Short Stocks Now…Or Wait? Market Wizard’s Jack Schwager: 'Dangerous Level' Here
Summary
Market Outlook: Jack Schwager characterizes the S&P 500 as bullish until proven otherwise, riding the uptrend with tight stops and watching a measured move extension near 7,850 as potential exhaustion.
Risk Management: He emphasizes very close stops, risking under 1% per position, and avoiding buy-and-hold given stretched valuations and the potential for fast reversals.
AI Theme: The AI trade is a principal market driver, but he warns of heavy capex, uncertain payoffs, and winner-take-most dynamics where a few leaders may emerge while others falter.
Tech IPO Risks: On high-valuation tech IPOs (e.g., SpaceX/Anthropic), he cautions that early investors may cash out post-lockup, creating downside risk even if long-term prospects remain.
Active vs Passive: With most active managers underperforming indices, he suggests index funds for those without a proven edge, while acknowledging exceptional outliers exist.
Trading Approaches: Notable strategies discussed include merger arbitrage expertise and shorting frothy small caps (early careers), along with time stops and moving-average-based risk controls.
Human vs AI: Despite AI’s pattern-recognition strengths, he argues markets’ ever-changing “rules” preserve room for human traders for the foreseeable future.
Overall Stance: He remains cautiously long U.S. equities, prepared to reduce risk swiftly if technical signals deteriorate or exhaustion levels are reached.
Transcript
It's not that difficult sometimes to feel confident that we're in a bubble. But what you can never feel confident about is how far does a mania go. You can't try to pick a top in a bubble cuz you nobody knows. I've been long significantly and I've been following it up with very close stops because this is the type of situation that can change easily. >> Well, the S&P now at 7,600 points, its ninth consecutive week of gains in a new record high. Is this a meltup or a trap? There's no better person that I can think of to answer this question than that guest Jack Schwagger, author of the legendary series of books, Market Wizards. Uh it's been popular for decades and now his new release, Market Wizards: The Next Generation, is due next week to hit the bookstores. Jack, congratulations on your new release and welcome back to the show. >> Thank you, David. You've inspired literally generations of people in finance. I was reading your book, Market Wizards, actually the second one, Unknown Market Wizards, um, back in university before I knew anything about stocks. And so, um, big fan of your work. Appreciate you coming on. I want to talk about current market conditions before talking about the new generation of traders that you've interviewed for your upcoming book. Now, you've told me on prior episodes on my show that you're not an indicators guy. Instead, you read price action and you look at failed signals um being more reliable than signals themselves. Now, the S&P, like I said, just closed at 7,600 points. How would you approach the question I posited in the introduction, which is whether or not this is a meltup that will continue or a trap for investors chasing the rally? >> Okay. So, I don't know. I never know. I never try to I never try to forecast. So, um, basically in the S&P, uh, what you what you had is you did have a Well, let me go let me pull up a chart so I can look at it while I'm talking. Uh, hang on. >> Yeah, let me do that. Well, I have I have the charts in front of me now, but you're welcome to. >> Oh, yeah. I'm just doing Oh, yeah. So, >> cuz I have Mark. So, uh, basically it's bullish until proven otherwise. Um, but what you had was you did have a very bullish occurrence in the in the S&P and I would say that's around the u uh that occurred approximately um mid midappril actually and what what that what that was was a breaking of curvature. So I mean I look at a lot of chart things and and one of one of the things is if you get a curve patterned either one that looks like a top or one looks like a bottom and you break that curvature that is a good that is a in my mind a very good signal. All these chart all these chart so-called signals uh are always none of them are definitive. the the just says the odds are better uh that it'll go in this case up than down and that pattern particularly doesn't occur that often and uh it's one that I pay attention to. So that is something that turned me personally bullish at that point and and since then there's been no reason to change that opinion. Um we've had uh the uptrend and consolidations and consolidations within an uptrend. The assumption, my assumption always is continuation unless proven otherwise. And so far, you know, we had a uh you had a uh consolidation form sort of around uh uh uh what was it uh late late April and then uh you had another one more recently. And each of those has kind of resolved with an upside breakout. And right now the market is in a small flag pattern. Again, my assumption is up uh unless you know which if it breaks on the downside that would be the first indication. But so far the market has not really given any uh any what I would consider bearish signals. So, and the way I've the way I've traded it uh is through stock positions is I've been long significantly for me, not significantly in terms of money, but what I would consider significant in terms of my account size and um and I've been following it up with very close stops because this is the type of situation that can that can change uh that can change easily. And uh the one thing I would say as far as where where I would turn neutral to even negative uh without any particular signal is if you get if you get a full measured move extension on this current swing and in terms of the June S&P that would be about 7850 or so. So uh we're at 7621 uh 7850. So you know another another 200 230 points would be a complete measured move extension and that would certainly say the market should be near uh at or near an exhaustion point and that's a number I'm looking to be you know as a warning to to to not be long. >> You said these conditions could easily change. Why do you say that? Uh no I mean saying that if the market action changes then then it changes basically I like I say I don't do any the only it's not forecasting but the only thing that would fall into the realm of forecasting is is um a market that's in a straight up trend getting to a measured move extension. measure move for those not familiar is it's if you take the swing in the low in in 2025 and take the relative high you had in early 26. Now if you that's that's the last major move. If you then take that equivalent move from the recent relative low that's the point where which again should be around 78.50 that's the point where I would say the market is fully extended. You mentioned being more cautious. Uh what does that entail for you? Are you talking about shorter time frames, uh quicker exits, more stops, or something else? >> If you looked at all my my positions, you would see that they're all have very close stops. Uh and I've been keeping the stops very close because we've had this straight up move and it's very easy for that type of thing to break suddenly. Plus, plus even though I'm not a fundamentalist in any way, but I am cognizant that uh based on valuations, the market is pretty extended, uh it's on historical high. It's a it's it's at or beyond areas which have led to tops before. So, it it's definitely the valuations are in an area where caution is is merited. So, uh, you know, so I I mean, like I say, I'm long, but but the depth of my commitment is very shallow. >> Before we continue with the video, I'd like to address one of the fundamental problems of owning gold. 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That's monetary-medals.com/lin link in the description down below or scan the QR code here and get your gold to start working for you now. the uh last two times since 2024 uh when we've had major draw downs in the S&P were geopolitical shocks. So liberation day in uh early 2025 >> and exactly a year later which is where we are now the Iran war and so both times have seen significant rebounds and then new higher highs. Is it safe to say that Jack in this administration we can expect another geopolitical shock to be a good buying opportunity? Would that be a good way to approach the markets as a trader? Do you think >> G I you know I I I make I can only make that evaluation after it occurs >> and uh >> and uh generally at least for the reason >> how how often do patterns repeat themselves you know in your in your experience >> I you know it's not what's more significant we mentioned the fail signal before the the fact that you had I mentioned a breaking of curvature but the fact that the market was ignoring what should have been bearish news is also bullish in the same although the April one was a pretty deep decline and uh more of a panic selloff so uh it did the market didn't ignore the news it just had a very sharp selloff and then uh came back off of it >> okay if you can jot your memory for us Jack and think back at the traders you interviewed around the dotcom era maybe shortly before or even right after uh what were they doing and uh to the successful traders who maybe identified a bubble and got out early, what signals did they look at and then we can draw bring it forward today. >> Emphasize is this came up in some interviews and of course can only come up in interviews after after 2000. Um uh but I remember in hetron market wizards uh it came up which was the book after which was the first book after uh it was a long time after 2000 but it was the first book after that point. Um the the the idea was that it was a number of traders. So actually even in stock market wisits uh John Bender a major theme of his was that the market was was way overextended. We were in a we were in a kind of a bub. Well, bubble is the easier way to summarize it. And uh he played it by putting on a huge short put uh a long put position. And uh because he he saw the action of the market uh with these stocks that had no earnings and no particular future going to these ridiculous levels. for numerous reasons. He believed that we were kind of building to a major top and so he did position for that. Now he did it by buying puts which limits limits the total risk. Uh and of course he proved you know dramatically right. another in another interview um I think it was Koshe was talking about that he he also believed there was a bubble but um it's very you can be pretty sure that something is it's it's not that difficult sometimes to feel confident that we're in a bubble but what you can never feel confident about is how far does a mania go uh like the NASDAQ at the time I think the high was somewhere in the mid5000 000s I think ultimately but it could have been it could have been the mid6000s it could have been the mid 4000s any of those people who who thought the NASDAQ was in a bubble in 99 were certainly totally right but they were just early uh so it's it's very very difficult to assess how far the market can go and in a bubble a market can go much further than people can believe and I mean the NASDAQ ultimately went down 80% from where it got to so so the market can get tremendous ly overextended. There's no way to know. So the other thing that uh that came up in in Market Wizard interviews is that you can't try to pick a top in a bubble because you nobody knows unless you do it like Bender did by buying puts. Um if you do it outright, you have to wait for the market to actually break. Yes, you give up a good size initial swing, but you have to wait for that market to break uh and uh to have the proof at least that it's over or the odds look like it's over. >> What do you think those same people would say today when confronted with trillion dollar tech IPOs, uh anthropic, for example, SpaceX with less than $20 billion of of revenue and more than a trillion dollars in valuation. Um, how do you think they would approach today's market? >> Well, you know, I mean, SpaceX, I I know nothing. Okay. I I I have no idea. But, uh, what what I can say is the the real money is going to be made by uh uh by the the the initial investors before it goes public. And once it goes public, those a lot of those investors