Stock Market WIZARDS
Interviews with America’s
Top Stock Traders
Jack D. Schwager
In memory of my mother, Margaret Schwager, loved by all who knew her for her kindness, empathy, and sincerity.
and
In memory of my brother, Kerwin Farkas, deeply loved by family and many friends whose support never waned—a reflection of a life well lived.
CONTENTS
Author’s Note to the Paperback Edition
Acknowledgments
Prologue: An Inauspicious Beginning
Stuart Walton:
Back from the Abyss
Steve Watson:
Dialing for Dollars
Dana Galante:
Against the Current
Mark D. Cook:
Harvesting S&P Profits
Alphonse “Buddy” Fletcher Jr.:
Win-Win Investing
Ahmet Okumus:
From Istanbul to Wall Street Bull
Mark Minervini:
Stock Around the Clock
Steve Lescarbeau:
The Ultimate Trading System
Michael Masters:
Swimming Through the Markets
John Bender:
Questioning the Obvious
David Shaw:
The Quantitative Edge
Steve Cohen:
The Trading Room
Ari Kiev, M.D.:
The Mind of a Winner
Wizard Lessons
Appendix: Options—Understanding the Basics
Copyright
About the Publisher
AUTHOR’S NOTE TO THE PAPERBACK EDITION
The interviews for this book were conducted from mid-1999 through early 2000—in other words, just before the major top in the stock market (March 2000). Since then, the S&P 500 has been nearly halved, while the Nasdaq has lost nearly three-quarters of its value (as of the end of September 2002).
Thus readers of these interviews are likely to think: “Yes, but how have they done lately?” Fair question.
In the revised edition, detailed answers to this question have been provided at the end of each chapter, along with short follow-up interviews, focusing on the experience of the traders during this protracted bear market.
ACKNOWLEDGMENTS
Although I found most of the traders in this book through personal contacts in the industry, several money manager databases and texts provided helpful references. In particular, I would cite the following:
Barclay MAP for Windows. This software program, which is updated monthly, allows searches of an impressively large database of hedge fund managers. The program is highly intuitive and permits the investor to extract and rank those trading programs that meet multiple user-defined criteria. (Barclay Trading Group: [641] 472-3456; www. barclaygrp.com.)
Van Hedge Fund Advisors International Inc. (VAN). A hedge fund advisory service that compiles its own hedge fund indexes and maintains one of the largest hedge fund databases. The company provided me with the results of a computer search of hedge fund managers meeting my extremely restrictive set of criteria. ([615] 661-4748; www. hedgefund.com.)
The CTA Report. A quarterly comprehensive compendium of CTA performance results, containing a well-designed two-page layout of tables and charts for each CTA. There is also an easy-to-use Web site for monthly updates. As the name implies, this service covers managers who specialize in futures trading; only a small portion of these managers focus on equity derivatives. (International Traders Research, Inc.: [858] 459-0818; www.managedfutures.com.)
The U.S. Offshore Funds Directory. An annual publication that contains one-page summaries and annual returns for over 700 offshore hedge funds. There is also a web link for updates. ([212] 371-5935; www. hedgefundnews.com)
When I began my search for traders worthy of inclusion in this volume, my first call was to Doug Makepeace. He has built a career on finding and investing his own and client funds with exceptional traders. Doug was most generous in sharing information with me, even though doing so threatened his ability to invest additional funds with these traders in the future if they became too well known.
Tom DeMark, a renowned technical analyst whose indicators are featured on many of the country’s leading financial data services, was particularly vigorous in his efforts to help me find traders for this book. Tom is in a good position to provide such assistance, holding the unofficial world record as the technical analyst who has worked for the most (four) Market Wizards or their organizations.
Marty Schwartz and Linda Raschke were two former Market Wizards (“former” referring to the books in which their interviews appeared, not their trading talent) who helped me find new Market Wizards for this book.
Other industry contacts who were particularly helpful in aiding my search for great trading talent include: Sol Waksman and George Van; Bob Morris, Andy Good, Tony Cimirusti, Loran Fleckenstein, and Jason Perl.
I find it extremely difficult to evaluate the writing quality of any book I am working on. I lose all sense of perspective. For this reason, it is invaluable to have someone to provide objective feedback as the book is being written. Enter my wife, Jo Ann, who read the final draft of each chapter as soon as it was completed. Her promptness in performing this task was not a reflection of her eagerness to read the material—in fact, few topics interest her less than the financial markets—but rather a resignation to the inevitable in the face of my unrelenting nagging. (“Have you read it yet?”) Jo Ann provided honest comments—sometimes brutally so—and very helpful suggestions, nearly all of which were accepted. Whatever the defects of this book in its final form, I can only assure the reader they would have been that much worse without Jo Ann’s input.
