Jack Schwager’s interview with Michael Masters in Stock Market Wizards didn’t ever get much deeper than a vague description of Masters’ approach. He basically looks for future catalysts and determines how they might affect a stock’s price. He also discusses writing software, so there is likely a systematic element to his process.
Despite his lack of details or examples, Masters is still able to convey several important truths that apply to all types of investing. I really liked his emphasis on writing out your strategy, and I think his idea of putting a time stop on a trade is very interesting.
Top Five Quotes From Market Wizard Michael Masters
“We stand portfolio theory on its head. We actually try to take unsystematic risk by being in stocks when the unsystematic risk is high relative to the systematic risk.” – Michael Masters
I have seen many people point out that too much diversification can lead to a portfolio that simply tracks the indexes. Masters makes it a point to explain that he prefers to do the exact opposite. He wants to be in stocks that have a good chance of moving one way or the other independent of the general market.
I like the idea that some stocks are more likely to track the indexes than others. By definition, stocks that closely track the indexes cannot rocket higher or crash lower. They simply do what the averages do. In order to find stocks that can hit home runs, we need to identify the ones that can move independent of the indexes.
“Except for my dad and my wife, Suzanne, everyone said that you couldn’t trade successfully and advised me against trying to do it.” – Michael Masters
I experience a lot of this. Working at a bar, I am constantly waiting on people who think that they know all there is to know about the stock market. It is painful to have to listen to people who are clearly clueless attempt to “teach me” things that I know are wrong.
I’m continually frustrated by conversations with people who have no concept of how much work I put into studying. I spend hours in libraries while they’re watching How I Met Your Mother, and then they want to “help” me. It’s insulting.
I also struggle with people who tell me that it’s not possible to trade successfully. Obviously, this is based on one trade that was a tip from their crazy uncle that didn’t work out. Trading is like anything else in life, you’ll get out of it as much as you put into it. Why don’t people seem to get that?
“One thing that helped me tremendously was writing the software for my trading ideas.” – Michael Masters
Cue my next big project!
In the next few weeks, I am going to begin learning to program trading systems. Not only will this be incredibly helpful to backtest different ideas and adjustments, I think it will also make some very interesting blogging.
I have seen similar quotes that say that programming your ideas forces you to fully develop them. For me, I am excited to be able to see how slight changes affect the performance of a standard system. How does adjusting the moving averages used in a crossover system affect annual returns and drawdowns?
“For every trade I put on, I have a time window within which the trade should work. If something doesn’t happen within the time stop, the market is probably not going to discount that event.” – Michael Masters
This is a concept that I absolutely need to implement. I can remember quite a few trades from last summer that did absolutely nothing after breaking out. Rather than dump them because they weren’t doing what they were supposed to be doing, I held them through their slow declines to my stop loss point.
“I believe that writing down your trading philosophy is a tremendously valuable exercise for any investor. Writing down your trading ideas helps clarify your thought process.” – Michael Masters
This goes hand-in-hand with programming. Blogging has helped me do the same thing. I have gained a lot of clarity from discussing my trading here. Writing out your thoughts forces you to really address what you believe and why you make certain decisions. Without this critical analysis, I would probably still be losing money through my discretionary stock buying.