Market Wizards - Interviews with Top Traders
Bruce Kovner- The World Trader
When this book was written, Bruce Kovner had an average return of 87% on equity, per year for 10 consecutive years. For example, if you invested $2000 with him in early 1978, you would have ended up having 1 million dollars after 10 years.
For Bruce, the road towards becoming a market wizard wasn't easily laid out. He started his adult life as a teacher and later had a run in politics. He thought that his studies and experience in economics and politics would help him become a better fundamental analyst.
And guess what? He was correct.
Bruce believes risk management is the most important thing for a novice trader. He has often advised beginners to undertrade. This means whatever you think your position ought to be, cut it into half. He himself never risks more than 1% of his equity in a single trade and recommends no more than 2% maximum.
Bruce also watches all the positions in his portfolio to check that the bets he places aren't too correlated. For example, if you risk 2% of your capital and bet on 10 different oil stocks, you can't really say that you are risking 2% on each of the positions because these stocks will move in sync with the oil prices. So it basically means that you are risking 15-20%.
In short, if you have 10 highly correlated positions, then you are really trading one position that is 10 times as large.
Bruce Covner also says that if he gets confused by whatever the market is doing or if his emotional equilibrium is disturbed, he closes all the positions regarding the event that is confusing him. This is his first rule of trading.
He believes that you should not get caught in a situation where you can lose a great deal of money for reasons that you don't understand. For him, such a situation was a market meltdown (Black Friday) on 19-10-1987. He temporarily closed all his positions for that day and the day after.
Another rule that he follows is staying rational and disciplined under pressure. He believes successful trainees are strong, independent and contrary in the extreme. They are able to take positions that others are unwilling to take. They are disciplined enough to take positions with the right size.
He believes that technical analysis is a great way to trade but he doesn't hold a position if he doesn't understand the market movement. Every position he takes has a fundamental reason behind it. In short, he thinks technical analysis often clarifies the fundamental picture and it is very crucial to study charts as it alerts him about the potential changes.
He thinks when price patterns are followed in a more in-depth manner, they can give false signals. He believes in taking a position with a predetermined stop. He knows where he will be getting out before he gets in. One should place the stops at a point that will indicate that the trade is wrong, not at a point that shows how much they are willing to lose.
Another thing that Bruce believes is that a trader should have control over his emotions and if he takes losses personally, he shouldn't trade.
Overall, he says that the most important thing to understand is risk management. One must always under-trade and work extremely hard to become a good trader. Lastly, one should not make the mistake of thinking of the market as a personal rival because the market doesn’t care whether you make money or not.