Episodes

Announcer:                 Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. [Music plays] Tune in each Thursday on iTunes, Google Play and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.

 

Dan Ferris:                 Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Before we get into today's episode, don't forget. Trish Regan is now a part of the Stansberry family. Check out her podcast, American Consequences With Trish Regan. The link will in the description of this episodes. Today, we will talk with Jack Schwager. I'm really looking forward to this. Jack Schwager. Yes, that guy. The guy who wrote all those wonderful market wizards books. He's here.

In the mailbag, it was kind of a light week this week. More comments than questions. But we do have one very good question from listener Thomas Y., and I'll show you an easy way to track the data he's asking about. In my opening rant this week, I'll just talk a little bit more about the real McCoy stock market bubble we're living in right now. That and more right now on the Stansberry Investor Hour.

 

A real McCoy stock market bubble. That's what we're living through right this minute, December 2020. And those words, the real McCoy stock market bubble – that's not just me. OK? That's Jeremy Grantham recently on CNBC. And he says, "We're living through" – I think it was the third real McCoy stock market bubble of his career. And that means a lot coming from Grantham because his firm, GMO, has studied stock market bubbles. They've studied like a couple dozen of them. So they know stock market bubbles inside out, upside down, and backwards. And they've tended to perform well throughout them. And his firm does these seven-year forecasts, large-cap U.S. stocks for the next seven years – negative returns. Negative annualized returns for the next seven years.

Small-cap stocks, U.S. stocks, negative annualized returns. Large-cap international stocks, negative annualized returns; most bond classes, negative annualized returns. The only thing that was attractive was like – it's like emerging-market debt. No, I'm sorry. Emerging-market equity. Emerging-market debt was still positive. That wasn't very attractive. But emerging-market equity I think was like the value end of it, right? Emerging-market value was like – they were forecasting 9% a year for the next seven years. Compared to what you can expect from the rest of the market, not too shabby. OK?

And then John Hussmann just came out – John Hussmann from Hussmann funds. We quote his work frequently because he does the best work on valuing the overall stock market and relating it to the history of the stock market's performance over the last century, right? So he's the guy. If you think the market is extremely overvalued, he's the guy to check with. And right now, he says it's more expensive than it's ever been any time in history, bar none, including 1929, March of 2000, anything. And his forecast for the S&P 500 for the next 12 years is like -3.6% a year. -3.6% a year. Holy crap. That's terrible.

And his forecast for like a portfolio – he does like a 60-30-10 portfolio. 60% S&P 500, 30% long-term Treasurys, 10% T-bills – short-term Treasurys. And that is like -1.7% a year for the next 12 years forecast, based on today's valuations. And valuation, you could say, "Well, it doesn’t matter," or, "It's a terrible timing mechanism." You won't get any disagreement from me on the timing mechanism. But over the long term, it's the force of gravity. I mean, that was one of the points Grantham made when he was on CNBC.

It was like, "You can't change the fact that the return depends on how much you're paying for the cash flows you get." Full stop, right? That's what investing is. And during times like this, people seem to think investing is something else. It's like playing the lotto or something. And we've just lived through, if you look on like Bloomberg or Wall Street Journal or something – their articles – we've just lived through the greatest November in the stock market since 1928, right? 1928. It was the greatest – actually, the great month in the stock market since like early 1928. And then, there's like the put-call ratio. If you want to know how crazy people are, how crazy the speculators. Are, you look at the put-call ratio. Lower than it's ever been in history.

So that means that more people are buying call options versus put options than ever before. They're just buying calls. They're speculating wildly. They're buying calls as, like I said, lottery tickets. So we've got rampant speculation in the most expensive market in history. You tell me what happens. Maybe it doesn’t happen next week or next month or even next quarter. But, well, I'll tell you what. I'm going to keep the rant really short this week because the next thought out of my mouth has got to be my quote of the week after I just said everything I just said. And this comes from none other than the great Bernard Baruch, which is how they pronounced it in his day and age in the early 20th century.

Bernard Baruch from his autobiography, My Own Story – from the first volume. I didn't even know there was a second volume. I had to order just yesterday. But he says, "Whatever men attempt, they seem driven to overdo. When hopes are soaring, I always repeat to myself, 'two plus two still equals four, and no one ever invented a way of getting something for nothing.' When the outlook is steeped in pessimism, I always remind myself, 'two plus two still equals four, and you can't keep mankind down for long.'" That's Bernard Baruch. That's where we are. We're at the people thinking they're getting something for nothing end of that, right? When hopes are soaring, I always remind myself nobody ever invented a way of getting something for nothing.

And that's what – when you see all these Robinhood traders and all the call option buyers, they think it's easy money, right? So they really do believe they're getting something for nothing, right? They don't think they're – they don't understand the amount of risk they're taking. You know? These are leveled instruments, call options are. And a lot of the companies trading are either pure garbage or – even if they're not pure garbage, even if they're the greatest businesses in the world – they're more expensive than they've ever been before.

And they don't get it, right? Their hopes are soaring. I think that's a great quote. I saw that like a week and a half ago. And I was like, "this has got to be a quote of the week." And things have just gotten more expensive since I first saw it. So that's the way it is. All right. That's all I want to say this week. I just want to – I know I've said this before and said it recently. So I just wanted to reiterate it, get it back in front of you. Because that's the way I am as an analyst, right? In the newsletter business, you know, one way you could do this is every month you say something different.

And you say something different, month after month after month. And then, one of your little predictions happens, and you go back, and you say, "See? See that? I told you," when you might've said the opposite the next month after that, right? I don't do that. I don't do that at all. I assess the situation. And if it doesn’t change, I don't change. And if it does change, I change, right? What did I say in early April of this year? I said, "Buy great businesses now because the market fell 34% in world-record time." Now we're back up to higher – more expensive than we were before the whole COVID thing.

So I'm back to being really super cautious and outright bearish even. And you could say, "But, Dan, you were bearish back in 2017." You're right. You're right. And I said, "The stock market is a lot risker." But what have we said is the definition of risk? Risk is a wider range of potential outcomes. And what has happened since 2017? If you look at a chart of the S&P 500, it's a big wedge widening out in time. The range of outcomes, the actual range of outcomes – not the potential, the actual one – was wider indicating, indeed, I was right. Because I said there was higher risk in a higher range of actual outcomes... is exactly what happened.

So I'm going to say I was right about that even though the market is really still bumping up against new all-time highs here. You know, I was right overall about the situation, even if not being long and strong and buying all the dips. You know, even thought that was really the best thing to do. All right. Let us do it right now. Let's talk to the one and only Mr. Jack Schwager. My listeners know they need to secure their savings for the future. And after working with my friend and publisher, Porter Stansberry, for nearly two decades, I've seen him make one incredible investment call after another over the years.

So that's why I wanted to recommend Porter's one critical move you must make with your money. You can get his full take on the subject by visiting www.newamericancurrency.com. Don't miss out. OK. It's time for our interview today. And I'm really super excited about this one. We have the one and only Mr. Jack Schwager with us today. You probably recognize the name. Jack Schwager's a recognized industry expert in futures and hedge funds and the author of a number of widely acclaimed financial books. He is one of the founders of fundseeder.com, a platform designed to find undiscovered trading talent worldwide and connect unknown, successful traders with sources of investment capital.

Previously, Mr. Schwager was a partner in the Fortune Group, a London-based hedge-fund advisory firm. His prior experience includes 22 years as director of futures research for some of Wall Street's leading firms – most recently Prudential Securities. Mr. Schwager has written extensively on the futures industry and great traders in all financial markets. He is perhaps best known for his best-selling series of interviews with the greatest hedge-fund managers of the last three decades. Market Wizards, The New Market Wizards, Stock Market Wizards, Hedge Fund Market Wizards, and The Little Book of Market Wizards.

If you have not read the market wizards book, you are missing something in your investment knowledge. Read them immediately. His other books include Market Sense and Nonsense, a compendium of investment misconceptions and the three-volume series, Schwager on Futures, including volumes on fundamental analysis, technical analysis, and managed trading. He's also the author of Getting Started in Technical Analysis, part of John Wiley's popular Getting Started series. Jack Schwager, welcome to the program. Thank you for being here, sir.

 

Jack Schwager:           Hey, thanks.

 

Dan Ferris:                 So I'm curious, Jack. Like, when did this all start for you? Like, how old were you when you first got interested in finance and then when you first got interested in futures?

 

Jack Schwager:           Well, I was at a graduate school – I think I was about 22, 23. And my first job was... I had no idea about markets. I mean, nothing more than anybody would. I even wasn't looking for a career in the markets. I didn't have – envision being a trader. None of that was part of my objective. All I was looking for was an analytical job related to economics. And I didn't know what that was going to be. And it turned out the first job that – offer that I had that was decent wasn't decent in terms of pay but in terms of being an interesting entry as my first job – was a position as a futures analyst for one of the brokerage firms. and that's how I got involved in markets. And of course, once you're an analyst, it's really a short step to be tempted to trade.

 

Dan Ferris:                 So what does a, you know, novice beginning futures analyst even do?

 

Jack Schwager:           Yeah. That's. good question. Especially when I came into the, you know... I go back a while. So I think I saw it in '71.

 

Dan Ferris:                 Wow.

 

Jack Schwager:           Yeah. So futures were really more of a backwater, I guess to some extent. But, moreover, there wasn’t much on it. So, I mean, I read what articles I could find. There really weren't any good books. I eventually ended up writing my own books. I didn't think there were, you know... that's why I wrote my first book. You know, Complete Guide to the Futures Markets. Because I didn't think there was any good out there. I just did sort of – I saw it as a fundamental analyst. So I was just doing my own economic type of research. And I didn't get moved to pick up on tech collapse. When I read on it, but I was kind of skeptical. It wasn't until years later that I really got very serious about technical analysis.

But in those early years, I was just doing fundamental analysis on the markets. And it was a purely creative process. It was just taking what analytical tools I had and learning just from, you know, just watching the markets. And it was kind of ironic. I still remember to this day I was two weeks into the job. And I got a call from one of the newspapers asking me to comment on the market. This one was immensely... that I, for a whole two weeks of knowledge or experience in markets at all, was being asked as expert advice. I still remember that to this day.

 

Dan Ferris:                 Yeah. I bet that gave you a real good feeling for the value of like talking head experts on TV for the rest of your career.

 

Jack Schwager:           Well, I guess it made me realize, you know, that what you hear isn't always worth listening to. Because I certainly probably wasn't at that point in time.

 

Dan Ferris:                 Right. Well, you were new meat. They were like, "Hey. We've never heard of Jack Schwager. We got to get him on the program."

 

Jack Schwager:           It was just basically – they were just trying to get something to write on why the market went up or down or whatever. I don't even remember which market it was.

 

Dan Ferris:                 Right.

 

Jack Schwager:           You know? Yeah.

 

Dan Ferris:                 Yeah. it's interesting why markets go up and down. Isn't that a crazy thing? Every day the market went up 0.5% because of this, and it went down 0.5% because of that. And it's all noise.

 

Jack Schwager:           Yeah. It's more than that. You know, this is one of the great ironies, is one of the things I point out in that book Market Sense and Nonsense is, people kind of try to look to the news for why the market went up and down. They got it completely backwards. You know, the market goes up or down – and this is really something to help with those consequences which is usually not the case – that people have to come up with some reason of why the market went up and down. They fit some reason.

And that reason could've been there, you know, all along, and the market went up that day and it went down other days. And that reason is still there. But they'll pull it out and say, "Well, the market went up because people started to pay attention to this." Whatever. So it just doesn't tell you why the market went up and down. Actually, most of the gyrations in the market are based off the – the nature trend is based off of underlying, driving fundamentals whereas the daily gyrations just – that's not related to news. Most of the time. It's usually just, you know, the market fluctuating around this basic trend and reacting to being short-term oversold or overbought.

Things like that. It's not – the news you read, typical financial papers on why the market is up or down is usually not the reason. And in fact, I even have a quote in the book. I have an example where I was at a Federal Reserve annual meeting, and the chairman sort of made some comments in the morning, and the markets were down. And the news was, "Well, the markets have disappointed Bernanke's comments. You know, it's still up because" – the same day the market went up, it goes higher. And I swear, the same news service, "The market was up today because they were encouraged by Bernanke's comments." You know? The same comments, nothing happened. The comments were made before the opening where the market opened lower, it was why the market was down. And when the market closed higher, it was why the market was up. I mean, this happens all the time.

