Kim: Aloha everybody, welcome back to The Wall Street Coach. My name is Kim Ann Curtin and I am here with Jack Schwager and George Coyle, the co-authors of my favorite new book, Market Wizards: The Next Generation. The reason I wanted to have this conversation today is because there are just incredible stories in here that I feel every trader who's serious today needs to read. This book has so much wisdom. So let me ask you, Jack, first: now that you've interviewed generations of traders, what's fundamentally different about today's Market Wizard, and what hasn't changed at all?

Jack: Okay, let's start with what's different. Take a simple example: this is the first Market Wizards book where anybody mentioned having played video games as an influence on their trading. A number of these traders started out as day traders, though almost none stayed that way. The speed and focus involved in playing video games well seems to have translated to trading, at least for day traders working on very short timeframes and following multiple things at once. So that's one difference.

Then, whether it's coincidence or not, this is the first book where a number of traders started with what I'd call negative asymmetry strategies, where if you're wrong you can lose a lot more than when you win. It doesn't matter what the strategy is. If you go through all the past books, whether traders were fundamental or technical, short-term or long-term, trading currencies or stocks, when you boiled their strategy down it was typically positive asymmetry: when they were right they won more than when they were wrong, and most of them actually lost on the majority of their trades.

Specifically, a few traders in this book started out short-selling small-cap stocks, which is a classic negative asymmetry trade. If you're right, the best the stock can do is go to zero, and we're talking single-digit stocks, a $6 stock going to zero. But if you're wrong, these stocks that have already gone up 700% in a few days for no justified reason can easily go up another few hundred percent, and sometimes they do. So the pain, if you're wrong, can be a lot worse than the gain.

Kim: And what would you say hasn't changed at all?

Jack: Most aspects of trading. Risk management, the most essential element of trading, hasn't changed and probably never will. And remember, I'm getting a biased sample, people who have been extremely successful. Very, very few people get there without sound risk management, so I'm not surprised to see it come up in every book, and I'd expect it to come up forever.

Kim: George, you've been writing and researching traders and investors for two decades yourself. What surprised you about this collection of today's Market Wizards?

George: A lot of them were, not forever, but essentially very fast traders doing intraday trades. In the literature, and by "the literature" I mean the fruits of all the research I've done in Jack's books and elsewhere over decades, almost everybody historically cautions traders against day trading. And yet that's what these guys were doing very successfully. So at a high level, that was the thing that struck me: this isn't supposed to work, and yet here we are. I actually posted something about this on X yesterday, wondering whether markets have changed or whether the current environment is just especially conducive to it. But at a high level, the thing that surprised me most is that you're not supposed to be able to succeed day trading, and here they are doing it.

Kim: I read your piece yesterday on day trading, and my favorite part was that you're wrestling with the question. And I suspect, Jack, you're wrestling with it too, having seen all these generations. Do you both feel it's the market environment that's different now?

Jack: Well, the market is always different. The only thing that stays constant is that it changes. There have been enormous changes since the first Market Wizards book, which dealt with people whose careers happened when they were trading in the pits instead of electronically, track records largely accomplished before widely available PCs. Also before the age of hedge funds. There were a sprinkling of hedge funds then, but we've gone from maybe fewer than 100 to 10,000 or 20,000 today. Add in data availability and everything else, and the market environment is always different. I don't know that there's anything about the strategies these traders use, other than that they require PCs, that's theoretically different from what might have been possible in the first book.

Kim: George, what do you think?

George: I think you can make either argument. If you want to argue day trading is here to stay and will stay effective, the key components are: one, commissions are zero now, which matters because 20 years ago people paid $6, $7 a trade no matter the size, and now it's zero, which makes trading back and forth a lot easier. Two, high-frequency trading gets a lot of negative press, but one thing it's probably done, and I haven't statistically analyzed this, is give people better fills, with lower slippage than historically, because more participants make markets more efficient. And three, overall trading volume just keeps going up, which probably helps too.

