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- [00:00]
Host
I get so many headaches every month.
- [00:02]
Jack Schwager
It could be chronic migraine, 15 or
- [00:05]
Host
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- [00:53]
Jack Schwager
Why wait?
- [00:54]
Host
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- [01:17]
Jack Schwager
That's it.
- [01:18]
Host
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- [01:23]
Jack Schwager
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- [01:24]
Host
six months or $180 or a 12 month plan required $15 per month. Equivalent taxes and fees. Extra initial plan term only greater than 50gb.me slow when network is busy, see terms foreign. You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. I've got the Gandalf, the Gray of finance here. He's back with me. We're doing wizards. We're doing market wizards. It always has to be this way. I'm going to get this excited every time. Jack Schwager, welcome back to Access Returns.
- [01:52]
Jack Schwager
Yeah, thanks. Appreciate it.
- [01:54]
Host
I mean, 40 years now of profiling some of the best traders alive.
- [01:59]
Jack Schwager
Been close. 88. So I guess we're we're 38 years
- [02:03]
Host
and you're at 38. All right, we're going to cross the not quite 40. Not quite. All right. Well, we're not going to age you anymore. We know. I mean, so many of us love the series of books. This one with George Coyle is maybe the. Am I correct to say this youngest, most risk adjusted cohort we've ever seen in one of the books?
- [02:21]
Jack Schwager
Well, yeah, I mean, definitely the youngest group. Yeah.
- [02:25]
Host
This is wild. I feel like this is like watching the World cup and thinking about the young talents where you go, there's just something about the youthfulness of some of these people that blew.
- [02:35]
Jack Schwager
I mean, there are certain differences that strike out, which, which, let's strike out is maybe the wrong term, but strike one. And like, for example, not one, not two. I don't even remember how many mentioned that playing video games was kind of an influence. That they were real, real fanatics about video games and they ended up being short term traders and the skills were compatible. So never in any prior market wizard book did I ever have any. The subject of video games come up. You know, hey, you ever play with
- [03:10]
Host
a video game, Jack? You ever play the video games? You personally?
- [03:13]
Jack Schwager
Yeah, I wasn't. I never was much into video games, although, I mean, just early on, the really beginning of video game. I mean, I remember I'm old enough to have played Pong.
- [03:27]
Host
Yeah.
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Jack Schwager
If the audience doesn't know it, look it up. But it's like one ball and two paddles. And typically in a bar, you know,
- [03:34]
Host
typically in a bar you have some mean Pong technique.
- [03:37]
Jack Schwager
Are you a competitive guy when it
- [03:39]
Host
comes to stuff like that if you're playing Pong? No, no.
- [03:42]
Jack Schwager
Yeah. No, I'm not competitive. No, not.
- [03:44]
Host
Okay.
- [03:44]
Jack Schwager
Not in that sense. Now.
- [03:46]
Host
All right, so one of the questions that I wanted to ask about this is basically the requirements for considering people. Because this is very, very different than like talking to Bruce Governor and people like that. This is just. It feels like a different set approaching the book even. How do you think about the requirements for getting in?
- [04:03]
Jack Schwager
I'm ultimately looking for a story, you know, has to be a good story. And as far as the performance side, there are two elements that two possible roads to it. One, somebody takes a small amount of money and turns it into a lot. Good example. One of the traders in this book went from a $40,000 account to a half billion.
- [04:29]
Host
We're going to talk about Simon Russo.
- [04:32]
Jack Schwager
That's a good example of that. And then you have people who have kind of crazy return risk numbers. You know, often I'm not talking about. And people thinking, I don't use the sharp. I'm biased against it for a number of reasons but people know the Sharp. So we're not talking here sharps of one or two. You know, we're talking like. Well in some cases not even calculable because one of the traders in the book never had a losing month. So you kind of get up, you get an infinity number, you divide by. By zero. But, but even some of the others you, you've got these crazy. As an equivalent to sharpe ratios of 10 plus. We're not talking one or two, we're talking about really crazy numbers. Actually one of the things about these trade is because the return risk is so good, the Sharpe ratio is always understating it because the Sharpe uses volatility as a risk measure. And as far as the Sharpe is concerned, as far as the risk denominator, it doesn't make a difference if you made 25% in a month or lost 25% in a month. You know, the risk measure in the Sharpe is the same. But there are other risk measures which really look at losses, not the volatility and only therefore are looking at volatility on the downside. And those measures are much more extreme for these, for these traders, not all of them, but like I say they usually fall into one or two categories when.
- [06:04]
Host
And we were talking about video games kind of joking with this a second ago. But this is serious because this class of trader, it's an entirely different ecosystem that's raised them. This ecosystem didn't exist out of this point in time. There's stuff that rhymes. So one, what do you make of this ecosystem? But two, and maybe this is the first part of this question. Where do you find these people? Are you hanging out in like some weird discord or something or on subreddits.
- [06:31]
Jack Schwager
Yes, I find them something. Word of mouth in some cases and often not often all the time. One of the questions I usually ask people I interview is hey, who do you know who should be in this book? You know, and that's. That is. That is one of the best leads I get is his traders telling me who they think you know, is really good. And so a few of the traders in this book came came because one trader gave me the names of a couple of the other traders in some case in this book, not so much. Yeah, somebody like Christian Koulimagi. I'd seen him on Twitter and I knew he had done well and I got his records and all that but he also seemed a very sharing guy. So, so I got to him. I, I knew off of that. So there were various, various ways of finding People,
- [07:36]
Host
what about the ecosystem part of it? How do you reconcile, I want to look bigger than the video games for a second. How do you reconcile this is the environment that they were raised in and that it maybe it rhymes with history, maybe it doesn't. You tell me.
