Michael Steinhardt is not my style of trader. He actually didn’t like that author Jack Schwager referred to him as a trader. He believes his long term outlook excludes him from the category. Steinhardt spent the entire interview basically saying that he doesn’t have a system. He trades based on fundamentals and his perception of world economics.
Obviously this guy is the furthest thing from a CANSLIM or Trend Following trader. I spent the first 20 pages of this interview trying to figure out what I could possibly learn from someone who traded so dramatically different from myself and the traders i generally study. Then, in the last two pages of the interview, Steinhardt hit me with knowledge that can be applied across all trading styles. I suspect this was Schwager’s motivation for including him in Market Wizards.
When Schwager asks Steinhardt what advice he would give the layman, Steinhardt replies: “One of the allures of this business is that sometime the greatest ignoramus can do very well.” This wasn’t the response I expected, so naturally, I found it interesting.
Steinhardt goes on to say that “you are competing with people who have devoted a good portion of their lives to this same endeavor.” This reminded me of the quote from Jesse Livermore about people who do not treat stock trading as a serious profession. They expect to show up, trade a few tips, and walk out with a bag of money.
Steinhardt points out that there is always someone on the other end of your trades and that person is likely to be a professional. One should respect his competition when trading. This business should not be taken lightly.
Steinhardt then closes his interview by describing elements of good trading:
“Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake. You need to believe in something, but at the same time, you are going to be wrong a considerable number of times. The balance between confidence and humility is best learned through extensive experience and mistakes. There should be a respect for the person on the other side of the trade. Always ask yourself: Why does he want to sell? What does he know that I don’t? Finally, you have to be intellectually honest with yourself and others. In my judgment, all great traders are seekers of truth.”
If you’ve read through my other Market Wizards Posts, you know that I am a big fan of these Rules to Live By style lists that traders discuss. I think this one is particularly interesting in that despite the fact that Steinhardt trades a style that is a polar opposite from mine, every one of his core principles applies to my trading as well.
I think the key takeaway from this list for me is that I need to find that balance between confidence and humility, which Steinhardt says I will learn through experience and mistakes. I think I gravitate too much towards the humility side right now. I am generally too quick to admit I’m wrong and cash out. Sooner or later I am going to be in a position that I need to have the balls to hold tight in. However, I have also been correct in most of my selling, so perhaps my issue is too much confidence in buying into stocks I have no business owning.
I believe that documenting my experience and mistakes here is the best way to learn from them, and I hope that education and experience will be cheap relative to the eventual payoff.