The counterargument is that we're in a sort of late-1990s-style wild bull market, who knows when it ends, where stocks do crazy things. That kind of volatility meeting a relentless ascent is really conducive to a faster trading style. Yesterday IBM was down 25%, today Dell was down 13 or 14% when I looked. Those are down, not up, but the point is the moves are massive, and when you get big volatility on shorter timeframes you can make money, as opposed to things that go nowhere. So I don't know. I'll have to check back in five years and see. There are compelling narratives on both sides and I don't know which will prevail.

Kim: Jack, are there specific key traits that come right off the top of your head, looking over all the traders you've interviewed? Many traders listening dream of being a Market Wizard, whether or not they're lucky enough to get in your book. What are the traits any trader has to be loyal to that you've seen consistently?

Jack: Quite a few, but let's take one that comes immediately to mind: hard work. It's not the answer people want to hear, because too many people are attracted to markets thinking it's an easy way to make a lot of money. The truth is these people who made a lot of money are almost ridiculously devoted, maybe even wedded, to the markets. You see it in every chapter. Somebody like [Rick], who gets up at 3:30 every day to check the markets and takes his last look at 8pm. He's not in front of the screen the whole time, but he's essentially engaged from 3:30am to 8pm. I wouldn't want to do that, but that's the level of devotion that typifies the extremely successful traders.

Take the trader in the first chapter, who for the first ten or twelve years of becoming a trader spent an enormous amount of time going through charts and researching methods. As he put it, he lived to trade, and it consumed his entire waking hours. Interestingly, his brother-in-law asked him, "Can you teach me to be a trader?" and he said quite frankly, "Look, I was in my 20s, I had no family, I spent a dozen-plus hours every day. You've got a family, you're going to spend an hour and a half a day. Don't do it." His advice was don't do it. So that complete devotion and intense focus is a unifying trait that's very, very common, and I'd argue it's true of every single trader in this book.

Kim: And in all your books.

Jack: I think it's true of the large majority of traders across all the books. There's that complete obsession with the act of trading, example after example. It's very unusual. Now, once they get past a certain point, after decades of research and work, some can then spend a lot less time and still be successful. A couple of traders in this book went from that model of their entire waking existence being the markets to making room for other things in their lives, developing methodologies that don't require them to be in front of the screen, and then doing better than during the period when they were so intensely tied to the markets. But you don't get that in the first few years. You get it after someone has devoted their existence for ten-plus years.

Kim: George, any particular trait you noticed across all of Jack's books and now this one you've co-authored?

George: Sure, but before I get to that, I'd add one thing about the hard work, and Jack, correct me if I'm wrong: to most of these guys, it doesn't feel like work. They really enjoy it. Jack recommended I watch the HBO show The Pit recently, and I loved it, we're waiting on season three now. When that show comes on, it's not "oh man, I have to watch this," it's enjoyable. These guys work 60, 80 hours a week on markets, but they'd rather do that than go for a walk. To people who don't feel that way about it, it would be brutal.

As for the consistencies, and there are always exceptions, there are really three things I call the trinity. Most Market Wizards and truly successful traders, one, respect the price action of the market, they listen to it and pay attention to what it's saying rather than fighting it. Two, they stick with their winning positions. And three, they cut their losing positions. To me, the key thing that differentiates successful traders is that they have an active process for defense. Jack's quote, and you'll have to give me the exact one, is a Bruce Kovner line to the effect of "know where you're getting out before you get in." That's a key differentiator you see in almost all of them. So if you want to go with the averages in your own pursuits, incorporate those three things into what you do.

Kim: I'm going to ask each of you if you have a favorite in this book. I know it's like children, but Jack, do you have a favorite?

Jack: There are quite a few chapters I really like, but if I had to pick one, it would be Simon Russo, which is a pseudonym. It's the only anonymous interview I've done in any Market Wizards book, and there's a good reason. First of all, he insisted on it, to the point where he literally sent us a nine-page NDA holding us legally responsible for keeping his identity secret. So it was either do it anonymously or not at all. My attitude was, if I told you his real name it wouldn't mean anything to anybody, he's just a guy trading that nobody knows, and the story is exactly the same either way. It was much more important to get the story than to have his real name. Of course, like anybody else, we verified the results.

