BIO: Jack D. Schwager is a recognized industry expert on futures and hedge funds and the author of the iconic Market Wizards series, in which he interviewed about 70 trading legends of our time.

STORY: Jack stayed too long in a position where his short was the strongest and his long the weakest, even though he knew this wasn’t the way to invest.

LEARNING: Never stay in a position that violates something that you believe in. In every position, know where you’ll get out before you get in.

 

“A mistake is not a trade that loses money. It’s a trade where you did something that violated whatever your approach is that makes money over time.”Jack Schwager

 

Guest profile

Jack D. Schwager is a recognized industry expert on futures and hedge funds and the author of the iconic Market Wizards series in which he interviewed about 70 trading legends of our time.

His most recent work in the series is Unknown Market Wizards, published in November 2020. Previous books in the series include Market Wizards (1989), The New Market Wizards (1992), Stock Market Wizards (2001), Hedge Fund Market Wizards (2012), and The Little Book of Market Wizards (2014). His other books include the revised edition of A Complete Guide to the Futures Markets (2017). Market Sense and Nonsense (2013), Getting Started in Technical Analysis (1999), and the three-volume Schwager on Futures series (1995-96).

Worst investment ever

In late 2008, the world was falling apart. Jack looked at certain things like the metals index, down about 80%. He thought China was still an emerging market growing rapidly and had every reason to continue growing. Jack believed that this economy would come back somewhat.

So, Jack decided to buy ETF calls on China and the metals as far out as he could, assuming that the longer the time, the more likely they were to come back. He bought them deep out of the money, so they were pretty cheap.

Several years later, Jack still had that position. Instead of just taking the profits, he hedged himself by selling the S&P Retail ETF (XRT) and the NASDAQ ETF. Jack put himself in a spread position where he was short NASDAQ and the retail index and long China.

One day, China dropped 2%, and the XRT rose 2%. So Jack’s long position went down 2%, and his short position went up 2%. So he got a 4% loss on position in a single day. Essentially, you want to be long the strongest and short the weakest. Jack’s position was precisely the opposite. Instead of getting out of the position, he stayed, hoping it would return in a bit, but it didn’t. Jack eventually got out but lost most of his profits.

Lessons learned

• Ensure your long position is the strongest, and the short position is the weakest.
• Never stay in a position that violates something that you believe in.
• Always have a set maximum amount that you’ll risk on any investment to prevent you from losing too much on any investment.

Andrew’s takeaways

• Sometimes you just have a good idea, but at the wrong time, and it’s ok to quit and come back when the timing is right.

Actionable advice

In every position, know where you’ll get out before you get in.

Jack’s recommendation

Jack shares a list of his top 10 investing books:

• Reminiscences of a Stock Operator
• Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading
• Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
• Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos
• The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It
• More Money Than God: Hedge Funds and the Making of a New Elite
• Option Volatility and Pricing: Advanced Trading Strategies and Techniques
• When Genius Failed: The Rise and Fall of Long-Term Capital Management
• What I Learned Losing a Million Dollars
• The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution

 

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Connect with Jack Schwager

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Andrew’s books

• How to Start Building Your Wealth Investing in the Stock Market
• My Worst Investment Ever
• 9 Valuation Mistakes and How to Avoid Them
• Transform Your Business with Dr.Deming’s 14 Points

Andrew’s online programs

• Valuation Master Class
• The Become a Better Investor Community
• How to Start Building Your Wealth Investing in the Stock Market
• Finance Made Ridiculously Simple
• FVMR Investing: Quantamental Investing Across the World
• Become a Great Presenter and Increase Your Influence
• Transform Your Business with Dr. Deming’s 14 Points
• Achieve Your Goals

Connect with Andrew Stotz:

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• My Worst Investment Ever Podcast