- [07:51]
Jack Schwager
You know, part of it also is talking about environment. If you go back to the first market wizards book, you didn't have prop trading firms, not in the way you do today. And most of them, a lot of them are not legitimate. So I put out a court of caution there. But there are some that are and those tend to be often focused on very short term trend day trading. In fact, in the few interviews in this book that traders came through that environment, the firm actively discourages anything beyond day trading. And day trading was more kind of an exception. If you go back to the earlier market wizard books, I mean, things weren't set up to bday training first. We didn't have be actually, well, the careers of the first mark of the traders in the first Market Wizards book, most of their trading career preceded PCs. So you just didn't, you know, the, the environment changed in some dramatic ways from those earlier traders. But the first few books they all tended to be, I can't think of offhand any day trader in the first few books. And in this book, you know, there were quite a few. Although they, I think in just about every case they transitioned. They, they started out as day traders but then somewhere along they all seem to figure it out eventually that hey, I'm doing really well at day trading, but I could do even so much better if I put the swing trading trading for a few weeks. And eventually some of them say, well, gee, maybe some of my positions I want to hold for longer than that. So you do see this transition, even if they start from day trading, they rarely, they don't stay in day trading for them. They, they, they expand their horizon to longer periods which could be weeks or in some cases months.
- [09:56]
Host
I want to talk about Lucas Froelish. Frolic, you correct me if you know how to say his name correctly. It is Froish.
- [10:02]
Jack Schwager
Yeah.
- [10:03]
Host
Oh, okay, good, good. I was my first pass. All right, so. And is it Lucas or Lukash? Do we know Luke?
- [10:11]
Jack Schwager
I guess it's Luke. Well, I call him Lucas. I don't know if he actually the producer might be Lukash, you know.
- [10:17]
Host
All right.
- [10:17]
Jack Schwager
Our buddy.
- [10:18]
Host
Our buddy.
- [10:19]
Jack Schwager
Not actually sure.
- [10:19]
Host
You know, if you're watching, just tell us in the comments. Lucas, how to say your name correctly here because these were the numbers from 2020. So I think a lot from the due diligence seat and I think about vetting processes and vetting returns. And then I come across something like Lucas's returns in 2020. And I go, okay, how. Tell this a. Tell what he did. Tell what this looks like. And then I want you to explain your process for vetting this.
- [10:46]
Jack Schwager
Okay, so his numbers for 2020, the percentage churn was like so crazy. It was in the high hundreds of thousands, I think let's call it 800, 900,000%. And you know, both George and I, like, you know, we just. No matter what statements we get, we just gotta. It's gotta be an audit. It's gotta have a legitimate auditing firm do this or just don't feel comfortable. And we told him that and it went back and forth. He did have. He did have audit the returns from a name auditor, but they would not, you know, they did the audit for him years ago, a few years ago. And it is one of the top five. It was one of the top five 10 auditors. It wasn't like an unknown auditing firm. But they wouldn't speak to us directly. So we said, look, we've got to get an auditor that we could talk to as well, you know, and eventually that I was. That was done. And they came back. And for that, for 2020, they had. They did come up with a different number, but it was higher. So it's crazy. I know. So what? He, you know, he was extraordinarily very aggressive. Was super aggressive. And he would catch these trades for like a few days at just the right point and, you know, make 100, couple hundred percent on a trade, then go into another trade and repeat it. I just was. This. Had this crazy period of these huge returns, trade after trade, all short term. To make this a little bit more understandable. It's. He wasn't. He didn't compound those returns because if it was compounding the returns, it would be absolutely crazy.
- [12:38]
Host
So, like 100 didn't turn into a thousand and a thousand.
- [12:41]
Jack Schwager
Yeah. So. Right. So he's pulling money out. Yeah, he's pulling money out. And so literally that's the. And I think technically speaking, it was the Dietz D I E T Z method or whatever of accounting that was used. But. But it. It was not. He was not compounding the money. So the returns end up being like that. And had he theoretically, had he kept the money in and had the same returns, you would have had this crazy number. But there are two provisos to that. One, his account would have gotten so large that it's unlikely that he could scale. You know, he would get in his own way. And secondly, I think trading, if he had all that money at risk, taking these large percentage of his account size risk on each trade, just the psychology would have been different. So, so you can't really judge it that way. But I will say there was not compounding. He still, I don't, I don't remember the numbers offhand now whether he, you know, made 10 or 20 times his starting account because he was pulling money out. But the percent return is a number that was so absurd that we just had to get somebody to, to, to warrant it.
- [14:05]
Host
It's definitely one of those things. Right. I just picture Excel with the, you know, the error thing where you have to expand the size.
- [14:12]
Jack Schwager
Yeah.
- [14:13]
Host
It's not a number that you see.
- [14:14]
Jack Schwager
It's one of those, one of those things that you look at and you say, oh come on, give me a break. You know, that's not possible.
- [14:20]
Host
What about especially with somebody like that, the, the idea of length of track record versus having these an anomaly month and anomaly year?
- [14:30]
Jack Schwager
Well, good question because that's one of the reasons it's hard to get too young of a cohort because I always want to see usually at least 10 years. I mean I've made occasional exceptions if it was like nine years or something and super stupendous and you know, but basically it's typically traders have 10 or more year track records and usually and often 20 or more. You know, I, I need the longevity to, to verify it's just not a flash in a pan because anybody, anybody can make a fortune in two or three years and typically end up blowing it. Right? Yeah, but if you see it, but if it's consistent over like 10 years and, and one of the things is these few of these traders started very literally high school. So it, it made their involvement in markets, that longevity possible to get somebody in their late 20s or 30s, which otherwise is just difficult because if you're acquiring a long record.
- [15:34]
Host
Let's talk about the guy who turned 40 and we mentioned this already, Simon Russo. You tell his story. Forty thousand dollar loan into 500 million in nine years.
- [15:45]
Jack Schwager
Yep, yep. And it was a load. Tell the whole.