will cash out. Uh, one thing to keep an eye on is is there going to be a normal, and I don't I'm not up to date on it, but is there going to be a normal six-month weight or are they going to shortcut it? uh but uh whatever price wherever it ultimately goes there's a good chance that that when the initial investors can cash out uh there there will you know that would be a point where you could get a big reaction even if it ultimately goes much higher but I I don't I just think but at the price it'll come out it's going to be a very high risk uh uh trade and I'm I'm personally ignoring And this is the keyword risk. So one of your famous conclusions after interviewing many many people over several decades is that there's no one right way to win. There are many ways to win but there's no way to win without risk management. So let's take today's example. You talked about um this market being long uh or being bullish. Now, how do you manage risk in what many people would call a euphoric market? On the one hand, you could stay defensive and perhaps miss out on a lot of gains. And on the other hand, you could ride the wave, have very little stops or hedges, and get burned if it all crashes the other way unexpectedly. Um, both argue could be could be bad. How do you walk that line? >> Yeah. Well, for me it's um I I certainly don't have I certainly am not in the buy and would not be in a buy and hold camp because that that does have a tremendous amount of risk. Uh so as I mentioned personally the way I approach it is I wait for spots in in different stocks where for chart reasons for chart reasons I think that there's a good chance the next swing will be up and I enter a relatively close stop uh at the time I I do the trade. So in any position I'm putting on I'm risking I'm risking very little typically less than 1%. Um, another commonality I think the Wizards had uh made the most money when consensus was strongest. For example, Paul Tudtor Jones before 87, Stanley Duck and Miller before Major Mackerel turning points. What would you say would be one or two of the strongest consensus talking points today? >> Uh, consensus talking points about about what >> the markets basically. What are the strongest consensus views that the majority of investors or perhaps market participants are hurting into right now? >> Um well I I I mean we've talked about it. We've talked about it and um uh essentially on the bearish camp is that the market is very highly valued and the bullish camp uh well it also comes down to where where people are on on the AI uh the AI trade which is basically driving the market. Um, and I I I don't I and both both arguments can be convincing. Uh, will will these companies really be able to recoup the great expenditures they're putting into this thing? And the other the other danger there is um yeah even if one one or two wildly succeed become the next Amazon so to speak um yeah there's some that can that can easily fail right so uh the mar the market will ultimately maybe they'll all get business but there's a good chance that one or two will come out to be the dominant leaders and that would lead the other ones in a high-risisk situation. I have no idea which ones and and I have no idea if that'll be the case but we have seen this before almost in we have seen a lot of examples of this type situation before. Uh >> so like if if it's uh Facebook versus uh what was the uh uh name is slipping me but the the competitor Facebook at the time uh both were were reasonable prospects I guess but one one went under and one thrived tremendously. So um you could have a situation like that. So that means that any particular uh investment in one particular company could could be o open to that risk but I have no idea the market is kind of discounting a tremendous amount of uh success and uh it may if it's an Amazon it could be underestimating it and if it's if it's uh one of these competitors that don't make it through then it then it could be way over a discount. I want to transition to talking about your new book. Uh before I get into details, let me just set this up for the audience here. If you were to speculate uh in terms of how people would perform, do you think that the people that you interview for your first market wizards book way back in the 80s would still outperform markets today in today's situation given how far things have come and how things are different today? >> Yeah. So I mean you have people like Paul Tuda Jones who I think um Bruce Co I don't haven't kept up to date in their performance. I think Coor and Jones are good examples of people who and Dra Miller was the second book which came only a few years later and I drug is a particularly good example but a number of the traders from those first two books which go back to 88 when the first 89 when the first one came out and 92 when the second one came out. So uh there are a number of traders there that sort of adapt and thrive in almost any any environment. Uh but there are some traders uh that uh uh did phenomenally well in the in the well the book came out in late 80s and so their track record was late 60s7s early 80s. a number of them were uh made their fortunes in trend following and trend following as a general strategy has uh certainly lost a lot of his efficacy. So in those cases I would say probably not. It it depends on this particular strategy and style. There was a time when betting on the market mean being mean means being diversified across 400 something 500 stocks. With concentration risk being so high today and the S&P being so focused on tech or heavily weighted towards AI companies, do you think that buying the market really is essentially just buying a few stocks today? Uh well actually you have a lot of you have I think you have more diversification uh in in market in the market behavior now than you do typically. I mean you have groups of stocks that are doing tremendously well uh you know say anything related to power or something like that and you have groups of stocks that are doing terrible like software. So you've got a I think you've got more uh uh more diversification across different sectors than than is typical. Uh one thing though the the recent this recent move up has been broad in the sense that uh uh I haven't looked at it recently but the last time I s I looked at saw it was the an equal weighted equal weighted S&P is in new highs and doing well. So you got that a bit of a dichotomy there. You have sectors that are doing tremendous and sectors that are doing terrible. So you have much more of a spread. You have much more uh diversification I think than is typical. Uh on the other hand, the market as a whole if you equal weight all stocks is doing just fine. Uh so uh you know I guess a the index has been representative of of the of the market move. I'm curious if one day you'll interview AI bots and ask AI bots how they're trading, but that day hasn't come yet. So, tell us about some of the highlights from your more recent book, The Next Generation of Traders. I haven't read that book yet. >> I read the New Market Wizards um who I guess at the time were the new where the next uh at the time the book came out were the next generation. um that came out I believe early 90s if I'm not mistaken. >> So early 90s to now. How are traders different? >> Well, there's more well traders are always different. So if you look at any any of the market wizard books, the the one versus the other, the traders are all different. But even internally within any given market wizard book, the traders are very different. That's one of the things that comes out that has come out of these uh uh the interviews I've gotten is that uh the successful traders pick a methodology that fits their personality and that tends to be different for everybody. So while markets change tremendously the uh it's not like there's one strategy that is predominant in one book and another in another book. uh basically uh it's always changing and what the and the mark the real change has been in the markets because you've gone from let's say the first market wizards book the track records of reformed pen we're talking about trading pits right we've gone from trading pits to electronic trading we're talking about track records of form largely uh prep so that's a huge difference I mean back in in those days uh people didn't have the option to just look at charts on their computer and they didn't certainly didn't have vast amounts of different data that was easily available. So, and you have the not only advent of BC, you have supercomputing. Uh more recent years, you have AI. Um in the last decade or two, you've had a tremendous uh uh advent of quant funds. I mean, you added actually you had the quant funds even back in the late 1990s, but uh but it's been particularly predominant in in the last say last 20 years. Uh and you've got these giant quant firms trading tens of billions with 100 plus PhDs. And so that those are the dramatic changes. Traders though individually seem to find the market wizards seem to find their own methodology each time. Are there different uh themes that as a whole traders are tackling um this year and last year versus let's say 1015 years ago for example let's say early 2000s everyone was focused on the China rising trade right and then of course there was a tech trade prior to 2000 um post 2008 it was the financial recovery and then a couple years ago it was high inflation what are people focused on now >> uh that varies from trader to trader there like I say there's no dominant thing. The only thing I would say that was different in this book in the upcoming book is that uh a number of traders used strategies that never were mentioned in any prior book and that were philosophically contradictory to to the type of trading approach used by virtually all the other people I interviewed. And that is uh all the other all the other books if you point if you drill down to even though their their methodologies were very different. If you drill down to what they were doing it was basically uh an asymmetric type of trade. that asymmetry could have been achieved in many many different ways but essentially wherever they were chartist or pure fundamentalist or whatever they were looking for situations where if they're right they'd make a lot more than they lost that was true of just about every trader I had interviewed in previous tra uh books in this book there were quite a few traders uh maybe even like 30 40% of the interviews where they made their initial millions with uh by selling small cap by going short small cap stocks which is the which is the epitome of the opposite of a positive asymmetry trade. It's a negative. It's a negative asymmetry trade because the best you can do is the stock goes to zero and some of these small caps which they were selling always into massive rallies. Uh some of those can go can go another thousand%. You never know. So uh it it what was surp it it was surprising and a number of traders made their initial millions uh by predominantly using the strategy of selling small cap stocks that they perceive to be essentially call it a pump and dump type type of situation. you know about companies that uh had underlying underlying structures where uh they were running they were burning cash. They would do let's say a convertible odd deal to raise the cash and with terms that were very negative for the uh stock and uh on the f on a on a significant rally you'd get those bond let's say the conversion of those bonds which would drive the prices down and there was no reason for the stock ever to be up. So that's the type of strategy that a number of these traders use initially although they all transitioned out of it because that strategy doesn't scale as they got like you know pass in the tens of millions or in some cases in the hundreds of millions obviously that strategy is no longer viable. Have you asked these uh traders of the next generation where this current new generation if trading today is fundamentally more challenging as a profession than 35 years ago when you first started interviewing people because of the availability of technology? I would assume markets are now a lot more efficient today than the late 80s. >> Yeah. And I would argue that's that's a reasonable assumption. >> Yeah. And it's what I assumed