turn it into a billion in like four months and then pull the profits out and put it to T-bills. And that was because his father went through the depression and it kind of instilled in him a fear of things going wrong. And so he was conservative in that score. And of course, if he had to compound it that wouldn’t work. He would have gotten too big. He had to keep the size small enough.

So his approach worked, but he did hit this incredible record. He was somebody who was extraordinarily successful, however, he had a temper. I think the running joke was that he tried hiring an assistant, and I think the longest that any assistant lasted was like three weeks or something like that. He just sucked at nobody. He suffered no fools. He had a temper, and in fact, in that first interview, we argued. And some of those arguments are in the chapter. So there’s an example of somebody who is extremely successful yet very far from calm.

Edward Thorp

[00:34:54] Sean: We’ll talk about that. You mentioned that the son of a father who went through the depression, so those influences, this was his own unique style. I’m thinking about how, like that authentic self, how that person, their style of investing lines up most with who they are. Is that something that you’ve uncovered that everyone’s different, but they’re doing from like their deepest state? Is that what you found or am I just wrong with that?

[00:35:16] Jack Schwager: No, I don’t know. In that case, there’s a direct line between his parental influence and what he ended up doing. I don’t know if that’s kind of a common theme beyond there. Thorp was really maybe the most brilliant person I ever interviewed. He grew up during the depression and in a very poor area but integral to him was kind of educated. 

His high school wasn’t very academically challenging. He kind of taught himself physics in high school and he got a scholarship to one of the California universities. The need to kind of self-educate himself, I guess all direction at the physics and math, which ultimately led to the approaches he used in trading and stuff. I guess it all grew out of that early experience. So, that’s another example.

[00:36:27] Sean: Thorp is one of those people I am genuinely, absolutely obsessed with. He is so fascinating to me, it’s beyond belief. You mentioned that he probably is the smartest person you’ve ever sat down with. I’m wondering, what about that meeting with him, did you walk away saying that?

[00:36:45] Jack Schwager: Well, yeah, the accomplishments of this man are really extraordinary, so I’m going to mention just a few of them. First of all, here he comes from nowhere and kind of gets to self-educate, gets into a good university going for his Ph.D. in physics, writes his thesis, besides he doesn’t know enough math. So he graduates in maths, gets a Ph.D. in maths, goes back, and completes his physics thesis. So he literally could have been a double Ph.D. in physics, math. Goes on, and decides that he wants to figure out how to beat the casinos, which sounds impossible.

Let’s take something like roulette. If somebody says he wants to beat roulette, probability-wise, that’s crazy. You can’t beat roulette. Except his solution is not the stupid things like looking for sequences in a random number and running a process, which is a fool’s game, but his thing was, Hey, let’s use Newtonian physics to figure out what part of the quadrant of the wheel or the part of the octet of the wheel is the most likely to land probability wise. This has to do with measuring the velocity at one point, and then the physics takes over, and you figure out where it’s most likely to land. To do that he teamed up, I’m forgetting the other famous physicist. Who’s kind of known as the father’s information theory.

[00:38:17] Sean: I’m going blank as well. One of the great parts that you bring up about beating the casino though, is he reached out to all of the smartest people he knew, and everyone was like, that’s crazy. You can’t do it. And he goes, you know what, there’s my opportunity. That is why I’m going to go after that.

[00:38:30] Jack Schwager: He was a gadgeteer, like gadgets and stuff like that. Together, and this is in the sixties, they built a mini-computer that could fit in the shoes. I remember I was in my senior year in college in 1969. And I remember using a mainframe that filled a room to run a simple thing. And these guys five, six years earlier had actually invented a mini-computer. That’s so far in advance and the way it would work he would sit there, one of them would run the computer, calculating the speed of the wheel and the ball on the computer.

And then he had a headset or some earplugs that he could hear. They had an octet that would indicate which ones were about to land. Anyway, they came up with something like a 40% edge over the casinos. Then he figured out a way to beat the casinos at blackjack. He understood that even though every game in the casino had a negative edge if you bet more when the probabilities are more in your favor in blackjack,  that you can take a negative edge turn on to a positive edge. 

And he wrote this and essentially kind of made it public. You wrote this book, Beat the Dealer, which became a really worldwide bestseller, and basically changed the way casinos operate. The casinos actually had meetings, what they should do with this maths professor. That was actually in my chapter, I have a story about an attempt on his life. After he did that he decided that was not the way, that was too much effort. 

