Trading Wizards’ Lessons, Pt 2: Learning from Mistakes

Everyone makes mistakes. But there are two types of people: those who learn from their mistakes and those who don't. The “value of mistakes” is the title of one chapter in Jack Schwager's latest book The Little Book of Market Wizards: Lessons from the Greatest Traders. We spoke with him to dig a little deeper.

Ticker Tape: How do great traders react to mistakes?

Schwager: The key question is whether you are able to learn from those mistakes and use the lessons to improve. Great traders, just like great inventors, understand that mistakes hold the key to improvement and ultimate success. A quote that I believe perfectly captures the ideal attitude toward mistakes comes from James Dyson, who said, "To do my vacuum cleaner, I built 5,127 prototypes. That means I had 5,126 failures. But as I went through those failures, I made discoveries."

TT: Can you give me an example of a trader who lives this approach?

Schwager: Perhaps no trader has placed learning from mistakes as such a centerpiece of his life and trading philosophy as has Ray Dalio, the founder of Bridgewater Associates. Dalio has strived to create a corporate culture in which it is acceptable to fail, but unacceptable not to call out those mistakes or fail to learn from them. In Dalio's words, "If you don't mind being wrong on the way to being right, you will learn a lot."

TT: How can traders learn from and improve on their mistakes?

Schwager: [By] keeping a trader's log in which they write down a summary of any significant trading mistake they make and the key lessons to be learned from that mistake. Traders will never banish making mistakes, but by recording and reviewing their past mistakes, they can drastically reduce repeating the same mistakes, a step that can easily spell the difference between winning and losing.

TT: You advocate trading big if you are confident in a position. Can you explain why this is important, and give an example of how it helps breed long-term profitability and success?

Schwager: All traders lose on a significant percentage of their trades. So long-term trading success requires capitalizing on those trades on which they have a high confidence level. Stanley Druckenmiller, one of the great traders of our time who traded money for George Soros during part of his career, said that the most important lesson he learned from Soros was that "when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig."