More Investing Advice From 'Market Wizards'

I previously wrote about a book that I recently finished reading called "Hedge Fund Market Wizards." It is one of the more recent installments of Jack Schwager’s excellent "Market Wizard" series, in which he interviews successful traders. Although traders and value investors utilize very different strategies, it is arguable that both groups can learn from one another. Here is some more investing advice that I gleaned from the book.

Flexibility and adaptability is essential to success

Schwager notes that successful traders will not only exit positions that go against them, they will also take the opposite side of the trade. Now, while I don’t suggest that every value investor also become a short seller, having mental flexibility is clearly of immense value (pun intended) in this field. One of the biggest reasons why investors lose money is that they develop an irrational attachment to a particular stock. They are more concerned with being proven right than they are with making money.

This doesn’t mean you shouldn’t believe in your ideas. You can have conviction and also be mentally flexible. In fact, the best traders and investors have the ability to both be entirely convinced that they are right and also to quickly recognize when they are wrong. This is an attribute also shared by elite athletes - they both believe they can win in any situation - no matter the odds - and are also capable of brutally dissecting their performance after the fact to identify weak spots.

You can lose money with a good system and make money with a bad one

This is a point that value investor Howard Marks (Trades, Portfolio) also frequently stresses. Whether or not you make money on an investment or a trade is not the deciding factor in whether or not it was a good investment. You can lose money on a sensible, undervalued stock, and you can make money by taking extreme risks and buying out of the money puts on microcap biotech stocks. The quality of an investment process is not determined by whether one investment worked out once, it’s whether you can make money consistently over a long period of time under a number of different market conditions.

In one of the interviews, equity trader Steve Clark delivers what I consider to be one of the best pieces of trading (or investing) advice I have ever heard:

“Do more of what works and less of what doesn’t.”

This seems obvious, but I think it’s a very underappreciated idea. It’s also quite similar to Warren Buffett (Trades, Portfolio)’s concept of the "circle of competence." Basically, investors need to identify what they are good at and stick to that. Another big reason why amateur investors lose money is that they do not focus on getting better at what they are already good at. They get sidetracked by a flashy new company that has gone through a 500% price appreciation recently and forget that they don’t have any experience in the business’ industry. Stick to what you know, and don’t worry about trying to be an expert in everything.

Read more here:

• What Value Investors Can Learn From Jack Schwager’s ‘Market Wizards’
• 2 Important Investing Lessons From Howard Marks
• A 1924 Economist Explains Why Warren Buffett’s Berkshire Hathaway Doesn’t Pay Dividends

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