- [15:49]
Host
Yeah, give us some. If you haven't read the book, this is like, this book is beyond nuts by even market wizard standards.
- [15:55]
Jack Schwager
Yeah, this is an incredible story. It's the only, it's actually my favorite chapter in a book and it's one of my, one of My favorite chapters in any of the books fellow, this is also the only time where I used I. The chapter is anonymous and the chapter is anonymous because he wants to be anonymous. He insisted on anonymity to do the interview. And not only did he insist on anonymity, he literally had his lawyer drafted a nine page non disclosure document that George and I had to sign. You know, attesting all that we would never divulge anything about his identity and holding us legally responsible if we did. So it was like a serious quest for anonymity. And my attitude was, look, nobody would know this guy. He's a solo trader. Nobody. If I told you his name, yeah, if I said his name, nobody would know who he is anyway. But he wants to stay anonymous so it makes no difference. And I let him choose a pseudonym. It makes no difference whether he's called Simon Russo or he's called by his real name. The story is exactly the same, you know, and I, I reference Shakespeare's line on that, you know, which is, you know, the famous rose line. So, so anyway, he, he was a musician. He was in one of the best music schools in the United States and he was very passionate about music. And that, you know, from her, from, from young childhood, that's what he wanted. That's, that was, that's what he wanted to do. And he's one of these people who is driven by mastery. I mean that anything he does, he has to master it. He can't just be good, he can't be, can't even be great. He has to be a master. What if he's due. So that was his quest for music and then he found trading and he had these shared passions and eventually he decided in midst of when he was in music school that he couldn't pursue both to the degree to his satisfaction, he had to pick one. And so he dropped out of music school and pursued trading. Now his first few attempts, he had some failures. In fact, he lost it all. And he was completely. The story could have ended there. He had borrowed, he had made some money for his father and he kept on borrowing from his father till he got to the point where if he borrowed anymore he would be, you know, he would be eating into his father's own money. So he didn't want to do that and he wasn't going to do, he was going to give up. Not that he wanted to. He still was looking for a way. But he had been contributing to this, to this group on the web and doing his research. And he's a Very, he does very intense research, Very intense research. And there's some very good traders in this group that he was part of that appreciated the, the quality of his work. And one of. One of the traders that found out that when he mentioned that he can't trade anymore, and he blew it all. Typically, he'd make money, make money, make money, then have one trade, let it go, and you know, he'd make like 500,000 in a half a year on a bunch of trades and then let one trade go. He was go short something, not have a stop, and he would get wiped out and the broker would sell him out. That was, that was his typical scenario. And so one of the traders knew that he was now no longer able to trade. And he said, look, I appreciate the work you do. I'm going to lend you 50, no strings attached, pay me back when you can. Loaned him the 50 he had that the first month he made, he made. He made like 90 on it or whatever paid him, actually made it like 100. He paid him back 50 plus an extra 10, which left him 40. And that was the account he eventually turned into a half billion dollars. An incredible story. He went through a number of different styles and along the way, his equity curve is kind of fascinating too. Looks like once he started making money, looks like a bit of a mountain chart, right? Then you have this big dip and then it resumes a mountain chart and up to. Gets to half a billion. And I said to him, well, hey, Simon, what gives here? You've got this incredibly smooth chart and then you got this huge dip. And will, he had like two trades in there that were kind of impulsive trades. And he broke his own rules. I mean, he had money management rules. Broke his own rules. One of the trades was Carvana. And this is, this is kind of scary. At this point, he had already made a couple hundred million and he went short. Carvana, he went short, it went against him, then came back down and he got out, had a small profit. And then it ran up again and I. He then sold he. Just because he thought he could do it again, but he didn't have a good reason at that point, went short. And he kept on going against him and he didn't honor his own stop. And finally there's an earnings report. Wildly bullish. You know, the thing gaps up. The next morning, he finally realized he dumps the whole position on. I don't know if it takes a fifth something between a 50 and $100 million loss.
- [21:26]
Host
I wrote down a $50 million loss 50 million.
- [21:29]
Jack Schwager
Now, here's the scary thing, right? I looked at what happened after that. Had he stayed short and been stubborn, that short would have been enough to wipe out his whole 200 million. He would have been flat broke again. Which is just a scary thought that here's a guy who went for 40,000 to half billion, did have a couple of bump trades where he broke his own rules. And one of those trades, maybe both of them actually, if he held on, could have wiped him out. So it's a sobering thought, wishing you could be there, live for the big
- [22:03]
Host
game, soaking up the atmosphere of the crowd. But too often, life gets busy or
- [22:09]
Jack Schwager
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Host
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Jack Schwager
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Host
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Jack Schwager
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Host
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- [23:08]
Jack Schwager
Yeah.
- [23:09]
Host
What's it say about knowing your own rules? Because there's a difference between knowing your own rules and following your own rules.
- [23:16]
Jack Schwager
Yeah, he's gotten to the point. Now, after we had written up the chapter and the book was not far from being sent to the printer, I get an email from him, we get an email from him saying, look guys, I don't want to have people think I walk on water. I gotta be honest here. I just recently had my worst loss ever. And this is from a guy who we know had a loss, you know, two losses in the 1500 million dollar error. So worst loss ever is pretty big. And it was the same story. You know, he went short, didn't honor his stops, and then he added to his position and added to his position and he eventually escaped. He was down like 100 million. And he realized at that point that, hey, I could blow it all on this one. Trade. But then the market acted. There was the market that finally the stock had a really big down day and he could recognize his very, you know, his knowledge, experience. He knew that was it. And then they said, okay, now he's just had to. And he got it down to maybe a 1 5, $15 million loss, covered the position, and then implemented these automatic, automatic rules to prevent, to protect himself against himself. And he gave us the rules, you know, that he, that he now has in place so to prevent him from ever doing that again, you know, so. And by the way, even though he, well, he only lost 15 million, he recovered to only a $15 million loss. And he had gone to, by the time we wrote this up, he had been to, he was to new eyes again. So an amazing story. Amazing story. Un.