And he went out to the markets and he figured out how, how to beat markets. He was the first person to come up with a market-neutral. Actually, he figured out the mathematical equivalent of the Black-Sholes model, which is the super famous academic paper that explains out-of-price options, and kind of changed option trading, everything else. But he had kind of been using those years before the paper was published and he didn’t publish it because he just had a money machine going. 

He was the first hedge fund to use convertible law, the first statistical law, lots of these hedge fund techniques, he was the first person to figure them out. It just goes on and on. This is one guy. And maybe the best part of it is, you think of all of that, he’d have a bloated little bit self, inflated but he’s not. He doesn’t make you feel, he doesn’t talk down to you. He doesn’t make you feel like you’re inferior. He’s just a good guy. So the combination of somebody who has achieved so much and is so brilliant yet doesn’t get distorted by it. I particularly was impressed with it.

Uncovering The Edge

[00:41:44] Sean: He’s a truly fascinating character. You mentioned his ability to uncover his edge. I’m wondering what you’ve discovered around these different traders actually uncovering their edge. The reason I’m asking this is so many times our greatest strengths, we’re almost blinded to, it takes other people to uncover them for us. How self-aware are most of these traders in really understanding what their unique edges are?

[00:42:04] Jack Schwager: They have to understand it. A couple of points here, first of all, there are two essential things to trade on the trading side. It’s more than two, but two core things. I talked about one being risk management. The other one is risk management by itself is not enough because you could have great risk management, and if you don’t have an edge, you’re still gonna lose. I mean, take your bet. In fact, the odd thing is that if you don’t have an edge, your best strategy is the exact inverse of risk management. 

So say if you going to play roulette, and you have a thousand dollars if you would ask a hundred mathematicians, what’s your best strategy to get a thousand dollars on roulette they should all tell you the same thing. Pick red or black pockets, even or odd whatever, put all thousand down, we are one time we’re gonna lose walk away. Now, your edge is still negative. Just more or less negative edges you only bet once. If you know so, which is the exact opposite of risk management. Risk management is you don’t want to lose very much.

If you don’t have an edge, the point is risk management can’t save you at all. You need two things. You need the edge and you need the risk management. To have an edge everybody has their own methodology and that’s a part of it. People have to develop a method that works for them, that is in tune with their beliefs. I’ve interviewed traders who have complete disdain for technical analysis. They say, oh, it was a bunch of mumbo-jumbos. It is just garbage, and they’re just a hundred percent fundamental. 

And I’ve interviewed traders whom it works for them. For example, I remember one said, I spent 10 years using fundamentals, lost money every year, recovered it as a technician. So you’ve got both extremes. And the point is what works for one doesn’t work for another. But each of these traders found a method that resonated with their inner beliefs. That was compatible and amenable to who they were. And it just worked for them. And it’s not going to be the same. In fact, by definition, it’s going to be different for everybody.

Rebounding Back From Failure

[00:44:23] Sean: One of the things that really impressed me is some of these traders, we think about failure as essential building blocks to develop over time. But some of these people went completely bust. And I’m just wondering what you uncovered about the people who went completely bust were they able to rebound and then have success again in the future?

[00:42:39] Jack Schwager: Yeah. I guess if you asked me what was one of the biggest surprises for when I did this book was how many of these people who were phenomenally successful actually completely blew out, and sometimes more than once. And I think the classic chapter on this was the very first chapter of Market Wizards. It was maybe it was my favorite chapter in the book. And maybe one of the favorite chapters I ever did about Phil, Michael Marcus, who was very shy. Well, I guess, a guy never gave any interviews. Nobody would know who he is. I happen to know him personally.

We actually met when I took my first job on Wall Street as an analyst. He was leaving the analyst position to become a trader. I was taking his position and he was cleaning out his desk when I came in. We talked, he was still in New York for a couple of years. We used to get together every few weeks. I kind of knew him. And he finally agreed to do the interview, but his story of all the failures he did, I just have to say, well, didn’t you just think you aren’t cut out for this? And he just like said, no. He uses an analogy of Fiddler on the roof where the protagonist is on the roof, talking to God, and it’s sort of like saying, am I really stupid?

