Jack Schwager is a writer best known for his "Market Wizards" series. These books are a compilation of interviews with highly successful traders, and are required reading for most trainee and junior traders on any floor.
Although trading and investing are two very different disciplines, I believe that value investors can stand to learn a lot from traders (and vice-versa). Successful traders all share a number of characteristics: they are adept at identifying asymmetric opportunities in the market, they are excellent at controlling risk, they are totally unemotional when it comes to their work and they are not afraid to admit when they are wrong.
In my opinion, these characteristics are also typical of value investors. They also need to find cheap opportunities off the well-trodden path that have a wide margin of safety, and be humble enough to accept when things have gone against them. This is why I think value investors can learn a lot from the heroes of Schwager’s books. Here are some lessons from "Hedge Fund Market Wizards."
There is no holy grail
A common misconception amongst investors is that there is only one single way to invest. This is patently untrue, as demonstrated by the many different people who have found success in the markets, all of whom utilize different styles and philosophies. Some investors find success in distressed debt, others specialise in a particular sector and still others deal in special situations. This is a good thing. It means that if you haven’t found a style or sector or asset class that clicks for you, then you just need to keep looking.
Find a method that fits your personality
This brings me to the second lesson. There are so many different ways to invest, and you need to find one that suits you as a person. What does this mean in practical terms? Firstly, you need to define your appetite for uncertainty. If you are someone who is comfortable with more volatility in your portfolio, and if you are happy to make ten investments in the hope that one of them will deliver in a big way, then your style will likely differ from that of someone who wants to limit volatility.
Establish a comfort zone
Comfort in investing depends on things like the amount invested and the level of diversification. Some people are comfortable putting all of their money into a single stock. Others need to buy an entire basket of companies to minimise the idiosyncratic risk of any one business failing. If you are not psychologically comfortable with your investment process then you will not be successful. Investors must control their emotions, but they must also recognise the limits of their self-control and accept that sometimes you need to adjust your decisions to your psychology. After all, we are only human.
Disclosure: The author owns no stocks mentioned.
Read more here:
- 2 Important Investing Lessons From Howard Marks
- A 1924 Economist Explains Why Warren Buffett’s Berkshire Hathaway Doesn’t Pay Dividends
- Seth Klarman: First, Don't Lose Money
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