- [24:55]
Host
Unbelievable Again, even by market wizard standards, which is saying a lot. I want to talk about this. Christian Koulamaggi.
- [25:04]
Jack Schwager
Yeah.
- [25:05]
Host
Security guard in Nasdaq Stockholm to 100 million. And I wrote down three accounts that he blew up before he even became profitable, which is a number.
- [25:16]
Jack Schwager
It might be four, I don't know.
- [25:19]
Host
But is it the size of these swings tell his story. And I'm just so interested in these failures. They're just.
- [25:25]
Jack Schwager
Well, Kulimaji is a. Gets it. He's, he's Swedish, gets a job in the, in Stockholm in the NASDAQ affiliate, you know, in Stockholm and kind of notices all these people coming in in high suits and, you know, these sharp car, you know, expensive cars and kind of, what the hell, what are these guys doing? You know? And he finds out that's due for investing or trading or whatever. Well, first he finds investing. He reads all these books on investing, and then he discovers, hey, there's something called trading, which is like investing on steroids. This is. Oh, I like that. You know, who doesn't love it on
- [26:01]
Host
steroids, let's be honest.
- [26:03]
Jack Schwager
So he saves up, saves up like $5,000 from the security job and kind of tries his hand and he loses it all pretty quickly and then. But he, he's, he has the bug. And so he's kind of doing more research and reading more and looking online. And he loves a security job because he works at night and he has a lot of free time. You know, he just has to do some rounds, but he has most of the time free. So he's kind of studying charts all night long and all that. And he, as you mentioned before, he makes several more attempts. Each time he saves up money from a security job and then he blows it and finally he gets to the point where he got it. He gets puppy gets profitable and he's making money steadily and he thinks he now has and he does. And he continues to build from that 5,000 to an ultimate peak over 100 million, which lasts only the plus 100 million lasts for like less than a week, I think. And that's late 22. And two things. One, he has a lot of. He's leveraged long in late 22, mid, mid to late 22. There's a peak in the market. So he's giving gives back a lot of lot of his profits on the open positions. But then he continues to trade the same methodology for quite a number of months, losing money steadily. So eventually he loses more than half his money. But he still, you know, he still has a small fortune. And then he, then he recovers partially, but the ship is steadied and you know, he's made a fortune. He still trades, but he decided, well he bought a boat and likes to travel. And so he kind of is not retired, but semi retired trades, trades intermittently and sort of not the way he used to because when he really made his money, he, he just ate and slept. The markets, he, he's one of these guys who trade, traded the market obviously all through the day, but in that nighttime research, apparently pre market, you know, the whole thing.
- [28:24]
Host
So what do you think, just looking back over the entire history of people who blow up their accounts along the way, is there any correlation between that and success? Is it just part of the learning process? I'm not saying that if you blow up your account you're going to go on, but I am saying it's surprisingly present.
- [28:43]
Jack Schwager
Yeah, well, I was surprised in the first book that there were people who blew up their account.
- [28:50]
Host
Same. That's part of the learning process of encountering your work is you wouldn't think,
- [28:55]
Jack Schwager
but ultimately became very successful. In fact, you know, another one of my favorite chapters was the first one in the first market wizard book, Michael Marcus, who, who had the litany of his failures. It's just, it's painful to listen to and the extreme nature of it. But he just, just had this driving belief that he could do it. Very similar to Koulimachi. You know, he just, I asked, I asked Kulamaji, you know, you blew up, you blew up, you blew up. Didn't you maybe think that hey, this you just don't have, have the talent that. And he said, well, you know, the first time I blew up, it took me a couple of months and the second time I lasted about six months, and the third time, it was like over a year. So I was. I felt I was getting better. You know, most people would look at it and say, hey, I blew up three times. No, he looks at it, it's taking me longer and longer to blow up, hence I'm improving. And he was right, you know, he was right to stick with it. So there is that this element of this extreme belief in yourself that's. That's part of it and just not just not giving up. So it doesn't mean everybody who has that is going to make it. But it is a characteristic of a number of the traitors to witness the type of failure that would have knocked most people out of the attempt, but they kept going. And that was an important element of why they were successful. That, that particular fortitude and self belief and confidence. It's just of an extreme nature, even when there's no empirical proof for it, seemingly. But somehow they just knew that if they kept at it, they would succeed.
- [30:43]
Host
It's that mental resistance training that you can literally feel in the words, like
- [30:49]
Jack Schwager
the belief that this is something they can succeed at. Yeah, they just had that understanding. And not everybody has that. Obviously not everybody has that talent and that ability. They apparently did and felt they could keep at it. If they kept at it, they would ultimately succeed.
- [31:07]
Host
All right, let's talk about one of the most offensive track records in market wizards history. Talk about Phil Godecker.
