Ep707: Jack Schwager – Never Stay in a Position That Violates What You Believe In

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win an investing you must take risk but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives do join me go to my worst investment ever.com and sign up for the free weekly become a better investor newsletter newsletter, where I share how to reduce risk and create grow and protect your wealth. Fellow risk takers this is your worst podcast host Andrew Stotz from East Arts Academy, and I'm here with featured guest, Jack Schwager. Jack, are you ready to join the mission? I'm ready. Let me introduce you for those that you know that don't know you. I think a lot of my listeners are around the world and they are in the finance industry. So they wouldn't know you but I think others may not. Jack is a recognized industry expert on futures and hedge funds and the author of the iconic market wizard series in which he interviewed many of the trading legends of our time. In fact, about 70 people that he estimates he's interviewed in the various books, people like Ray Dalio as an example. I thought I would just run through the chronology of your books. I know when I was a young guy, I started as an analyst in 1993. And I went to you know, Market Wizards right away and started to try to, you know, understand, but let's go through the chronology first in 1984, the complete guide to the Futures Market 1989 Market Wizards 1992 The New Market Wizards 1995, three volumes swager on futures series 1999 Getting Started in technical analysis 2001 Stock Market Wizards hedge fund Market Wizards was in 2012 in 2013, market sense and nonsense 2014 Little Book of Market Wizards, one which I would just listen to on Audible again before this interview, and I highly recommend that one particularly for those that say, I don't have a lot of time. That's a great one that sums it up. And then you got an update to your futures market book. And that is a complete guide to the future markets futures markets, would you update in 2017 and unknown Market Wizards in 2020? Jack, you've been busy tell us about the unique value that you're bringing to this wonderful world?

Jack Schwager 02:35
Well, I guess it just from feedback I've heard it's being a conduit to some of the great financial minds of traders. And I've apparently done a good job in relaying their thoughts and their concepts and ideas and advice. And, in fact, once I got to the labor market wizard books, I almost found that virtually everyone that was interviewing had read the original Market Wizards books. And in many cases, those books were there. Were there with a catalyst for them getting into the industry. So I guess I'm that if I have a unique contribution it is being that conduit.

Andrew Stotz 03:24
And I'm curious, are you naturally a writer? Are you naturally an interviewer? Or how did you approach this?

Jack Schwager 03:34
I'd say the main skill in making the Market Wizards I consider myself a writer probably foremost in a way. But I think edit editing is actually a super critical element maybe maybe more important than our it is my pure Writing in The Wizard books, all counts for maybe 20% of the text, the intros and the summaries of chapters before the end. But the heart of each chapter is the interview, and that those interviews get boiled down from we're really, in many cases very long conversations, in some cases over two days period. So I've had interviews where the tapes I was liberated, this I was listening to or as long as it's about 12 1314 hours and what that translates into a tremendous amount of material plus when we speak we are not literate. In other words, it sounds fine in conversation. But if you literally copy every word for word, we all sound illiterate are very rare exceptions. And so you really have to do just to get it coherent and grammatical. And to avoid you know, to finish run on set To set in complete sentences, and to truncate run on sentences and, and to unify the same topic coming up 10 times in a conversation, there's really a tremendous amount of editing. So, you know, people often say you're a great interviewer, and I correct them, I say, I'm probably a great editor, I don't know about the interview part, because the interview is to present the work, the editing, and the writing is 98%.

Andrew Stotz 05:27
And I guess your your subjects really appreciate that, because they may be flowing in their expression of their ideas, but to have some of that really, kind of structure that brings, you know, brings a lot more clarity to what they're saying,

Jack Schwager 05:41
yeah, if I do my job, well, they don't necessarily realize that, in other words, I'm trying to get as close to what they're saying in their words. And, and so that's, that's one of the objectives I have, you have another objective is making it, you know, read well and, and be, you know, compelling and interesting. But if I do it, right, they, you know, if you read a coherent version of what you said, they'll say, oh, yeah, that's what I said. That's, but in reality, it is no. There was an interesting, give me an interesting example that has to do with coherence. But what one trader had a was making a point. And he was talking about a psychological experiment, a famous psychological experiment about how we miss remember things, right? And it was a very good example. But I kind of knew of the study. And I think he had the right concept. It was about right. But I thought certain elements weren't right. So I actually went back, got the study, and I edit his his interview, to correct the mistakes that he had made, because he was trying to quote it exactly. But so that's an example. But he, I'm sure he never knew that, that they were corrected. That was, you know, that's an example.

