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Author: edmay Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 23022  
Subject: Wizard Lessons Date: 1/30/2001 12:18 AM
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Recommendations: 58
I received Jack Schwager's new book, Stock Market Wizards from Amazon the other day. Like his other books, it's a series of interviews with top traders. This book's focus is soley on equity markets and stock trading.

What I really like about this book is at the end Schwager distills the lessons from the interviews he conducted. What follows is a summary of his 65 points.

1.) There Is No Single True Path - the great traders employ a diverse set of methods.

2.) The Universal Trait - discipline. develop an effective trading system and plan that addresses all contingencies. Follow the plan without exception. Success depends on execution phase.

3.) You Have to Trade Your Personality - no single way is the right way, you have to know who you are and choose an approach that is comfortable for you.

4.) Failure and Persaverance - some of the best traders have experienced complete failure. They learned from their mistakes and changed their approach in order to change their results.

5.) Great Traders Are Marked by Their Flexibility - Markets are dynamic, Approaches that work in one period may cease to work in another. Success requires the ability to adapt to changing conditions.

6.) It Requires Time to Become a Successful Trader - "You can't become a doctor or an attorney overnight, and trading is no different"

7.) Keep a Record of Your Market Observations - gaining experience can't be rushed, but it can be made more efficient by writing down market observations instead of depending on memory.

8.) Develop a Trading Philosophy - an integration of market concepts and trading methods based on your experience and personality. It's a dynamic process that needs to be revised as you gather experience.

9.) What Is Your Edge? - unless you can answer this question clearly and decisively, you are not ready to trade.

10.) The Confidence Chicken-and-Egg Question - is confidence inherent that then leads to success in trading, or does confidence come from being a successful trader. Most of the Wizards appear to be inherently confident in themselves.

11.) Hard Work - so many people think the market is where they can make easy money, but those who excel tend to be extraordinarily hard workers.

12.) Obsessiveness - a fine line between hard work and obsessiveness, a line frequently crossed by the Wizards.

13.) Wizards Tend to Be Innovators, Not Followers

14.) To Be a Winner You Have to Be Willing to Take a Loss - "You can't be afraid to take a loss. The people who are successful in this business are the people who are willing to lose money"

15.) Risk Control - novices spend too much time on entry strategies and not enough time on money management. Strategies include stop losses, reducing position, selecting low risk positions, limiting initial position size, diversification, short selling and hedging.

16.) You Can't Be Afraid of Risk - risk control shouldn't be confused with fear of risk. "You have to be willing to accept a certain level a risk, or else you will never pull the trigger".

17.) Limiting the Downside by Focusing on Undervalued Stocks - many of the Wizards consider only undervalued securities

18.) Value Alone is Not Enough - value can be a necessary condition, but it is never a sufficient condition to buy a stock.

19.) The Importance of Catalysts - "the key question is, what is going to make the stock go up?"

20.) Most Novice Traders Focus on When to Get In and Forget About When to Get Out - getting out is as important as getting in. Liquidation strategies include; stop losses, profit objective, time stop, violation of trade principle, counter-to-anticipated market behavior, portfolio considerations.

21.) If Market Behaviour Doesn't Conform to Expectations, Get Out - if things don't go the way you thought they would (e.g., earnings report), liquidate.

22.) The Question When to Liquidate Depends Not Only on the Stock but Also on Whether a Better Investment Can Be Identified - funds are finite. Sometimes you have to liquidate a position that is sound if a better opportunity arises. Always look to upgrade your portfolio.

23.) The Virtue of Patience - whatever your criteria to initiate a position, you must have the patience for those conditions to be met.

24.) The Importance of Setting Goals - believing that an outcome is possible makes it achievable. You must not only believe, but also commit to it.

25.) This Time is Never Different - "this time is different". Just remember: It never is.

26.) Fundamentals Are Not Bullish or Bearish in a Vacuum; They Are Bullish or Bearish relative to Price - a great company could be a terrible investment if its price rise has already more than discounted the bullish fundamentals.

27.) Successful Investing and Trading Has Nothing to Do with Forecasting - "All that is required for successful investing is the commonsense analysis of today's facts and the courage to act on your convictions".

28.) Never Assume a Market Fact Based on What You Read or What Others Say; Verify Everything Yourself

29.) Never, Ever Listen to Others Opinions - it is essential to make your own decisions.

30.) Beware of Ego - "no matter how successful you become, if you let your ego get involved, one bad phone call can put you out of business".

31.) The Need of Self-Awareness - you must be aware of the personal weaknesses that may impede your success and make appropriate adjustments.

