I found Jack Schwager’s interview with Gil Blake from The New Market Wizards to be very interesting. Blake’s investing strategy involves rotating his capital in and out of different sector based mutual funds. He argued that it is much safer and more predictable to invest in a group of correlated stock as opposed to picking individual stocks. Since this interview was conducted way before the invention of ETFs, I would love to hear an update on how Blake is trading today. I thought his approach was a very interesting take on sector rotation.
Top Five Quotes From Market Wizard Gil Blake
“I’m not a big fan of diversification. My answer to that question is that you can diversify very well by just making enough trades per year. If the odds are 70 percent in your favor and you make fifty trades, it’s very difficult to have a down year.” – Gil Blake
This philosophy on diversification goes right along with what most of the people I study have taught. Once you start increasing the number of stocks in your portfolio, you basically become an index fund and it becomes very difficult to beat the general market averages. Blake doesn’t directly address the fact that he has some diversification build into his system because he invests in funds that own many stocks. This insulates him from losing everything if one stock goes broke overnight.
“Whenever I take a position, I like to imagine what it would be like under the worst-case scenario. In doing so, I minimize the confusion if that situation actually develops. In my view, losses are a very important part of trading. When a loss happens, I believe in embracing it.” – Gil Blake
Here we see yet another Market Wizard discussing the importance of cutting losses. Blake actually calls it “embracing” losses. His worst case scenario approach is something I have used for years by simply setting a stop-loss order right away every time purchase a stock.
“The lesson for me was that if you break a discipline once, the next transgression become much easier. Breaking a diet provides an appropriate analogy – once you do it, it becomes much easier to make further exceptions.” – Gil Blake
I found this quote interesting because it has such a broad application to life in general. Breaking your investing rules can be a very slippery slope, and anyone who has ever broken their rules knows this. I think Blake is very clever to relate trading discipline to diet discipline. You can do a great job following a given diet for weeks, but once you slip up and eat a cheeseburger, it becomes that much easier to eat another one the next day.
They say that the best way to rid yourself of addictive behavior is to starve the addiction. The more you feed whatever craving you have, the more it will crave. Breaking your rules and losing money can be very addictive.
“Opportunities change, strategies change, but people and psychology do not change. If trend following systems don’t work as well, something else will. There’s always money being lost, so someone out there has to win.” – Gil Blake
This is nothing we haven’t heard from lots of other Market Wizards, but I like the way Blake phrases it. This was the second time in the interview that he mentioned that markets are constantly changing and evolving. I like the simplicity of his view that there is always money out there to be made and all he has to do is figure out how to get it.
“First of all, most traders don’t have a winning strategy. Second, even among those traders who do, many don’t follow their strategy. Trading puts pressure on weaker human traits and seems to seek out each individual’s Achilles’ heel.” – Gil Blake
This quote reminded me of some of the earlier Market Wizards interviews who claimed that you could print trading rules in the Wall Street Journal, but people wouldn’t actually follow them. This second part really complicates the process. Not only do you have to find a system that gives you an edge, you also have to have the discipline to follow it.
It is also interesting how Blake describes trading putting pressure on a trader and seeking out his Achilles’ heel. The discipline that successful trading demands will force a trader to search himself for flaws and deal with those flaws head on.