Andrew Stotz 06:57
I think that's a good one. And you know, how I came up with this podcast, my worst investment ever was, I was walking in the park here in Bangkok. And I was listening, I was just scanning through some podcasts to listen to while I was exercising, and there was this one that was called My worst interview ever. And I thought, that's interesting. So I listened to that. And I found a lot of like, kind of famous guys in the hot spot, podcast space, talking about their worst interview, they had one guy that was explaining that the guy who was interviewing was drunk. And it was just like, all over the place. And it was just his worst interview. And, and then I sent an email to the guy who had that podcast, who may still have it. And I said, I love your idea. And I think I'm gonna replace it with my worst investment ever. And just to say, appreciate what he's done, and hopefully, that you don't have a problem with that. And I never heard from him, but it made me think for this interview, it would be fun to ask you, what was your worst interview ever, you don't have to call out names. You don't want to worst

Jack Schwager 07:57
interview ever? Well, the worst interviews ever are anonymous, because I didn't use them. So every book there, you know, what appears there are interviews that I did, that never saw the light of day, for a good reason. I couldn't make them remotely interesting. Or, you know, something that I would want to read. So those are, you know, so but that's kind of a general of the interviews that I did. Accurate either to that well, one that I would think was the worst interview. And it was a fellow called Gary Bill Feld. And I had this how I found Bealefeld was the following. I was research director at the time and, and responsible for putting out or supervising after the market closed summaries and stuff like that. And when I was writing certain summaries, if I was if I was the one writing or or file or something else about the city bond market, I would often see, you know, Solomon was a was a big buyer today, and Morgan Stanley was a seller and, and, and BLH was a, you know, BLH was a prominent buyer and I kept seeing BLH. And I said somebody, and he businesses in wood Hills BLH. Well, anyway, I did some research, I found that BLH was one guy in Peoria, and size and lots of story. So so and it turns out, this guy sort of started out trading one or two, lots of corn, which is one of the lowest common size contracts and futures. And he was successfully built and built and built. And by the time I read, I interviewed him, I was trading like 5000 T bonds, which is like, those are big trades, you know. And so he was like, really throwing around size and the straits that were as large as some of these big financial houses. So I went out to interview and just the idea I had to get that into because it's such a great story. And turns out, he's sort of modern day Gary Cooper every everything I asked him was like, a one word answer. Are you up? Or no, you know, it's like, I couldn't get anything out of him. He was. So he was so succinct and not succinct in a, in an interesting way, just like us in a way of somebody who just didn't want to talk much or whatever. And at the end sort of bid on the I kept on trying and trying different questions, and nothing was working. And then at one point, he said, I haven't been haven't poker analogy that will be you know, as it all makes sense, except I don't want an undirected, you turn off your date. So I turn her off, he gives me his poker analogy to training. And it was fine. And I said, Why don't what was wrong with having that on the tape? And he said, Well, he says, I don't want people to think it's like gambling or something. I know, it says, No, it's not. I said, it's not gambling, you made it, you know, I got, so I got to use that power grip. But I really had very, very little, it was the only interview where my narrative was longer than the interview. So anyway, that was,

Andrew Stotz 11:14
that's interesting. I mean, I've had some on mine, you know, I've now done more than 700, where I just see that the person needs some help. And so I tried to draw out a little bit more out of that and out of the story, but there are some definitely some people that just, you know, they just don't they don't, you know, express a lot of it. What's also been funny, some people who like are, like great storytellers. But then they come on, and their storytelling isn't actually that. Great, which has been kind of surprising. Another question, I wanted to ask you, before we get into the big question of the podcasts, I mean, it's such an opportunity to get you on. And, you know, I feel, you know, grateful that you here, I was going through the little book of Market Wizards and the lessons and, you know, I was thinking about it, and then I was listening to your masters of business. With Barry. Yeah. And so that was, and I just thought, you know, if we could sum it up into, let's say, the three most important things for the average person out there, when they're thinking about, should I be investing? Should I build a career in investing and all that, I kind of got to the point where it's like, okay, trading, your own personality seems to be number one, don't, you know, you may, you may try to find other ways, you may try to find what's right for you by looking at others. But eventually, trading your own personality was number one, number two seem to be the need for an edge, which is your chapter number four, in the book, that you know, so what you got your great personality style of trading, but you don't have an edge, then it doesn't work. But then I was kind of, I wasn't sure where to go for number three, like you have the importance of hard work of trading should be effortless. You have risk management, I'm just curious, what are those two, and what would be the third, or