what I assumed uh before my last book which was Unknown Mark Wizards the uh initial draft the initial uh version coming out 2020 and then the uh revise of 2022 but uh that's what I expected what I found in that book and what I certainly found in this book were traders were having we found tra I say we because I had a co-author in this book George Coyle Uh we found traders for this book and I found traders in the last book that had track records that either based on cumulative profitability cumulative dollars made or based on return risk. The track records that were as good if not better than anything I I found in the early books which included uh legendary traders. So if the markets were efficient, there shouldn't be traders. For example, uh, one trader in this the most recent book took a $40,000 account and as the last time I spoke to him, he was up to half a billion. So 40,000 half a billion is as good as anything I've ever seen. So there are traders doing that. Um, and uh, that that would not happen. That doesn't happen with luck. That's not you can't get that with luck. You can you can get a short-term run, but you don't get a you don't get a 10-year run uh that turns 40,000 to half a billion. Over the past 40 years since you've been doing this, what would be the strongest evidence you have to dispute or perhaps disprove the efficient market hypothesis positive by many people made famous by Eugene FMA who have interviewed before um the theory and I'm simplifying this for the people watching the show broadly states that you can't repeatedly beat markets over time because eventually information will filter without any any luck. And so you can beat the markets one or two years, but eventually markets are efficient and it's just not feasible. >> So I I I found many traders who are walking uh walking reputations of the official market hypothesis. So in this book, you have one trader who hasn't had a losing month uh in like 15 years. Now I should say that of course we always verify track records but so one trader hasn't had and we in the book we only talk about 11 years because prior to that he was uh managing family money and those those numbers were not available but I have no reason to disbelieve him. So I think so we we claim we just asserted the 11 years there's no no losing months not not the 15. You don't get that if the marks are efficient. there's another trader who in like 20 years has had five losing months or whatever uh small lo small small losses and so again that's now the one the one classic example uh from a previous book is Ed Thorp and edge fund market wizards uh and I I did a particular probability calculation there uh so Thorp ran a his first fund 19 years he had only three losing months in 19 years all all of all those losing months were less than 1%. And I did a simple binomial probability calculation where I did a simplifying assumption that gains and losses were equal, which they were not because his average gain was larger and uh and used this like only three losing months out of 19 years. and the probability then the number was so extraordinarily large that I had to find a way to translate it to people so they had some sense of what that number meant. So I came up with the example that if you were to take a randomly pick an atom from the entire mass of the earth, not just the surface, the entire mass, and then you were to repeat the experiment and randomly pick another atom and you pick the same atom, that probability would be over a trillion times or I don't forget how much, but would be tremendously uh that tremendously larger than the probability of Thorp track record if the official market hypothesis were correct. >> Did those traders that the ones that didn't have a single loss over extended period of time did they beat the markets though or were they just up? Well, I mean they Yeah, they Well, they're they're positive in that. Well, based on here's the thing. The trader losing month. First of all, he's extraordinary risk adverse. So, you never he always kept on going back to the small same small account size. So literally trading well we we use nominally $100,000 to the calculation but he typically has less you know less than $100,000 but $100,000 was a conservative assumption and on that assumption he was making he was making let's say 350,000 a year on $100,000 always kept the same size and never had a losing month. So yeah, in terms of beating the market based on the count, yeah, I mean, you know, killing the market and with no draw with never losing much. So yeah, so so the answer is yes. But also, not only was he extremely riskadverse, his strategy couldn't scale. It could scale larger than he was trading it, but it couldn't he there's no way he could compound it. So the trade-off there is yes he can get he can get a chart that is a money machine but he but he can't compound it. >> Okay. So here's I I I think the question that's been bothering me personally is the following. A new study from S&P 500 or S&P rather standard and poor shows that roughly 90% of active public equity fund managers underperform their index and 81% of active public fund uh fixed income managers underperform their index. So these are professionals who are a lot smarter than me who know a lot more than me. And I'm, you know, I'm reading your book, I'm reading a lot of other people. I'm interviewing yourself. I'm interviewing a lot of other people. And I'm thinking to myself, should I aspire to be the 10% or should I just buy the index? You know, everyone wants to be the 10%, but mathematically you're and not no one's not, you know, you're not the 10% because by definition, if everyone's a 10%, you're not the 10%. You know what I'm saying? Why don't we why why are we even doing this is ultimately my question. >> Yeah. So, you know, the old fal I mean, everybody believes they're above average, which obviously is impossible. But, uh, so first of all, that statistic you mentioned, that's been true. There have been studies forever. I don't probably hundreds of studies and it's true every time. You know, 91 is maybe on a high side, but it's always like 80% plus, I think. >> Sure. Um and that is first of all let me say this that's a natural consequence of if you take all these and we're talking mainly uh I think mutual fund managers here uh and uh basically if you take all their portfolios you really have the market and so um if you have the market but they're paying they're paying transaction cost they have slippage on their trades so it's mathematically impossible for the entire group to to to beat the market because they are the market and they have costs that the mark that an index doesn't. An index just holds a position and only once in a while when there are changes in the index does it have any any transaction costs. So it that will always be true. I mean that's one thing I can predict is forever that will always be true. Now as as as far as whoever should should people try to beat the market or just go into an index fund. Yeah. strong feelings there and it's there is no one one answer fits everybody. It depends it depends on the individual. Now if you are somebody who does not devoted tremendous amount of research time and is uh has a lot of experience and has some particular methodology that you have reason to believe has an edge then yeah for the for those traders you're better off uh just going into an index fund. Don't even try trading. Uh, one of the traders in this, uh, in this new book, Christian Kulamagi, uh, sort of talks about his brother-in-law, seeing him, Kulamagi took a $5,000 account into 100 million. Then he had a draw down, but he he did go up above 100 million at one point with a $5,000 account. So his brother-in-laws asked, "Can you teach me to trade?" And he says, "No, you shouldn't trade." He said, "I I was in my 20s. I spent 80 hours at 80 80 hours a week uh studying the market. I I you know eight slept. I just did nothing but research in the markets. Uh you have a family, you you're going to devote what maybe an hour a day if you're lucky to the markets. There's no way you can do the same thing. So uh you know his advice is on bro law is don't even try it. So for most people uh unless they've unless they like I gave the the qualifications before unless they fall into that category they would be better off you would be better off in an index fund. But if you don't have an edge then by all means go for it. Your >> your book features a lot of anomalies and exceptions to exactly what you just said though here uh again I haven't read the book yet. It's not out but here's a synopsis on Amazon. A musician who dropped out of school to pursue a trading career whose current accumulative profits total nearly 500 million. I think you mentioned this earlier. A volunteer firefighter who has not had a single losing month in over 10 years of trading. I have a lot of questions about this. Sure. >> So the first question is what do they do during COVID during liberation day month which was last year during the Iran war right and then you know there are several other bare markets that I can were were drawowns that I can name I mean they predicted all of these or were they just sitting on cash I give you a specific answer. Let's take the volunteer firefighter firefighter first who I we talked about before uh >> and uh he has a specific strategy. He is extraordinarily expert at merger. Uh so he's made a life study and this is a guy who gets up literally at 3:45 a.m. to check the pre-market. >> Wow. um doesn't and does his last look at the markets at 8:00 p.m. And in between he takes some breaks uh little bit, but for the most part he's in front of the screen, not only mark not only for the full market uh session, but before and after as well. So that's not something that most people would want to do, nor would I recommend that as a lifestyle. But that's what he does. Now the strategy is mer like I say extraordinary expert expert at it. He so he he's knows all these he knows all the quirks all about the filings. He knows what to look for in filings. For example, a trade he mentioned where uh the mar example of a trade might be uh a merger deal is announced, market runs up, he goes short. Why? because um he can he he looks at the filing and he notices that the filing is in Maryland and not Delaware. And that's not going to mean anything to almost anybody, but he knows that in Maryland it's easy for the company uh to uh turn down uh you know turn down the merger to to to not to to avoid it and it's very different in Delaware. So, um, but that that knowledge and that's how he basically beats the bots on at the at their own game because he knows all these nuances that are just too sophisticated and too too expensive to to fully program uh in these bots that that recognize a headline and trade instantaneously. Nobody can beat them. So, uh, but that's his strategy. uh the uh the musician has gone through many uh many phases. He he's one of the traders who initially shorted small cap and uh eventually went to uh uh trading mid you know uh uh eventually ultimately at this point he's transitioned all the way from going short small cap fork they trades that lasted a day or two uh to taking long-term position trades. Uh so he's completely transitioned but he's basically adjusted and adapted uh through his entire trading career. So there's no single answer on how he's done it. But whatever approach he used, he just uh devoted a lot of research to it. >> People watching this will probably think to themselves, gee, a musician who dropped out of school, security guard, a volunteer firefighter. You know, these aren't Black Rockck execs. These are seemingly regular people and if a regular person with a regular job can do this, so can I. What would you say to that? >> Well, I I think most people if they if they if you did the amount of work and had the amount of devotion that these people did to trading, you probably get the point of profitability. But I think there's another there's another element to it. uh there there's that type of rigorous uh commitment and passion and work to trading. That's part of the equation. But the other part of it is I do believe that certain people just have born were born with something ineffable was that that makes them uh has the ability to to excel in trading just like certain