Unknown Market Wizards

The best traders you've never heard of

Jack D. Schwager

• Editore: Harriman House
• Anno: 2020
• ISBN:
  9780857198709
• Argomento: Business
• Categoria: Investments & Securities

The Market Wizards are back!Unknown Market Wizards continues in the three-decade tradition of the hugely popular Market Wizards series, interviewing exceptionally successful traders to learn how they achieved their extraordinary performance results. The twist in Unknown Market Wizards is that the featured traders are individuals trading their own accounts. They are unknown to the investment world. Despite their anonymity, these traders have achieved performance records that rival, if not surpass, the best professional managers. Some of the stories include: - A trader who turned an initial account of $2,500 into $50 million.- A trader who achieved an average annual return of 337% over a 13-year period.-A trader who made tens of millions using a unique approach that employed neither fundamental nor technical analysis.- A former advertising executive who used classical chart analysis to achieve a 58% average annual return over a 27-year trading span.-A promising junior tennis player in the UK who abandoned his quest for a professional sporting career for trading and generated a nine-year track record with an average annual return just under 300%.World-renowned author and trading expert Jack D. Schwager is our guide. His trademark knowledgeable and sensitive interview style encourages the Wizards to reveal the fascinating details of their training, experience, tactics, strategies, and their best and worst trades. There are dashes of humour and revelations about the human side of trading throughout.The result is an engrossing new collection of trading wisdom, brimming with insights that can help all traders improve their outcomes.

Part I: Futures Traders

Peter Brandt: Strong Opinions, Weakly Held

It is remarkable how many of the Market Wizards that I have interviewed failed in their initial trading endeavor—some multiple times. In this respect, Peter Brandt fits the bill. What is unusual about Brandt, though, is that after well over a decade of spectacular success following his initial failed attempts, he lost his edge, went cold turkey on trading for 11 years, and then resumed trading for a second lengthy span of outstanding performance.

Brandt is definitely old school. His trading is based on classical chart analysis that traces its origins to Richard Schabacker’s book, Technical Analysis and Stock Market Profits, published in 1932, and later popularized by Edwards and Magee’s, Technical Analysis of Stock Trends, published in 1948.

He started his financial career as a commodities broker in the early 1970s, just when spiking inflation and soaring commodity prices transformed commodities from a financial backwater to the hot new market. Back then, the futures markets were called commodities because all the futures markets were indeed just commodities. This period was the threshold of the introduction of financial futures in currencies, interest rates, and stock indexes, which would become the dominant futures markets, making commodities a misnomer for this market sector. Brandt started his trading career in the commodity trading pits in the quaint old days when futures market transactions were executed in the bedlam of a ring of screaming brokers, in stark contrast to the quiet efficiency of current-day electronic trading.

Brandt’s trading career encompasses 27 years—an initial 14-year span and the current ongoing 13-year span—with the two trading segments separated by an 11-year hiatus. The reasons for this lengthy interruption in his trading career are discussed in the interview. Brandt does not have his performance records prior to late 1981. Over the entire 27 years he traded since then, Brandt achieved an impressive average annual compounded return of 58%. Brandt, though, is quick to explain that this return is inflated because he traded his account very aggressively—a point borne out by his very high average annualized volatility (53%).

Brandt provides the perfect example of a trader for whom the ubiquitous Sharpe ratio greatly understates the quality of the performance. One major flaw inherent in the Sharpe ratio is that the risk component of the measure (volatility) does not distinguish between upside and downside volatility. In regards to the risk measure, large gains are viewed as equally bad as large losses, a characteristic that completely contradicts most people’s intuitive notion of risk. A trader such as Brandt, who experiences sporadic large gains, is penalized by the Sharpe ratio, even though his losses are well contained.

The adjusted Sortino ratio is an alternative return/risk metric that utilizes losses instead of volatility as the risk measure, thereby eliminating penalization for large gains. The adjusted Sortino ratio is directly comparable to the Sharpe ratio (the same is not true for the conventionally calculated Sortino ratio).1 A higher adjusted Sortino ratio (as compared with the Sharpe ratio) implies that the distribution of returns is positively skewed (a greater tendency for large gains than large losses). And, similarly, a lower adjusted Sortino ratio implies returns are negatively skewed (a greater propensity for large losses than large gains). For most traders, the Sharpe ratio and the adjusted Sortino ratio will be roughly in the same general vicinity. In Brandt’s case, however, because his largest gains are much greater than his largest losses, his adjusted Sortino ratio (3.00) is nearly triple his Sharpe ratio (1.11)! As another reflection of the strength of Brandt’s return/risk performance, his monthly Gain to Pain ratio2 is very high at 2.81—a particularly impressive level in light of the length of his track record.

Brandt is the one trader in this book for whom the title adjective “unknown” is not entirely apropos. Although through the vast majority of his career he was indeed unknown, and he is still not widely known in the broader financial community, in recent years, through his Factor market letter and a rapidly growing Twitter following, he has gained recognition and respect from a segment of the trader community. Indeed, several of the traders I interviewed for this book cited Brandt as an important influence. But I had strong motivations for including Brandt in this book that overrode my preference for maintaining the purity of the title.

In a way, Brandt was the catalyst for moving me from writing this book “someday” to beginning the preliminary steps for the project. I knew that if I wrote another Market Wizards book, I wanted Brandt to be in it. Brandt and I are friends. I was familiar with his views about trading, which I thought were spot on, and I felt I would always regret it if I failed to capture his perspective in a book. At the time, Brandt lived in Colorado Springs and mentioned to me that he was moving to Arizona in a few months. Since I lived only about 100 miles away in Boulder, Colorado, I thought it would be more efficient to interview him before he moved and that doing so would provide the ancillary benefit of getting the book started. Ironically, by the time I got around to scheduling the interview, Brandt had already moved to Tucson.

When I arrived at the airport, Brandt was waiting for me at the bottom of the exit escalator. I was glad to see him again. Although it had only been a little over a year since we last met, his walking posture had noticeably changed, with his back bent slightly forward. Thirty-five years earlier, Brandt suffered a terrible accident. He had gotten up in the middle of the night to go to the bathroom. He recalls wondering in annoyance, “Who left this chair in the middle of the hall?” Brandt was sleepwalking. The “chair” was actually the railing of the upper deck. He clambered past the obstacle, and the next thing he knew, he was flat on his back, unable to move. Brandt had fallen nearly twenty feet. He suddenly realized what had happened. So did his wife, Mona, who, upon hearing the crash of the fall, immediately dialed 911.

Brandt spent over 40 days in the hospital, wearing a body cast and sandwiched between two mattresses that could be rotated regularly to change his position. Since the accident, Brandt has had a half-dozen surgeries on his back, and now with age, his back is visibly bothering him more. He lives with constant pain—something I know only because I have asked him about it. He is a bit of a stoic and never complains about the pain, nor does he take any pain medication because he doesn’t like how it makes him feel.

Brandt drove me to his home, which is situated in a g...