Jack Schwager 13:06
what would be the three, number three, or number three might be number one, it would be risk management. And, you know, most specifically novices, but most people involved in trading and investing. Think it's all about finding great methodology and putting on being brilliant and thinking great trades and forecasting, and all this Goldust, nice, colorful stuff. But really, when you get right down to it, all these traders, they'll tell you that the most important thing, why they're still successful is risk management. And in cases where they've blown risk management, you know, they've not survived so, or in what's more common is in many of these traders, they didn't understand or appreciate, or were effective with risk management in early career, and had sometimes, in some cases, multiple white back failures. So I would say, risk managers is definitely in the top three, it may be number one, because to succeed, you have to stay in the game. And if you don't have the risk management down, sooner or later, sooner or later, you're going to wipe out. So I definitely would put that out there.

Andrew Stotz 14:26
And yeah, and I'm thinking like, you know, trading your own personality and getting an edge is kind of like a starting point. If you don't have those risk management is kind of Yeah, it's,

Jack Schwager 14:37
you know, you know, I'm saying so, creating your own personality and having an edge are the components of, of having an approach, that there's some reason why you should feel why you should come out ahead. It's not just you're not just flipping coins or, or, you know, I don't know, listening to people in the office, taking their ideas or whatever. So That's so yeah. So that yeah, and one of the points I make in talks is that you know, risk management isn't enough you, you can have the best risk management if you don't have imagined how to win. Example I use as you know, roulette that said, you could ask your guests 100 mathematicians, what's my best betting strategy? In roulette, you know, you go, you got $10,000, you want to, you want to bet for the weekend, they'll all tell you I mean, the simple you can be advice can't be you know, bet, if you have to bet, they'll all tell you, you better or one time read a blog on or even and then win or lose walk away those your best odds, because you don't have an edge. And so ironically, if you don't have the edge, your best risk management is the exact 180 degree opposite of what we think of as risk management, betting it all at once. I mean, you can get further away from reasonable risk management than betting everything on one trade. But if you don't have an edge, that is indeed your best strategy. Of course, a better strategy is not betting but

Andrew Stotz 16:04
I like to call my podcasts the number one risk management podcast season, even though I'm not an expert on risk management in my topic isn't risk management. But when you listen to these episodes, you realize like there's a lot that, you know, there's a lot of lessons that we can learn to avoid big mistakes. But I'm just curious, like, what how would you describe risk? I've listened, I've read what you've said, and I've, you know, read everything I possibly can in the world of finance. And I work in the world of finance, still to this day investing? But I'm just curious, like, what is risk? And by the way, my mother is listening. So she's 85. And she doesn't know anything about finance. So you got to keep it simple.

Jack Schwager 16:43
Okay, well, basically, where risk is, you know, academics talk about volatility, and you know, and all that. But in essence, common sense, and most people will tell you risk is losing money. So the idea of risk management is to mitigate or limit losses into two components. One, the maximum, you could lose on any single trade, or investment. And the other component is the maximum that you could lose in your whole portfolio. But those are the two elements, it has to do about controlling maximum loss. And if every trade you do around the speakeasy, trading investing are not the same. And we can talk about that distinction as a separate question. But for now, I'm just talking about one. So I'm not walking, every repeating everything twice for investing. Let's assume it from a trading perspective. A key element is just making sure you don't risk very much on every each trade. And if you're risking a fraction of a percent, or maximum 1% in each trade, if you have some edge, none and be a big one. But if you do that, the odds are good that you'll stay in the game. Because you're not when people go wrong, because they have some idea they get they think it's the best idea in the world. They put it on large. They don't think they'll get out of this losing. But then they start they thought rationalizing, oh well, well, this happened. But that's probably the bottom. And then the next thing is bump the bottom and the next thing, and so on and so forth. So not unusual for people to kind of ride a single position into oblivion, and wipe out their you know, their account because they did limit the risk. But that's what it is a matter of controlling risk at the position size at the position, sorry, position, position level, and at the portfolio level.

Andrew Stotz 18:45
Great. That's a great description. And one last thing in relation to risk and said, you know, in the world of finance, we're kind of grasping at numbers to try to define what we're talking about. And we have things like maximum drawdown, we have things like standard deviation, we have things like Sortino ratio, or all of these different measures. Are they measures of risk? Are they measured, and is a measure of volatility, a measure of risk?

