TDI Podcast: Wizardly Discipline (#953)

28:22And so he had to stop doing some of the stuff he was doing because of the algos, but still is able to come out ahead because when there is like SEC filings or whatever, when it's things with complexity, some of these things are, the algos aren't there. yet to do fine-tuned interpretation. Or like he gives examples of, let's say there's a merger deal announced, but the jurisdiction is in Maryland instead of Delaware. He'll know that that makes a big difference because the laws make it less that in Maryland And the company that would be acquired has much more power to reject it than, let's say, in Delaware or something like, you know, a situation like that.

29:18So he's aware of those nuances. The allegos wouldn't. So he can still find situations where he can trade on things like SEC filings because they require a certain degree. Some of the things in there require enough nuance of interpretation that it's not been sort of computerized away. Well, that brings up two points, right? Number one is how long is it going to take till that goes away? But the second thing, right, that's only a matter of time, let's be honest. Yeah, so. But the second thing is, and then I want to answer both, right? It's a matter of time. And the second thing is that goes right to the efficient market theory and inefficient markets that have been – I would think – I'm going to extend on this for a second.

30:06I would think that one of the things that many of the traders have and many traders can make money on is the inefficiency. That's what you're talking about here, right? This guy knows about these things and it's not an efficient situation because not everybody knows about that Maryland versus Delaware or whatever it is. And there's other things, for example, with maybe tax rules and line items. And there's a market efficiency issue where maybe an ARB is out of whack for a buyout or for a convertible bond or potentially for a bond rating that may change because of something. So the market efficiency thing, which over the years, due to transparency laws, et cetera, has been getting better and better, right?

30:47The efficient market has been getting better and better. And I would think that – does that limit the amount of wizards in the future? You would think so. But I'm finding traders who are better – who are as good or better than any traders I've ever interviewed. And crazy stories. I mean, in the book I'm working on now, I've got two of the traders who started with small accounts. And by small, I mean like 50 ,000 or under. And have run it up to – this is not going to sound believable, I know, but have run it up to a half a billion dollars. Wow. So I've – Two traders that have done that. So you don't – Without any – wait, wait.

31:31Without any outside money. You're saying taking that money, trading it to that level. I'm talking about that$50 ,000 being compounded to the point where they've gone to$500 million. Wow. Wow. That's unbelievable. Over what period of time? Let's see. It doesn't matter what period of time, by the way. It's pretty amazing. Roughly 20 years or less. That's impressive. Yeah. I mean, that's, I mean, it's crazy, right? Right. That's like a better return than if you had a Bitcoin. I mean, that's the same kind of stuff we're talking about. It's crazy. Crazy. Yeah. Crazy. And they're still going. And yeah, still, they're still going.

32:18Yeah. I'd assume that they're, even though their hit rate may be good, they move the markets more if they're doing something compared to when they were investing 75 ,000. Oh yeah. So that's the, you bring up another point. So yes. Long ago, they had to stop doing what they were doing originally because they started out. Well, they were completely different traders. But one guy started out with small cap. And now, given the size he's trading, small cap isn't worth his trouble anymore. The size he would have to trade small cap is so small that it's just not worth his time. So you mentioned your new book.

33:01I believe you have a co-author on this book. Can you tell us who that is and why? Sure, sure. There's a fellow by the name of George Coyle, who has a long history and experience in financial markets. And the way I actually, he's responsible for this book coming to life because I had no plans to write another book. but about a year ago, year and a half ago, a mutual acquaintance of ours emailed me and he said, hey, you know, this guy I know has written some articles on traders and be interested in getting, you know, your feedback. Would you mind if he sent you the articles? And I said, sure. So he was the connection.

33:44And so he, so George sent me a couple of the articles and, you know, I thought they were pretty good and said, yeah, I'll talk to you. And so I spoke to him and I said, hey, you know, you've got some good articles here and you're right on on what you're thinking about it. And, you know, you should think of maybe compiling these into a book or something. And I gave him some tips about writing and all of that. And, you know, I said, hey, I didn't want to be involved. I wasn't planning to do another book. And sort of asking me if I could. And one problem he had is that he was quoting a lot from my books.

