The Little Book of Market Wizards: Book Review

This 'Little Book' is a selection from Jack D. Schwager's classic set of four previous 'Market Wizards' books.

In any list of ‘must-read’ books on trading, you would certainly find two titles of Jack Schwager: Market Wizards and The New Market Wizards. These two books—and a few later books of Schwager—have a fascinating format. They are questions and answers with the world’s largest and best traders. Schwager set out to find answers to what differentiates the highly successful market practitioners, or market wizards, from ordinary traders? What traits do they share? What lessons can we learn from those who achieved superior returns for decades while maintaining strict risk control? Schwager has spent decades interviewing legendary traders in search of answers. Himself a trader, he has been able to draw out ideas and strategies of the world’s best minds churning out great risk-adjusted returns in bonds, equities, commodities and forex markets.

Every interview charts their career paths, recording early failures and later successes. Many of them were almost wiped out early in their trading lives before they pulled themselves up and reapplied themselves, realising that controlling risk is the key to returns. These inspiring stories have resonated with traders all around the world. These two books, and later Stock Market Wizards and Hedge Fund Wizards, have become Bibles for traders. Peter Brandt, a successful trader, writes in the introduction that it is an annual ritual for him to read these books during Christmas holidays.

The Little Book of Market Wizards is a combination of the four books in the Market Wizards series. It provides the major insights garnered across the four Market Wizards books, spanning a quarter century. Schwager has extracted lessons and concepts that are essential to success in trading, regardless of the methodology. For instance, chapter five discusses the ‘Importance of Hard Work’. Schwager points out “I interviewed Marty Schwartz in the evening after a long trading day. He was in the middle of doing his daily market analysis in preparation for the next day. It was a lengthy interview, and they finished quite late. Schwartz was visibly tired. But he wasn’t about to call it a day. He still had to complete his daily market analysis routine. As he explained, “My attitude is that I always want to be better prepared than someone I’m competing against. The way I prepare myself is by doing my work each night.”

Chapter eight discusses ‘Risk Management’, the one a factor that can make or break a trader. When Schwager asked Paul Tudor Jones what was the most important advice he could give to the average trader, he replied, “Don’t focus on making money; focus on protecting what you have.” As the author explains, “most trading novices believe that trading success is all about finding a great method for entering trades. The Market Wizards I interviewed, however, generally agreed that money management (i.e., risk control) was more important to trading success than the trade selection methodology. You can do quite well with a mediocre (i.e., slightly better than random) entry methodology and good money management, but you are likely to eventually go broke with a superior entry methodology and poor money management. The unfortunate reality is that the amount of attention most beginning traders devote to money management is inversely proportional to its importance.”

Chapter nine elaborates on ‘Discipline’. When the author asked the market wizards what differentiated them from the majority of traders, the most common reply he got was ‘discipline’.
This may seem too simplistic to some, vague to others, and too obvious to many more. But Schwager underlines how Randy McKay, a very successful trader, once lost millions over a few days just because he slackened a bit and let a losing position grow too large.

One of the most important lessons from successful traders is that losing is a part of the game. Traders who have developed a method that works, and have a risk control system in place, are never bothered about losses. They know that trading is a business of probability—not certainty. If you have read at least the first two volumes of the Market Wizards series, you will find this a good refresher. If you haven’t, this would be a great appetiser.

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For God’s Sake: Book Review

A look at how gods and goddesses play a pivotal role in deciding trends in the Indian marketplace

This book provides a trivia-heavy look at the pervasiveness of religion in India, from the point of view of the fast-moving urban Indian. Even though breezy, the book is valuable, especially for young readers.

As a compilation of case studies and reference for marketing professionals, the book delivers  a useful compendium of instances. At the end of one such anecdote, author Ambi Parameswaran declares, “The real lesson from this story is that while Indian consumers may be hidebound in their religious views, they are willing to suspend these beliefs when it comes to getting a good bargain.”

Parameswaran discusses how the Indian consumer repeatedly makes his choices based on long-held religious biases and ideas. He contextualises this with the launch of the first Ramayana serial on Doordarshan and the concurrent drift away from Nehruvian socialism. He  shows how these old ideas direct Indians’ consumption of products in relation to marriages, travel, media and entertainment, music, and food.  

The book is heavy on tidbits of information like the classifications of matter in the Vedas and the Upanishads, the pillars of Islam, the percentage of Muslim women who wear a burqa, gospel music from Aretha Franklin, and the fact that MTV Coke Studio originated in Brazil.  For most younger readers, this is not a bad thing. From planetary positions to mythology to why non-vegetarian food in Chennai used to be available only in ‘military’ hotels. For those who know, it reads like a revision and, for the uninitiated, it tells them what they should know.

Parameswaran’s vast experience is never in doubt, when you read through the sheer range of topics he uses to make his points. Gems like the story of how astrology nearly held up the declaration of India’ s Independence, and how it was eventually resolved by KM Panikkar, are peppered throughout the book.

