Reading notes: Stock Market Wizards

I recently finished Stock Market Wizards by Jack D. Schwager and really enjoyed it.  You can find it on Amazon or strangely on google books:

http://books.google.com/books?id=0DE0dBXG15AC&dq=stock+market+wizards&pg=PP1&ots=VNpv3jek7I&sig=J7c7nJRiIMNOwUoMtyGjq2zGU5s&hl=en&sa=X&oi=book_result&resnum=1&ct=result

Below are my personal notes. I know they are by no means complete thoughts and you may have a hard time pulling out what I’m talking about sometimes…but hopefully they are coherent enough to be useful.

Key takeaways:
-there are a million strategies to invest successfully
-you need to develop an approach that suits who you are / your skill sets
-you need to set rules to stay within that approach
-you need to be disciplined to fllow your rules
-you need to be capable of noticing…noticing when you’re greedy, fearful, when information is just noise and when information is trade able
-you need to be able to lose money emotionally
-you need to be able to limit your losses
-you need to be able to adapt your rules over time
-EVERYONE has lost money in the market…the goal isn’t to make money, it’s to make more than you lose because you will lose a lot

what is your edge:
“every trader in this book has a specific edge” Don’t trade until you know yours:
-masters has developed a catlyst-based model that identifies high probability trades
-Cook has identified price patterns that correctly predict the short term direction of the market 85% of the time
-Cohen combines the information flow provided by the select group of traders and analysts he has assmebled with his innate timing skills as a trader
-a tremendous investment in research and very low transaction costs have made it possible for shaw’s firm to identifty and profit from small market inefficiencies
-Watson’s extensive communication-based research allows him to identify overlooked stocks that are likely to advance sharply well before those opportunities become well recognized on Wall Street.

Trader notes
Stuart Walton

• Buy good expensive companies
• what makes up a “blessed stock”: 25% fundamentals, 25% technical, 25% is how the stock responds to different information such as: macroeconomic events and its own news as well as round numbers ($30 etc) and 25% for gut feel of the direction of the market
• technical analysis: general, linear upward trend
• Trusts his gut

Mark Cook (contact)

• Journal what you notice…it took him years of journaling to develop a working method
• Osu grad who grew up on the farm and continues to farm to fulfill his need for hard work
• “Hope should never be a strategy”
• observation is key
• PLAN: Write a plan at beginning of each year and each month…your plan won’t be right, but it at least forces you to think ahead, to visualize
• take detailed notes
• react don’t anticipate
• Always know your max loss in each position
• Increase activity NOT exposure
• Whenever you say “I hope this position comes back,” you need to get out
• patience
• best trades work the quickest (20 minutes in one of his trades)
• usually hold position for 3 days or less except for rare events
• expect 3 to 5 years of learning before becoming a successful trader
• even noticed which days he performed best :Tuesday best and Fridays the worst (REALLY NOTICING)
• Be honest about your weakness and deal with it (noticing again)

Business plan guidelines:
-it should contain specific answers to all of the following questions:
-what markets are you going to trade?  You need to select a market that fits your personality, because a market is a reflection of the people who trade it.
-What is your trading capitalization: You should be able to say “I could lose all this and be ok,” but you should be able to make enough as you do from your current job
-how are orders entered..scale into positions or all at once? how will you exit winning trades?
-what type of drawdown will cause you to stop trading and re-evaluate your approach?
-what are your profit goals measured on as a short time frame as is feasible for your approach?
-what procedure will you use for analyzing your trade?
-what will you do if personal problems arise that could adversely affect your trades?
-what will your working environment look like?
-how will you reward yourself for successful trading?
-how will you continue to improve?

Ahmet Okus
-buy cheap companies
-look at insider buying…don’t just look at the amount, but look at the amount relative to salary, etc
-TOP PRIORITY: Don’t lose money

2 schools to investing:
-over research to a point of confidence…don’t mess with stops because you researched your buy and are confident the price will come back
-set stops to limit losses….I like this option

**Minervini
-losing money can be a good thing…if you learn from it
-if you win big when you win, and have minimal losses on your losing trades..then you only have to be right 50% of time
-be ok with buying one of your picks at a higher price…
-keep trading until the trade is right (buy, get stopped out, buy, get stopped out)
-caps losses at 10%
-find chart patterns that work and notice WHEN they work
thought: careful of new high stocks…they are owned by lots of Happy investors full of HOPE it will go higher…will jump ship quickly if the tide turns
-look way back for historical trends in charts
-beest teacher is results

**Steve Lescarbeau
-find a niche that works for you…traded mutual funds
-look for catalysts
-noticed stocks down big before earnings are more likely to go up after announcement

**John Bender
-all about options
-again great at NOTICING
-buying up Costa Rican real estate to build a wildlife preserve
-ignored the traditional model of options pricing…developed his own probability distribution
-stock price movements are NOT random (which he says the Black-Scholes model assumes)
-ONLY USES TECHNICAL ANALYSIS becaues it is important and used by lots of traders…therefore it will have an impact on price…TA can show you what others are thinking
-new highs can attract new inflows, which can attract more new highs, which attracts
-QUESTION EVERYTHING (headlines, newspapers, bloggers, analysts etc)
*Idea: How can internet traffic trends be leveraged as part of a trading strategy?

Steven A. Cohen
-trade on a hypothesis and stay in the trade as long as hypothesis appears to be true
-know what you are…are you an options trader, a long term buy and hold, commodities, short, day trader?  know what you are and stay within it 95% of the time
Thought: I struggle with this a lot…I like to think of myself as someone who can see the big picture and likely consequences of current events (where trends are going)…with that I like hte idea of buying and holding.  On the other hand, the gambler in me is attracted to short, quick money…which is why I trade in and out of things so often and why I love options.  I’m looking for a home run, though in either scenario.  I need a way to appease the gambler in me so that it doesn’t overwhelm, while allowing the visionary / noticer take control.  I think my best approach should be a buy and hold 6 month trading window kind of guy…longer term than daily, but not 5 years ahead..this hsould appease the gambler in me as we..

Dr. Ari Kiev
-first step: You must decide that you are going to win
- must say “I”m going to be a successful trader,” and start taking steps towards that
-Tell EVERYONE…something about sharing your goal with others makes you more likely to go for it
believing in an outcome makes it more achievable
-stretch for uncertain goals, it will lead you to greatness
-Being preoccupied with not losing gets in the way of winning
-maintain sense of control…focus on what you have control of (where you invest, how much you invest, when you buy, when you sell)..don’t waste time on things you have no control over (bad economy, etc)
-learn how to maintain a winning attitude at all times, even when you are losing…the best traders feel the same regardless of their performance

Ari’s strategy:
define a target
a strategy consistent with finding the target
set out disciplines to follow it and risk mgmt guidelines
then trade
track
and evaluate performance

summary:
-discipline is key…regardless of strategy
1. develop an effective trading strategy and plan out all possible outcomes (generic not specific…)
2 follow that plan (but be willing to adapt it for new lessons)
-keep a daily journal of thoughts / observations
-AGAIN it’s about NOTICING
-What is your edge? Where do your natural talents offer opportunities?
-must understand risk control
-know reasons to exit
-profit objection reached?
-time stop?