‘Get your head out of the mixer’ and other lessons from failure
• Author and fund manager Jack Schwager recounts the ups and downs of investment marvels
You can often learn more from studying the investing failures than the investing greats. Besides, mistakes in the market are invariably costly. So, what better way to learn than through other people’s mistakes? To this end Jack Schwager’s interviews with stock market wizards are as good a place as any to go in search of a few examples.
At one time Bruce Kovner may have been the world’s largest trader in the interbank currency and futures markets. Two thousand dollars invested with Kovner in early 1978 would have been worth more than $1m a decade later.
Kovner said: “In my first year, I had just quit graduate school to trade. One day, I made a particularly bad trade and lost about $300. Since I only had about $3,000, that was a very big loss and it was destabilising. I then compounded the error by reversing my original position and losing again. To top things off, I then reversed back to my original position and lost a third time. By the end of the day, I had lost $1,000, or one-third of my entire capitalisation.
“Since then, I have learnt that when you have a destabilising loss, get out, go home, take a nap, do something, but put a little time between that and your next decision. When you are getting beat to death, get your head out of the mixer.”
Gary Bielfeldt began his trading career with a $1,000 investment, which, according to Schwager, he eventually built up to “staggering proportions”.
Bielfeldt says: “One of my worst years was 1980. The bull markets had ended, but I kept trying to hold on and buy back in at lower prices. The markets just kept on breaking. I had never seen a major bear market before, so I was all set up for an important educational experience .... When you are starting out, it is very important not to get too far behind because it is very difficult to fight back. Most traders have a tendency to take risks that are too large at the beginning. The most important thing is to have a method for staying with your winners and getting rid of your losers.”
Besides the impressive gains he registered, an impressive aspect of Tony Saliba’s trades is the incredible risk control. It’s not surprising. In his first six weeks of trading, Saliba lost almost everything.
As he recounts: “I sought advice from the more experienced brokers on the floor. They said, ‘You have to be disciplined and you have to do your homework. If you do those two things, you can make money. You might not get rich, but you can make $300 a day, and at the end of the year that’s $75,000. You have to look at it that way.’
“It was like a light bulb went on. I realised that this chipping away approach was what I should be doing, not putting myself at a big risk, trying to collect a ton of dough. I stuck strictly to this and it worked.”
Jim Rogers began trading the stock market with $600 in 1968. In 1973, he formed the Quantum Fund with partner George Soros. Rogers says: “One of my greatest lessons happened in my early days. In January 1970 I took everything I had and went short. Needless to say, two months later, I was completely wiped out because I didn’t know what I was doing.
“One of the stocks I had shorted was Memorex. I sold Memorex at $48. In those days, I didn’t have the staying power psychologically, emotionally and, most important, financially. I ended up covering my shorts at $72. Memorex eventually went to about $96 and then went straight down to $2.
“I was dead right, absolutely, flat-out, perfectly right. But I ended up getting completely wiped out. The market didn’t care that I was dead right ....
“Wait for something to come along that you know is right. Then take your profit, put it [in a] money market fund and just wait again.”
Mark Cook’s early attempts at trading were marked by repeated setbacks. But each failure only made him work harder. After many years of tracking the market, filling volumes of market diaries and assiduously recording and analysing every trade he made, his trading became consistently profitable.
Cook believes most aspiring traders underestimate the time, work and money required to become successful.
He is adamant that to succeed as a trader requires complete commitment, a solid plan, adequate financing and a willingness to work long hours. “Those seeking shortcuts need not apply,” he says. “And even if you do everything right, you should still expect to lose money during the first few years.”
Mark Minervini achieved a 155% annual return to win the 1997 US Investing Championship. In 2000 he launched his own hedge fund, the Quantech Fund. “When I started trading I didn’t have a method,” he recalls. “I was buying low-priced stocks that were making new lows.
“I was also taking tips from brokers. The worst experience was in the early 1980s, when my broker talked me into buying a stock that was trading just under $20 ....
“He claimed the company had developed an AIDS drug that was going to get Parenteral Drug Association approval. He convinced me to buy more. [But] the stock kept on sinking. Eventually the stock fell to under $1, and I lost all my money.
“My mistake had been surrendering the decision-making responsibility to someone else. My broker still got a commission, but I was sitting there broke. Incidentally, although I didn’t realise it then, I now fully believe that losing all your money is one of the best things that can happen to a beginning trader. Because it teaches you respect for the market.
EVEN IF YOU DO EVERYTHING RIGHT, YOU SHOULD STILL EXPECT TO LOSE MONEY DURING THE FIRST FEW YEARS