 

Dan Ferris:                 Yeah. It's funny. A couple weeks ago on the podcast, I covered two headlines that occurred within 24 hours of each other – totally opposite explanations for the same... or, they were the identical explanation for opposite moves. It's just ridiculous. Abd you can tell it's a big tell, isn't it? It's like, they never tell you why the market's going to do what it's going to do tomorrow. It's always their back-fitting the story to what happened yesterday. Why don't they ever tell me what's going to happen tomorrow?

 

Jack Schwager:           That's their job. Their job is to do that. By the way. In this new book – this is kind of an interesting, useful point I think for listeners. And one of the traders I interviewed, fellow by the name of Jason Shapiro, is a real contrarian trader. But one of the most useful things he said in that interview was, his favorite word is "despite." Despite. "If you ever see a market went up today 'despite' this news," he says, "That's a really bullish signal." Because when they can't even explain, you know, why the market – they have to explain it went up despite opposite news, that itself is telling you something. So it's kind of a related point, I think, that's worth knowing.

 

Dan Ferris:                 Yeah. I thought you made a similar point, I want to say in the section – like your little narrative section right after the Peter Brant interview. There was a section I thought where you had said... I could have this wrong. I could be confusing it with another part of the book. But it was like you were saying basically when people say, "Oh, it was the old Fed quantitative easing, is going to crash the market," story. And that was a huge despite, right? Despite, despite, despite for years and years and years. And the thing just keeps going up and up and up.

 

Jack Schwager:           Yeah. Yeah. Yeah.

 

Dan Ferris:                 Yeah. Peter's an interesting guy, isn't he? Peter Brant. He's your first interview in the new book, Unknown Market Wizards.

 

Jack Schwager:           Yeah. I know Peter. So he's the one person – well, he and I... I knew well. I mean, a couple people I had met. But Peter I knew as a friend. And he just has great – and he's a future trader. But he trades stocks somewhat too. Also, since then he's just a future trader. But his insights about markets and particularly about money management are really valuable. I mean, he's a true veteran. I mean, he's traded like 40 years. And all the – in two separate careers. He traded for like, you know – I don't know – 16, 17 years and then traded again. You know, then stopped trading. Went cold turkey for about 11 years and then restarted again. And his whole emphasis is that – he is a... he trades on charts.

But his real points are, "that's not the charts." Charts don't predict anything. He's just giving them useful points where to put on trades. But what really drives his results in terms of return to his... is his absolute risk management. And he has lots of comments and suggestions and advice about risk management – lots of different rules. You know, some that you kind of don't hear around everywhere. Like, he has one rule he calls his Friday rule which is, if he has any position on that's a Friday close which is losing money – doesn't make a difference how much –if he's not ahead in the position by Friday's close, he'll get out.

And he says that rule has saved him a lot of money over the years. Just one example. But he has lots of those types of rules. And I kind of knew – since I knew him, I wanted to get him in the book sort of preserve his – he's now, I think, 72, 73. I wanted to make sure I got an interview with him and captured his ideas for posterity. And that was actually a catalyst for writing this book. I sort of, you know, wanted to have his interview. And we both live in Colorado, about two hours apart. He was moving out of state. So that's what got me started, I think. "Well, let me interview him before he moves." Ends up he had moved by the time I got to interview him. But that's what got me started on the project.

 

Dan Ferris:                 Oh, cool. Yeah. That's an interesting interview, because he comes right out and says, "Long-term chart patterns don't work anymore." I mean, he says it in plain, clear English.

 

Jack Schwager:           Yeah.

 

Dan Ferris:                 That kind of – didn't surprise me, but it's still... it blew me away a little bit.

 

Jack Schwager:           Well, this is from a man who has traded on charts all his life and profitably. But his thing is, the charts don't – you know, he emphasizes over and over, "The charts don't predict anything." But what they are useful for is, there are points at which – based on the pattern – there's a realistic shot that the market is going to go significantly one way or the other. And it's a higher probability point in time. It doesn’t mean that that prediction – let's say it looks like the market is formed like, say, hedge holders or whatever. That's completed, and it looks like it's ready to go. And he thinks the market's going to go higher. It doesn't mean that that's a reliable prediction this market's going to go. It means that there's some reasonable probability that this might be a point where the market takes off.

And if it, you know... he'll put a position on it. Moreover, it has to be a point where you can define – it has to be a type of pattern where he can define a close point, a close stop point, which tells him he should be out. And so, those are the points he looks for where there's a reasonable possibility it might be the beginning of a new swing. And he can take the trade and not risk too much. And if he's wrong, he's out. His typical loss on a trade is – oh, I don't know, 0.25%, maybe 0.5% at most of his equity. So he's never, you know, risky. I think 0.25% is probably pretty close to what his average losses are in a trade. So it's not that the charts are predicting so much. It's that the charts provide entry to – a tiny entry – to the, "Here's a spot where the return/risk is favorable." That's what it does.

 

Dan Ferris:                 Right. And he puts the emphasis – like you said. The emphasis on risk management. And this is just a way to – it's like the charts are just a way to set that process in motion.

 

Jack Schwager:           Exactly.

 

Dan Ferris:                 But it's really the risk management process that is key. And I have to say. If there's one theme from like the very first market wizards book all through, you know, New Market Wizard, Stock Market Wizard – all of them – it's this. Isn't it? It's risk management.

 

Jack Schwager:           Yeah. And I try to – I beat people over the head in all the books with this that say, "Look, here are great traders. You know, they've been enormously successful." And what they all say – in fact, I can think of only one exception... what they all say is that, "Hey, risk management is critical to succeeding as a trader." And moreover, most of them will emphasize that, "Hey, it's not my methodology so much as my risk management of why I have succeeded." So it's super important, and it's exactly the thing that particularly beginning traders tend to not appreciate or understand or want to deal with.

And I think that's part of the thing is ,you know, risk management isn’t particularly exciting. You know, it's really a matter about how you're going to lose money, right? And it's not appealing. And there's nothing dramatically creative you can do with it. It's much sexier to try to figure out, "Hey. Some great methodology to get in and out of trades that nobody else is figured out." That appeals to people. But they kind of ignore how critical the risk management part is. Because even if you have a good methodology, if you do not have good risk management, it's just a matter of time before you get carried out.

