Jack Schwager’s interview with Market Wizard John Bender from Stock Market Wizards was interesting because Bender’s strategy is to exploit deficiencies in the standard options pricing model. I am certainly not an expert on options, but I found Bender’s argument about probability distribution to make perfect sense. I also found a lot of general knowledge in his interview, particularly with regards to risk analysis.
Top Five Quotes From Market Wizard John Bender:
“The thing that I liked about trading was that the only limitation you had was yourself.” – John Bender
While making easy money was what initially drew my interest to trading, the intricate mental aspect is what I have continued to find fascinating. Bender is absolutely right, there are no limitations in trading. You are completely free to trade any style or strategy that you like in any manner that you like. People have made fortunes using polar opposite strategies.
There is no right way to trade. The trick seems to be that you have to find an approach that suits your own personality and then master it. At the current moment, I am not sure that individual stock picking is a good approach for me because I seem to take an ADD approach to the markets. I switch which stocks I like every single day, and it seems to get worse when I have real money on the line.
Exploring our personalities the way trading forces us to can be enlightening, but only if we give it a chance to be.
“There are a few things that are essential to success in both trading as well as playing gambling games as a business. First, you have to understand edge and maximize your edge. Second, you have to be able to deal with losing. For example, a world-ranked backgammon player could lose $100,000 to a total pigeon because of bad luck. If that happens, he can’t lose his head. He has to stay calm and continue to do what he is supposed to be doing. Third, you have to understand gambler’s ruin – not playing too big for you bankroll.” – John Bender
Assess your risk. Cut your losses. Don’t go broke. Sound familiar?
Once again we have a Market Wizard using the gambling analogy to illustrate these principles. The problem that I often come across is that everyone agrees with these concepts on Saturday afternoons when they are 100% in cash. However, those same people will struggle and make excuses when the pressure is on and they have open positions during market hours.
It is important that you find a strategy that allows you to have the same opinions about the market regardless of your involvement in it.
“As a professional gambler or as a trader, you are constantly walking the line between maximizing edge and minimizing your risk of tapping out.” – John Bender
In order to further explain this quote, Bender proposes a coin flip bet where you have a ten-to-one chance of winning, but you have to bet your entire net worth. This is a great bet for someone with a low net worth and a lifetime to make up for a loss, but it is a bad bet for someone who is older and has a large net worth.
We must constantly be assessing how much risk we are taking and whether the payoff is worth that risk. It is much easier to take huge risks with a $5,000 portfolio than it is with a $500,000 portfolio. However, you will want to adjust the risk of the $5,000 as it grows to $500,000.
“A market that is driven by inflows can have small corrections, but it has to then immediately recover to new highs to keep generating new money inflows. Otherwise, money inflows are likely to dry up, and the market will fall apart.” – John Bender
I thought this was an interesting way for Bender to describe a market that was being driven by new money coming into it rather than actual growth. The difference is tremendous. It also provides an interesting look at the Fed-fueled market we are currently experiencing.
“The only time anyone touts a position is when they have it on and want to get out. When you turn on some financial TV program and see someone tell you to buy a stock, there’s a good chance he’s telling you to buy what he wants to sell. I’ve seen fund managers recommend the stock on TV and then seen their sell orders on the floor the same day.” – John Bender
I’ve always found it hard to believe that people could be that deceitful, but apparently it is true. I’ve obviously been schooled for years to avoid putting any stock on analyst recommendations, but it’s sometime hard to believe that these people still get air time on TV.