And he just got this sense, no, you could do it. I would say there’s this kind of two lessons there. One, early failure does not necessarily imply long-term failure. Of course, sometimes it does, but not necessarily because a lot of people did have early failures. And the second thing is that these people had just an incredible self-confidence and drive to be able to come back again and again. Not many people are able to do that. Many people would just give up. Lose that drive.

[00:46:38] Sean: With Michael, did he change his strategy, or was the original strategy the same in the end? It could have been due to luck or timing or whatever it is.

[00:46:47] Jack Schwager: Every story that he had had to do with a failure of risk management. He had all his eggs in one basket type of thing. Learning that the hard way kind of made him much more cognizant of the risk management side. That was one part of it. And another part was he just learned better how to trade. It’s just a matter of experience. It was a combination of those things. The thing though, he wasn’t the same trader when he became successful as he was initially. Initially, he would fail, try something else, fail, then hide on steep, begin to get a methodology, and then be right and then just bet everything, bet the farm, so to speak. 

And then something would happen. For example, there was a year, there was a corn blight and he kind of had the instincts early on that this was going to be a big thing. He just poured a lot of corn contracts. He took a few thousand dollars that he had. He multiplied the 50 and then he bought, borrowed money, and bought more. And there were rumors that it was going to be happening again a second year. And he took all his money and put it into grain counter. He had borrowed money from his mother.

And he came from a relatively lower middle class. I would say a poor to middle-lower class family. They didn’t have that much money. And he took her money and one morning there was a story that was on the Wall Street Journal, one of the papers and the story read more blight on the Chicago board of trade than in the fields of Iowa. Something along that line. And the market went limit down, a little bit down and he lost it all. He had to get through those phases. And once he became successful, he wouldn’t be doing stuff like that anymore.

Adapt & Be Willing To Learn

[00:48:59] Sean: One of the things you kept bringing up there is just his ability to learn. And that’s one of the key themes, right? Like these guys are just absolute learning machines. What have you uncovered about their ability to learn? And of course, there are multiple things they’re learning. They’re learning better mindsets to attack. They’re just learning from a wide breadth of different industries and domains. What have you uncovered about their ability to learn?

[00:49:22] Jack Schwager: Yeah, you have to adapt. You have to be willing to change. That’s why I think people who are dogmatic in nature, would make lousy traders. I think you have to be able to admit you’re wrong, to be very flexible, to reverse your position, not to hope you’re right, but also to change your method.  If I just use the recent book as an example, and there’s a couple of good examples, but maybe the best example is a fellow by the name of Marsten Parker. There aren’t that many purely systematic traders that I have.

Usually, they are more discretionary, but in this last book, there’s one, purely systematic trader, and he’s the one. And so he’s an ex software guy. Everything he always did and he fell into trading just because it lived in this software development, led him to an interest in developing trading systems. And so he kind of developed this set of systems and he traded it for a number of years. He worked for a software company that got acquired. He got like a billion dollars plus and used that as a stake.

He traded for a number of years quite successfully using these systems. And then he noticed one year, the first few months it just stopped working, and he kind of prophesied the problem is that he’s waiting till the end for the close. The market has just gotten quicker. People are reacting quicker because of computerization. And he realized he had to make the decisions. He had to change the systems so it executed it today or earlier today, estimating what the volume would be, let’s say at the end of the day, based upon say the volume in the first segments of time. 

So he changed it. But since he was a software type, sitting in his office, he’s got every system, every combination system, he ever traded. I said, well, what happened to that original system or combination systems? He says I can bring it up. He clicks a couple of times and he brings it up. It’s this wonderful chart. It goes straight up, reaches a peak, and then goes straight down. From that point to this day, it never stopped going down. From when he did notice it stopped working, and from that point on, it lost money every single year.

It’s like kind of a beautiful example of where somebody who’s earned living trading would have been down, had he not had the flexibility to realize that the markets had changed, his approach wasn’t working, he needed to change. So that’s one example, there are lots of others like Peter Brandt who is a true classic chart analyst. Although most of his important messages have to do not so much with charts as have to do risk management.

But Peter noticed that a lot of the patterns that used to work because of chart analysis became too popular, they stopped. So he no longer pays attention to that because these patterns here, they may have worked 10, 15, 20 years ago and before, but they’ve stopped working. So yet he had to adapt. So he uses certain patterns but has dropped a lot of them. You have to learn, you have to change. That’s key to staying successful.