 

Dan Ferris:                 You know, you're right. It's not very sexy, is it? But I would go farther than what you said, Jack. You said, like, novice traders – they don't appreciate it. Isn't it true that novice traders... they seem to think the exact opposite. Like, they think the opposite of what Peter Brant was saying. They think that you got to know that chart pattern, because that's going to predict how much money you're going to make. And those chart patterns have high predictive value. And if you can just find enough of them, you can be rich in no time. Right? I mean, they think the exact opposite of the way it really is.

 

Jack Schwager:           That's probably true. That's probably true. And one of the things I find humorous is Peter now – you know, the book is called Market Wizards. And Peter is the one who's really known, – well, somewhat known. He's not known in the investment community because he doesn’t manage money. But he's known among trades because over the last few years he's built up his big Twitter following, right? And it's humorous when I see this like – somebody will criticize him.

You know, "Why should anybody listen to Peter? You know, he predicted the S&P was going down 1,000 points lower," or whatever it might be. You know? And, you know, yeah. he took a trade – he took a trade short the S&P 1,000 points lower. But you know what? He was out of the trade one day later with a 10-point loss. You know? He's been long 50 times since then. So it's like – like I say, it's humorous the way people react to this stuff.

 

Dan Ferris:                 It is humorous. And the reality – you know what the reality reminds me of? If you ever saw the film or the play, Amadeus, about Mozart?

 

Jack Schwager:           Yeah.

 

Dan Ferris:                 And Mozart is portrayed as this kind of almost silly character. And at one point, he says, "You know, I compose in my head, and the rest is just scribbling and bibbling and bibbling and scribbling." And if you look at the reality of the great genius composer's life, you would see him just like sitting at a table scribbling all day. And it's a very boring – and  it's nothing anyone would ever want to do with their life. You know? And yet, the narrative is, we talk about what a genius he is and the creative process and all this stuff. And it's just so much drudgery to it. And I feel like trading is the same way.

 

Jack Schwager:           Yeah. The boring thing – let me use that word. Because thanks to Hollywood, people have this image of trading – they have an image of trading. What they think trading is, is a room full of people screaming at the top of their lungs, just super aggressive and people losing fortunes and making fortunes, going crazy, tearing hair out, jumping on a desk, throwing phones at the screen. Whatever. You know? That's the image people have with trading. If you go watch actual, really successful traders or a room where there are some really good traders, it's closer to a library than the Hollywood image. It's really more cerebral, focused – highly focused, really intensely focused.

And there is no super excitement and stuff like that. That’s actually very, very negative. And there's a quote by Alex Honnold who's, you know, probably the world's greatest free climber. I think what he does is insane. People who don't know who he is, he's this guy who – without protection, without ropes. But without ropes for protection will climb sheer cliffs like Yosemite, El Capitan. And there's a movie, you know, that he made. If you haven't seen it, extraordinary worth seeing. But he's interviewed on 60 minutes. And I'm watching it. And she asks him, "Do you ever get an adrenaline rush?"

And he says like, "Oh, my – no. If I get an adrenaline rush, something is drastically wrong. Everything needs to be slow and controlled." Sorry, I'm paraphrasing here. And I sort of hit the pause button on the remote, ran to get a pad, replayed it, copied it word-for-word. And I use that as the opening quote in – I think it was Little Book of Market Wizards. Because I thought it was so, so apropos for what trading really is. There should be no adrenaline rush. The idea is to get the emotions out of it. You want everything to be slow and controlled. And again, this is a type of thing that people get totally backwards. They think it's all about excitement. But if there's excitement, that's really not – then you're doing something wrong.

 

Dan Ferris:                 Yeah. And one guy – you know, I've only heard of – these people in your book on known market wizards – they really are unknown. I've only heard of Peter Brant and John Netto. And you're talking about emotions. John Netto has a whole chapter in his book, Global Macro Edge. It's much later in the book. It's, "Emotions are our greatest ally, not our biggest enemy." And he says, "When I start to get too comfortable in a position, it makes me nervous."

 

Jack Schwager:           Yeah.

 

Dan Ferris:                 That's complex, emotional self-analysis.

 

Jack Schwager:           It is.

 

Dan Ferris:                 "When I get too comfortable like this, it makes me nervous."

 

Jack Schwager:           You know, and Netto – in that particular interview, we have a little bit of... because one piece of advice I've repeated in multiple books is this idea of trying to get emotions out of it. And Netto said, "Well, why would you want to do that?" And of course, you know, my thing is because emotions interfere with clear thinking and objective training and stuff like that. But he takes it one step further. I mean, he doesn’t – so when you go onto the screen, he agrees that that type of emotion is detrimental. But he's kind of moved to the point where he's introspective enough that he can analyze his own emotions as an indicator of when he's wrong. If he finds himself, like he says at one point – let's say he's long gold, and gold immediately goes up a bit.

And it looks like it's going to go up much higher, and he gets super, "This thing is going to the moon." And if he goes from that sort of like feeling seven or eight about the trade to be like a 10, "There's no way this thing can lose It's going right away," that's an indicator to him that, sure – there's a sure thing that market's going to first correct now before it goes higher. So he uses himself as a contrary indicator. But that's kind of sophisticated. For most people just trying to eliminate emotions is the first step. Getting to a point where you can tap into your emotions as a contrary indicator is a more complex thing that requires lots of experience.

 

Dan Ferris:                 Yeah, I'll say. Is there anybody – you've interviewed dozens of people for all these books over the years. Has anyone else ever spoken about emotions the way Netto does?

 

Jack Schwager:           No. Not the way Netto does. No. No. I mean, it's come up a number of times in the framework of, "You don't want to let your emotions get in the way." And that's come up in many ways. For example, the idea of one trader saying, "Don’t trade so large that fear influences your decisions." You know? So if fear is playing any role, your position size is too large. I mean, that's an example of advice related to emotion, right? So the idea is to have your position size at a point where you don't have that particular emotion; namely fear.

So yes. It's come up many times, but not the way Netto – Netto has kind of gone contrarian approach to it and say, "You don’t want to exclude emotion. Because if you can tap into your own emotions as" – again, I'm emphasizing the word here – "as a contrary indicator." So when he uses emotions, it tells him that because he's so one way or another about a market, it's a sign that it's going to go the other way short term.