34:22And he didn't feel it was fair to be quoting so much, first of all, you know, for my books without having me. And I said, well, yeah, but I wouldn't feel right. I had to be doing something more. And then I thought about it. And I read his, you know, a couple of his articles. He said, you know what, George, I can actually write my own commentary on your article and add it as an addendum. And if you want to do that, you know, give me your book and I'll add my addendum and, you know, we'll have some sort of split and I could do that. And, you know, so I approached my editor and we sent them a couple of chapters where George had written the chapter.

35:01And George was using basically other sources. So he was doing a lot of research and, you know, a lot of quotes from different places and paraphrasing and so forth and putting it together into one narrative. So my editor kind of looked at it and he said, hey, you know, I love your summary, but, you know, the other thing, we just, he just wasn't interested in the book unless there was an actual, unless it was a firsthand interview. He didn't like the fact that it was all being sourced secondhand. in hand. So anyway, that kind of one thing led to another. And I said, okay, you know, you know, all right, so maybe we'll work together.

35:43And so we ended up, so we ended up working together. And the book we're writing is really very much like the previous Market Wizard books. So sometimes, George, the interviews, by the way, tend to be in transcript form are kind of long. So, you know, you might have 100 pages of transcript. You've got to boil it or plus. And you want to boil it down to 20 pages or whatever it is, right? 20, 30 at most. And so we divided them up. You know, I did some from scratch. He did some from scratch. And then his version I would then rewrite to my satisfaction. And he would have – I'd send him back and he could comment on my changes and stuff.

36:33But basically, that's the way we did it. So we divided the workload and we did the interviews together. And the book is turning out just fine. So this brings me to a question that you and I are not getting any younger by the day. You got it. And I'll go so far as saying, I'll call it the Market Wizard franchise. I'll call it that. I don't think it's an untrue thing. Who's going to continue on? Is George going to continue on? Because I think it's a necessary thing. Yeah, I never thought about it before. And you're right. I'm not, I'm certainly getting on. And, you know, I'm still pretty, I'm luckily still pretty much there with it.

37:10You know, I mean, my mental faculties are pretty much there. And I don't think my writing has degraded at all. And so that type of stuff, I'm still kind of totally capable. I'm not as focused as I used to be, for sure. And I certainly can't do anything like the workload I used to do. But I'm still kind of there. And it's just a question if I want to do it in another book. Yeah, I'm not suggesting you're not, Jack. Yeah, no, I understand. That's not what I'm saying. I'm just saying that - But at 77, yeah, I'm not going to do that. The world needs to continue having these. And I think this kind of thing, may I propose that to you that you consider that?

37:48I don't have any plan for you. I'm just saying consider that. Yeah, I would give George my blessing, you know, based on my experience of working on this book, you know, at given the point where I no longer want to do anything. And he and he wants to. There you go. There you go. We just we just made we just made a we just we just helped everybody out there with the understanding that it will continue on. Everybody feels good. Now, going back to the ideas that we've been talking about, the newest book, the book that's coming, without giving away too much, but is anything like, oh, brand new in there?

38:31Because with this new book, the last book you did was what year? Last book was 2020? Yeah, 2020. 2020. 2020. Yeah, 2020. So let's call that before AI, by the way. I mean, that will, yeah, I guess it was before AI was as prominent as it is now. There was, there was, well, it's kind of the, what you call AI is also a. Machine learning, smart, smart, smart algos. But. Algos were certainly there. Yeah. Is this starting to pop through a little bit though? The AI? So, yeah, I mean, not explicitly in terms of in actual examples. I mean, the algos are kind of more obvious. But AI itself, what AI is doing, in fact, one thing of AI is even the people who create it don't know exactly what's going on a lot of times.

39:30I mean, that's part of what AI is, right? It's making its, it's deciding its own rules and patterns and stuff like that. So that's still too early on for I think traders to comment on knowing specifically how AI is affecting the markets. But algos have been affecting it for some time and that's come up. Right. Let's switch gears a little bit. And let me give you some, I'll call it rapid fire questions. Yeah, sure. I have a few of them that I kind of was pondering. And, you know, you can go as long as you want, but I thought maybe you can, you know, some of these will be quick. Okay. Let's start in the back.