Jack Schwager 19:12
Volatility is sometimes measured. So it's, it's a reasonable proxy sometimes, but other times it's completely misleading. So when is it reasonable? Well, if, for example, if you, if you double your position size, you'll double the volatility and you'll double the risk. So in that example it is and if you're, if you're let's say if you're now let's say thinking investing example, if you're investing in say, your your assets percentage, you're investing in the stock market, you know, the larger percentage you invest, you know, the more you risk is and and you know, the larger percentage, the bigger the volatility, so those cases it's correlated where it goes wrong. Is volatility measures both the very the volatility the, the variation on the upside as well as the downside. So people only think of risk in terms of downside. But if you have a strategy that has a lot of upside of volume movement that could turret that could tell you that it's risky. Now I'll give you a perfect example of one trader I interviewed, who was one of the people actually that I found through Michael Lewis's book, The Big Short was one of the people who successfully made a fortune going short, you know, a in these bonds that were the subprime bonds that were just completely ridiculously mispriced. But that trade basically had, you could only lose a limited amount in that trade. Because there's no reason for the follows bonds to go up. But you know, you have to pay the interest. But that was it. But if they were indeed bad, they could just go worthless. And so there was the opportunity, I think he made like 80 to one on that trade.

Andrew Stotz 21:10
Okay, now it was trading that it was going to go bad for the listeners. Trade, they're gonna go bad. So that

Jack Schwager 21:17
was right, and he took positions that profited from those bonds going worthless. And so I think he made something like some ridiculous amount, they do want some crazy ratio of the amount to the rest of the money. But his record on that, let's say, and he doesn't have to Tracy look for. So when he has a good month, and when he wins, he's got to be enormous up. It's good look highly volatile. But he's limiting his he's limited his risk, or it could be a trade where he's buying an option. So you can only lose a premium. So if he's writing is a big move, he'll get a very large gain. But if he's wrong, he just loses the premium. So in his case, he has lots of volatility, but he doesn't have a lot of risk. Take somebody else who likes sells options, out of the money options, that type of strategy will be a money machine, as long as the markets don't go up or down too much. We don't really go up and down moderately, it'll continually make money. But if you have a situation, like the march 2020, or 2007, or 2007 2008, George, actually 2008 2000 March peak, those type situations, those strategies can get, you know, just get decimated without going into the details. So there you have, where if you haven't hit one of those, those events, it looks like a very smooth performance, you have low volatility, but high risk, because the risk is sporadic. It's like walking through a minefield. If you don't step on a mine, it looks like there's no risk. But the mines are there. So that's why I say volatility is a poor measure of risk, because it's dead wrong and many instances. But there are a lot of cases where it is proxy, and academics like it because the math works without getting into details.

Andrew Stotz 23:13
Yeah. And that's I guess, what I was thinking now after you're talking is that it's view volatility, standard deviation, and those types of things, view them as an information metric. They provide you information. And in some cases, that information, high volatility may be bad. And in other cases, high volatility may not be bad, you know. And so that's a good one. One of the things that happened for me when I read your books is I realized something I realized, I'm not a trader. I was a fundamental analysts, I think you've talked a little bit about your own background and other interviews I've heard. But I, I was a fundamental analyst, and I went to these books. And I was very excited. And I enjoyed reading the stories. But the more I read, the more I thought, I'm just not a trader like this. And I then had clients that were these men and women all around the world, the best traders, fund managers and traders, and I love to go and bring them my ideas. But it was never, that's what I got out of the book, as opposed to many people that said, I really improved my trading style by using the tips and things that I saw from those guys. And I'm just curious, you know, you probably never thought that you help someone in that way. But that definitely helped me kind of think, okay, go back to your fundamentals. This is what you like, this is what you do understand a little bit about momentum, but you know, that that really helped me in the book.

Jack Schwager 24:45
Yeah, well, that's an element an example of trade your personality, or your case, invest in your personality. Yeah.