His story is phenomenal. Like a number of traders, he had early situations where he made money and then lost it all, and he was at the brink of never becoming a successful trader. The last time he'd blown his account down, he was broke and basically couldn't trade anymore. He's one of these guys who does extraordinarily deep research, and he was part of a web group where good traders posted their work. He had a following because his research was so intensive and sound. When he mentioned he could no longer trade, one of the traders in the group said, "I'll give you $50,000. Don't worry about it, pay me back when you can, no strings attached. I just respect your work." So literally a stranger gave him $50,000. On that first stake he more than doubled it, making about $100,000, then paid the guy back $60,000, the original $50 plus another $10 just because he'd been so kind. That left him $40,000, and with that $40,000 he eventually turned it into half a billion dollars. And the story of how he did that is interesting as well.

Kim: How about you, George, who's your favorite?

George: I don't know if I have a single favorite, there are great elements in so many. But one part I really enjoy and relate to is [Rick]'s chapter. He and I are the same age and he went to Fordham. I didn't go to Fordham, but he knew he wanted to work on Wall Street and be an investment banker, and in the chapter he admits he didn't even know what an investment banker did, it was just a thing to be. So he cold-calls his way into a job and then realizes he's just updating pitch books, and it isn't fun at all, you're so far removed from the markets. I didn't go into banking, but I remember coming out of college everybody said "I want to be an investment banker" and none of us really knew what it was. So I always relate to that and laugh, because the idea of trying to sell companies on you being the one to finance their debt does not appeal to me as a career path. That part is always fun for me to read because I lived it.

Kim: I think that's the power of the Market Wizards series in general, the variety of temperaments and personalities. A lot of traders I've coached over the years speak specifically to stories from the books, "I want to follow in his footsteps," not exactly, but there's an inspiration or an archetype. Notice how many traders in this book reference the Market Wizards series, because it lets you see the pain and suffering and the ultimate victory.

I'll tell you, Simon Russo's chapter is my favorite too, and I wanted to speak to something he said. I loved that he said he loves every single part of it, and that he welcomes failure, because you can't succeed without it. He also spoke about how much randomness and luck play a part, which tells me he has a lot of humility. And I loved the beginning where he talks about a letter to his parents about who he is, that he's comfortable with and has discovered who he is, and doesn't need to follow others, he wants to follow himself. With the power of that statement, is that true perhaps for all Market Wizards, even if they're not conscious of it? Is there a sense of them knowing who they are, what they're good at, their style, and having the ability to follow themselves?

Jack: The element of self-confidence is really important. It also explains how so many of these traders who had early failures are able to overcome the empirical evidence, which was not supportive of their assumption of ultimate success. They have this inner strength and belief in their own ability, that they will succeed. That inner drive, self-confidence and belief, is key in many of these traders.

Kim: It seems like a razor's edge between incredible confidence and humility.

Jack: There's a distinction: it's confidence, but not ego. They have tremendous confidence, but at the same time they know they screw up, can screw up, and have screwed up, and that nobody can take it for granted that they've got the market beat. So they have that element of humility. Russo recognizes that but for luck, the whole story could have ended very differently.

He actually had a postscript after we finished the interview, which we put in the book. One of his trades was going short Carvana, and his reason for going short wasn't a good one. He'd done the trade before and sold it at a previous level, and it got back up to that level, so he shorted it, but it wasn't really part of his usual methodology, which is normally pretty deep research. It went against him and he started adding more. He knew it was wrong but he kept doing it. Then a very bad earnings report came out, the stock gapped overnight, and he finally threw in the towel, losing something like $15 million on a spur-of-the-moment trade. Not inconsequential. But here's the thing: I went back and looked at the chart afterward and asked what would have happened if he hadn't covered. The stock went up for another year-plus, and even though he'd made $200 million or so by that point, had he stuck with that one bad trade it would have wiped him out completely. A sober thought, and one I know he realized as well.

Kim: I also saw the humility in that he reached out to both of you after the interview to say he'd just had a serious loss, as if that would disqualify him. And I thought, God, that just qualifies him.