Subconscious Experience

[00:52:41] Sean: One of the things that you brought up that just piqued my interest was around the subconscious. I’m almost somewhat surprised to hear different traders talk about this. I would love to hear your thoughts on this overall, after being able to hear this from different people and just what you’ve analyzed.

[00:52:57] Jack Schwager: Sure. People talk about intuition and trading, it’s kind of a thing. And some people have many, I think the common response or reaction to that is that there’s some sort of oddball thing. Oh, call it whatever. It’s illogical to get to hold that. And that’s kind of broad. The way I see intuition and a lot of these traders have this intuition. They just kind of always have a sense of when the market’s going away and McCain always verbalized why, or even know why.

But to me, the explanation of intuition that works is that these people have a lot of experience. They’ve watched markets for a decade or two decades or whatever. They have been in tens of thousands, hundreds of thousands of trades. It’s just a wealth of experience. They had experienced. You can’t always associate what it is about, but sometimes I’ll see something, say, I would see a chart. I mean, there may be something about the market, the way the market’s acting, or the way the charts are developing.

They’ve been able to, not really pick a particular pattern, but get just the sense that the market’s going to go one way or the other. And what I see is intuition being subconscious experience. And one of the reasons why it’s subconscious sometimes is because it may be something that you don’t want to recognize consciously. I put this story in the first Market Wizard book and it’s not for the traders. It’s actually a personal experience, but this is way back. I guess I was long on the Canadian Dollar. I wasn’t even long. 

I think I was bullish on the Canadian Dollar, but it had run up a bit. I couldn’t get myself to buy it because Hey, I could have bought it a week ago, less than two weeks ago. I just felt it was going higher, but I just couldn’t because if I bought it, then I’d be admitting I was an idiot for not buying it a week or two earlier. But one night I had this dream and I dreamt that the Canadian Dollar, just exploded to the upside. And that was a perfect example at a conscious level I couldn’t admit what I kind of knew internally because it would just be an admission that I had really screwed up by not buying earlier. 

But in my dreams that came out and I did go with it. I did buy it and it did go up substantially. That’s a personal example of where the subconscious came out in a dream because I couldn’t admit it to myself. I didn’t want to admit it consciously because it would be admitting I was wrong. 

[00:55:50] Sean: This is one of those topics a lot of people avoid. I’ve had some experiences as you’ve mentioned with yourself. I’m fascinated by this, the adaptive unconscious because through all of our senses, we’re taking in about 11 million bits per second, and we’re only analyzing about 60 of them. What you mentioned, these tens of thousands of trades experiences, I’m just excited for the science, hopefully, to catch up at some point so we can understand this a bit better. 

Reputation

One of the things that I’m so intrigued by, and I’m just impressed by, and just curious about for you is, what’s going on behind the scenes? You’ve spent a lot of time over the years, and I mean, you do a really good job, getting these people who are most of the time, highly private to share, and then you can bring this to light. What do you do behind the scenes to make you better at your own craft?

[00:56:34] Jack Schwager: I don’t know what makes me better. I don’t have anything to hide, it seems. But in terms of getting people to agree to interviews, part of it is that sometimes like in the first book I knew some of the people directly, so that’s helpful. But one thing I do is, and in the first book I had to go by that and their recommendations and by people believing in me. I basically went, Hey, look, I’m not a journalist. I’m not going to do an expose. I’m just trying to find the truth here. And I’m not trying to blindside you. 

It’s a hard sell a lot of times, like you say, why should they give me an interview so badly? As I say, a number of these people have never given interviews again in their lives and many of them never managed money, wanted to manage money. So there’s not a motive there. The reasons they do it could be varied like maybe they wanted a parent to read the story or a child to read the story or something like that. They may have some motive that’s not monetary. But, basically, I still have to convince them.

And one of the things I do behind the scenes is I tell them, look, I’m not going to publish anything until you see it. And I’ll let you see it and approve it before it gets published. If you want changes, I’m fine with it, that’s no problem. If we have a disagreement, hopefully, find a compromise. But bottom line, I give them, I give them the out that they have to approve it. In a couple of cases that kind of backfired. I had a written interview and I couldn’t use it, but that’s worth the price. 