 

Dan Ferris:                 Yeah. Don't try this at home, huh? I want to shift gears a little bit here because I just want to ask you two things. One is, like, if you can tell me about how much and what kind – if any – of your own trading you've done over the years on the one hand... and then, I also want to talk about Fund Seeder. And whichever one of those you want to talk about first is fine with me.

 

Jack Schwager:           Yeah. So we'll go in order. You know, in my own trading... first of all. Actually, I emphasize that I write about market wizards. I am certainly not a market wizard. My own trading is not profitable, for sure. But only because I've interviewed these people and I've kind of learned from the process myself. So I eat my own cooking. And, you know, what I'm telling... the advice I'm giving in these books are advice I follow myself. And, you know, as to help me transform from being a loser to a winner.

But not a – I'm just not naturally a good trader – you know, I don't have any particular skill in trading like the people I interview do. And it's never been a full-time advocation. It's always been kind of a hobby. You know, I usually have full-time endeavors. And so, I would trade on the side. Just a hobby's probably the best way to describe it. And there are times where I'm so busy I don't have time to focus at all – I don't trade. And there are times where I do trade, where I have more time I trade more. You know? So it varies. Anyway.

So that's my – and my training methodology is... I saw it as a fundamentals which, for me, coming from an economic background it seemed natural. But it turned out it was the wrong approach for me. Which I discovered over time. You have to find what works for you. I eventually ended up with technical analysis. I went for a period where I did systematic trading because I didn't want to have the emotion of having to make decisions. I discovered that– for myself – systematic trading was actually more emotional because you have to be willing to tolerate drawdowns. There were a lot... and just believe in the system.

And I was uncomfortable with types of drawdown you could get with systematic trading – particularly trend following. So I eventually just ended up doing chart-oriented trading which is what I trade these days. That's what I do. And basically, I would say I pick chart points. I could be going against a trend or with the trend. I do both. I probably go against the trend more. Not necessarily against the main trend, but against a short-term trend more often than not. And I always have a stop. Like I advise people. "Always know when you got to get out before you get in." So that's my trading.

Anyway. Fund Seeder is a company that was started on the premise that there must be, you know, tons of – or many, many, many traders globally that are very skilled, but no one knows their – they'll never have a chance to manage any money if they wanted to because they're in the wrong country, they didn't go to a "name" college. You know, they just – in fact, I got a perfect example in this book. You know, a fellow in the Czech Republic. You know, so first of all, Czech Republic you know, nobody's going to go – somebody from the Czech Republic trying to get money to manage...  good luck. Moreover, his education – you know, forget about going to have a Princeton on his resume. His education ends at high school.

So, you know, here's a guy who wouldn't have a chance in a million of ever getting anybody to pay any attention to him no matter what he did. But he's been consistently, you know, doing – you know, making money year after year, almost every quarter and just a phenomenal return-risk numbers. Now, he doesn't have a lot of money because he basically never had any money. He just lives on his trading. But he's trading mega-cap stocks. So theoretically, his approach could be used on billions but he's trading on a smaller cap. Anyway. That's a good example of somebody... perfect example of the type of person we're looking for. Somebody who really had come up with a trading methodology that worked. He's been doing it for like 15 years and would not have any chance of ever getting discovered.

So the idea of Fund Seeder is to find these people, provide them – by providing them with a platform that traders can use to analyze their performance. You know, you can – they can link their account to a broker, which gets updated every day. And then, they have an equity curve. They get generated underwater curves. You know, show their drawdowns. They can get all sorts of performance analytics. They can do technical analysis under equity curve, etc. – all for free. Because what we're trying to do with that part of the company – with the technology side – is to just build a database of traders. A number of which will be very scaled.

And on the other side, we have an investment arm which has the objective of partnering with major allocators, which we're in the process of doing negotiating deals. And then, we'll connect – those allocators can then tap into our database. And so, for people that want to manage – people who want to get their performance analytics on their trading – that's a good spot. Won't cost anything. And for people who think they have the skill to manage money and don't have the proper avenues – which the vast majority of people don't – this is a way of getting discovered.

 

Dan Ferris:                 That's pretty cool. And when did you start – when did Fund Seeder start?

 

Jack Schwager:           Well, the idea was probably about six or seven years ago. First couple years was kind of just developing the site and stuff. You know, I say from the time we had any meaningful number of traders, you know, the fund was operating, we actually and to redevelop the whole software. We initially white-labeled another party's software. I was kind of unhappy with all of – with everything. And we ended up redoing the whole thing. And so, nothing is left from the white-label days except for one metric we kept. But that's it. Anyway. From that point on, this may be about four or five years ago.

 

Dan Ferris:                 So I guess my point is, like, I'm surprised there aren't dozens of such businesses. Are there to your knowledge?

 

Jack Schwager:           There are – you know, I don't think there's a precise simple sites which had maybe like trade-following sites. There are some other sites that try to – I really am not too up on... I just know there are some other people doing – not the same thing but trying to get traders to log on to different ways. But I think our model of basically just provided the analytics of traders and then looking to partner with big-name, you know, large institutional allocators to then act as the connector between the trader and those allocators. I think that's different.

And we are just on the threshold of that. My expectation is that once the network we're in currently – I can't mention names. We're currently actually in the negotiation process with one of these entities. And I think once the deal's completed, we could then – then that news becomes available – we go from not just being a source of nice performance analytics but also an avenue to connecting traders with allocation money. Then, I would look for a kind of a real sort of tipping point to use Malcolm Gladwell's... the way he put it, it's now become a cliché in a number of traders subscribing. Because I think that type of marketing publicity would make people aware we're here, and the model has begun to work.

 

Dan Ferris:                 Yeah. I just think it's a really cool idea. And, you know maybe it's just like when the iPhone shows up and everybody goes, "Oh. Why didn't we think of this sooner?" It just sounds like a cool idea. But I hope you don't mind me jumping around a little bit. We do have limited time with you.

 

Jack Schwager:           No. I like that.

 

Dan Ferris:                 Yeah. We've talked with traders and other people who've written about markets and interviewed traders and things. They all seem to be telling me that trading is harder now than it was 20, 30 – but even like 10, 15 years ago. Do you think that's true?