Jack: At one point it was his worst loss ever, at least marked in the market, and he felt he had to notify us and let us know, to have the record be honest.

Kim: I was so impressed with that. This is a person who's a very old soul, because it's a hit to your ego to go back to Jack Schwager and say "I have to give you a postscript." What did you both enjoy most about talking to these traders, who are all so young for the most part? What surprised you and was fun?

Jack: For me, what I enjoyed most, what was particularly striking, was the brutal honesty of most of these traders. They didn't put themselves in the best light, they were very frank about all their shortcomings and feelings. I'd hope that intense honesty comes through in the interviews.

Kim: It really does.

George: For me it was just being part of the whole thing and getting to work with Jack. I've been reading these books for a long time and never imagined I'd wind up writing one, and there were moments where it was like, is this really happening? So it wasn't so much any one interview as being part of the whole process, seeing behind the curtain and how the sausage is made. Being able to ask these Market Wizards direct questions after doing so much research on this stuff was really awesome. And so far the reviews are pretty solid, so people seem to like the questions we asked. As always, thank you, Jack, for including me, I appreciate it.

Kim: The questions are phenomenal, and the way they're worded facilitates the traders' frankness. Thank you for putting so much into them, because that's what opens up their ability to speak to what they've done, the mistakes they've made, and the sacrifices they've made. One phrase that [Lucas] used in his chapter was "experience-born intuition." I love that wording. Would you speak a little about it? Do you see it among all the Market Wizards, or certain traders more than others?

Jack: That complete phrase is important, because people think of intuition as some mystical thing. It's not mystical at all. Intuition is basically subconscious experience, that's the way I'd explain it, and that's what he's referring to. Having been exposed to so many market situations over so much time, there are things that trigger somewhere in your mind. You may not even know exactly why, but it's something that was similar in the past triggering so-called intuition.

George: One thing on that: I wrote an article about implicit learning, an academic discipline that's not very deeply explored. I actually came across it in John Markman's annotated edition of Reminiscences of a Stock Operator. He wrote, and I'll read it, "After years of looking at stock trading sequences, Livermore had internalized probability outcomes to an extent that did not need to be verbalized. Psychologists call this implicit learning, or the ability to know something without knowing you know it. The key is immersion, or repeated concentrated exposure." I can send you the link to my article. It's pretty interesting, you see it in certain traders. In the article there's a comment about Elaine Crocker, president of Moore Capital, who was in charge of the traders at Commodities Corporation, one of the original futures hedge funds. She said a lot of times traders can't articulate why they make money. It's a very interesting field of study, though when I tried to pick up a couple of books on it from the library they were essentially useless. This tape-reading concept could be viewed as a version of implicit learning, it goes back 100-plus years and people still talk about it, so it's clearly a real thing, but it's fuzzy and hard to quantify. I'll send you the link if you want.

Kim: That would be great, I'll put it in the notes for this episode. Do you think AI will impact trading itself in dramatic ways in the next three years, or do you feel it's further out?

Jack: It's a tough one. On the one hand, you don't want to underestimate the power of AI, which is clear to everyone at this point, and I think we're essentially in an exponential advancement stage, because AI is now helping build future generations of AI. The power of it will be extraordinary and probably impossible to estimate. But there's a saving grace when it comes to trading: trading isn't like the sciences. In science there are physical and biological laws, constants that don't vary, and given the exact same inputs you'd get the same output, even if the process is extraordinarily complicated. In trading, the rules aren't fixed, the influences aren't the same, and the same inputs can have different consequences. Take an unemployment report: an unemployment figure much higher than expected will sometimes be bullish for the stock market and other times bearish. It's like that for almost everything that affects the market, the same conditions can have opposite effects. Since AI draws its power from pattern recognition, and the patterns don't necessarily stay the same, past patterns may not drive the future. So I assume AI will come up with powerful trading systems and strategies, but I don't think it will destroy the ability of the solo or individual trader to find niches where it's still possible to do well.

Kim: Anything you'd add there, George?