PROLOGUE
An Inauspicious Beginning
Men are from Mars because they missed the flight to Venus. When to leave for the airport has always been a subject that my wife and I have viewed from different perspectives—my view: late enough to make it exciting; my wife’s view: early enough to allow for a traffic jam, a flat tire, airport shopping, and a full course meal before the flight.
For years I left for airports without allowing for any spare time and never missed a flight. About eighteen months ago, I moved to Martha’s Vineyard, where the travel time to the airport can be accurately estimated because of the limited traffic off-season and because the airport is so small—sort of like the one in the old TV series Wings, only smaller. (At least it was when I began this book; a new airport has since opened.)
One morning, only a few months after we had moved to Martha’s Vineyard, my wife, Jo Ann, and I were scheduled to fly to Boston. I was so cocky about the predictability of getting to the airport on time that I left our house—approximately a twenty-minute drive away—only thirty-five minutes before the scheduled departure time. The drive took a few minutes longer than expected, due to being stuck behind a slow driver on the no-passing, single-lane road; I realized I had cut it just a little bit too tight.
“We’ll still make it,” I assured my wife, “but we won’t have much extra time.” She seemed skeptical—irrationally so, I thought. We pulled into the airport entrance only ten minutes before flight time. Even though the parking lot was only a stone’s throw from the terminal, I dropped Jo Ann at the entrance, saying, “Let them know we’re here.”
When I returned about one minute later, I found Jo Ann standing outside waiting for me with a troubled expression. Confused to see her there, I asked, “What’s wrong?”
“The plane left,” she said in a voice that was a cross between disappointment and “I told you so.”
“What do you mean, the plane left?” I asked, glancing at my watch, even though I k
new the exact time. “It’s only eight minutes to ten.”
I went into the terminal, angry that the small prop plane had left without us before the scheduled time. “I don’t get it,” I said to the woman at the airline counter, all prepared to be the aggrieved customer.
She couldn’t have been nicer. “Our planes leave as soon as everyone is here. Since we hadn’t heard from you to tell us you were running late, we assumed you weren’t coming. If you had called, we would have held the plane.” And, you know, they would have, too; that’s how Martha’s Vineyard works. How could I be angry at anyone other than myself after that explanation?
Fast-forward about six months—the beginning of the interview process for this book. I am scheduled to catch the first flight on an intricate itinerary that will take me to four states in four days for six interviews. This schedule has no leeway for missed flights.
Wiser from experience, I make sure to leave early for the airport, allowing for plenty of extra time. On the drive there, Jo Ann, who is dropping me off, notices that I have lint on my blue blazer. She offers the helpful hint that I should ask the people at the airport counter for tape to brush it off. We arrive about thirty minutes early. I pull up to the curb and say good-bye to Jo Ann. After checking in and sitting for a while, I realize I have enough time to take care of my lint-laden jacket. I walk up to the counter and obtain the necessary tape.
There are about a dozen people in the small waiting room. A few moments later there is an announcement for my flight: “Now boarding section one, seats one to eight.” I pull out the red, plastic, envelope-size boarding pass and notice that it is emblazoned with the number 11. “How quaint,” I muse, “that they would board such a small flight in two sections.” I sit down and return to my lint-removal project.
I’m sitting there absentmindedly, picking lint off my jacket. Suddenly I snap back into reality. I realize that it must be at least five or ten minutes since they called for the boarding of the first group of passengers. I look around the waiting area and, to my horror, I discover that it is virtually deserted. I jump up, run through the doors to the airstrip, and see a small plane with propellers whirring. “Wait!” I yell, waving my arms frantically as I rush toward the plane. I see my whole precisely orchestrated trip—all four days, four states, and six interviews of it—unraveling on the spot.
The airline attendant intercepts me. I flash my large red boarding pass. “You’re not going anywhere,” he says firmly. At first I think he means that it’s too late and I missed the plane. But then he adds, “Your section will be leaving in five minutes.” That’s when I learned that at the Martha’s Vineyard airport “sections” refer to different planes!
I slink back to my seat. The moment of panic having passed, my sense of awareness returns, and I am able to appreciate completely the full scope of my stupidity. The last time I felt that embarrassed I had just asked an infrequently seen relative when she was “expecting,” only to learn subsequently that she had given birth two months earlier but had obviously retained a good portion of the gained weight. Oops.
“Okay, okay,” you’re saying, “a slightly amusing anecdote—maybe—but what does this have to do with trading or investing?” Simply this: If you’re too busy picking the lint off your jacket, you’re liable to miss the plane. In other words, don’t get so caught up in the details that you miss the big picture. Here are some examples of market myopia:
a trader who does exhaustive research trying to identify the most promising new technology companies but overlooks the fact that a 70 percent price rise in the sector during the past six months implies an unusually high-risk investment environment
a trader who scrutinizes a company’s financial statements and reports but fails to realize that the company’s soaring profits have been due to a single product whose future sales are threatened by the imminent entry of new competitors
a trader who is engrossed with finding better timing-entry methods but virtually ignores such critical questions as: When and how will positions be exited? How will risk be controlled?