people excel in certain sports or whatever. I mean, not everybody's going to be a professional athlete in any given sport, no matter how hard they work. I I I would say it's no different than in trading. Some people just have the right genetic makeup. Like the uh well, the musician, for example, says like one of the things that he knows about himself is that from a very early young age, he can be he had the he was always non-phased in in terms of any crisis. He just was always calm. that was just no matter what. So, this is a guy who's seen some enormous uh when he's broken his own rules has seen some enormous drawdowns uh but had the he sort of u has that uh composure to be able to to be calm and despite lose being in a position that that uh lo is losing extraordinary amounts of money. What was their approach to developing unique risk management tools and and um setups? You had people uh Christian Kulami, I'm not sure if I'm saying his name right, um turned $5,000 into a peak of $105 million between 2011 and 2021. He had setups that uh most traders never developed. It's it's it's it's it's very difficult to come up with something unique in an age where um the amount of information we have and the technology that we have kind of forces people to converge into similar styles of trading. >> Yeah. So you would think so. Um actually his case he basically and this is uh interesting he basically says uh I think I'm getting word for word here. I I never I didn't invent anything. Basically, he said he says I nothing I do is original. He he ultimately after all this research came down to three types of setups and uh which are discussed in the interview and each of those setups he got from somebody else on social media. It's not that he developed them but he made them his own and he married it ultimately with first management. He's a guy who uh the first three four times he tried trading wiped out his small accounts and he finally did it on the fourth or fifth time. Um and uh um so he he says quite explicitly I'm not doing anything original. I got ideas he got his ideas off of social media but the way he Trey has traded them uh and the risk management he's used uh has has made it possible for him to succeed. So, uh, >> it's it's mathematically improbable to never have a losing trade. I'm talking about a losing month, I'm talking about one losing trade. The the the difference between somebody like this guy or other people you've interviewed in your books and somebody who's not making profits is how you approach that losing trade, >> right? How do these people do it? What's their approach to something that's down? So um they they're they basically I guess have different risk management approaches in some cases like uh the volunteer fireman or another the fellow I mentioned who only had five losing months over a long period of time. Uh both of them are just extra so extraordinarily risk averse that if they have a losing trade it probably doesn't last two minutes. So, uh, they they don't need they don't need stops. They watch the market and, uh, or they may have a stop in as well, but they'll they'll be out if a trade doesn't work, they'll be out, uh, in a couple of minutes. And even if a trade in in in the volunteer fireman example, even if a trade isn't losing money, but if he isn't ahead within 20 30 minutes, in fact, he just he has he uses this time time stop concept, he'll get out of it. So on one hand, you have traders who would just get out almost instantaneously on the first loss. They're either right right away or they're out. So that's that's one type answer. Another type of answer is they just have uh risk level or let's say Kulumagi what he'll do is u he'll use like simple moving averages uh if the move is going on and uh if it and that'll be his first indication that something is wrong now he'll have a stop in anyway usually but if uh if a market's going sharply higher he'll He'll have a he'll use a shorterterm moving average. So so the very very s first time uh let's say it breaks the 10day moving average which is very easy to do for for price to break the 10day moving average he'll be he'll be out because that's just cuts cuts his chances down of losing much a lot of money. Uh so that's another style. the musician who's who got up to half who's up to half a billion uh after having a couple of incidents discussed in the book where he took these enormous losses by breaking his own rules essentially only a couple of times but and interestingly after we finished the book after we finished the original chapter he he he communicated back to us uh saying that he just had his worst draw down ever and he didn't want he didn't want to to have the book come out without acknowledging that. So that's actually in the book where the and but that last draw down was so bad that uh and he after that draw down he he rebounded in very quickly again but uh but that draw down was so bad that he implemented very rigorous rules to protect himself against himself and those rules include defining initially how much risk the trade is taking and tightening it up. So uh those are some of the answers. >> Exiting a winning trade is equally important. Uh have these successful traders relied more on technical qualitative uh signals sorry quantitative signals rather um or qualitative information like news or macro data that you they think would turn the position >> depends on the trader some. Yeah. Although I think for most of the traders it ultimately became a combination of both fundamental and technical. Some traders uh were initially mostly mostly technical base one way or the other. Uh but ultimately uh just thinking off top of my head I think most of them use both fundamentals and technical. >> Okay. Finally. So for somebody who may have read your prior books in years past, what do you think they will learn differently or sorry some new information they will learn or gain from reading your next book, the next generation of market wizards? >> Well, uh one one difference in this book versus all the other market wizard books is for the first time I included charts in the book. Uh so uh so there are some uh there's some maybe more explicit presentation of the trades that are discussed in the interview and so I guess one thing is Reus can see at least for some some of the interviews and some some of the strategies used uh what what the trades look like and what the thinking was. uh but in general I think in every market wizard book some timeless lessons come across like risk management you know uh and they come across very strongly uh explicitly and just implicitly through seeing the stories of these traders themselves. So and then every trader and every reader or listener if it's an audio uh I find latches on to different chapters in the book as being personally relevant. So what anybody would get out of any particular chapter varies and when people talk to me who've read my books and say you know what my chap my favorite chapter is I have no idea because it's always something different. So what what any reader listener can get out of this book will depend on on the individual. >> Would you ever consider interviewing a unsuccessful trader? Basically somebody who's lost a lot of money >> and just you know we can learn from his mistakes. >> Yeah. I mean I've I've thought of that idea and it's a good idea. It's an interesting idea. Now, part of that part of the uh motivation to do that type of book is actually fulfilled in the market wizard books because quite a number of the traders I've interviewed had early failures or sometimes even after they were successful have incidents of where they broke their rules and had a large loss. So, so some of that is in the market in the mark in this book and and in other Mark Wizard books. Um but I think it's a good idea. One thing if you just have a purely losing trader, you might have difficulty getting getting them there. We I am considering doing another book with the co-author my co co-author in this book George Coyle where we just not specifically a marker wizard book but where we kind of do a chapter on different one chapter on each chapter would be a different story somehow related to Wall Street. And one of those one of those chapters that we have in mind will be an individual who ultimately is successful but had the couple of enormous draw downs uh just mind-boggling and uh and so yeah so that the the book where we're we're very seriously considering doing would have that type of uh uh story. And finally into the future, do you think there's still a place for human traders uh AI uh agents have emerged as having in some cases superior information processing skills and we repeatedly read from your books and other people that some of the best traders trade without emotion sticking to the rules like you said um developing uh almost robotic processes. Well, who better to do that than a robot itself? So, can AI just replace human traders in 20 years time? >> Yeah. Okay. So, so you're right about, you know, number of those things. I mean, uh AI does have a number of advantages. uh uh certainly pattern recognition is kind of the essence of of AI and that's important in trading and that would be certainly an advantage where they can where AI can come up with uh with strategies that uh humans can't come up with because of the complexity that the patterns it can find. So that and you say the non-emotionality all that is true. Now I would say here's the saving kid here's a saving grace. First of all AI has been around at least for you know for some dependence what but in some form it's been around for some years now. Uh and I'm still finding traders with exceptional performance. So apparently for now it's still is the the the potential to be able to uh do not only beat the market but beat it by by miles is still apparently there and I'm I'm not finding obviously all the traders that do that. I'm finding a sampling of them. So that it's not been it's not been uh human trading has not yet been negated for sure. Uh now there is the saving grace. Uh I I would never underestimate AI because the progress that's going on now is exponential. Once you get to AI helping design the next version of a particular platform, uh you you're into you're into an exponential stage. So uh I would never underestimate that. But there is an inherent basic uh saving grace here and that is the markets are different than anything else. uh it's not like uh using AI to find a drug combination that can cure some disease and there are like trillions of drug combinations that that could be you know have to be tried and experimented and but AI can kind of shortcut that process but that's because science biology physics you know the rules that govern it don't change they're It's not like uh proteins say behave in one way in you know today and then 10 days from now they behave some different way. It's like it's not like the the rules of gravitation change. It's not like any it's not like what anything quantum mechanics all of the rules that drive the world only are fixed. They don't change. Uh so those problems can ultimately be solved uh by uh enough uh processing power. Something like uh climate which is extremely complex uh ultimately can probably be refined more and more in terms of AI being able to to come up with predictions that are more accurate than than humans ever could have done. So yes in those in those cases uh AI will beat humans in all all cases. Ultimately doctors I think ultimately will will be using AI as a as a diagnostic tool. Uh but they will never be able to outperform what AI will eventually be in terms of diagnostic capability. The difference in the markets is they the rules change all the time. simple examples. Uh sometimes bonds and stocks are positively correlated, sometimes they're negatively correlated, sometimes they're uncorrelated. So the same types of things. So that means if you've got a uh if you get a uh if you get an interest rate hike or something, it can or an unemployment uh uh uh drop or raise or whatever. any of those things sometimes could be positive, sometimes could be negative. The rules are always changing and uh that would make it more difficult for AI to come up with any types of it wouldn't come up with the absolute uh solutions. So I think always always is a dangerous word but I think for for a good length of foreseeable future uh there'll still be a place for humans just because a uh the markets are a different type of problem. They don't have the advantage of having fixed rules. >> Okay Jack, thank you very much. We mentioned your book that's coming out. I believe it's out next week uh the 9th of June. Anywhere else we can go to follow your work besides your upcoming book? No, nothing special in it. >> Okay. >> All right. Good. Well, we look forward to reading uh Market Wizards: The Next Generation. So, do uh do stay tuned for that book release. Thank you very much, Jack, and I appreciate your insights. Take care for now. >> Thank you for watching. Don't forget to like, subscribe,