32.) Don't Get Emotionally Involvoed - "If you let emotions get involved, you will make bad decisions".

33.) View Personal Problems As a Major Cautionary Flag to Your Trading - health and other personal problems can sometimes decimate performance. Know when to take a hiatus if personal difficulties arise.

34.) Analyze Your Past Trades for Possible Insights

35.) Don't Worry About Looking Stupid - never let decisions be influenced by concern about what others will think of you.

36.) The Danger of Leverage - if you're leveraged too heavily, all it takes is one mistake to knock you out of the game.

37.) The Importance of Position Size - all trades are not the same. Trades perceived as having particularly high probability of success should be implemented with larger size.

38.) Complexity Is Not a Necessary Ingredient for Success

39.) View Trading As a Vocation, Not a Hobby - "Hobbies cost money".

40.) Trading, Like Any Other Business Endeavor, Requires a Sound Business Plan

41.) Define High-Probability Trades methodologies differ, but all good ones have ways of identifying high-probability trades.

42.) Find Low-Risk Opportunities

43.) Be Sure You Have a Good Reason for Any Trade You Make - if you can't summarize the reasons you own a stock in four sentences, you probably shouldn't own it.

44.) Use Common Sense In Investing - Lynch principle of buying what you know.

45.) Buy Stocks That Are Difficult to Buy - "I put in an order to buy at 42, and got a fill back at 45. I love that."

46.) Don't Let a Prior Lower-Priced Liquidation Keep You from Purchasing a Stock That You Would Have Bought Otherwise - don't pass on a stock you sold earlier at a lower price if it's still a good stock. Don't be afraid to get back in after you've been stopped out if the trade still looks good.

47.) Holding on to a Losing Stock Can Be a Mistake, Even If It Bounces Back, If the Money Could Have Been Utilized More Effectively Elsewhere - don't tie up money in stocks going nowhere when there are other opportunities.

48.) You Don't Have to Make All-or-Nothing Trading Decisions - if you can't decide on taking profits, there's nothing wrong with taking profits on part of it.

49.) Pay Attention to How a Stock Responds to News - If on good news, stock goes up and bad news, doesn't give ground means the stock has been "blessed" by the market.

50.) Insider Buying Is an Important Confirming Condition - willingness of management to buy its own stock is not a sufficient reason to buy, but it's strong confirmation of a good investment.

51.) Monitor Major Fund Holdings - funds can take months to unload or aquire a position. Tracking their movements can give you clues to likely future performance.

52.) Hope Is A Four-Letter Word - if you say to yourself, "I hope this position comes back", it's time to get out or reduce position.

53.) The Argument Against Diverisification - "Simple logic: My top ten ideas will always perform better than my top hundred".

54.) Caution Against Data Mining - avoid this by forming hypothesis of market behavior first, than test, rather than blindly looking at data, searching for patterns.

55.) Synergy and Marginal Indicators - it is possible for fundamental and technical indicators that are marginal on their own basis to be combined for a much more reliable indicator.

56.) Past Superior Performance Is Only Relevant If the Same Conditions Are Expected to Prevail - "people persist in believing that what has happened in the recent past will go on happening into the indefinite future, even while the ground is shifting under their feet."

57.) Popularity Can Destroy a Sound Approach - portfolio insurance in the 80s blew up because the strategy became too popular. Will the same happen to index funds?

58.) Like a Coin, the Market Has Two Sides--but the Coin is Unfair. - you can bet on both sides of the market, but the historical odds are in favor of the longs. Shorting has other disadvantages such as uptick rule, having to borrow shares, limited upside and unlimited downside.

59.) The Why of Short Selling - can reduce risk in context of total portfolio. Can enhance returns in times of market difficulties.

60.) The One Indispensible Rule for Short Selling - always have a predetermined point where you will cut losses if trade moves against you. Even if you're bearish analysis is unchanged.

61.) Identifying Short-Selling Candidates (or Stocks to Avoid for Long-Only Traders) - high receivables, change in accountants, high turnover in CFOs, company blaming short sellers for decline, company changing core business to get into prevailing hot trend.

62.) Use Options to Express Specific Price Expectations

63.) Sell Out-of-the-Money Puts in Stocks You Want to Buy - for bargain hunters; sell puts at strike price where you'd buy the stock anyway. You get premium if stock doesn't decline to your level or you get stock at price you wanted anyway, with premium offsetting your purchase price.

64.) Wall Street Research Reports Will Tend to Be Biased

65.) The Universality of Success - almost all of the traits listed, with the exception of those that are exclusively market specific, are the traits required for success in any field.

Ed
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