40:11Let's start with way back when and your story. What first, this is maybe a little bit longer, this one. What first drew you into this industry? And more importantly, what keeps you here? Yeah, by the industry, you mean financial? Yeah, financial, yep. Yeah, pretty much accidental. I mean, accidental beyond the fact that I was an economics major. But so coming off a graduate degree in economics, I was just looking for an analytical job. And it so happened, the first decent job offer I had, well, it wasn't so decent, actually. It was a very paying job. But it was decent in terms of being interesting, was as a commodity market analyst.

40:54And so that was the position I took. I knew nothing about commodities. I knew very little about markets in general. So I came into it as a pretty much as a total novice and certainly not somebody who was a teenager at thoughts of, gee, I want to get into Wall Street and stuff like that, as do a lot of traders I interview. I was never in that group. I just literally fell into it because the first job that appealed to me that I was offered coming out of graduate school happened to be an analyst position in commodities. Okay. And what keeps you here? What keeps me here? Well, I've gone through a lot of different phases, but the markets are always interesting.

41:39There's never, yeah, they're always changing. It always requires creativity. So, it's one of those jobs, it's one of those careers and spheres of operation where it doesn't get boring ever. Yeah, never. Especially now. Well, anytime. I mean, I've been through a lot of things. I don't know if now is any more fascinating than the 70s, let's say, which was, you know, people think we had inflation recently. They weren't around in the 70s. I know. There was a lot going on in the 70s. As a matter of fact, you've seen a lot of market cycles, right? So what's one lesson that stayed true through all of them?

42:22Well, okay, particularly for young readers, particularly for your younger listeners out there. I mean, this is, you know, the idea of investing, you know, buy and hold and all that kind of does have merit, you know, for the long run. The trouble is it's kind of hard to live through. But it's also the trouble is that the timing of when people go to it is completely off. So I did a book 12 years ago, whatever, called Market Sense and Nonsense. And one of the chapters in there, I basically did an analysis. I got data going back to literally as far back as it existed on the stock indexes. I think it went back to like 1860s or something like that.

43:07But I basically did is I calculated, you know, what was your forward, if you invested in the stock market, you know, today, what is your average turnover the next five years, 10 years, 15 years, 20 years? And I did that looking at each year, what was the prior five year, prior 10 year, prior 15, prior 20? And what you found was, well, not surprising to me, but what you found was that by far your best results was when you came in and the last 10 years looked like crap. You know, everybody, you know, was maybe the last 10 years were net negative and everybody was negative on the market. So if you look back at the last five years, if the last five years, 10 years, 15 years, those periods are near the lower historical range of percent return, then that is a really good time to be a long-term investor.

44:07Is the opposite true? It's the reverse also. Yeah, that's what I'm asking. If you come in after the last 10, 15 years have been great, the next 10, 15 years usually aren't. That's the old reversion to the mean concept, right? That's the whole point that you're truing out. Yeah, it is. It is. Reversion to mean is a cliche, but it's a cliche because it's true. Right. So what's your take on the current investment environment? And are we in a new era or just another phase? Yeah. Oh, well, you know, we're not in, you know, this time is, I don't, I can't think of an instance where this time really was different.

44:47There's always a reason why this, there's always some Wall Street explanation of why this time is different. But this time is never different. It never ends up being that way. I mean, so now maybe the argument is, because of AI, this time will be different. I mean, it could be the first time where that argument is true. But I heard it in all different situations, right? So I basically, just going on what I just said, And this is not a prognostication, but based on what I just said, because indeed the last 10 years have been quite good, and I guess the last 15 as well, and the last five. So because I think you'll find that we're sort of the recent periods have been on the towards of the higher end of returns, that the next 5, 10, 15, I would not expect them to be particularly good in that sense until, you know, unless, of course, we get a drawdown, unless we get a 2008 or a 2000, 2001 thrown out there again.

45:55And at that point, the situation changes again. It doesn't mean that the stock market won't be a good long-term investment for the next 15 years. What I'm saying is it'll be a good long-term investment once you get enough of a drawdown so the past 5, 10 years don't look great. Right. What's the one financial myth you wish people would stop believing? Aside from this time is different.