Sometimes there are cases where they had me sign a contract, but rarely. There’ve been only a few times that I actually signed the contract, but in most cases, they’ll take me at my word. And I think I also have a reputation for being somebody who’s trustworthy. So that has helped. And I think in subsequent books, people saw who were in the initial books. And like I say, reputation, they might’ve checked. And they said he’s okay. And let stuff like that. So I think once I had the first book out, it paved the way to get other people to agree to it.

What Jack Schwager Wished He Knew Earlier

[00:59:09] Sean: Being able to analyze your entire career. Is there a lesson that took you a while to learn that now being able to look back at you wish you would’ve learned it immediately? And then kind of just implemented that more frequently?

[00:59:20] Jack Schwager: As far as career-wise, I’ve done different things. In the writing, I would say no. I think my initial instincts worked well, which was always to kind of try to write cleanly, and if it’s an analytical book trying to explain things to people, not assuming that they are quantitative or whatever. I felt that I did a better job than a mathematician would do. I didn’t do anything of math because I had to really understand it myself and I was much closer to a general reading audience.

The thing is the curse of knowledge. If you know too much you don’t realize what people would know. Ironically because I really was so inferior in knowledge, I felt I actually did a better job in writing about some of these things to people who had a thousand times my knowledge. In the other books, the more general audience books, like the Market Wizard books, there was a matter of shooting for things that were both important to the reader but were also interesting. Also tried to use humor when I could. I still remember, they said my second marker was a book.

I had an editor and I tried to put in humor wherever I could. I got back the edited copy, and normally my copy is pretty clean and there’s not much, it’s just more like almost typographical instructions. The editing changes are very minor and usually approve. In this last book, I had a great editor and the almost heavy editing changes I took. She took out every humorous line. And I said what the hell are you doing? It wasn’t keeping with the typical investment book they were doing. 

The importance of writing something that is interesting, including a historian, most people will appreciate. Occasionally, you’ll get somebody saying they just want trading advice. They don’t me want to, well, it’s too bad. I’ll include everything in the chapter that I think is a good story or as important. I’ll include both. Because I think the story makes it a good read. It makes it a better read. And I think it also helps people understand the people that I’m interviewing. I think that’s instinctive. 

I wouldn’t say that’s things I learned. Those are things that just seem to be natural that I should be doing. And as far as the learning process, if it comes to something like trading, I say, what I wish I knew at the beginning would have been the risk management side, which I understood eventually. But as far as the rest of my career, I wouldn’t say there’s anything other than that.

Jack Schwager Interests Outside of Trading

[01:02:24] Sean: Well, speaking of that acquisition of knowledge earlier, you mentioned you are curious. You read broadly, you’re interested in a lot of different things. What outside of trading has captured your attention? Is there anything like that over the years? You’re like, oh yeah, it might be a book, it might be a person you’re like, oh, wow. I just couldn’t stop myself from going down a rabbit hole here.

[01:02:24] Jack Schwager: Not so much in terms of intense things. I‘ll read books on various topics but I wouldn’t say anything, just one thing where I’ve gone really deep and sort of gotten second expertise in any area. It’s just more things that I find interesting. I have read a number of books on, I love books that have to do with true adventure type of narratives like Endurance, the famous Alfred Lansing’s book on the Shackleton’s expedition. I just recently read a couple.

I read recently the In the Kingdom of Ice, which has another story about, well, this is back in the 1800s. In the 1860s or 1870s or whatever, but they thought that the North Pole, there was some sort of body of water, actually, they were a hundred years too early. The way it’s turning out with global warming, they’re going to be right. But at the time that they thought there was a big body of water up there, and they tried to sail to the North Pole, they got stuck. They got trapped in the ice for a few years and the whole story of what happened thereafter. 

They’re incredible stories because they’re true. And what these people did is just extraordinary. Another book I’ve read recently is River of Doubt: Theodore Roosevelt, who after he lost his third presidential run was a co-leader of an expedition for an unexplored Amazon River. We’re talking about going down somewhere nobody’s ever gone with hostile indigenous people likely to kill you, with all sorts of disease, and all sorts of perils.

And he was almost dead after that expedition. It’s like a historical aspect that people wouldn’t necessarily know. It’s fascinating because it’s true. The great thing about these people and what they did, especially when they went into the unknown, nobody’s ever been there and everything else. So you find those stories. I tend to kind of lean-to nonfiction just because to me, that’s actually a lot more exciting and interesting because it’s not only a great story, but it actually happened.