 

Jack Schwager:           Yeah. And if you sat me down before I did this book and asked me that question, I would say the same – I would've said the same thing. I would've said, "Well, you know" – I remember when I wrote my first market wizards book, you know, at that point in time – this was pre... well, it was pre-PCs. I mean, you have to do anything, you had to it on a big IBM mainframe, that type of thing. And so, it was a day where – there were not a lot of... there were no hedge funds were like... there were a small smattering of hedge funds. There was a lot of retail trading.

And, you know, of course a lot of retail trading today, too. But not in the same way. Back then, it was a much bigger – let’s put it this way. The professional traders were much more of a proportion of the pie than they are now. So I would've said, "You know, hey. With the massive increase in computer power with these firms coming in with literally hundreds of high-powered quants developing methodologies to extract the inefficiencies out of the market, high-frequency trading. On and on. You know, and this massive growth in hedge funds relative to what it was. It would be much harder for the individual trader to really get any superb type of performance.

So, yes, I would've said that. And I was surprised when I did this book that the traders in this book... many of them actually have track records which are as good, if not better, than any I've ever encountered. Now, true, they're managing smaller accounts. So it's not like – of course, you can't do... if you're Ray Dalio of Bridgewater, you're managing God knows how many billions. You know, I don't even know how much they're up to these days. But I think when I interviewed him, it was like $50 or $100 billion, massive amount of money. Or even other hedge-fund managers trading $10 billion which is still a lot. You know, massive amount. It's very different, maybe, than direct trading smaller amounts; a couple of million or, in some cases, hundreds of thousands or whatever.

So, yeah, that's true. But these people still compile... in fact, one example. One fellow in the book started with literally $2,500 in capital about 15, 16 years ago. When I interviewed him, he had built that up to $15 million. And I just – I am still in contact with him now, and I just got an E-mail from him the other day, a direct message from him the other day telling me that he's now made $100 million this year alone. And I asked him, "$100 million cumulative?" He said, "No. This year alone." And this is a guy that started with $2,500. So, you know, in fact, I would say that his multi-plication of money kind of exceeds anything I've ever encountered. So yeah. There are people in this book that kind of belie the fact that it's not possible to do extraordinary things. Now, he's one in 100 million. But, you know – so I don't want to mislead people to think they can do that. But the point is, it can be done.

 

Dan Ferris:                 It can be done but, you know, like you say, he's one in 100 million. It sounds like you still say, "Yeah. It's really hard."

 

Jack Schwager:           Look. Look. There's a difference between just being profitable on your trading – which is the same category I would consider myself in and being a superb trader and having great return risk numbers. So like I say. I'm not in that camp, but hey. There's nothing wrong with still making money in the markets, right? You don't have – not everybody is going to be a superstar. You know, it's true of anything. I mean, not everybody's going to make it on a – you may like playing basketball, but you're not going to be in the pros, right?

How many people make the pros? Well, one percentage of people play basketball at the pros. So any sport. Or music. I mean, 1% of the violin people – play that play a violin – end up playing solo for a major orchestra. Any endeavor. The people who are exceptional are always a tiny percent. So there's a difference between being capable an doing OK and between being phenomenal. And by definition, there's only a tiny percentage of people that are ever going to be phenomenal.

 

Dan Ferris:                 Right. Part of the story here is that – like you say – institutions now... they weren't most of the market before. But now, they are.

 

Jack Schwager:           Yeah.

 

Dan Ferris:                 And basically, that's your competition if you're an individual. And, I mean, Warren Buffett will tell you it's an advantage to have a small amount of capital and be a small investor versus a bigger one. But it seems to me like folks who are talking about – that's a different approach, though. I'm talking about... like for example. We interviewed Gregory Zuckerman, the guy who wrote about Jim Simons, the Jim Simons book, Man Who Solved the Market.

 

Jack Schwager:           And let me give him a plug. His book, The Man Who Solved the Markets, I believe it was, was a great book. So, you know, let me plug somebody else's book here. So just an amazing job of getting all these people in a super-secret firm to open up.

 

Dan Ferris:                 I know. Yeah. That was one of the main questions that we had for him. And he didn't expect it. He conceived of the project and didn't expect to be able to do it. But lo and behold. We learned a lot from that. But art – I feel like part of what we learned is that, you know, the competition in that type of trading is just like, you know... they're literally rocket scientists. You know? It's literally rocket science – you know? And that's who you're going up against.

 

Jack Schwager:           Well, yeah. But that's a difficult approach. You know, you can't compete at that – you can't compete at that type of trading, right? So you can't – so you're talking about a – you're talking about a firm who might have, you know... I don't know, 100-plus quants or how many quants they have. And we're not just talking about quants. We're talking about people with PhDs in mathematics who were leaders in their field. You know, we're talking about real geniuses in many of these cases. And you have not just one or 10 or 50. You know?

And of course, you have super computing power. You have all the support they need and everything else. But what they're going to come up with methodologies that are not the type of thing that an individual trader could do, right? And I'm not privy to what they do in any way. But essentially, these types of shop – what they're doing is, they're looking... they're using scores, many who know hundreds of different types of systems but looking at interrelationships between markets and derivatives. They might be looking at 10,000 different securities, looking at the relationships between them. And applying different types of mathematics to it.

And so, they're just trying to find those places where they – lots of different strategies which give them a small little edge. Like, they want to be – they're trying to be the casino in 1,000 different ways, right? So It's not that they have one particular strategy. But altogether, all those strategies kind of give them a casino-like result. Which is like steadily increasing money without big drawdowns. But it's very rare – only a few shops – that really have succeeded to that extent. And it's not the type of thing an individual trader could do. And the people who do succeed as individual traders, you have to find a completely – that's not the avenue that makes any sense anyway. This would be a completely different approach.

 

Dan Ferris:                 Right. Yeah. Oh. In the back of the book, it says you interviewed a trader who made tens of millions using a unique approach that employed neither fundamental nor technical analysis.

 

Jack Schwager:           Yep.

 

Dan Ferris:                 That is – like, once you pick up this book, that's a reason to dig into it and find that story alone.