Short Stocks Now…Or Wait? Market Wizard’s Jack Schwager: 'Dangerous Level' Here
Summary
Transcript
It's not that difficult sometimes to feel confident that we're in a bubble. But what you can never feel confident about is how far does a mania go. You can't try to pick a top in a bubble cuz you nobody knows. I've been long significantly and I've been following it up with very close stops because this is the type of situation that can change easily. >> Well, the S&P now at 7,600 points, its ninth consecutive week of gains in a new record high. Is this a meltup or a trap? There's no better person that I can think of to answer this question than that guest Jack Schwagger, author of the legendary series of books, Market Wizards. Uh it's been popular for decades and now his new release, Market Wizards: The Next Generation, is due next week to hit the bookstores. Jack, congratulations on your new release and welcome back to the show. >> Thank you, David. You've inspired literally generations of people in finance. I was reading your book, Market Wizards, actually the second one, Unknown Market Wizards, um, back in university before I knew anything about stocks. And so, um, big fan of your work. Appreciate you coming on. I want to talk about current market conditions before talking about the new generation of traders that you've interviewed for your upcoming book. Now, you've told me on prior episodes on my show that you're not an indicators guy. Instead, you read price action and you look at failed signals um being more reliable than signals themselves. Now, the S&P, like I said, just closed at 7,600 points. How would you approach the question I posited in the introduction, which is whether or not this is a meltup that will continue or a trap for investors chasing the rally? >> Okay. So, I don't know. I never know. I never try to I never try to forecast. So, um, basically in the S&P, uh, what you what you had is you did have a Well, let me go let me pull up a chart so I can look at it while I'm talking. Uh, hang on. >> Yeah, let me do that. Well, I have I have the charts in front of me now, but you're welcome to. >> Oh, yeah. I'm just doing Oh, yeah. So, >> cuz I have Mark. So, uh, basically it's bullish until proven otherwise. Um, but what you had was you did have a very bullish occurrence in the in the S&P and I would say that's around the u uh that occurred approximately um mid midappril actually and what what that what that was was a breaking of curvature. So I mean I look at a lot of chart things and and one of one of the things is if you get a curve patterned either one that looks like a top or one looks like a bottom and you break that curvature that is a good that is a in my mind a very good signal. All these chart all these chart so-called signals uh are always none of them are definitive. the the just says the odds are better uh that it'll go in this case up than down and that pattern particularly doesn't occur that often and uh it's one that I pay attention to. So that is something that turned me personally bullish at that point and and since then there's been no reason to change that opinion. Um we've had uh the uptrend and consolidations and consolidations within an uptrend. The assumption, my assumption always is continuation unless proven otherwise. And so far, you know, we had a uh you had a uh consolidation form sort of around uh uh uh what was it uh late late April and then uh you had another one more recently. And each of those has kind of resolved with an upside breakout. And right now the market is in a small flag pattern. Again, my assumption is up uh unless you know which if it breaks on the downside that would be the first indication. But so far the market has not really given any uh any what I would consider bearish signals. So, and the way I've the way I've traded it uh is through stock positions is I've been long significantly for me, not significantly in terms of money, but what I would consider significant in terms of my account size and um and I've been following it up with very close stops because this is the type of situation that can that can change uh that can change easily. And uh the one thing I would say as far as where where I would turn neutral to even negative uh without any particular signal is if you get if you get a full measured move extension on this current swing and in terms of the June S&P that would be about 7850 or so. So uh we're at 7621 uh 7850. So you know another another 200 230 points would be a complete measured move extension and that would certainly say the market should be near uh at or near an exhaustion point and that's a number I'm looking to be you know as a warning to to to not be long. >> You said these conditions could easily change. Why do you say that? Uh no I mean saying that if the market action changes then then it changes basically I like I say I don't do any the only it's not forecasting but the only thing that would fall into the realm of forecasting is is um a market that's in a straight up trend getting to a measured move extension. measure move for those not familiar is it's if you take the swing in the low in in 2025 and take the relative high you had in early 26. Now if you that's that's the last major move. If you then take that equivalent move from the recent relative low that's the point where which again should be around 78.50 that's the point where I would say the market is fully extended. You mentioned being more cautious. Uh what does that entail for you? Are you talking about shorter time frames, uh quicker exits, more stops, or something else? >> If you looked at all my my positions, you would see that they're all have very close stops. Uh and I've been keeping the stops very close because we've had this straight up move and it's very easy for that type of thing to break suddenly. Plus, plus even though I'm not a fundamentalist in any way, but I am cognizant that uh based on valuations, the market is pretty extended, uh it's on historical high. It's a it's it's at or beyond areas which have led to tops before. So, it it's definitely the valuations are in an area where caution is is merited. So, uh, you know, so I I mean, like I say, I'm long, but but the depth of my commitment is very shallow. >> Before we continue with the video, I'd like to address one of the fundamental problems of owning gold. 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That's monetary-medals.com/lin link in the description down below or scan the QR code here and get your gold to start working for you now. the uh last two times since 2024 uh when we've had major draw downs in the S&P were geopolitical shocks. So liberation day in uh early 2025 >> and exactly a year later which is where we are now the Iran war and so both times have seen significant rebounds and then new higher highs. Is it safe to say that Jack in this administration we can expect another geopolitical shock to be a good buying opportunity? Would that be a good way to approach the markets as a trader? Do you think >> G I you know I I I make I can only make that evaluation after it occurs >> and uh >> and uh generally at least for the reason >> how how often do patterns repeat themselves you know in your in your experience >> I you know it's not what's more significant we mentioned the fail signal before the the fact that you had I mentioned a breaking of curvature but the fact that the market was ignoring what should have been bearish news is also bullish in the same although the April one was a pretty deep decline and uh more of a panic selloff so uh it did the market didn't ignore the news it just had a very sharp selloff and then uh came back off of it >> okay if you can jot your memory for us Jack and think back at the traders you interviewed around the dotcom era maybe shortly before or even right after uh what were they doing and uh to the successful traders who maybe identified a bubble and got out early, what signals did they look at and then we can draw bring it forward today. >> Emphasize is this came up in some interviews and of course can only come up in interviews after after 2000. Um uh but I remember in hetron market wizards uh it came up which was the book after which was the first book after uh it was a long time after 2000 but it was the first book after that point. Um the the the idea was that it was a number of traders. So actually even in stock market wisits uh John Bender a major theme of his was that the market was was way overextended. We were in a we were in a kind of a bub. Well, bubble is the easier way to summarize it. And uh he played it by putting on a huge short put uh a long put position. And uh because he he saw the action of the market uh with these stocks that had no earnings and no particular future going to these ridiculous levels. for numerous reasons. He believed that we were kind of building to a major top and so he did position for that. Now he did it by buying puts which limits limits the total risk. Uh and of course he proved you know dramatically right. another in another interview um I think it was Koshe was talking about that he he also believed there was a bubble but um it's very you can be pretty sure that something is it's it's not that difficult sometimes to feel confident that we're in a bubble but what you can never feel confident about is how far does a mania go uh like the NASDAQ at the time I think the high was somewhere in the mid5000 000s I think ultimately but it could have been it could have been the mid6000s it could have been the mid 4000s any of those people who who thought the NASDAQ was in a bubble in 99 were certainly totally right but they were just early uh so it's it's very very difficult to assess how far the market can go and in a bubble a market can go much further than people can believe and I mean the NASDAQ ultimately went down 80% from where it got to so so the market can get tremendous ly overextended. There's no way to know. So the other thing that uh that came up in in Market Wizard interviews is that you can't try to pick a top in a bubble because you nobody knows unless you do it like Bender did by buying puts. Um if you do it outright, you have to wait for the market to actually break. Yes, you give up a good size initial swing, but you have to wait for that market to break uh and uh to have the proof at least that it's over or the odds look like it's over. >> What do you think those same people would say today when confronted with trillion dollar tech IPOs, uh anthropic, for example, SpaceX with less than $20 billion of of revenue and more than a trillion dollars in valuation. Um, how do you think they would approach today's market? >> Well, you know, I mean, SpaceX, I I know nothing. Okay. I I I have no idea. But, uh, what what I can say is the the real money is going to be made by uh uh by the the the initial investors before it goes public. And once it goes public, those a lot of those investors will cash out. Uh, one thing to keep an eye on is is there going to be a normal, and I don't I'm not up to date on it, but is there going to be a normal six-month weight or are they going to shortcut it? uh but uh whatever price wherever it ultimately goes there's a good chance that that when the initial investors can cash out uh there there will you know that would be a point where you could get a big reaction even if it ultimately goes much higher but I I don't I just think but at the price it'll come out it's going to be a very high risk uh uh trade and I'm I'm personally ignoring And this is the keyword risk. So one of your famous conclusions after interviewing many many people over several decades