I (Chris) am talking about Jack Schwager’s 1989 book Market Wizards.
It’s one of the most underlined and dog-eared books in my library.
It’s also a cult classic on Wall Street. And it’s easy to see why…
Market Wizards is an “instruction manual” on how to beat the market.
And as you’ll see in today’s dispatch, the essential lesson it teaches is simple to follow.
If you take this lesson to heart… and apply it to your own investing… you’ll be able to target outsized gains in your portfolio without worrying about suffering ruinous losses.
Can the market be beat?
The answer from finance academics: No, not unless you’re very lucky.
If they’re right, anyone even trying to beat the market is delusional.
But Schwager was a trader, not an academic. And he knew that some top traders and investors proved the academics’ theory wrong.
So he set out to find them and learn their secret sauce.
And for Market Wizards and two follow-up books – The New Market Wizards and Hedge Fund Market Wizards – he sat down and talked to the greatest moneymakers on Wall Street.
In fact, they include some of the most famous investors of all time.
Take Paul Tudor Jones. He shot to fame after making about $100 million from the 1987 market crash. (The Dow plunged 22.6% in a single day on October 19 of that year – aka “Black Monday.”)
Or Jim Rogers. In the early 1970s, he cofounded the Quantum Fund along with George Soros. It gained a jaw-dropping 4,200% over 10 years.
Or Richard Dennis. He was a Chicago-based commodities trader. And he reportedly made a personal fortune of $200 million from his speculations.
Or Ray Dalio. He runs the world’s largest hedge fund, Bridgewater Associates. And since he set it up in 1975, it’s produced more dollar returns than any other fund on the planet – $45 billion in net gains.
His name is Larry Benedict. Schwager featured him in Chapter 3 of his 2012 book Hedge Fund Market Wizards (right after the chapter on Dalio).
And as Schwager makes clear, Larry is one of America’s most prolific moneymakers.
Between 1990 and 2011, he didn’t have a single losing year.
That includes 2008. In a year when most American households lost 25% to 30% of their net worth, Larry generated $95 million.
And between 2004 and 2012, Larry and his firm generated more than $274 million for themselves and clients.
And according to Schwager, Larry did this by averaging annualized compound returns of 19% a year… with a maximum drop in the value of his fund of just 5%.
That’s because, tonight at 8 p.m. ET, Larry will host America’s First Trade-a-Thon.
Broadcasting from his Florida mansion, he’ll attempt to generate $70,000 or more from a single day’s worth of trading.
His reputation as one of the world’s greatest traders will be on the line.
If he wins, the profits will go to a Florida charity. If not… well, let’s just say he’ll lose a lot of money.
But here’s what’s so exciting about Larry’s event tonight – win or lose, he’ll be revealing the secret sauce that made him one of the world’s most successful traders.
This has never been done before. So make sure you tune in live to witness it yourself.
In a word, discipline.
The popular view is that a trader is someone who takes big risks to earn big rewards.
But that’s just the Hollywood version. In reality, the world’s most successful traders spend most of their time managing their downside risk.
That was the golden thread running through the Market Wizards books. All the super-traders Schwager interviewed reported that finding a discipline that works – and sticking to it – was the key that allowed them to haul millions out of the markets without blowing up.
Fans of our own master trader here at Legacy, Jeff Clark, will know what I mean.
Jeff is looking for home-run trades. But he only ever trades with 10% of his overall liquid net worth. The rest he keeps in safe-haven assets such as cash, gold, and bonds.
And Larry has a similar obsession with keeping his risk under control. Schwager…
Risk management dominates Benedict’s approach. To say he is cautious is an understatement. If his losses in any month approach 2.5%, Benedict will liquidate the entire portfolio and start with a clean slate the next day, trading at a reduced position size.
That’s why Larry hardly ever takes a loss. Schwager again…
The rapidity with which Benedict cuts his exposure explains why he has never had a large monthly loss. His worst month in 13 years of trading (seven years in his fund and six years previously in a managed account and proprietary account) was a moderate 3.5% loss.
In other words, Larry is able to make big bucks without ever taking big losses.
And it’s why, across Legacy Research, we hammer on the importance of thinking about the downside risk… as well as the upside potential… of every investment or trade you make.
Larry is an extreme case. But he’s living proof this approach works. As he put it in a recent interview, “The market knows more than you. And can humble-ize you in an instant.”
I’ll have more for you tomorrow on the usual way Larry manages his risk.
But this doesn’t have to be any more complicated than always sticking to an “asset allocation” strategy.
That means never putting all your eggs in one basket. So instead of owning all your liquid net worth in stocks, you also own some cash, some gold, some bonds, some real estate… even some collectibles… in the mix.
That way, no single event, such as a stock market crash, can threaten your way of life.
Here’s that link again to secure your spot for Larry’s event.
And if you want to hear more about why I’m so excited for Larry’s broadcast tonight, I recorded a brief video just for you and your fellow Daily Cut readers. Click here or the thumbnail below.
Until tomorrow…
Chris Lowe
December 11, 2019
Baltimore, Maryland
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