George: We get asked about AI a decent amount and my answers change all the time. If you use AI to create an image, like putting my head on a lion's body, it's easy to see it's doing what it's supposed to. With trading systems, which I spent many years designing, it's a lot harder. My advice: if you're going to use AI to build a trading system, make sure the system is actually doing what you think it's doing. Don't just assume "it's shown good results," check the signals, cross-reference against your own coding, because I've seen a lot of AI-generated stuff that's wrong. And if you go down that road you get into machine learning, which arguably is over-optimization, so how do you contend with that?

I once wrote an article about Renaissance Technologies based on Gregory Zuckerman's book The Man Who Solved the Market. There was a point where they had a drawdown because the market did something it hadn't really done before. It got me thinking: say you let AI build a thousand models, and they all work and all fire on the same stock at the same time on the same side. You'll have to put some kind of bound on that so your entire portfolio isn't in one stock, unless you want to risk ruin. So I think it'll end up being some back-and-forth between humans putting logical bounds on things and AI helping. One thing I was thinking about as Jack answered: AI might be very helpful to identify chart setups, which we show a lot of in the book, and then the trader picks. It would be nice to say, "go find me every episodic pivot today," which could make screening a lot easier. But as far as actually coming up with the logic of systems and doing the trading, everything I've seen so far makes me very wary of letting a system trade on its own.

Kim: Makes sense. I'm going to bring this to a close with one question, but first I want to remind everybody to get your copy of Market Wizards: The Next Generation. It's a book you'll read fast because every story is so riveting and so different, the cast of traders is very eclectic. We're going to move to an X Space now, but I wanted to ask, after all the elite traders you've interviewed, what's your current view: are great traders built, born, or both?

George: I ran a little survey on X recently and asked people to take a personality test, and most traders came back as NTs, INTJs, ENTJs and the like. It seems the NT personality types tend to migrate more toward trading, they were about 70% of the 300 or so responses I got, and they're a surprising minority of the general population, so personality types seem to play a role. The other thing I keep coming back to is implicit learning. Michael Marcus from the original book said he didn't have a good sense for it at first and learned to have it. Was it dormant and then came alive? Can anybody activate it, or only certain people, like a sleeper agent in the Bourne movies who comes alive? Is that trading ability inherent and activated via study? I don't know that we could ever fully answer it, but I think people can work hard enough to become proficient. It takes a lot of work, and they have to sift through and become clear on themselves and find the right style, because if somebody tries to trade someone else's style they'll potentially be terrible at it. So that's my non-answer answer.

Kim: Born, built, or both, Jack?

Jack: I became a better analyst because I read the books and took lessons out of them. What lessons people draw depends on their method, personality, who they relate to, and so on. But anybody who's open-minded, flexible, and willing to learn can get useful things that make them better. A simple example you'll see repeatedly in this book is journaling. At least some of the traders keep journals as an important part of how they became better, recording both what they did right and, more importantly, what they did wrong, and then reviewing those records. If you record your trades and why you made them and how they worked out, and you review them, you'll trip over your mistakes when you read them back. You may still make the mistake occasionally, but a lot less often, and that's an important step in becoming better. So I think anybody can become better by learning from the right material.

However, I don't think anybody can necessarily become a Market Wizard. I think these traders, maybe all of them, are in their own way born with some element in their personality or psychology that makes them particularly attuned to becoming good at this. It's not true of everybody, and that applies to every field. Only a small percentage of the population, no matter how much they love music or how much they practice, will become a soloist with a major philharmonic orchestra. Same in sports, only a small percentage, no matter how devoted, can excel at a given sport. There are always exceptions, but for the most part I think that's true. So the answer is really both: yes, Market Wizards are born one way or another, but they'd never have become that without committing so fully to the endeavor. It's a combination of DNA, talent, and the tremendous work that goes into getting to that level.

Kim: Beautiful, I'll end it there. Thank you both for your time, for writing this book, and for helping traders learn from those who are elite at this. I thank you both for being on this podcast, and I'm looking forward to the success of the book.

Jack: Thank you.

George: Thank you, Kim.

Kim: I hope you've subscribed to The Wall Street Coach podcast, and if you haven't, it's time to do so. See you on the next podcast.