Andrew Stotz 24:53
Um, one last thing I wanted to ask before, I mean, I really been thinking a lot since. Since use I'd love to come on the show. And I don't want to take much more time on it. But I just thought, you know, one of the things we know in the world of finance and we know in life, I was a student of a guy named Dr. W. Edwards Deming. When I was a young man, he was the father of the quality movement came, you know, coming back from Japan and helping Japanese, bringing his teachings into America. And when I worked for Pepsi, they sent me to study with him. And the key thing that I learned from him, one of the key things was that there is variation underlying everything. And that there's normal variation. So, and it helped me to realize that so many of the outcomes that I used to think were something unique, and you can look at companies, you know, they give a bonus to someone, and they don't give a bonus to others based upon what is probably just random variation. And we also know that there is persistency, in let's say, coin flipping, there will be some people that flip heads over and over and some that flip 10 Tails over and over, just by pure chance. How do we know that the people that you've interviewed are not just there, because of chance that they're there because of skill?

Jack Schwager 26:16
Well, because of longevity. So I don't interview people who've got great records for three, four or five years, I tried to find people, you know, like minimum of a decade, and in many cases, it's a couple of decades. And so that's, you know, although I mean, there are exceptions, I think, maybe, maybe earlier on the first one was his book, I'm thinking somebody like Paul Tudor Jones, when I interviewed him, he only had like five years of trading behind more least five years, he was managing money. And I admittedly the five years, he had like five, three digit years in a row. So there was, I've kind of figured it wasn't pure luck. But anybody continued to be fine. So essentially, though, I look for longer records, I'm looking at return risk as well. And I'm also looking for it, it could be like somebody who has very, very good return risk, or x superb return risk for a long period. Or it could be somebody who's taking a small amount of money in into a really an immense amount of money. That's the other type of story. But either way, those things usually don't happen by luck.

Andrew Stotz 27:30
I think people get so longevity,

Jack Schwager 27:33
you want huge rates, and you can get somebody who buys tech stocks in 1997. And then is lucky enough to get out to that, you know, early 2000s. It looks like a genius. So I mean, I guess that's possible. But it's not doesn't usually those people end up holding, it may give it all back.

Andrew Stotz 27:54
And some of the people are compounders, where they're just trying to compound something. And some of them are taking money out to keep the size of their portfolios, maybe at an optimal size, because maybe their trading strategy doesn't scale. But who would you say is your the out of all the different people you've interviewed is the best compound or that ended up with the most at the end of the period that you've known them?

Jack Schwager 28:18
Yeah, so there's a few, but the one I think that probably takes the prize is somebody in the most recent book, unknown Market Wizards, and I got an email one day, somebody says, Well, you may not believe this, but I turned, you know, $2,000 gap into 50 million. And I wasn't planning to do another book. I said, I'm not planning to move the book. That's a great story. If you could prove it, I'd certainly be interested. And so it turns out, like, within a year, I did decide to do a non Market Wizards. And I emailed them back, and I said, Hey, am I did, I am going to do that book. Can you prove it, and he sent me all statements. And so he, you know, so that was true. And it was two and a half 1000 is like 2000. But in the last few years, I know, I just did an update. I just did some interviews a few months ago, for an update for the paperback with each of these traders. And he didn't want me to mention the amount of money but he's essentially quintuple what he you know that. So

Andrew Stotz 29:21
for the guy was that

Jack Schwager 29:23
Jeff Newman? Okay. Yeah, yeah. So, Jeff Newman, so in terms of compounding, I don't think anybody you know, can get that. I mean, there are people, so many people in the early books, like, like Michael Marcus, started with a $30,000 account, and I interviewed him build out 80 million and that's pretty good. But it's not two and a half 1000 to 250 million. Yeah, so credible. I think Jeff probably takes the cake.

Andrew Stotz 29:54
Well, I appreciate you taking the time to go through some of those things and you know, giving us your insights. And then valuable to my audience who really is here to hear a story ultimately, and your story. And so now it's time to share your worst investment ever. And as I always say, since nobody goes into their worst investment thinking it will be tell us a bit about the circumstances leading up to and then tell us your story.

Jack Schwager 30:16
So ironically, is my worst trade at least the worst one, I can remember. The one that sticks out in my mind, and also one that has the lesson actually started out as a great trade initially. So I remember late 2008, the world was falling apart. And I thought to myself, I've seen this before. You know, this is like one of those paddocks, you, I think, was a rough childhood said, you know, you wait to buy until the roar of the cabins are outside the city. And so I looked at certain things I looked at, like, the FSI, which is the Chinese EDF. And it was down like 75% and, and the company XL E, which metals, the metals index, and it was down, like, around 70 80%. And I thought, well, things like as well, China is still an emerging market that's growing rapidly, every reason why it'll still you know, grow. It's not, you know, it's got to come back somewhat. I mean, if you buy when it's down 75%, what, how much can you lose here. And the same thing with like, metals, I said, metals, you need, you know, metals are needed for, you know, just needed for everything, right. So they're gonna, they're not gonna go away in us and sort of mark is going through a panic here, and everything's getting so. But these are things you can sort of bank on, that sooner or later on, come back, I don't know how well, so what I decided to do was to buy out of the money leaps, you know, calls, as far out as I could a couple of years, on the assumption that the longer the time, the more they likely to come back. And I bought them out of their money. So they're pretty cheap.

