I found Jack Schwager’s interview with Steve Watson from Stock Market Wizards to be interesting in that it stretched my mind a bit. Watson bases his trading on fundamental research combined with information he gains from actually calling company executives. While this couldn’t be further from my approach, once again, we see that there are some rules that apply to all types of trading.
Top Five Quotes From Market Wizard Steve Watson:
“I didn’t expect to get a job managing money on day one. I just wanted to break into the business. Once I decide I am going to do something, I become determined to succeed, regardless of the obstacles. If I didn’t have that attitude, I never would have made it.” – Steve Watson
One of my favorite parts of these interviews is when the people being interviewed discuss how they got involved with trading. I like reading about the mindset they had before they became successful. I have been able to draw quite a bit of motivation from that.
It’s great to read about how determined Watson was to be successful. I also appreciate that he was willing to put in the work and didn’t expect to be managing money right from the start.
“But it really comes down to my philosophy: It’s much more valuable to do your own research so that you can make your own decisions about when to get in and out.” – Steve Watson
Watson is referring to using research from analysts in making buy or sell decisions. We can take this a step further and apply it to systems trading. It is much more valuable, and some would say essential, to do your own research when building and backtesting your trading system. Doing all of the work yourself enables you to understand the system inside and out. This comprehensive knowledge of what you are doing will make trading the system seamless.
“If it looks like dead money and what I originally thought would happen is not happening, then it’s probably better to just move on.” – Steve Watson
Once again, despite having a completely different approach to trading that I do, we see a Market Wizard advocating cutting losses. The number one theme from all of the interviews I have read seems to be that keeping losses under control is the number one rule across all forms of trading, investing, and gambling. On the flip side, letting losses run seems to be the fastest way to blow up an account.
“You have a locomotive while prices are going up, but the problem is, what happens when the locomotive stops and reverses direction, as it invariably will. Are we near a top or will the top form three years from now? I can’t answer that question. All I can do is control the factors over which I have an influence.” – Steve Watson
Watson trades based on fundamental research and actually talking to company executives. This couldn’t be further from my style. I don’t even like talking on the phone. However, we both agree that there is no point attempting to predict price movements. In this respect, Watson has an element of trend following in his approach, despite how different it is from a more traditional trend following strategy.
“We’ve had a lot of short positions that we closed out because they went against us and that later on collapsed. But we are much more concerned about avoiding a large loss than missing a profit opportunity.” – Steve Watson
Watson again stresses the importance of cutting losses short. He actually goes as far as to say that missing a big profit is OK with him if it means that he keeps his loses under control. This is easier said than done. I have a very hard time watching a stock continue higher after I get out