- [31:13]
Jack Schwager
Yeah, yeah. So Phil started out. He's one of these guys who started out as a short seller, which, interestingly, that's another interesting difference about this book and the other books. This is the only market wizard book where several people started out with what I would call negative asymmetry strategies. Now, there's a great range of different types of strategies that, that the people I interview use. They could be pure fundamentalists, pure technicians in technical. They could be using charts or quantitative approaches. They could be mixing technical, fundamental. They could be short term, long term trading stocks, trading futures. There's a million different ways they trade. But the one common denominator of almost all the strategies that these people used was they were positive asymmetry trades. In other words, when they won, they won much bigger than they lost, no matter what approach they were using. That was a characteristic of their trading style. And most of them, the vast majority, would lose more than half the time, but their wins were much larger than losses, and hence their great success. In this book, there were several traders like Phil who started out with negative Asymmetry trades. And in fact Phil, even when he transitioned went to another negative asymmetry trade, meaning that that the potential losses were greater than the potential win. So for example, Phil started out as a short trade or small cap. If he's right, what's the best thing that can happen? Stock goes to zero. Normally these are single digit stocks, so going to zero, it's not like you have a stock going from 200 to 0. You have a stock going from $7 to 0. It's not, not the same thing. That's his best outcome. If he's wrong, he's selling. The stocks that he's selling are stocks that are, have just gone up several hundred percent, let's say for almost invariably nonsense reasons or being pushed in by stories which are irrelevant or whatever. And so does the short is fundamentally sound. And ultimately almost all these stocks eventually go to zero or go way down. But if a stock rallies several hundred percent in a few days, no reason it can't rally it up as several hundred percent in a few days. And that's not uncommon. But the best you could do is a gain of 100%. So that's unusual. I never encountered that among any of the people I interviewed. So that was Phil's initial strategy. And he, he just had an extremely high win rate. He, you know, he just, and the thing that saved him, the thing reason why Phil was able to get away doing this is he seems to be one of these people who was born with just an internal risk management sensibility. As soon as something goes against him, he's out. He's just, it's like a knee jerk. You know, like when they test your reflexes and, and hit your knee, you know, your knee's supposed to for him, get trade starts, go against him. That's like a, it's like a reflex. He's out, he's just out. And so I asked him, you know, Phil, what, I get what you're doing. But like this strategy, eventually you're going to get something. A mark is going to have a sharp down. And you know, any sharp down you're in if you're selling now. I'm sorry, switched over. I'm now talking about. He switched over to selling options. I should have explained. Okay, so. And he reason he switched over was he needed to be larger scale. So he switches to selling options, which is a, again another negative asymmetry trade. You know, you're selling the option, the most you can make is a premium. But if you're wrong, it can go multiples against you go 20 times, you go any number against you. So so basically the reason he gets away with it is he, like I say, he has this great, these great instincts that he developed that he had also when he sold short stocks of getting out instantaneously if he's wrong. And there was an instance where he was tested and we had it in a Trump so called liberation day imposing tariffs. And if you remember we had like four days where the market just completely crashed. Very, very sharp, very sharp decline, very quick, very big. And he was short option. So sounds like he should have taken a massive hit. And turns out he only lost, I think he lost less than a million dollars on it, which for his size account is trivial. And the reason he only lost a million he is because he instantaneously recognized that the trade was against him. So he got out instantaneously. But even that's an understatement. He didn't just cover all his options right away, he did something better. He went, he bought S and P puts equivalent to offset his entire risk. And the reason why that's better because that's a trade you can do in seconds. And if he was working out of his options, that could take a while. So he instantaneously hedged out his risk. So yeah, he took an immediate loss right on the opening type of thing, but he was out right away. So he wasn't there for those four days down, just the very beginning of it. And he's like that consistently on everything. And so he's able to get away with these type of strategies. Although I would not recommend either one of those to anyone, you know, unless you're, unless you have phenomenal risk control management.
- [37:11]
Host
It's so interesting to hear about those controls that he possessed. And I wait to say it, what was it, one losing year in two decades, Is that what he put up?
- [37:19]
Jack Schwager
Yeah, he lost. He lost. Yeah, he lost. He had one down year. His down year was like $30,000. And I mean all his multi's, all his winning years were multi million, you know. So
- [37:33]
Host
question about, about this, and this is another one scope of all the books for a second here. There's like your grand slam hitters who just step up and dazzle you with a couple of just giant moves of everything forward. And these, these guys who just kind of bunt over and over again and they just don't screw up like, like a person, like a Phil, I'm curious, how do you see that on balance the people who have just the mammoth wins versus the real, real slow and steady grinders.
- [38:00]
Jack Schwager
Well, if it's just a mammoth win or a few mammoth wins, that doesn't make that, that wouldn't, that wouldn't qualify. It's like as I said before, I'm looking for people who've been around doing this for, for 10 plus years and preferably a lot longer.
- [38:16]
Host
But you have some people that kind of like in those periods, it's like they kind of go sideways, they go down and then they take a big jump and they kind of move along sideways.
- [38:24]
Jack Schwager
Yeah, yeah, that's okay. It's there. That's. That's actually a good strategy. If you got a strategy that makes a. Makes a lot of money, then tread. Treads water, it makes a lot of money. Trans water. That's great.
- [38:37]
Host
Right? What do you think the balance is between people who can figure out that bunting strategy versus the basically just don't die, then take the next stair step higher.
- [38:47]
Jack Schwager
It's. It depends on the methodology to using. It depends on their personalities. Some people just are much more aggressive and willing to take risk than others and others are extraordinarily conservative in how much risk they take on any trade. So that becomes the matter that comes down to personality. And it has to be one can't. One type can't do the trades of the other type. You know, if you're right, if you're somebody who just can't stand risk, like the trader who has all winning months, he couldn't trade anybody else's strategy because he just couldn't tolerate. Tolerate the risk would be impossible and other traders would go crazy limiting themselves to the relatively small amount of money he makes. I mean he's content making, you know, 3, 400,000 a year with no losing months. It's. It's like a job. It's like a living, you know, and it's a. It's a reasonably paying job and so it works. But he's not making a massive fortune. A lot of the other traders would feel completely inhibited using a strategy where they're only making a few hundred thousand a year. They would bust out of their skin. So it really is a matter of personality.
- [40:01]
Host
I think I was extra thinking about that watching Home Run Derby stuff, you know, in the. Just not long ago now. And with that Home Run Derby stuff, you're thinking how many of these guys would actually lay down a bun if they even got the signal? Yeah, because they're just not wired for it. And that's. It's a feature, not a bug. Let's talk about bandasian yeah, the technology dinosaur. He's holding his phone camera backwards during the interview. This is another one where him. In this book, it's oh, Chef's Kiss.