 

Jack Schwager:           Yeah. And that was kind of amazing to me because not only was it an approach I'd never encountered, but it expanded my universe. You know, what I thought was the universe of trading. Because all my life – and I've been involved with markets now 50 years, right? So I always assumed – well, anything anybody's doing, person could be using some sort of fundamental approach. It could be a million different fundamental approaches. But there's some sort of fundamental approach. Some technical approach.

Again. There could be a million different technical approaches. Or some combination of the two. I mean, what else is there? I mean, you're going to flip a coin, you're going to call heads or tails. You're not going to call sideways, right? There's nothing else. So Chris Kamila, this trader, sort of made me realize that, "Hey. There's a whole way of trading that doesn't use either of those two." And he literally said,– he didn't like fundamentals. It was boring. He didn't want to do that type of work. He thought he would never excel at it. "There's probably a million other people that can do it better than I can," he says. Paraphrasing. And he didn't find charts or technical analysis particularly useful.

But what he always liked was, he always had this thing of spotting trends early. And, like, he talks about where he used to go to garage sales and try to find an undervalued item, and he would ride his bicycle. Every morning before he did this, he would stop for – you know, he would stop for his drink. And now, I've kind of got mental blank of what brand it was. But, you know, one day he goes, and the machine – it's not there. You know, it used to be the whole machine, and now it's only like a row or something. Here's what happened. And a person tells him that, "Oh, there is more competition now. This is Arizona," whatever.

And so, he went with his brother. and he was like a teenager. There they are, 13, 14 – I don't know. It's his brother who was in the markets for something. He was a broker. And he said, "How could I take advantage of this?" And this broker tells him about puts. And so, he put puts for him. You know? And so, that was his first trade. But he ends – as a child, he had this inclination of spotting these trends. And so, what he ended up was, both physically fund-spotting _____ like that but also... but then using social media to amplify this approach and then looking for analyzing social media like Twitter and trying to find when there was an increase in traffic in certain types of word combinations.

And that would tell him, you know, that there was this new trend starting. So like for example. Like LaCroix. You know, to anyone familiar with LaCroix. It's like, you know, we order it by the caseload virtually. So he said, when first he saw people – and this was when the transition went going from people drinking lots of soda to trying to get off sugar soda and to sparkling waters, that. And LaCroix was this national beverage corporation, was the stock. And so, they were the first like big player. And he saw all these – on Twitter, he saw this big spike in people talking about switching to drinking LaCroix and these flavored waters without sugar. You know? And sort of that was a trade. And so, he picks up – he picks up on these things before they show up in earnings. You know, before thy even show up in credit-card data. So that's his approach. He uses social media.

 

Dan Ferris:                 Wow. Jack, I feel like you've taken us on a little mini-odyssey here from your early beginnings to this sort of weird social media trading idea. But we are out of time. I do want to ask you my final question that I ask all my guests. If you could leave our listener with just one thought today – about anything at all, but I imagine it'll be about trading from you – what would that be?

 

Jack Schwager:           God. Oh, boy. It, one, makes it difficult. Basically, well – we talked about risk management so I won't go to that. I think people sometimes miss what's important. And so, if you want – you know, you should go into trading not just to make a lot of money although, I mean, occasionally that works. But I think really what's more important... and trading isn't life. Money isn't life. It's more about how you live your life. And, you know, I think there'll be traders who – phenomenal traders. But I wouldn't want to live their life. You know, they're spending 15, 20 hours in front of the screen.

And, you know, it's – again. You have to ask yourself, "Is this the way you want to live your life?" So I think a balance of – if you have a passion for trading, if it's what you love to do, great. You know? You can spend enormous amounts of hours on it. But if it's just a matter of money, you should not lose the perspective that there are a lot of more important things. It's really about living your life in a beneficial way, which may include trading or may even – trading may even be the dominant thing. But only if it really is... and you have to ask yourself, "Do I really have a passion for this, or is it all about just try to get rich, and I really don't like this process, and it's a definitive of my life?"

 

Dan Ferris:                 Well said, man. That's a great final thought. The guy who was interviewed like, you know, all these traders says, "Have some balance in your life." I think that's a great final though, Jack. Thank you for that.

 

Jack Schwager:           Thank you. Yep.

 

Dan Ferris:                 And I hope you'll come back and talk to us sometime.

 

Jack Schwager:           True. It was fun. I enjoyed it. Yeah. Glad to do it with you.

 

Dan Ferris:                 Yeah. Yeah. Me too. I guess that's bye-bye for now, Jack. Thank you so much.

 

Jack Schwager:           All right. Nice talking to you. It was fun. Thanks. Bye.

 

Dan Ferris:                 OK. Wow. I'm so glad that we got to talk to the one and only Jack Schwager. And I meant it when I said at the beginning about the market wizard books. If you have not read them, you are missing something. I would probably have said that, you know, even if we didn't get to talk with Jack. Because the lesson – you know, and I keep saying this every time we talk with traders –the lesson of risk management just keeps coming back and back and back. But what's really cool is that, you know, over these like four or five market wizard books, there's all different stories. Like, you just heard him talking about this guy who trades off social media. There's all these different ways to decide how to place a trade.

And yet, the real meat of it – the core of it – is about risk management. And so, they all come back to this core, like, from different angles. It's pretty cool. To read all the market wizards books is a really cool experience. And it's a really cool experience to talk with Jack Schwager too, right? All right. That was great, man. Let's see what's in the mailbag. My colleague and friend, Dave Lashmet, is on fire right now. His average close pick this year alone has returned 187% – almost triple your money. Today, he's got a time-sensitive $13 stock pick that he believes is set to explode. This is an opportunity you don't want to miss.

Listen to Dave's take along with all of his evidence on the stock over at investorhourtech.com. Check it out. In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms, please, to [email protected]. I read every word of every e-mail you send me, and I respond to as many as possible. Kind of a light mailbag this week. More comments than questions. There was only, really, one question. The rest of it was all comments which is kind of cool. We're just talking, right?

So I'll include some of these comments. Frist one is from Larry B. He says, "Dan. In your recent podcast, you were discussing how time is sometimes like an accordion stretching out or compressing in relation to things changing. It reminded me of the quote attributed to Lennon." Vladimir Lennon. Leonard apparently said, "There are decades where nothing happens, and there are weeks where decades happen." I'm going to stop you right there, Larry. That is exactly what I'm talking about. Time just compressed like crazy.

