Market Wizard Joe Ritchie

Jack Schwager’s interview with Joe Ritchie in The New Market Wizards was much more technical than the previous interview with his brother, Mark Ritchie. Most of the interview was a very detailed discussion on how Joe Ritchie’s firm implemented their arbitrage strategies. The later part of the interview shifted to a discussion on how Ritchie interviews and hires people to work for him. While this was very interesting to anyone looking to start their own firm, there was limited information for the independent trader. It was clear, however, the Ritchie employs many of the same beliefs that have been presented by other Market Wizards.

Top Five Quotes From Market Wizard Joe Ritchie:

“I did, however, know traders that went short silver at $9 and $10 because the price seemed so ridiculously high and ended up riding the position until they had lost their entire net worth. That happened to some of the best professionals I knew in the silver market” – Joe Ritchie

This reminded me of the classic example trend followers use where a trader buys and holds Citigroup the whole way down because it seems cheap. In both examples, the idea is that you need to get out of positions that aren’t going the way you expected them to as fast as possible. This becomes even more important under extreme circumstances. Any time that market experts agree that a market must do something, the market tends to find a way to prove them wrong.

“My basic argument was that there are a number of technicians trading with the same information and the distribution of success is a matter of who uses that information better. Why shouldn’t it be the same with fundamentals? Just because all the information is in the market doesn’t mean that one trader can’t use it better than the next guy.” – Joe Ritchie

I thought this was an interesting view that was slightly out of line with what most of the Market Wizards have said about fundamental analysis. Similar to this view, I have always believed that as an individual trader, I would never have access to the same quantity or quality of information, fundamental or technical, that major fund traders have access to. With that said, I do have the advantage of being able to maneuver my limited funds far more easily than they can. Therefore, while others may have better information, I can do a better job of using that information.

“Yes, the market has become much more competitive, but so have we. As long as we stay a notch better than our competition, there will still be good profit opportunities.” – Joe Ritchie

Ritchie goes on to explain that there will always be opportunities where the market values investments incorrectly. I was impressed by his attitude that he simply had to continue to evolve with the market and become more competitive. I have always been fascinated by the way truly great traders are able to adjust their trading style based on the way a market is acting.

“I think that probably explains a lot of it, but it presupposes that reality matches the curve in a mathematician’s head. Believing that can get expensive.” – Joe Ritchie

This quote comes from a section of the interview where Ritchie is discussing mathematical probabilities and how real world results rarely follow the same distribution curve. Once again we are dealing with the issue of predicting markets. Just because a market is probably going to go a certain direction, or due to change course, or overbought, or oversold, does not mean that the market is actually going to act that way. It is usually when markets are most likely to continue in a direction that they actually reverse course. We must be careful to plan for what might happen, but be prepared to react if we are wrong.

“Successful traders tend to be instinctive rather than overly analytical.” – Joe Ritchie

This is from a part of the interview where Ritchie is discussing what he looks for when hiring traders. He goes on to say that analytical people generally make the worst traders and that another key trait he looks for in a trader is humility. This follows the thinking that a trader has to be able to admit when he is wrong and be able to change direction quickly. Overly analytical traders often convince themselves that they must be right and then have a difficult time believing that they could be wrong. This is a fatal flaw.