Parameswaran has done a better job with the book than Penguin though; the cover is so hideous that you would skip the book if you walked past it on a bookshelf. Ironically, Parameswaran is an ace marketer himself.

The book’s jacket is much like an advertising pitch, the pitch exceeding the end product, as usual. It poses heavy questions at the outset, like what can “Harvard Business School learn from the Kumbh Mela?” and “Are Indians becoming more religious and more consumption driven at the same time?” Eventually, it delivers a confabulated take on modern India. For younger readers, the book is a repository of information on the cultural life of an older generation.

A special mention of a chapter on Muslims in India is a must. It is one of the book’s best written chapters. He also delivers some masterful myth-busters for the stereotyping glasses many of us carry around. Like the notion that Islam and women’s rights are antithetical to each other. Parameswaran shows us how Islam is the only major religion where women are explicitly supposed to be equal to men. What it has become today, is another matter altogether. One of Parameswaran’s preoccupations throughout the book seems to be the explosion in religiosity in modern India and the pervasive consumerism.

This cannot be understood without a deeper understanding of both, but that could have deviated from the focus of the book. Still, one may find an aching need to get a sense of the depth of these and other matters. Nevertheless, the end of the book, which contains “Religion: an essential vocabulary” is a brilliant list of ideas that shape, and have created, the modern Indian ethos in Parameswaran’s own experience. The book suffers from not exploring how ideas in the religious lives of people interact with their buying decisions. The causes, the unconscious drives behind our religiosity, are left unattended. To some, the book may seem to drag on longer than it should, in the absence of anything other than the idea that is already expressed in the first half—that religion drives buying and, in turn, must drive marketing.

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Investing in India: Book Review

India is not the easiest place to get your head around. This book gives a value investor’s guide to investing in India

India has more than 6,000 listed companies, but formal research is available only for some hundred-odd companies. Therefore, the Indian market is rife with mis-pricing which value investors can take advantage of. At the same time, investors need to be careful and not fall into a value trap. A value investor, Rahul Saraogi, managing director at Atyant Capital Advisors, in his book titled Investing in India: A Value Investor’s Guide to the Biggest Untapped Opportunity in the World guides investors through case studies about how Indian companies are run and what investors should look for.

Saraogi explains how the Indian market is awash in amazing investment opportunities. However, he warns investors that they need to have an understanding of India’s history and culture before choosing to invest. Financial analysis should have weightage, but two critical factors that determine whether an investment will do well or not are: corporate governance and capital allocation.

He mentions that there are companies that understand capital allocation and compounding of capital, and there are those that don’t. Then there is a third category of companies which basically run Ponzi schemes. He gives the example of how Sahara operated the largest Ponzi scheme in the country. Therefore, it is important to be aware of such practices.

He explains a five-step framework to evaluate stocks and to separate value stocks. Each stock needs to go through one filter before going through the next. The five filters he explains are: corporate governance, capital allocation, business fundamentals, financial strength and relative opportunity.

When it comes to corporate governance, Saraogi says he looks for companies that treat minority shareholders like equal partners in the business and whether the company is run keeping in mind and safeguarding the interest of minority shareholders. He mentions that there are situations where dominant shareholders use companies like personal piggy banks or they use them to promote their own agendas; they’re not really safeguarding the interests of minority shareholders—unfavourable mergers, preferred dividends, etc. He further mentions that identifying poor corporate governance is subjective and no two investors will agree on what is forgivable and what is not.

The second most important filter is capital allocation. Most companies destroy the earnings that they retain with themselves, over time. After achieving a particular size or social standing, promoters no longer care about maximising returns on capital or growing real wealth. Instead, they get carried away by setting up offices and factories around the country and around the world. They expand the business for the sake of growth, but end up taking on significant debt and risk the long-term well-being of the company and its shareholders. They participate in competitive bids to acquire companies and, often, destroy value in the process. Few companies actually understand how capital grows and how it is compounded.

One such example he gives is of EID Parry, part of the Murugappa group from Chennai. Despite being in various cyclical businesses, he says that the Murugappas have an excellent track record of capital allocation and value creation. The flagship company, EID Parry is primarily into sugar manufacturing but the group has diversified into businesses like fertilisers, confectionery and ceramic bathroom fittings. These businesses have grown, with very little additional capital, to critical sizes; some of them were subsequently sold at attractive prices.

After a company passes through these two important filters—of corporate governance and capital allocation— one can then look at business fundamentals and financial strength. A high cash-generating business that is prudent in its capital allocation makes for a stock that is likely to be a winner. The last filter deals with the constant evaluation of potential stock investment ideas relative to stocks already in one’s portfolio. It is important to diversify one’s portfolio, but over-diversification can result in average returns.

The book gives an overview of the country’s history, government, politics and media practices. The author also delves into the banking system, financial infrastructure and real estate. It is really targeted at foreigners but is also a good refresher for an Indian investor. After all, Indian investors have stayed away from their own stockmarket and thereby missed the incredible value creating opportunity   over the last decade. Even today, they are ignorant about the opportunity ahead.

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