Andrew Stotz 31:52
On the Chinese market. Yeah. Well, the ETFs on

Jack Schwager 31:55
the ATF on the Chinese market, ETFs on metals, there are some others, you know, but So those are the big ones. The big one was the, the FSI and the and the metal. So anyway, so several years later, I still had that position. You know, the calls had gone. I mean, they were out of money, but they were way in the money. By the time, you know, by the time but we're getting close to expiration, I think I might even have rolled in year four, and you know, on the leaps, but anyway, so that I had that position. And I should have I could have just taken the profits. But at the same time, everything else had been rallying, too. And in particular, the XR t, which is retail index, and the Nasdaq had, at very large, had the largest rallies and I thought they were probably a bit more of a duck. So I got to build two smart by half. And instead of just taking one we're really sizable profits in those positions. And that was probably one of the best trades I ever did. I, instead said, Well, I'll sell I'll hedge myself by selling by selling the XR t, which is the retail ETF and the Nasdaq ETF. And so I had that I was actually I essentially put myself in a spread position where I was short, NASDAQ and read the retail index, and I was still long. You know FSI one day. And this is this I'll never forget, one day, the FSI goes down 2% which is a fair sized move. But the XR T goes up 2% Same day. So what I'm what I'm long goes down 2% But I'm sure it goes up 2%. So I got a 4% loss on position in a single day. Now I knew this is why it's such a bad trade. I knew you never you, I know you want to be the opposite. You want to be long, the strongest and short the weakest. And here I was in exactly the opposite position. But that's why this is a mistake. I mean, I knew it. So the mistake is instead of just getting you know, I should have covered I mean, I knew I should have covered. But I said Well, let's focus on one day is ridiculous for this spread. I'll get out but you know, it'll probably come back in a little bit. Well, it didn't. They kept on widening and widening. And after a couple of weeks, I just got it I got so I ended up getting back on that all my profits but a much larger jump than I should have been by just gotten out of the first day. I would have retained the you know, the lion's portion of it. As it was I gave back way too much. So the mistake was staying in a position where I was like I said, long the weakest and short the strongest and and also just a more general sense staying in a position any staying in a position where I knew it was bad, you know, trying to wait for a better soft spot yet so stay was that the mistake wasn't so much that I started getting out of the FX I hedged it. Okay, I thought I thought those were more of a done, I would maybe pick up some of the spread. But once I saw that 2%, up 2% Down day, I should have been out immediately. And it ended up being a very sizable retrace retracement of profits. And so that's my restraint.

Andrew Stotz 35:23
And how did you know if it is just a just noise? You know, it's just movement in the markets that can be, you know, painful sometimes, but you should hold your position versus knowing that, okay, I've got to close this position. And I think part of that may go back to what you talked about about risk management and trying to think also about overall portfolio losses and stuff. But it just curious because there are plenty of times when you're in something and you're like, I believe in this, but it's not working in my favor, and then you immediately cut out and then you didn't give it enough time to work. I'm just curious how you think about that? Yeah, well,

Jack Schwager 36:04
well, that's gonna happen, no matter what you do, it happens, everybody. But in this case, it was much more clear cut that you don't you never know anything, right? Whatever your approach is, whatever your product is, you there are certain things that contradict that approach. So the mistake here, so I, one of the things I knew was you, when you have related markets, you want to be long what's the strongest and short? What's the weakest. And, you know, if you have a spread position or if you're going short, you want to look for the weakest, the weaker market in a sector, and you want to be long the stronger markets in a sectors, I knew that. So here I had a clear violation of something that I believe that, that that rule doesn't work all the time. Nothing works all the time. But it works more often than it doesn't. And I knew that and the fact that I ignored that. That's where the mistake was.

Andrew Stotz 37:03
And now to kind of step back and simplify that. How would you describe the lessons that you learned?

