Walk on Water: Five Lessons from Jack Schwager

What the youngest Market Wizards cohort reveals about track records, blowups, and why the machines changed more than the humans did.

Matt introduced Jack Schwager as the Gandalf the Grey of finance with “40 years now of profiling some of the best traders alive.” “Close,” Jack said. “I started in ‘88, so I guess we’re, what, 38 years in.” The new book, Market Wizards: The Next Generation, written with George Coyle, covers the youngest group of traders he’s ever profiled, and several of them told him that video game fanaticism fed their short-term trading skills. That subject never came up in any of the earlier books. Jack is old enough that his own gaming experience was Pong, usually in a bar. Matt asked what the next era of trading might look like, and he wouldn’t guess. Technology changes and markets change, he said, but “a lot of the elements of trading haven’t.”

Lesson 1: Big Returns Mean Little Without a Long Record

When Jack and George saw Lukas Froelich’s returns for 2020, somewhere between 800 and 1,000 percent, Jack said these were numbers “that you look at and you say, ‘Oh, come on, give me a break.’” No statements would do it. “It’s gotta be an audit,” Jack said. “It’s gotta have a legitimate auditing firm do this, or we just don’t feel comfortable.” Froelich had audited returns from a name firm, but that firm wouldn’t speak to the authors directly, so a second audit got commissioned, and for 2020 it “did come up with a different number, but it was higher.”

“He didn’t compound those returns,” Jack said. “Because if he was compounding the returns, it would be absolutely crazy.” Froelich was pulling money out. Had he left it all in, the account would’ve gotten so large he couldn’t scale the strategy, and with that much at risk the psychology would’ve been different. The big year didn’t get him a chapter anyway. Jack wants to see at least ten years of track record, and often twenty, because “anybody can make a fortune in two or three years and typically end up blowing it.” One trader in the book has never had a losing month, which breaks the Sharpe ratio calculation, since “you get an infinity number, you divide by zero.” Even he had to document eleven years of it through statements. It’s a useful standard to borrow the next time a fund or a newsletter shows up with a three-year miracle.

Lesson 2: Bad Stretches Are Part of Getting Better

Kristjan Kullamägi was working night security at Nasdaq’s Stockholm affiliate when he started wondering what the men in nice suits and expensive cars actually did all day. He read investing books, then found out about trading, which struck him as investing on steroids, and that appealed to him. He saved about $5,000 from the security job and lost it. The security job gave him time for it. The rounds took up a small part of each night, and he spent the rest studying charts. He saved another stake and lost that one too. Matt counted three destroyed accounts in the book, and Jack said it might be four. Jack asked him whether all that failure ever made him doubt that he had the talent for this.

The first time I blew up it took me a couple of months, and the second time I lasted about six months, and the third time it was like over a year. So I felt I was getting better.

Jack distilled the logic: “It’s taking me longer and longer to blow up, hence I’m improving.” And he turned out to be right about himself. The $5,000 eventually grew past $100 million, though the peak lasted less than a week in late 2022, when he was leveraged long at the top and kept trading the same way while he gave back more than half. He’s semi-retired now. He bought a boat, and he still has a fortune. Jack has been watching this pattern since Michael Marcus in the first Market Wizards, whose litany of failures is painful to listen to, and he’s careful about the causality, because blowing up doesn’t predict success and plenty of people have that self-belief without the talent. But trader after trader in these books witnessed what Jack called “the type of failure that would’ve knocked most people out of the attempt,” and kept going with no empirical proof they’d succeed. Most investors’ bad stretches are milder. Jack’s question to Kullamägi still fits. Is anything underneath actually improving?

Lesson 3: The Hard Part Is Protecting Yourself From Yourself

Jack’s favorite chapter in the book, one of his favorites in the whole series, came with a nine-page nondisclosure agreement. The trader he calls Simon Rousseau, a pseudonym Jack let him choose, was at one of the best music schools in the country, driven since childhood to master whatever he touched, until he decided he couldn’t fully pursue both music and trading and dropped out. A familiar loop followed. He’d make money for half a year, then go short something without a stop and get sold out by his broker. He kept borrowing from his father until one more loan would’ve meant eating into his father’s own money. He wasn’t willing to do that. He was going to give up. Then a trader in his online research group who admired his work stepped in: “Look, I appreciate the work you do. I’m gonna lend you fifty, no strings attached. Pay me back when you can.” Simon made about a hundred thousand the first month, paid back the fifty plus an extra ten as thanks, and the $40,000 that remained became half a billion dollars in nine years.