46:26And well, you know, one, one is, and this is not one that I wish people would stop believing, but I think it's a myth. The official, you mentioned it before, the official market hypothesis. You cannot, you cannot interview the people I've interviewed. And, and by the way, you know, check their records or verify their records because anybody can say anything. And certainly on the internet, you have a lot of people claiming they've done a lot of things which they haven't done. But we've got to go from a lot to everyone. But go ahead. Yeah. Not everyone, but a lot. OK, so the point here is that that I've seen just too many people whose records I verify do things that are impossible.

47:11That would be statistically like what? You just take two other traders, you know, in this book. One of them has not had a down month. at least in 11 years, but even before then, but the last 11 years he was on his own. So we could look at his, you know, returns. Not a down month. What's that? Not a down month. Not a single down month, right? Not a single down month. Another trader. And he's not just investing in like money markets. No, he's not doing anything obvious. He's actually, he's kind of doing a lot of merger ops stuff and stuff where people have lots of, you know, have down months. But, you know, he just hasn't.

47:56He's very short term, though. He's extremely short term. Another trader is also very short term. His record, now he's been trading for like 25 years, but his record since he was a prop trader for other firms before, but since he formed his own firm, his record goes back only about, I don't know, 15 years. is he had like five or six down months, but they were all tiny. And the odds of having just five or six tiny down months and actually his worst down month in that whole 15, 16 years was less than his average monthly return. Wow. So put that in. And that is, you can't have that happen in an efficient market.

48:45Those type of results would be impossible. So that's going against the whole indexing. Well, not going against, but there is another side to the story is the point. You're not saying that buy and hold S &P 500, bad thing. You're not saying that. You're saying there's other things. Well, the thing here is, you know, this is kind of odd here. So what I've written, and I think I wrote this in the last book, was that the efficient of market-up offices, no doubt in my mind that it's wrong. No questions asked. No maybes. However, here's the irony. Most people would be better off acting as if it were right.

49:23Yes, no, I get that. I get that. Because most people don't have an edge. And they actually will be better going into a low-cost index fund than trying to do it on their own. And there are statistics and studies that prove this. Yeah, no, I get that. So most people would be better off acting as if the efficient market hypothesis was correct, but it is wrong. Which means for some people who have the talent and have done enough work and figure it out, they can indeed beat the market. Right. So there are many people who are impacted significantly from the books you've written, whether it goes back to the early days of getting started in technical analysis or some of the more recent.

50:13What book, what mentor, what experience has had the most impact on your philosophies? Yeah, well, sort of I've interviewed so many people, I guess a lot of them have. But the biggest influence has been on the risk management side. So take one example, and we probably I probably mentioned this to you before. but one of the traders from the, actually the very first market was his book, was Bruce Covner, who then went on to found this firm Caxton. And Bruce has been one of the more successful traders out there ever. And he had one line in that first interview, which has had a big impact. And that line is, know where you will get out before you get in.

51:06which is very good advice because, first of all, it captures about 95 % of risk management in one sentence, which is a feat in itself. And the thing about making a decision of knowing where you'll get out before you get in is psychologically insightful in an implicit way because what changes when you go from not in the market to in the market? What changes is you lose your objectivity. Because if you're not in a position, you could be – Oh, you're a genius. You're a genius. You could be the Superman of activity because you've got no money on a lot. Right. Once you're in a position, you now, every news story that comes out, if it's for the position, aha, I'm right.

51:49And if it's adverse to the position, well, yeah, but that's already discounted. Or, yeah, that's going to just be a temporary effect. You know, you'll make excuses. But before you get in, you can think clearly. So my advice, and I advise all people to do this, before you put a position on, decide, hey, what price am I going to be wrong? Where should it not go if I'm right on this trade? And what you do is when you enter, let's say you want to buy a stock that's at 50 and you figure, well, it should go from here. It might pull back a couple of bucks, but it shouldn't go back to 45. If it goes back down to 45, I've just blown this trade.

52:29Okay, buy the stock, put in a stop, good till cancel at 45. And then you don't have to worry about it. And you've also defined what your worst loss on the trade is. You know, it's funny because there's a lot of times I have trades on for clients or positions on, I should say. Positions on for clients in our trading portfolio. And, you know, it's like, it's going against us here. We knew kind of where we wanted to be on this. And, you know, I'm not willing to take it down this much more than X dollars. and it's so relieving to actually have a trading stop on versus having to think through it. And also somehow it's very cleansing to put it on and knowing where you're going to be and it hitting and you're fine with it versus me chasing a position price to get out and freaking out about, oh my God, it's going lower than I want it to go.