Jack Schwager 37:10
Yeah, so I get the bird, the broad lesson, which is, is don't violate anything that you believe that you know, and never stay in a position that violates something that you believe in. I mean, all the trades that we consider mistakes, come down to doing something that I knew enough that it was wrong. And so that's what makes a mistake, it's not that a loses money, this is where people go wrong. A mistake is not a trade that loses money. A mistake is a trade where you did something that violated whatever your approach is that makes money over time. And, and go, that could be a lot of different rules. But it could be any nose, it was like violators up. So the big lesson is never stay in a trade that violates something that you know that you believe in, or that you'll really be any other side. And normally if you weren't already in a position. So that's the big that's the big. Yeah, I mean, I think the most important lesson.

Andrew Stotz 38:15
And one of the things that if I would add something to this, the one thing I would say is that sometimes you just entering at the wrong time, and that your thesis may work, it just may be right now there's other factors overwhelming that thesis. So there's nothing wrong with exiting. And then you can still watch that thesis. If the thesis ignites at some point. It's just that you had a good idea, but it was just a wrong time. Sometimes we just have a bad idea. So that would be kind of the other thing. I would just add to it. What anything else you would add to that?

Jack Schwager 38:49
No, I mean, that's, that's correct. I mean, sometimes there are a lot of trades that trade ideas or investment ideas, and may be good, but the timing is wrong. And the loss in the interim, there may be more than you can help manage until it finally does work out. So the safest thing is to always decide this is the maximum amount that I'm going to risk on this idea. And that if you stick with that, that prevents you from losing too much on any idea. Because invariably, it will be something and it may not be it may not be anything you did wrong. It could be something that like look, sort of the Goodwill COVID situation, there was some signs earlier on. But I guess maybe that's not the perfect example. But if it came, I mean, there were some signs a week or two before but let's say something like that occurs without any indication at all. And the market suddenly goes down a lot. Well, that's nothing you could have anticipated. That's no be example. But in depending what you're reading it could be it could be any, any event that could be that's unforeseen unfold. receive word, there is no way anybody could anticipate it, and it works against your position. So that's a situation where you lose money, but it's not because you were wrong in your analysis is just that a completely unforeseen event happen. But you could be, let's say, your, your, your, your short, you're short, some agricultural commodity. And there's a sudden event that's completely unanticipated. Maybe, you know, maybe there's a disease of the crop that suddenly gets announced or anything, or there's a weather event that occurs suddenly, that destroys the launch box and the crop. You could have been, despite that, necessarily. So, you know, that's,

Andrew Stotz 40:54
yeah, I had a recent trade where I went into US banks. And I went in basically writing some momentum. So my thesis at the time was that the momentum was strong enough in the large banks at the time, that I saw a small position that I could put into that into my portfolio. And it was about 7% of the overall portfolio. And then Silicon Valley Bank happened, boom. And now, all of a sudden, you're in a situation where you're either going to sit there and say, Well, my thesis is still right, and your Baba Baba blah, or you're gonna get out. And basically, I ended up exiting that position, within a few days of opening that position, just because I knew I wasn't coming in to play a turnaround in banks or something like that, and therefore I was getting out.

Jack Schwager 41:49
That's a perfect example. So there's no way you can anticipate that really.

Andrew Stotz 41:53
And, you know, the other thing, I think this ties back to the top three things that we talked about at the beginning about, you know, you had your own trading, you know, style that fits your personality. And the other point is that you have some edge, you know, what your edge is, you know, you've got to have an edge and be aware of it. And I think in the risk management process, it sounds like, you know, how knowing when you're going to exit, before you enter is such a valuable risk management tool that helps you to predetermine future action, so that when the emotions run high, or you come up with a new thesis, you're able to override that and say, Nope, I'm gonna and so I would add in that, it's kind of a risk management tool is predetermined, the future action.

Jack Schwager 42:36
That's what I, what I kind of label, the most important, single most important piece of advice you could give anybody is know where you're gonna get out before you get it.

Andrew Stotz 42:46
And you said it long before I ever said it. So you are the man

Jack Schwager 42:49
actually, I was quoting Bruce Conner, so.

Andrew Stotz 42:53
So now let's just think, now let's go to a young person right now who they're young people are seduced by all kinds of investing opportunities, whether that's Bitcoin and cryptocurrencies, or tech stocks, or whatever, there's all kinds of opportunities that they're facing. I want you to think about, you know, what you learn from this story and what you've continued to learn. Let's now imagine a young person, you know, that who's investing like, what's, what's one action that you would recommend that they take to avoid suffering the same fate, the same loss?