is that there's no one right way to win. There are many ways to win but there's no way to win without risk management. So let's take today's example. You talked about um this market being long uh or being bullish. Now, how do you manage risk in what many people would call a euphoric market? On the one hand, you could stay defensive and perhaps miss out on a lot of gains. And on the other hand, you could ride the wave, have very little stops or hedges, and get burned if it all crashes the other way unexpectedly. Um, both argue could be could be bad. How do you walk that line? >> Yeah. Well, for me it's um I I certainly don't have I certainly am not in the buy and would not be in a buy and hold camp because that that does have a tremendous amount of risk. Uh so as I mentioned personally the way I approach it is I wait for spots in in different stocks where for chart reasons for chart reasons I think that there's a good chance the next swing will be up and I enter a relatively close stop uh at the time I I do the trade. So in any position I'm putting on I'm risking I'm risking very little typically less than 1%. Um, another commonality I think the Wizards had uh made the most money when consensus was strongest. For example, Paul Tudtor Jones before 87, Stanley Duck and Miller before Major Mackerel turning points. What would you say would be one or two of the strongest consensus talking points today? >> Uh, consensus talking points about about what >> the markets basically. What are the strongest consensus views that the majority of investors or perhaps market participants are hurting into right now? >> Um well I I I mean we've talked about it. We've talked about it and um uh essentially on the bearish camp is that the market is very highly valued and the bullish camp uh well it also comes down to where where people are on on the AI uh the AI trade which is basically driving the market. Um, and I I I don't I and both both arguments can be convincing. Uh, will will these companies really be able to recoup the great expenditures they're putting into this thing? And the other the other danger there is um yeah even if one one or two wildly succeed become the next Amazon so to speak um yeah there's some that can that can easily fail right so uh the mar the market will ultimately maybe they'll all get business but there's a good chance that one or two will come out to be the dominant leaders and that would lead the other ones in a high-risisk situation. I have no idea which ones and and I have no idea if that'll be the case but we have seen this before almost in we have seen a lot of examples of this type situation before. Uh >> so like if if it's uh Facebook versus uh what was the uh uh name is slipping me but the the competitor Facebook at the time uh both were were reasonable prospects I guess but one one went under and one thrived tremendously. So um you could have a situation like that. So that means that any particular uh investment in one particular company could could be o open to that risk but I have no idea the market is kind of discounting a tremendous amount of uh success and uh it may if it's an Amazon it could be underestimating it and if it's if it's uh one of these competitors that don't make it through then it then it could be way over a discount. I want to transition to talking about your new book. Uh before I get into details, let me just set this up for the audience here. If you were to speculate uh in terms of how people would perform, do you think that the people that you interview for your first market wizards book way back in the 80s would still outperform markets today in today's situation given how far things have come and how things are different today? >> Yeah. So I mean you have people like Paul Tuda Jones who I think um Bruce Co I don't haven't kept up to date in their performance. I think Coor and Jones are good examples of people who and Dra Miller was the second book which came only a few years later and I drug is a particularly good example but a number of the traders from those first two books which go back to 88 when the first 89 when the first one came out and 92 when the second one came out. So uh there are a number of traders there that sort of adapt and thrive in almost any any environment. Uh but there are some traders uh that uh uh did phenomenally well in the in the well the book came out in late 80s and so their track record was late 60s7s early 80s. a number of them were uh made their fortunes in trend following and trend following as a general strategy has uh certainly lost a lot of his efficacy. So in those cases I would say probably not. It it depends on this particular strategy and style. There was a time when betting on the market mean being mean means being diversified across 400 something 500 stocks. With concentration risk being so high today and the S&P being so focused on tech or heavily weighted towards AI companies, do you think that buying the market really is essentially just buying a few stocks today? Uh well actually you have a lot of you have I think you have more diversification uh in in market in the market behavior now than you do typically. I mean you have groups of stocks that are doing tremendously well uh you know say anything related to power or something like that and you have groups of stocks that are doing terrible like software. So you've got a I think you've got more uh uh more diversification across different sectors than than is typical. Uh one thing though the the recent this recent move up has been broad in the sense that uh uh I haven't looked at it recently but the last time I s I looked at saw it was the an equal weighted equal weighted S&P is in new highs and doing well. So you got that a bit of a dichotomy there. You have sectors that are doing tremendous and sectors that are doing terrible. So you have much more of a spread. You have much more uh diversification I think than is typical. Uh on the other hand, the market as a whole if you equal weight all stocks is doing just fine. Uh so uh you know I guess a the index has been representative of of the of the market move. I'm curious if one day you'll interview AI bots and ask AI bots how they're trading, but that day hasn't come yet. So, tell us about some of the highlights from your more recent book, The Next Generation of Traders. I haven't read that book yet. >> I read the New Market Wizards um who I guess at the time were the new where the next uh at the time the book came out were the next generation. um that came out I believe early 90s if I'm not mistaken. >> So early 90s to now. How are traders different? >> Well, there's more well traders are always different. So if you look at any any of the market wizard books, the the one versus the other, the traders are all different. But even internally within any given market wizard book, the traders are very different. That's one of the things that comes out that has come out of these uh uh the interviews I've gotten is that uh the successful traders pick a methodology that fits their personality and that tends to be different for everybody. So while markets change tremendously the uh it's not like there's one strategy that is predominant in one book and another in another book. uh basically uh it's always changing and what the and the mark the real change has been in the markets because you've gone from let's say the first market wizards book the track records of reformed pen we're talking about trading pits right we've gone from trading pits to electronic trading we're talking about track records of form largely uh prep so that's a huge difference I mean back in in those days uh people didn't have the option to just look at charts on their computer and they didn't certainly didn't have vast amounts of different data that was easily available. So, and you have the not only advent of BC, you have supercomputing. Uh more recent years, you have AI. Um in the last decade or two, you've had a tremendous uh uh advent of quant funds. I mean, you added actually you had the quant funds even back in the late 1990s, but uh but it's been particularly predominant in in the last say last 20 years. Uh and you've got these giant quant firms trading tens of billions with 100 plus PhDs. And so that those are the dramatic changes. Traders though individually seem to find the market wizards seem to find their own methodology each time. Are there different uh themes that as a whole traders are tackling um this year and last year versus let's say 1015 years ago for example let's say early 2000s everyone was focused on the China rising trade right and then of course there was a tech trade prior to 2000 um post 2008 it was the financial recovery and then a couple years ago it was high inflation what are people focused on now >> uh that varies from trader to trader there like I say there's no dominant thing. The only thing I would say that was different in this book in the upcoming book is that uh a number of traders used strategies that never were mentioned in any prior book and that were philosophically contradictory to to the type of trading approach used by virtually all the other people I interviewed. And that is uh all the other all the other books if you point if you drill down to even though their their methodologies were very different. If you drill down to what they were doing it was basically uh an asymmetric type of trade. that asymmetry could have been achieved in many many different ways but essentially wherever they were chartist or pure fundamentalist or whatever they were looking for situations where if they're right they'd make a lot more than they lost that was true of just about every trader I had interviewed in previous tra uh books in this book there were quite a few traders uh maybe even like 30 40% of the interviews where they made their initial millions with uh by selling small cap by going short small cap stocks which is the which is the epitome of the opposite of a positive asymmetry trade. It's a negative. It's a negative asymmetry trade because the best you can do is the stock goes to zero and some of these small caps which they were selling always into massive rallies. Uh some of those can go can go another thousand%. You never know. So uh it it what was surp it it was surprising and a number of traders made their initial millions uh by predominantly using the strategy of selling small cap stocks that they perceive to be essentially call it a pump and dump type type of situation. you know about companies that uh had underlying underlying structures where uh they were running they were burning cash. They would do let's say a convertible odd deal to raise the cash and with terms that were very negative for the uh stock and uh on the f on a on a significant rally you'd get those bond let's say the conversion of those bonds which would drive the prices down and there was no reason for the stock ever to be up. So that's the type of strategy that a number of these traders use initially although they all transitioned out of it because that strategy doesn't scale as they got like you know pass in the tens of millions or in some cases in the hundreds of millions obviously that strategy is no longer viable. Have you asked these uh traders of the next generation where this current new generation if trading today is fundamentally more challenging as a profession than 35 years ago when you first started interviewing people because of the availability of technology? I would assume markets are now a lot more efficient today than the late 80s. >> Yeah. And I would argue that's that's a reasonable assumption. >> Yeah. And it's what I assumed what I assumed uh before my last book which was Unknown Mark Wizards the uh initial draft the initial uh version coming out 2020 and then the uh revise of 2022 but uh that's what I expected what I found in that book and what I certainly found in this book were traders were having we found tra I say we because I had a co-author in this book George Coyle Uh we found traders for this book and I found traders in the last book that had track records that either based on cumulative profitability cumulative dollars made or based on return risk. The track records that were as good if not better than anything I I found in the early books which included uh legendary traders. So if the markets were efficient, there