Someone Jack Schwager Would Love To Interview

[01:05:19] Sean: You just mentioned some of these people going into the unknown. If you could do what you do great, spend a day, eight-plus hours interviewing, sitting down with anyone throughout history, it could be someone alive today. I’m just wondering who you would love to spend the day with.

[01:05:32] Jack Schwager: That’s a good one. You think of like a famous scientist or like hindsight, something like that. I was hesitant to say that because I’m just not smart enough to do any of you. There were not enough as to what people, nothing comes to the top of my head as people that I would love to interview because I’ve never thought about it. I never thought about going outside my sphere. I’m sorry, I don’t have a good answer.

[01:06:13] Sean: Is there someone in this sphere, is there someone in the markets that you haven’t gotten to sit down with?

[01:06:19] Jack Schwager: Oh yeah. Thank you. That’s an easy one. There’s one person in particular that I tried repeatedly, never actually spoke to. I never got through their circle of assistance or whatever, and that’s George Soros. And the reason I wanted to, well, I interviewed Stanley Druckenmiller who ran his own hedge fund for 30 years, an incredible career. I think he did like 30%, roughly for 30 years. Really one of the best trader investors of modern times. He worked for a while with George Soros. When the Berlin wall came down, the Soviet Union kind of imploded. He was like, he needs to focus on Russia. 

He wanted to convert those economies to democracies or influence them in that direction. That’s where his focus was and he’s on Soros’s website, his own background, and stuff. Druckenmiller was running his funds. Through Druckenmiller, I tried to get Soros to agree, also on my own. The reason I wanted to interview Soros, maybe I don’t know if he’s the best trader of modern times or ever, but he is certainly in the top 10, and just one of the best ever. And he has a fascinating life story. He escaped during the Holocaust, I think from Hungary. 

I don’t know the exact story, but I know he did. And he came from nothing to this incredible wealth. He did try, he had some experiences as I say, Eastern Europe in Russia with trying to convert those economies, everything related to that plus he has all this trading stuff. You know the famous story, how he broke it the Bank of England and lots of other things. I think he would’ve made a great interview if he had been willing to cooperate. And so that’s a perfect example of somebody I really wanted to interview, but just couldn’t get to.

[01:08:32] Sean: I heard from someone that when you reached out to him the reason he didn’t proceed was that he got that back pain. I’m making light that Soros used to get back pain when his subconscious was telling him around a certain trade.

[01:08:44] Jack Schwager: Well, you heard that he got that when I asked him? 

[01:08:45] Sean: Totally joking here. 

[01:08:47] Jack Schwager: Good. That’s the son who tells that story. It was actually a stomachache. I think he saying to paraphrase it when he gets a stomach ache when he’s in a position, it’s time to get out.

[01:09:04] Sean: Well, Jack (Jack Schwager), this has been so much fun. This has been an honor for me. Your books are something, just unbelievable wisdom throughout the years. I’ve been able to pull from, extract from, go back to over and over again. I want to make sure we link the listeners up with you. Where can they stay connected with you? I know you’ve got a few different places they can go. Where do you want them going?

[01:09:25] Jack Schwager: Basically I have a website which I have to admit, I kind of got lazy, no longer updated, but it’s jackschwager.com. Just my name (Jack Schwager). But basically, as far as the books, there are there but obviously Amazon or any seller. I’m also involved with a startup called FundSeeder which is fundseeder.com, which has a platform for traders, a free platform of performance analytics. If traders want to have free analytics on their performance, they can go to fundseeder.com. I guess those are the spots. 

[01:10:07] Sean: Great. All those will be linked up in the transcript, but Jack Schwager, I cannot thank you enough for joining us on What Got You There.

[01:10:12] Jack Schwager: I enjoyed your questions. I figured you’d go some of the areas and you did. That’s great.

[01:10:20] Sean: You guys made it to the end of another episode of What Got You There. I hope you guys enjoyed it. I really do appreciate you taking the time to listen all the way through. If you found value in this, the best way you can support the show is by giving us a review, rating it, sharing it with your friends, and also sharing on social.

I can’t tell you how much I appreciate it. Looking forward to you guys, listening to another episode.

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