- [40:29]
Jack Schwager
It's wonderful. He's a trader with no losing months. Now, we could confirm 11 years of no losing months through statements, but he traded some fam. He was with a family officer and traded their money for like four years and said he didn't lose months. I have no reason to doubt him, but I can't prove the other four, you know, but, you know, basically, so realistically I say, yeah, the guy has 15 years. We hasn't had a losing month. He's, he, he became an expert in one type of strategy. Convertible arbit, merger up. Convertible merger up. And he just, like, he's one of these people who would go into, you know, filings and statements and go through the minutiae and enjoy it, you know, and just go in these amazing details and kind of what came up in the, in the, in the interview is how the hell does he survive given AI or it's not even AI, it's just, even before AI, Just the, just the programs that people can use a
- [41:43]
Host
computer to read and do these calculations.
- [41:46]
Jack Schwager
They'll recognize keywords, right?
- [41:47]
Host
Right.
- [41:48]
Jack Schwager
Yeah.
- [41:48]
Host
You shouldn't think there'd be an edge.
- [41:49]
Jack Schwager
Recognize mer, whatever. And those programs will execute faster than any human can possibly. Faster than a human could read the headline. Right. So I asked him how he survives in that. And the reason is because he finds these situations which are too sophisticated for the bots to actually manipulate. For example, he gave one example came up. There was some merger announcement and the market rally. But now he had gone through all the docs and he knew that the company was domiciled in Maryland and as opposed to Delaware, most people, that would mean a damn thing. But he knows that Delaware, very easy, A merger company can't really prevent it. But in Maryland, the company doesn't want the merger. It's not going to go. It's not going to happen. And so he knows that. So he goes short, you know, against where the bots can, you know, that's the type of trade they're not going to catch because it's a real fine detail. And theoretically could they program it to catch all those details? Yeah, but it's not worth it because the trades aren't big enough to warranty that type of effort, nor are they frequent enough. So he's found there's no niche where even with the bots operating, he's still pulling out a Steady money. Now this is just to give you an example of how hardworking these guys are and how devoted they are. He gets up at 3:30 every morning and he takes his last look at the markets at 8pm now yeah, there's a couple of times from the day when he's away from the but his trading day goes from 3:30 to 8. Now I don't know about you, but I wouldn't want to. Even if I could get no losing months, I wouldn't want to live that life. But he does it, you know. So it takes a certain type of commitment and devotion that most people don't have and wouldn't want to have because you are sacrificing a lot. But that's Pandasian. That's his story.
- [43:55]
Host
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Jack Schwager
It gives your job post the boost
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Host
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- [45:03]
Jack Schwager
By definition it's impossible because as far as I know, even the AI developers don't necessarily know what, what the AI program is doing. You know, how it gets to its conclusion, maybe to some parts they do and all that. But I know it's a real problem because the pattern recognition gets so complex that it's not even necessarily traceable. So there could be no answer there. Yeah. So, and, and any book about AI developers would be much more about the theoretical aspects of programming. AI would have nothing to do with the markets. But I, I will throw out this, that there is a difference between AI, between more when it comes to applying AI the markets are different than anything else that I, I can think of. And that is because any other discipline is ruled by math and science. And science. When I say science, I mean science that is automatically, you know, rule based. And you know, the same thing happens, you got the same conditions, the same outcome will always happen, right? It's not like sometimes you'll get one result and sometimes you'll get another result. If all the initial conditions are the same, you can predict the exact outcome. Markets are not like that because you can have the same conditions and the outcomes can be wildly different. So you could have times where an unemployment report comes up, comes out and the unemployment is surprisingly high and there'll be times that'll be bad for the market, other times it'll be good for the market. So that kind of variability in how the same news item with the same input can affect markets is the thing that makes it particularly hard for, would make it particularly hard for AI to treat like any other market. So if you take development of drugs, yeah, it's an extremely complex problem because of the just extraordinary amount of combinations that can be tried and patterns that have to be recognized. But it's a solvable problem because you know the proteins are going to behave the same way. You know they're not going to change behavior. So it may be very hard to figure out what combination is going to be an effective drug. But once you do, it's not going to change under the same exact treatment conditions. Whereas in the markets that's not true. So it carves out a possibility that the markets may be something that even I can solve totally.
- [47:57]
Host
Lance Brightstein. And I want to talk about day trading and transaction costs and that whole idea that day trading is impossible because the cost will eat you up. Talk to me about Lance.
- [48:08]
Jack Schwager
Oh yeah, Lance. Lance started out in a prop shop and which was one of the day trading prop shops as I mentioned. And so here's where Lance, he decided he wanted to be a trader, found the and he turns down. So here are some of the. Here's a couple of good examples of characteristics of people who succeed now they succeed here in trading but I guess this will really apply to almost anything. So first of all, Lance gets a job offer out of college for at the time I think it was like a job offer for it was over 100,000 a year starting salary and it was some, I forget some which brokerage firm or whatever and he gets an offer from the prop firm for like 1/4 the amount 20, I think it was $26,000. So which job does he take? He takes the prop shop job because he figures, yeah, you know, sure, I'll be, I'm giving up like 75,000 a year initially, but if I can succeed at. And he had talked to people at the prop shop and he understood, yeah, three quarters of people fail, but one quarter succeed and if I'm in that one quarter, I could be making a million a year or more. And so if I get to that spot, I'll more than make up the lost ground. So he takes the job, he takes the prop shop job for 26. Then he decides he really, hey, he wants to learn from the best person. So the best trainer in the firm at the time had a newborn and was going to move, wanted to move out of the city, was moving to Princeton. And so he needed a training assistant. Lance figure he's a young guy out of college just like all most of the other prop traders and they all want to stay in New York because hey, let's face it as he, if you're a 20 something and New York is more appealing than Princeton, so you know, he, but he's, he realizes that he can learn the most from this guy. So he volunteers for the trading job in Princeton, you know, and, and sure enough that trader ends up being his mentor. He gets his initial methodologies, he gets them started and it takes him about a year or two till he starts becoming profitable. But once he's profitable, he's unstoppable and he becomes the best trader in the firm and remains as such for year after year. And he has this desire to trade longer term and it's against the company philosophy and he eventually leaves on his own and then he goes off on his own and rather than being stuck to the glued to the screen all day, he now trades much more, less frequently and he ends up making much more than he did even though he was doing very well as a day trader. So he builds most of his fortune actually after he leaves the firm, just trading his own account.