Jack Schwager 43:29
Assuming they're already involved in trading or investing,

Andrew Stotz 43:31
let's say that they're relatively new to it, but they are trading,

Jack Schwager 43:35
they're already Trey young, just at what level of novice we're talking here. I would say the single most important thing is what you just said before is, on every position, decide know where you're gonna get out before you get in?

Andrew Stotz 43:50
And what's the resource that you'd recommend for our listeners, yours of yours or any others?

Jack Schwager 43:57
You know, in terms of being like books, or whatever, so

Andrew Stotz 44:02
yeah, it? I mean, I would say my first answer to that is, the little book is the, you know, the one that really kind of encapsulates a lot. So out of all of your books, maybe what's the one that you would say, that people could start at? That's any other books or things that have helped you?

Jack Schwager 44:19
Yeah, I wrote that exactly. For that system. Or, for more, you know, for people who just didn't want to, you know, just wanted a more, I guess, it's the most layman of the books and ebooks it's an it's not a although it's a market Wisdom book, it is in the market, because it's not the interview style type of thing. But yeah, so that book I tried to boil down I think was 20 key principles I learned from the book. So that's for a novice and lay reader, that's probably a good starting point. And if that resonates, they can go to the actual you know, the, the original the other interview books which are more detailed and and have But sales so and as far as other books, I always recommend reminiscences of a stock operator by a fever, which is a book that was written in 20s, but still resonates. And I actually haven't tried to remember all the books I recommend, if, if people go on Quora, and, and query my name, along with recommended books, there was a point in time where I did a day session there and answered a bunch of questions.

Andrew Stotz 45:31
And I think I got that list right here. reminiscence of a stock operator, and I'll put this in the show notes, ladies and gentlemen, but the diary of professional commodity trader by Peter Brant, yeah. Fooled By Randomness, by and a bunch of other ones. So I'll definitely include those in the show notes. Those recommendations on books, and who is the person that you really, really want to interview?

Jack Schwager 46:00
That I haven't? Yes. Well, the person I most wanted to interview that I never was able to get, I actually never was able to get to him directly. But through intermediaries, I was not successful with George Soros.

Andrew Stotz 46:18
And do you think there's any any hope now or it's still I

Jack Schwager 46:21
gave up? I tried a couple of times. Yeah. Yeah.

Andrew Stotz 46:25
And last question, what is your own, you know, in your own life and your own personal or work life? What's your number one goal for the next 12 months?

Jack Schwager 46:34
Oh, I don't have a goal. That's good. That's good. So yeah, goals, by the way, aren't always good, especially when it comes to trading or investing. Because and this is a point of me, in my books, and particularly the most recent book, and 111 of the traders in that makes him um, it's all who, who, you know, phenomenal trader, but he worked in trading, among other traders. So in these prop trading shops, and I saw a lot of traders, I asked him for differentiating differentiation between between successful and unsuccessful traders. So one, one beautiful thing he saw in a lot of unsuccessful successful traders is they had a target, what to make every month. And it's ironic was that people would say, Gee, that sounds like a good thing to do. Or the reason it's a bad thing is because the market doesn't give it now about what you're talking is, I mean, your approach is there times the market is going to be conducive to it, there's times where there's just not going to be opportunities. And if you're trying to make a profit goal every month, and it's not a month where it is, right for your strategy, whatever it is, then you're going to be taking sub optimal positions and trades. And those are things that can end up being losing money. So the very idea it's ironic the very existence of a target, and will cause you to lose money. In many instances, and instances where the market is not favorable to your approach, whatever it is, I found in common

Andrew Stotz 48:09
that it's interesting parallel I thought about in my understanding of the teachings of Dr. Deming is that the idea I came up with was that if, if the subject you're measuring knows it's being measured, then a target is dangerous. Now, in the case of the stock market, it doesn't know that it's being measured, but I think you've just got so much factors and randomness in there that putting a target related to that, ultimately, is just, you know, kind of seems like it's it's a fool's errand. So, yep, it's a good point. Well, listeners, there you have it another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. As we conclude, Jack, I want to thank you again for coming on the show and joining the mission. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience? No, I appreciate the good job. The questions and I enjoyed it. Thanks. Well, we all enjoyed it very much. And that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. Let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your worst podcast host Andrew Stotz saying. I'll see you on the upside.