shouldn't be traders. For example, uh, one trader in this the most recent book took a $40,000 account and as the last time I spoke to him, he was up to half a billion. So 40,000 half a billion is as good as anything I've ever seen. So there are traders doing that. Um, and uh, that that would not happen. That doesn't happen with luck. That's not you can't get that with luck. You can you can get a short-term run, but you don't get a you don't get a 10-year run uh that turns 40,000 to half a billion. Over the past 40 years since you've been doing this, what would be the strongest evidence you have to dispute or perhaps disprove the efficient market hypothesis positive by many people made famous by Eugene FMA who have interviewed before um the theory and I'm simplifying this for the people watching the show broadly states that you can't repeatedly beat markets over time because eventually information will filter without any any luck. And so you can beat the markets one or two years, but eventually markets are efficient and it's just not feasible. >> So I I I found many traders who are walking uh walking reputations of the official market hypothesis. So in this book, you have one trader who hasn't had a losing month uh in like 15 years. Now I should say that of course we always verify track records but so one trader hasn't had and we in the book we only talk about 11 years because prior to that he was uh managing family money and those those numbers were not available but I have no reason to disbelieve him. So I think so we we claim we just asserted the 11 years there's no no losing months not not the 15. You don't get that if the marks are efficient. there's another trader who in like 20 years has had five losing months or whatever uh small lo small small losses and so again that's now the one the one classic example uh from a previous book is Ed Thorp and edge fund market wizards uh and I I did a particular probability calculation there uh so Thorp ran a his first fund 19 years he had only three losing months in 19 years all all of all those losing months were less than 1%. And I did a simple binomial probability calculation where I did a simplifying assumption that gains and losses were equal, which they were not because his average gain was larger and uh and used this like only three losing months out of 19 years. and the probability then the number was so extraordinarily large that I had to find a way to translate it to people so they had some sense of what that number meant. So I came up with the example that if you were to take a randomly pick an atom from the entire mass of the earth, not just the surface, the entire mass, and then you were to repeat the experiment and randomly pick another atom and you pick the same atom, that probability would be over a trillion times or I don't forget how much, but would be tremendously uh that tremendously larger than the probability of Thorp track record if the official market hypothesis were correct. >> Did those traders that the ones that didn't have a single loss over extended period of time did they beat the markets though or were they just up? Well, I mean they Yeah, they Well, they're they're positive in that. Well, based on here's the thing. The trader losing month. First of all, he's extraordinary risk adverse. So, you never he always kept on going back to the small same small account size. So literally trading well we we use nominally $100,000 to the calculation but he typically has less you know less than $100,000 but $100,000 was a conservative assumption and on that assumption he was making he was making let's say 350,000 a year on $100,000 always kept the same size and never had a losing month. So yeah, in terms of beating the market based on the count, yeah, I mean, you know, killing the market and with no draw with never losing much. So yeah, so so the answer is yes. But also, not only was he extremely riskadverse, his strategy couldn't scale. It could scale larger than he was trading it, but it couldn't he there's no way he could compound it. So the trade-off there is yes he can get he can get a chart that is a money machine but he but he can't compound it. >> Okay. So here's I I I think the question that's been bothering me personally is the following. A new study from S&P 500 or S&P rather standard and poor shows that roughly 90% of active public equity fund managers underperform their index and 81% of active public fund uh fixed income managers underperform their index. So these are professionals who are a lot smarter than me who know a lot more than me. And I'm, you know, I'm reading your book, I'm reading a lot of other people. I'm interviewing yourself. I'm interviewing a lot of other people. And I'm thinking to myself, should I aspire to be the 10% or should I just buy the index? You know, everyone wants to be the 10%, but mathematically you're and not no one's not, you know, you're not the 10% because by definition, if everyone's a 10%, you're not the 10%. You know what I'm saying? Why don't we why why are we even doing this is ultimately my question. >> Yeah. So, you know, the old fal I mean, everybody believes they're above average, which obviously is impossible. But, uh, so first of all, that statistic you mentioned, that's been true. There have been studies forever. I don't probably hundreds of studies and it's true every time. You know, 91 is maybe on a high side, but it's always like 80% plus, I think. >> Sure. Um and that is first of all let me say this that's a natural consequence of if you take all these and we're talking mainly uh I think mutual fund managers here uh and uh basically if you take all their portfolios you really have the market and so um if you have the market but they're paying they're paying transaction cost they have slippage on their trades so it's mathematically impossible for the entire group to to to beat the market because they are the market and they have costs that the mark that an index doesn't. An index just holds a position and only once in a while when there are changes in the index does it have any any transaction costs. So it that will always be true. I mean that's one thing I can predict is forever that will always be true. Now as as as far as whoever should should people try to beat the market or just go into an index fund. Yeah. strong feelings there and it's there is no one one answer fits everybody. It depends it depends on the individual. Now if you are somebody who does not devoted tremendous amount of research time and is uh has a lot of experience and has some particular methodology that you have reason to believe has an edge then yeah for the for those traders you're better off uh just going into an index fund. Don't even try trading. Uh, one of the traders in this, uh, in this new book, Christian Kulamagi, uh, sort of talks about his brother-in-law, seeing him, Kulamagi took a $5,000 account into 100 million. Then he had a draw down, but he he did go up above 100 million at one point with a $5,000 account. So his brother-in-laws asked, "Can you teach me to trade?" And he says, "No, you shouldn't trade." He said, "I I was in my 20s. I spent 80 hours at 80 80 hours a week uh studying the market. I I you know eight slept. I just did nothing but research in the markets. Uh you have a family, you you're going to devote what maybe an hour a day if you're lucky to the markets. There's no way you can do the same thing. So uh you know his advice is on bro law is don't even try it. So for most people uh unless they've unless they like I gave the the qualifications before unless they fall into that category they would be better off you would be better off in an index fund. But if you don't have an edge then by all means go for it. Your >> your book features a lot of anomalies and exceptions to exactly what you just said though here uh again I haven't read the book yet. It's not out but here's a synopsis on Amazon. A musician who dropped out of school to pursue a trading career whose current accumulative profits total nearly 500 million. I think you mentioned this earlier. A volunteer firefighter who has not had a single losing month in over 10 years of trading. I have a lot of questions about this. Sure. >> So the first question is what do they do during COVID during liberation day month which was last year during the Iran war right and then you know there are several other bare markets that I can were were drawowns that I can name I mean they predicted all of these or were they just sitting on cash I give you a specific answer. Let's take the volunteer firefighter firefighter first who I we talked about before uh >> and uh he has a specific strategy. He is extraordinarily expert at merger. Uh so he's made a life study and this is a guy who gets up literally at 3:45 a.m. to check the pre-market. >> Wow. um doesn't and does his last look at the markets at 8:00 p.m. And in between he takes some breaks uh little bit, but for the most part he's in front of the screen, not only mark not only for the full market uh session, but before and after as well. So that's not something that most people would want to do, nor would I recommend that as a lifestyle. But that's what he does. Now the strategy is mer like I say extraordinary expert expert at it. He so he he's knows all these he knows all the quirks all about the filings. He knows what to look for in filings. For example, a trade he mentioned where uh the mar example of a trade might be uh a merger deal is announced, market runs up, he goes short. Why? because um he can he he looks at the filing and he notices that the filing is in Maryland and not Delaware. And that's not going to mean anything to almost anybody, but he knows that in Maryland it's easy for the company uh to uh turn down uh you know turn down the merger to to to not to to avoid it and it's very different in Delaware. So, um, but that that knowledge and that's how he basically beats the bots on at the at their own game because he knows all these nuances that are just too sophisticated and too too expensive to to fully program uh in these bots that that recognize a headline and trade instantaneously. Nobody can beat them. So, uh, but that's his strategy. uh the uh the musician has gone through many uh many phases. He he's one of the traders who initially shorted small cap and uh eventually went to uh uh trading mid you know uh uh eventually ultimately at this point he's transitioned all the way from going short small cap fork they trades that lasted a day or two uh to taking long-term position trades. Uh so he's completely transitioned but he's basically adjusted and adapted uh through his entire trading career. So there's no single answer on how he's done it. But whatever approach he used, he just uh devoted a lot of research to it. >> People watching this will probably think to themselves, gee, a musician who dropped out of school, security guard, a volunteer firefighter. You know, these aren't Black Rockck execs. These are seemingly regular people and if a regular person with a regular job can do this, so can I. What would you say to that? >> Well, I I think most people if they if they if you did the amount of work and had the amount of devotion that these people did to trading, you probably get the point of profitability. But I think there's another there's another element to it. uh there there's that type of rigorous uh commitment and passion and work to trading. That's part of the equation. But the other part of it is I do believe that certain people just have born were born with something ineffable was that that makes them uh has the ability to to excel in trading just like certain people excel in certain sports or whatever. I mean, not everybody's going to be a professional athlete in any given sport, no matter how hard they work. I I I would say it's no different than in trading. Some people just have the right genetic makeup. Like the uh well, the musician, for example, says like one of the things that he knows about himself is that from a very early young age, he can be he had the he was always non-phased in in terms of any crisis. He just was always calm. that was just no matter what. So, this is a guy who's seen some enormous uh when he's broken his own rules has seen some enormous drawdowns uh but had the he sort of u has that uh composure to be able to to be calm and despite