The scary part is the dip in the middle of that mountain chart. With a couple hundred million already made, he shorted Carvana a second time mostly because the first short had worked, skipped his own stop, and finally dumped the position after a wildly bullish earnings report gapped the stock up. Matt wrote down a $50 million loss. Jack checked what staying stubborn would’ve cost, and the answer was the entire $200 million.

Then, with the book nearly at the printer, an email arrived.

Look, guys, I don’t wanna have people think I walk on water. I gotta be honest here. I just recently had my worst loss ever.

“It was the same story,” Jack said. He went short, didn’t honor his stops, and added to the position as it went against him. He was down about $100 million and got out with a $15 million loss. Then he implemented automatic rules “to protect himself against himself” and sent Jack the list. He was at new highs again before the chapter was done.

Lesson 4: Even the Best Are Wrong More Than Half the Time

“There’s a million different ways they trade,” Jack said of the people he’s profiled, fundamentalists, technicians, short-term, long-term, stocks, futures. The common denominator for almost all of them was positive asymmetry. When they won, they won much bigger than they lost, and the vast majority would lose more than half the time.

This book has the first exceptions. Matt described Phil Goteker’s track record as one of the most offensive in Market Wizards history, and the numbers back him up. Two decades, one losing year, and the losing year cost about $30,000 against winning years in the multi-millions. Phil built that record shorting single-digit stocks that had just run up several hundred percent on nonsense, a trade with the asymmetry inverted, since his best case is a $7 stock going to zero while a stock that ran several hundred percent can always run several hundred more. He later switched to selling options because he needed larger scale, the same shape again. Phil, Jack said, “seems to be one of these people who was born with just an internal risk management sensibility. As soon as something goes against him, he’s out. It’s like a knee-jerk.” The knee-jerk got tested when tariffs crashed the market four straight days with Phil short options. He lost less than a million dollars, trivial at his size, because instead of unwinding option positions he bought S&P puts to offset his entire risk, a trade that takes seconds.

I would not recommend either one of those to anyone... unless you have phenomenal risk control.

For everyone not born with Phil’s reflexes, the common denominator points the other way, toward keeping mistakes cheap, because mistakes are constant.

Lesson 5: The Market Gives You What You Actually Want

Matt raised the old objection that day trading can’t survive its own transaction costs, and Jack answered with Lance Breitstein. Out of college, Lance had an offer paying over $100,000 a year and a prop-shop offer paying about $26,000, and he took the $26,000, reasoning that three quarters of prop traders fail and the quarter who make it can earn a million a year or more. Then the firm’s best trader had a newborn and moved to Princeton and needed an assistant. Every other twenty-something wanted to stay in New York. Lance volunteered, and the firm’s best trader became his mentor. He took video of his key trades and came in on weekends to replay them, in fast motion to quicken his execution and in slow motion to study what he did right and wrong.

Jack knows what that wanting looks like because he admits in this book that he never had it. He may have believed early on that he wanted to be a great trader, but in 38 years he never once took a full week off to devote to trading. He did take a full year off, unpaid, to write an analytical book about futures he knew couldn’t sell many copies, aware that “every time I put an equation in the book, I knew I was reducing my sales.” Ed Seykota said long ago that win or lose, everybody gets what they want out of the markets, and Jack conceded the point. “I may have thought I wanted to be a great trader. I ended up getting what I wanted out of the markets, which is being a successful writer.” The sabbatical told the truth his ambition wouldn’t. His advice for anyone drawn to trading follows from that. The commitment can’t be forced, and money is a poor reason.

You have to love that endeavor enough to devote your life to it. And not for the money... for the endeavor itself, for the game of winning against all these other players.

The Bottom Line: Worse Than Random

When Matt asked our standard closer, one belief his peers would dispute, Jack came up empty. What the wizards believe is generally correct, he said, and he tries to be influenced by them, not to contradict them. Earlier, asked how people who want to trade should think about it, Jack had quoted Bill Eckhardt in The New Market Wizards, who said “our human nature is so poorly attuned to trading that most people will do worse than random.” The academics claim a dart-throwing monkey matches the professionals, and in Jack’s rendering, “the monkey’s gonna do better ‘cause he’s not inhibited by human emotion.” Getting out of a loser locks in the pain, and giving it two more days buys two days of hope. After 38 years, Jack still finds solo traders putting up phenomenal records with “no special edge or information or resources.” Pong or prop shop, the game has always been played against yourself.

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