- [51:11]
Host
These journeys are so interesting. Another part that just kind of jumped out at me with, with both Russo and with Brightstein, with Lance, there is, it almost feels like there's something different that this generation is thinking about money and meaning because they have these charitable endeavors too that they're not just trading forever.
- [51:33]
Jack Schwager
You know, you're right on that. I think there's more, more, more people in this book said they got attracted to the markets significantly or at least in part because they, they thought it was a way to make a Lot of money. Now typically going into the markets because you want to make a lot of money is, is not a good thing. It's usually, you know it, it usually doesn't end well. If that's your motivation, it's almost invariably doesn't work out. But it did for these people because it wasn't just that that was their initial attraction but once they got into it, they got deeply into it and were fully committed. Like Lance. He not only is there all day long trading but then stays at night and reviews his trades, even takes video of his trade, of his trading, of his key trades and then comes in on a weekend and replays them both in, both in fast motion so he can get quicker in executing trades and in slow motion so he can see, he can study exactly what he did right and wrong. And this is on weekends and he, I think he does this almost every weekend. So yeah, he may have decided hey, the markets are a good place. I'm attracted because I want to make money. But that's not. It quickly became the obsession of, of becoming great at trading. And if that wasn't there then these traders wouldn't have succeeded.
- [53:04]
Host
We have a lot of people that are long term investors, allocators, not traders and we've done episodes you and I before literally unpacking this how classic market wizards stuff relates to people who think more like in the investor mindset with this new group. Is there anything in particular that you think is useful for long term investors to take?
- [53:28]
Jack Schwager
Yeah, I mean a number of these traders. Lucas. It's true of Lucas. A slew of Kevin Shu is the Singaporean trader that we didn't talk about yet. It's true of Lance to some extent, probably true one or two others that. Oh with Simon Russo. It's true. Simon, Simon as well is they transition to longer and longer strategies and so for. And in many cases most of their money was, is then made in trading longer term. So there is a good deal of discussion about trading that is more holding a position oriented and, and spelling out the conditions that make that, that qualify for that type of trade.
- [54:21]
Host
It's very philosophically rich. I'll say that my experience with these is that there's more depth to it than just how somebody picked up, bought or traded security or swapped an option out or whatever.
- [54:33]
Jack Schwager
Right.
- [54:35]
Host
I want to ask about. You say two things limit anyone's chance of becoming a market wizard and that's innate talents and the willingness to make an all consuming commitment. A lot of people are still. The pandemic is One thing where people took on trading, a lot more people are still taking on trading. And I go back to those things that to become something you need that either innate talent or the willingness to make this insane commitment. What advice would you give to people who are even. How should people think about that if they want to trade?
- [55:08]
Jack Schwager
Yeah, I mean, you, you, you can't, you can't look to achieve what these traders achieve. Well, for most people, let's be realistic. You know, these traders have exceptional, exceptional success. And a good deal of it, I think has to do with personality traits that were inborn. Like we talk about this instantaneous reflex of risk management or the ability to take risk. In some traders case like Simon Russo talks about how from early on he could stay calm in crisis situations. Those things are inborn and to the degree they help, and in these cases they did help significantly, you can't manufacture that. So not everybody's born. In fact, there was. There's a line from one of my books by Bill Eckhart in New Market Wizards. He said that most people are so poor, our human nature is so poorly attuned to the trading that most people will do worse than random because our natural instincts are to do the type of things which not only don't, the markets don't reward, but they actually punish the things that we will do naturally. For example, you know, like holding onto a losing position. If you get out, it's going to feel bad, it's going to be pain. You've locked in a loss. If you say, you know what, I'm going to give it just two more days, then you got hope for two days and you feel better. Now that type of human nature is negative, is negative to trading success, but it's part of our natural born instincts. And so it goes beyond the classic, the line about academics will say, well, you could take your little monkey, throw darts at a quote page and the monkey will do as good as the professional traders. You know, what Eckhart was saying was the monkey's gonna do better because he's not inhibited by human emotion. Right. So for most people, they got the wrong combination. So there are rare individuals who have the right combination or can train themselves sufficiently. So that's part, that's one part. And then it's the commitment. We talked about all these examples of people working these tremendous hours and complete devotion to the markets and all that. It's not necessarily a lifestyle that is going to be attractive or advisable for most people. So you have to, if that's what you want to do, you have to have that type of commitment and it can't be forced. You have to actually, you have to love that endeavor enough to devote your life to it. And not for the money. I mean, for the endeavor itself, for the ability, for the game of winning against all these other players. That has to be compelling enough that you're willing to devote this tremendous amount of time and work to it.
- [58:12]
Host
I love the tremendous amount of time of work reminder because you have to earn it. And it makes me think of the. The Ed Sakota, the win or lose, everyone gets what they want out of the market.
- [58:23]
Jack Schwager
Yes. Yeah.
- [58:24]
Host
And it makes me think of you with the comment that you wanted to be a better writer. Yeah, well, you got it out of this.