lose being in a position that that uh lo is losing extraordinary amounts of money. What was their approach to developing unique risk management tools and and um setups? You had people uh Christian Kulami, I'm not sure if I'm saying his name right, um turned $5,000 into a peak of $105 million between 2011 and 2021. He had setups that uh most traders never developed. It's it's it's it's it's very difficult to come up with something unique in an age where um the amount of information we have and the technology that we have kind of forces people to converge into similar styles of trading. >> Yeah. So you would think so. Um actually his case he basically and this is uh interesting he basically says uh I think I'm getting word for word here. I I never I didn't invent anything. Basically, he said he says I nothing I do is original. He he ultimately after all this research came down to three types of setups and uh which are discussed in the interview and each of those setups he got from somebody else on social media. It's not that he developed them but he made them his own and he married it ultimately with first management. He's a guy who uh the first three four times he tried trading wiped out his small accounts and he finally did it on the fourth or fifth time. Um and uh um so he he says quite explicitly I'm not doing anything original. I got ideas he got his ideas off of social media but the way he Trey has traded them uh and the risk management he's used uh has has made it possible for him to succeed. So, uh, >> it's it's mathematically improbable to never have a losing trade. I'm talking about a losing month, I'm talking about one losing trade. The the the difference between somebody like this guy or other people you've interviewed in your books and somebody who's not making profits is how you approach that losing trade, >> right? How do these people do it? What's their approach to something that's down? So um they they're they basically I guess have different risk management approaches in some cases like uh the volunteer fireman or another the fellow I mentioned who only had five losing months over a long period of time. Uh both of them are just extra so extraordinarily risk averse that if they have a losing trade it probably doesn't last two minutes. So, uh, they they don't need they don't need stops. They watch the market and, uh, or they may have a stop in as well, but they'll they'll be out if a trade doesn't work, they'll be out, uh, in a couple of minutes. And even if a trade in in in the volunteer fireman example, even if a trade isn't losing money, but if he isn't ahead within 20 30 minutes, in fact, he just he has he uses this time time stop concept, he'll get out of it. So on one hand, you have traders who would just get out almost instantaneously on the first loss. They're either right right away or they're out. So that's that's one type answer. Another type of answer is they just have uh risk level or let's say Kulumagi what he'll do is u he'll use like simple moving averages uh if the move is going on and uh if it and that'll be his first indication that something is wrong now he'll have a stop in anyway usually but if uh if a market's going sharply higher he'll He'll have a he'll use a shorterterm moving average. So so the very very s first time uh let's say it breaks the 10day moving average which is very easy to do for for price to break the 10day moving average he'll be he'll be out because that's just cuts cuts his chances down of losing much a lot of money. Uh so that's another style. the musician who's who got up to half who's up to half a billion uh after having a couple of incidents discussed in the book where he took these enormous losses by breaking his own rules essentially only a couple of times but and interestingly after we finished the book after we finished the original chapter he he he communicated back to us uh saying that he just had his worst draw down ever and he didn't want he didn't want to to have the book come out without acknowledging that. So that's actually in the book where the and but that last draw down was so bad that uh and he after that draw down he he rebounded in very quickly again but uh but that draw down was so bad that he implemented very rigorous rules to protect himself against himself and those rules include defining initially how much risk the trade is taking and tightening it up. So uh those are some of the answers. >> Exiting a winning trade is equally important. Uh have these successful traders relied more on technical qualitative uh signals sorry quantitative signals rather um or qualitative information like news or macro data that you they think would turn the position >> depends on the trader some. Yeah. Although I think for most of the traders it ultimately became a combination of both fundamental and technical. Some traders uh were initially mostly mostly technical base one way or the other. Uh but ultimately uh just thinking off top of my head I think most of them use both fundamentals and technical. >> Okay. Finally. So for somebody who may have read your prior books in years past, what do you think they will learn differently or sorry some new information they will learn or gain from reading your next book, the next generation of market wizards? >> Well, uh one one difference in this book versus all the other market wizard books is for the first time I included charts in the book. Uh so uh so there are some uh there's some maybe more explicit presentation of the trades that are discussed in the interview and so I guess one thing is Reus can see at least for some some of the interviews and some some of the strategies used uh what what the trades look like and what the thinking was. uh but in general I think in every market wizard book some timeless lessons come across like risk management you know uh and they come across very strongly uh explicitly and just implicitly through seeing the stories of these traders themselves. So and then every trader and every reader or listener if it's an audio uh I find latches on to different chapters in the book as being personally relevant. So what anybody would get out of any particular chapter varies and when people talk to me who've read my books and say you know what my chap my favorite chapter is I have no idea because it's always something different. So what what any reader listener can get out of this book will depend on on the individual. >> Would you ever consider interviewing a unsuccessful trader? Basically somebody who's lost a lot of money >> and just you know we can learn from his mistakes. >> Yeah. I mean I've I've thought of that idea and it's a good idea. It's an interesting idea. Now, part of that part of the uh motivation to do that type of book is actually fulfilled in the market wizard books because quite a number of the traders I've interviewed had early failures or sometimes even after they were successful have incidents of where they broke their rules and had a large loss. So, so some of that is in the market in the mark in this book and and in other Mark Wizard books. Um but I think it's a good idea. One thing if you just have a purely losing trader, you might have difficulty getting getting them there. We I am considering doing another book with the co-author my co co-author in this book George Coyle where we just not specifically a marker wizard book but where we kind of do a chapter on different one chapter on each chapter would be a different story somehow related to Wall Street. And one of those one of those chapters that we have in mind will be an individual who ultimately is successful but had the couple of enormous draw downs uh just mind-boggling and uh and so yeah so that the the book where we're we're very seriously considering doing would have that type of uh uh story. And finally into the future, do you think there's still a place for human traders uh AI uh agents have emerged as having in some cases superior information processing skills and we repeatedly read from your books and other people that some of the best traders trade without emotion sticking to the rules like you said um developing uh almost robotic processes. Well, who better to do that than a robot itself? So, can AI just replace human traders in 20 years time? >> Yeah. Okay. So, so you're right about, you know, number of those things. I mean, uh AI does have a number of advantages. uh uh certainly pattern recognition is kind of the essence of of AI and that's important in trading and that would be certainly an advantage where they can where AI can come up with uh with strategies that uh humans can't come up with because of the complexity that the patterns it can find. So that and you say the non-emotionality all that is true. Now I would say here's the saving kid here's a saving grace. First of all AI has been around at least for you know for some dependence what but in some form it's been around for some years now. Uh and I'm still finding traders with exceptional performance. So apparently for now it's still is the the the potential to be able to uh do not only beat the market but beat it by by miles is still apparently there and I'm I'm not finding obviously all the traders that do that. I'm finding a sampling of them. So that it's not been it's not been uh human trading has not yet been negated for sure. Uh now there is the saving grace. Uh I I would never underestimate AI because the progress that's going on now is exponential. Once you get to AI helping design the next version of a particular platform, uh you you're into you're into an exponential stage. So uh I would never underestimate that. But there is an inherent basic uh saving grace here and that is the markets are different than anything else. uh it's not like uh using AI to find a drug combination that can cure some disease and there are like trillions of drug combinations that that could be you know have to be tried and experimented and but AI can kind of shortcut that process but that's because science biology physics you know the rules that govern it don't change they're It's not like uh proteins say behave in one way in you know today and then 10 days from now they behave some different way. It's like it's not like the the rules of gravitation change. It's not like any it's not like what anything quantum mechanics all of the rules that drive the world only are fixed. They don't change. Uh so those problems can ultimately be solved uh by uh enough uh processing power. Something like uh climate which is extremely complex uh ultimately can probably be refined more and more in terms of AI being able to to come up with predictions that are more accurate than than humans ever could have done. So yes in those in those cases uh AI will beat humans in all all cases. Ultimately doctors I think ultimately will will be using AI as a as a diagnostic tool. Uh but they will never be able to outperform what AI will eventually be in terms of diagnostic capability. The difference in the markets is they the rules change all the time. simple examples. Uh sometimes bonds and stocks are positively correlated, sometimes they're negatively correlated, sometimes they're uncorrelated. So the same types of things. So that means if you've got a uh if you get a uh if you get an interest rate hike or something, it can or an unemployment uh uh uh drop or raise or whatever. any of those things sometimes could be positive, sometimes could be negative. The rules are always changing and uh that would make it more difficult for AI to come up with any types of it wouldn't come up with the absolute uh solutions. So I think always always is a dangerous word but I think for for a good length of foreseeable future uh there'll still be a place for humans just because a uh the markets are a different type of problem. They don't have the advantage of having fixed rules. >> Okay Jack, thank you very much. We mentioned your book that's coming out. I believe it's out next week uh the 9th of June. Anywhere else we can go to follow your work besides your upcoming book? No, nothing special in it. >> Okay. >> All right. Good. Well, we look forward to reading uh Market Wizards: The Next Generation. So, do uh do stay tuned for that book release. Thank you very much, Jack, and I appreciate your insights. Take care for now. >> Thank you for watching. Don't forget to like, subscribe,