Good investors don’t buy on even odds. Book#70

I saw this book Market Wizards by Jack Schwager referenced by many gurus of the finance community. I got to it in the early months of last year by curiosity but also with a dash of skepticism.

After having read quite a bit about value investing and the dangers of speculation and momentum trading I wasn’t so convinced that reading about the success stories of short term traders was an excellent idea. But I guessed that as long as I knew that from the start I wasn’t going to get carried away into wanting to become a short-term futures speculator too.

Admittedly though some ground rules explain the success of these traders from the second half of the 20th century, that are also of paramount importance to value investors. Trading is a short term game and investing just like it requires a willingness to take risks and a discipline to monitor these risks carefully. But it also requires patience, self-confidence, independent thinking, and an aptitude to avoid biases.

Among the many aphorisms that this book has, I noted down these two that sum up the above rather well in my opinion:

“If you don’t bet, you can’t win. If you lose all your chips, you can’t bet.”
“The stock market is neither efficient nor random. It is not efficient because there are too many poorly conceived opinions; it is not random because investor emotions can create trends.”

All these traders had many different approaches to trading, such as quantitative, macro, or momentum. But reading about all of them helped me make my list of do’s and don’t and reinforced further my existing beliefs in value investing. In a nutshell, don’t trade from technicals, don’t act because you are bored, don’t speculate, and don’t try to guess what others are thinking or doing. What I have to do is to own businesses, buy value, wait for hysteria, wait for the obvious, wait for asymmetrical bets. This last point is crucial: “good traders (and good investors) don’t gamble on even odds, they find opportunities that, if right, will profit them tremendously, and if wrong, will not hurt them.” If you keep taking bets where the odds are in your favor, you may not win them all, but in the long run, it should work out ok.

On a side note that book reminded me that I’d like to read more about Paul Tudor Jones, and Jim Rogers. They are not really value investors but I am curious to learn what made them this succesful for this long at the global macro game.

My purpose in life is independence, fulfilment and a better understanding of how the world works. Like Charlie Munger, I believe in the discipline of mastering the best that other people have ever figured out. And like Sir Isaac Newton, I believe in our ability to see further than any others before us by acknowledging that we are standing on the shoulders of giants. With this blog I hope to keep track of my learning about investing, business, decision making, entrepreneurship and self development while inspiring others to do the same. For the moment the format of this blog will be one post for each book that has influenced me, but I expect it to evolve over time. Join my Journey. John.