- [58:33]
Jack Schwager
I kind of put it up front in this book at the end as a summary that I may have early in my career thought I wanted to be a great trader. And thinking back on thinking, and I didn't in the sense that as I spell out in the book, I never so much took a full week off to devote to trading, you know, and one can rationalize and say, well, you're young and you, you know, you didn't want to take that chance of giving up an income and all that. But the truth of the matter is I took a full year sabbatical when I was young to write an analytical book which I knew couldn't sell a lot of copies because it was an analytical book. But I just wanted to write the best book on futures markets since I didn't think there was a good one out there. And that was my goal. And I took a full year off, no, no pay or anything for a book that I knew wasn't gonna. Couldn't sell a lot of copies because it's not an audience, there's not a big audience for that type of book. And in fact, every time I put an equation in the book, I knew I was reducing my sales. So that wasn't my goal. So I can't rationalize to say, well, I was playing it safe. I didn't want to give up a salary, so I never had that commitment trading. But I do really, I do realize that that's a coda was right. Everybody gets what they want on the markets. I started out interviewing traders because I thought, hey, I could learn a lot from them and it'll be a fun project. And what I ended up doing is becoming a writer and enjoying that and being good at that and writing quite a number of books and having an important part of my Career being a writer. So I may have thought I wanted to be a great trader. I ended up getting what I wanted on the markets, which would be being a successful writer.
- [60:21]
Host
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- [60:54]
Jack Schwager
Mm, mm, mm.
- [60:56]
Host
You about this spicy Italian sausage. I voted for this topping. Yeah, just another perk of being a member. Come join us, Sam's Club. So if you could take anybody from the backlog of market wizards books with anybody from this book, you could put them in a room, they'd have a conversation and you got to just be a fly on the wall. Who would you pair up?
- [61:19]
Jack Schwager
Oh, God, he tore my disparate people. Yeah, I don't know. I'd say. Probably off the top of my head, I'd say Drucken. Stanley Druckenbiller is one because he's always got insightful, interesting things to say and observe and talking about a conversation here and. Yeah, I wouldn't. Maybe with Simon Russo.
- [61:46]
Host
You know, I had a feel like it was going to be Simon Russo, but I was curious. Yeah, I would love to see Druck and the anonymous Simon Russo fly on the wall style. So every generation kind of captures the era. What do you think the next era is?
- [62:03]
Jack Schwager
What's.
- [62:03]
Host
What's the next era? Where do we go beyond this? Is it just the AI assisted thing? What's next?
- [62:09]
Jack Schwager
Yeah, I don't know. The thing is, technology changes, markets changing. I. I come from the beginning in a world of pits and no computers and, you know, let alone all this data we have now and everything. So the world has changed a lot, but a lot of the elements of trading haven't. And the approaches are always different. And even in a. Even in any given book, almost all the traders are differentiated. So I don't. I think it's just a. That's a chance thing of who gets picked and what happens to be the strategy more than what error it is.
- [62:48]
Host
You know, I do love that answer. I'm glad that you answered it that way. Because it just seems futile to think that you could guess this in advance when you look at the absolute remarkable nature of so many of these peoples and the environment they just found themselves in.
- [63:03]
Jack Schwager
Yeah, I knew a thing. And even in the last book, which I initially, the initial book, it was revised with an update in 22, but the initial book was 2020. And then of course, this book is 2026. But even in the 2020 book, I thought, gee, you know, we've got, given the advent of all these giant quant firms with hundreds of PhDs and this massive supercomputer power and all this data, it's going to be hard to find people with track records like I did in the first book. And I found people whose track records were as good, if not better. And the same goes for this book. Now, true, in most cases, they can't be trading. They're not going to be trading hundreds of millions. Well, certainly not to start. Right. And so the strategies they use, at least in the beginning, are not scalable. So it's not quite apples and oranges where these bitcoin firms might be managing tens of billions, but still it does say that you can get these phenomenal track records by solo traders with no, no special edge or information or resources.
- [64:14]
Host
It's really remarkable. I have one more closing question for you here. One thing you believe about investing that you think most of your peers would disagree with.
- [64:25]
Jack Schwager
Oh, that I believe that most would disagree. I actually, I don't think I can come up with anything because as a group, certainly, and almost all of them, what they believe is generally correct. And if anything, I try to be influenced by what they believe, not contradict it. So I don't have any radical, you know, radical ideas that would contrast with traders that I've interviewed.
- [64:56]
Host
I, I like this answer too, because generally speaking, we could probably pay a little more attention to the stuff that we know is right.
- [65:04]
Jack Schwager
Yeah.
- [65:04]
Host
And that's there. The water in which we swim actually has some useful information in it. Jack, this has been an absolute pleasure. If people plug, say the name of the book, tell people where they can go and find it and for sure about you on the Internet.
- [65:17]
Jack Schwager
So it's market wizards, the next generation. And you know, any, anywhere, you know, Amazon or any other book, you know, book source. So it's pretty much everywhere.
- [65:29]
Host
Not hard to find. Catch up on the new book. Catch up on the whole series. Jack Schwager, thanks again for doing this with us. You're watching Excess Returns Like Comment, subscribe all the things below and we are out. Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@excess returnspod.com. if you have any feedback or questions, you can contact us at excess returnspot gmail.com no information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts
- [66:07]
Jack Schwager
Close your eyes, exhale, feel your body relax and let go of whatever you want you're carrying today. Well, I'm letting go of the worry
- [66:16]
Host
that I wouldn't get my new contacts in time for this class. I got them delivered free from 1-800-contacts. Oh my gosh, they're so fast. And breathe. Oh, sorry. I almost couldn't breathe when I saw
- [66:27]
Jack Schwager
the discount they gave me on my first order.
- [66:29]
Host
Oh, sorry.
- [66:30]
Jack Schwager
Namaste. Visit 1-800-contacts.com today to save on your first order.
- [66:35]
Host
1-800-contacts for their clients.