And so much happened in 2020 versus most other years. Larry continues. "That quote came to me during the meltdown in March and at other times in my life. 9/11, 2008 crash, 1987 crash. Things roll along and suddenly change direction. This year qualifies. Love the interviews. Larry B." Thanks, Larry. Spot-on. Perfect timing on that quote. Next is Thomas Y. with our only question this week. He says, "How are profit margins 'the most dependably mean-reverting data series in finance?' per Jeremy Grantham's doing." Right? So that's Thomas Y. He's asking, "How do profit margins look?"

Because a famous quote by Jeremy Grantham, who I talked about in my rant today... Grantham has famously said, "Corporate profit margins are the most dependably mean-reverting series." And they've been on a tear for some time. They've been quite elevated. And I'll tell you. You can track this, Thomas, and everybody else. If you go to the Federal Reserve economic data website, FRED, right? It's FRED – fred.stlouisfed.org. And you can look around. There's all kinds of data. FRED's a great resource. But this one is corporate profits after tax divided by gross domestic product, right? Over gross domestic product.

So this number has been, like – there was a peak in 1950 about... what is it, 9.87%? There was a peak in 1979, 8.5%. There was a peak in 2006, third quarter, 10.4%. There was a – looks like the all-time high peak of this data series going back to 1947. First quarter 2012, 11.7%. And then, of course, we got a little spike downward, didn't we? Earlier this year, right? And it was down to about 8%. But we're skyrocketing right back up. We're above 10% again in the third quarter 2020. So yeah. We're still in an elevated range historically here.

So the question is, "Does this – you know, are things different now or not?" And are all these like high-margin, low-capex-type software and Internet businesses... are they just going to pull this up forever? Is it really, truly different this time forever, or is this going to mean-revert back into just like the 7 or 8% range on a more long-term basis? And obviously if it does, then stocks are even more over-valued than they look, right? And Hussmann, that's one of his metrics. He calls it margin-adjusted CAPE.

So he adjusts for the historic margin trends, and he insists that that is the one series that correlates the most negatively with the subsequent returns on the S&P 500, meaning when that thing has been high, you know, 90%-plus of the time, more than any other PE or price-to-sales, the market has fallen. Good question. That's my answer, and you can track it yourself at the FRED website. Mark P. writes in and says, "Hi, Dan. Love to listen to your show. About bitcoin." I knew we were going to get a bunch of these.

People still have bitcoin on the brain. Mark says, "About bitcoin. I think the fear of government ban or intervention in part stems from observing what government has been able to foist upon us during the pandemic. Eight months ago, did we honestly think folks could get arrested inside our homes for having unmasked guests over? Too many people seem to be willing to accept and cower to these absurd directives. It doesn’t seem like such a stretch to me that a governmental ban on bitcoin could be swallowed by the general population or perhaps just banning large or any businesses from accepting bitcoin is payment for their services. That still seems like a big investment risk to me. Having said that, however, I must admit to owning some. Keep up the great work. Mark P."

It's a fair point. Look. If bitcoin starts – keeps I shouldn’t say starts. It has started to work like gangbusters. If it keeps working gangbusters and keeps appreciating in value and makes a real dent in the demand for hard currency in the world, yeah, governments are going to take notice, and they're going to try to do something. Chester B. is the last one this week. Chester says, "Dan. Second-time writer here. Obsessed listener. I'm still hoping you will try to interview Scott Lynn of masterworks.io about his art investing platform and his view on the art market in the future. As you've said before, everyone should have art in the portfolio."

I'm going to stop you right there, Chester. Masterworks.io is interesting. I think everybody should go check it out. Just take a look at it. I don't know anything about it, but I was just kind of browsing around. And it's an interesting idea. I do take issue with the term "blue-chip art," though. That's a little bit of a stretch for me. You know, unless you're talking about the Mona Lisa or something. But, you know, I did not say that everyone should have art in the portfolio. If you recall, I was talking about Jim Rickards, who I – I like the guy. I sat next to him at dinner a few years ago, and we had a great conversation.

And he has this quote where he says, "Ask these people in Europe how they preserved wealth over centuries through wars and inflation and in all this crazy stuff that happened, you know, invading armies and everything. And they'll say, "One-third, one-third, and one-third." One-third in land, one-third in gold, and one-third in art. The gold and the art being portable and the land in a decent Western developed country. You have a good title, you can get your land back eve after a war, after the invading army's gone. So land, gold, and art. That's what I said. I didn't say that I know anything about art or that I think you should own art.

I said I think you should make investing personal, and you should – you know, if art's your thing, then go for it. If Ferrari's are your thing or vintage guitars or wine or whiskey and casks... we mentioned all of these things. Just make it person is what I said you should do. But Chester B. continues. He says, "Dan." All caps. "You freaking get bitcoin, my man. Once the light goes off, you become disgusted with people that don't understand what money is. Sure, there's risk. But that's with all investments in today's economic environment. All new forms of money are very volatile in their infancy when weighted against other assets of the time."

And then, he says he wants me to interview a guy named Preston Pish. We've talked about their program before. It's a pretty cool podcast that I listen to. And then he says he wants to hear the two of us talk. So, you know, I've asked for these suggestions before. I appreciate it, Chester. He says, "Thank you and keep up the great podcast. Chester B." Well, thanks, Chester. That's good advice, and maybe we'll do some of that. And I'll look into art I'll look into this whole Scott Lynn and masterworks.io. I think that's probably a pretty decent recommendation too, it sounds like. If it has anything to it at all, right?

All right. Yeah. That's another mailbag, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. If you want to hear more from Stansberry Research, check out americanconsequences.com/podcast. And do me a favor. Subscribe to our show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us growth with a rate and a review. You can also follow us on Facebook and Instagram. Our handle is @InvestorHour. Also, follow us on Twitter where our handle is @Investor_Hour. If you have a guest you want me to interview, do what Chester B. did – write in, drop us a note at [email protected]. Till next week, I'm Dan Ferris. Thanks for listening.

 

Announcer:                 Thank you for listening to this episode of the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to invvestorhour.com and enter your e-mail. Have a question for Dan? Send him an e-mail: [email protected]. This broadcast is for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.

 

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