Jack Schwager Says Hedge Fund Managers are Not Necessarily Smarter than the Rest of Us
Hedge Fund Market Wizards author Jack Schwager spoke to Benzinga recently, and the whole interview can be heard here.
When asked if hedge fund managers are naturally smarter than the rest of the population, Schwager said no. "A number of them are absolutely brilliant," he said. "But a number of them I wouldn't consider intellects in that sense. They might be smart people but they're not exceptional. That's not what makes them exceptional traders. Intellect may help but by itself is certainly not enough. It's more a matter of having the right type of personality and having the ability to change your mind very quickly, to act without hesitation when you're wrong."
Schwager also spoke about his time with Ed Thorp, who famously wrote the book Beat the Dealer. "He didn't start out in the markets," Schwager said. "He's most famous for a book he wrote called Beat the Dealer, in which he wrote about how to bet blackjack and beat the casinos. The casinos had to actually change the way they worked - using multiple decks and reshuffling - because of his book. He eventually became a phenomenal hedge fund manager. So those stories about his early forays at the blackjack tables are great. Also, he and Claude Shannon, the father of information theory, as a pet project collaborated and built the first miniaturized computer to predict roulette wheel spins. This back in the 60s. It gave them a 44% edge at roulette. They did it to prove it could be done, not to make money - they only played with dimes. Thorpe wasn't gambling at all, it was all about probability. He was trying to flip the table, so that he was the casino, and he did."
Schwager continues, "He took a game like blackjack, which has a built in negative edge, and figured out mathematically that by varying the bets so you bet more when the odds were in your favor, and less when the odds are against you, you can turn what is a negative edge game into a positive edge. That does have a straight analogy with trading. It means that if you can successfully wager more when you have high confidence trades, assuming that you can judge the better probability trades, you can make money even if on balance, your ideas are net negative."
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