53:25Let me hit it now. And then you're like, am I hitting it at the right time? What am I doing? What if it pops? Am I going to be pissed off if I just got emotional about it? It's going to pop right back up. Exactly. I agree. Yeah, and then there's the proverbial, well, it's already down here. I'll just give it another$3. Yeah, and I'll buy some more. Well, that's even worse. All right, so let's finish up looking ahead. Is there a particular trend? Let's leave AI out of this. that's going to define the next decade of investing? I don't know if there's a trend, really. It's sort of hard to define what AI is going to do to the markets.

54:05I'm not sure myself on that one. You know, that's, you know. Well, I mean, let me help you with this for a second. Let's dovetail this into the things that are going on right now when it seems like government is getting in. And, you know, for a long time, state-owned enterprises in China were like, oh, my God, what a horrible thing. We have Chinese government owning parts of Japan buying into the major markets or the Norwegian sovereign wealth fund buying. Terrible. Oh, my God. And now we do it. It's like, oh, what a great idea. I don't know if people agree it's a great idea. I don't think it's a great idea personally.

54:45But is this something where we're going to have basically the governments take over? I doubt it. I mean, it's true of this administration, but I don't anticipate, like a lot of things in this administration, I don't expect it to continue beyond this administration. Right. Maybe that's why a lot of things are just look past of what goes on. Who knows? Kind of crazy times. But all right. Anything else that you want to talk about? When's the book coming out? What's happening? what's well good the book the book will come out next summer i think uh but not finished writing it yet uh i think it'll come out around june july something like that oh and it's going to be called it's going to be called um marco wizards the next generation and it's like a star trek it's like a star trek yeah so you know george mentioned i'm not a star trek fan yeah it's like star trek but yeah i'm not a i'm not a star trekking um george was aware of it and uh he said that and And I said, gee, I wasn't even aware of that.

55:47So I thought it was appropriate because the cohort of traders are younger than any cohort I've ever interviewed. Now, given that I'm looking for traders with at least 10, 15 years experience, there's a limit to how young they could be. But most of the traders are 30s, which is pretty young for a group of traders that I've interviewed. By the way, are these traders, these younger traders, different than, let's say, your first set of – well, clearly different than the first. Let's not talk about that. The last – are there a lot more crypto involved? Some crypto, but crypto – I didn't interview any traders who are crypto traders per se.

56:28If they trade crypto, it's just like any other market. They might have traded it, but it's not a big thing that's come up. Um, there, the one big difference I've noticed is, uh, so many of these traders have a very short-term orientation, or at least had very short-term orientations in their early years until maybe they got too much money to be that short-term. But, uh, that's - Or it's possible that their upbringing, which allowed them to focus on studying for school, watching TV, listening to music, uh, and all at the same time. Well, that and playing video games. Yeah, all at the same time.

57:07So this is the first book where playing video games has come up on several interviews. I don't think it's come up ever in any of it. So this time it's come up several times. That's cool. I like it. Yeah, yeah. That's good stuff. My favorite video game when I was a kid. Well, listen, when I was a kid, we had Space Invaders, one of the first ones that came out, Galaga. we had Asteroids Missile Command Donkey Kong all the Mario all the favorites but those were all quarter machines back in the day and we used to go down I was in high school I can still remember Pong Pong was great I love Pong two paddles and one ball three items on the screen Right.

58:00And that's all we could focus on at the time, by the way. Well, that's all the program could focus on. That's true also. Jack Schwager, always a pleasure. Thank you so much for joining us today on The Disciplined Investor. Yeah, thanks, Andrew. Thanks. Appreciate it. Take care. Well, there it goes. There you have it. There is the last bit of, tidbit of, smidgen of knowledge from The Disciplined Investor podcast from 2025. Looking forward to seeing you next year. You have some great guests, some best ofs, some things happening. You're going to really enjoy it, I'm sure. Learn from it, utilize it, profit from it.

58:36Thanks for joining me this year. Happy New Year. I'll see you soon. Bye-bye.

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