All of these examples contain the same basic message: Maintain a whole-picture perspective. Focus on the entire market and the sector, not just the individual stock. Be attentive to qualitative factors, not just the available quantitative information. Develop a trading plan that encompasses all the aspects of trading, not just the entry strategy.
STUART WALTON
Back from the Abyss
In June 1999, at the peak of his career, after eight years establishing one of the most extraordinary stock trading track records of the 1990s, and with $150 million under management, Stuart Walton returned all money to his investors and walked away from trading completely. The emotional repercussions of a marital breakup were interfering with his ability to focus on trading, and he did not feel it was right to manage money until he could once again devote “100 percent energy and enthusiasm” to the task. In the preceding eight years, he had achieved an astounding 115 percent average annual compounded return in trading profits (92 percent for his clients after deducting management fees), with annual returns ranging from a high of 274 percent to a low of 63 percent (excluding the 1999 partial year).
Stuart Walton’s career as a trader is marked by a string of contradictions and paradoxes. He wanted to be an artist or a writer; he became a trader. Though he valued academics and disdained the financial world, the markets became his profession. He once hated trading so much that he awoke feeling that he couldn’t do it for another day and quit his job that morning; several years later, the markets were his endeavor and passion. His initial forays into stock trading were marked by such ineptitude that he nearly went bankrupt, yet he subsequently became so skilled that he more than doubled his money annually.
I visited Walton, a Canadian expatriate, at his office in downtown San Francisco. I discovered that, although managing a nine-digit sum, he had no trading assistants, no back office staff, no marketing people, no programmers, not even a full-time secretary. His firm, Reindeer Capital, consisted of Stuart Walton alone. His isolation was deliberate. After having gone wrong so often by listening to tips and opinions, he had come to realize the importance of not being influenced by others while trading.
Walton was relaxed and outgoing. We talked for five hours straight without interruption. The time passed quickly.
* * *
Is there some significance to the name of the firm or are you just partial to reindeer?
The firm is named after my great-grandfather, William Gladstone Walton, who was given the nickname “Reindeer” for a famous trek he conceived and led. Much of what I know about him I learned from my grandfather, who passed away last year at the age of one hundred, narrowly missing the feat of having lived in three separate centuries. In 1892, at the age of twenty-three, Reindeer Walton left England to work as a missionary in northern Canada. He typically traveled over two thousand miles a year by canoe and dogsled, visiting his far-flung constituency—the Indians and Eskimos that lived around the Arctic Circle.
One year, vast forest fires swept through northern Quebec, destroying almost all the region’s vegetation and game, and leaving the native population at the brink of starvation. Reindeer Walton came up with the idea of herding the Siberian reindeer, which are also called caribou, from Alaska to northern Quebec. Through sheer perseverance, he convinced the Canadian government to finance the trek, which he organized and led. It took him five years, from 1921 to 1925, to herd three thousand reindeer across northern Canada. Reindeer are not like cattle; they move only when they want to move, and they go in all different directions.
How did he keep them herded together?
Caribou will follow the feeding path. He used a lot of foresight in choosing the right route. He succeeded in getting three-quarters of the herd to migrate; the remainder died or dispersed. His trek permanently changed the migration patterns for Siberian reindeer. The portion of the herd that survived flourished in northern Quebec, and he became a loca
l hero.
Is there some principle you wish to symbolize by the name, or is it just a matter of honoring your great-grandfather?
I tell people that my great-grandfather added more value to society than I ever will.
When did you first get involved in the markets?
As soon as I graduated from McGill University with an M.B.A. I originally wanted to be a cartoonist.
A cartoonist with an M.B.A.? Were you planning to be the world’s first business cartoonist?
No, the cartoonist ambitions came earlier. When I graduated from college, I definitely wanted to be a cartoonist. I sat down with the head of the art department, and he told me, “If you feel you know how to draw and represent the human body as well as one of the masters of art history and are then prepared to make five dollars per hour drawing cartoons, then this is definitely the career path for you.” His comments threw some cold water on my plans. I had also done some writing in college, and a few of my short stories had been published. I thought that journalism might be a good alternative career path that allowed some creativity.
Your interests seem to be so strongly artistic. Why did you go for an M.B.A.?
Because the journalism idea fell through as well, and I decided I needed to earn a living.
What went wrong with journalism?
I applied to several journalism schools. That summer, while visiting my parents, who were in Brazil at the time, I received a rejection call from Carleton University, which was my first choice for a journalism school. I received the call during a party. Maybe it was because I’d had too many Brazilian caipirinhas, which is their rum concoction, but I said to myself, “I guess this is another one of life’s crossroads.” So I decided to give up the idea of becoming a journalist. I guess I didn’t want to do it badly enough to pursue it.
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