Book Review – Market Sense and Nonsense

In 'Market Sense and Nonsense' (Wiley, 2013) celebrated author Jack D. Schwager tries to give the reader a guide on which things really make sense in the markets; and which do not. He refers in part to scientific studies that emphasize his statements.

1. THE 10 KEY FINDINGS IN THE BOOK (according to us)

The opinions of financial experts can cause short-term price movements, but have no influence over the long term.
Prices make news, as financial news quickly adapts to current price movements.
The markets are not fully efficient as fundamentals are priced in late and many market participants are affected by emotions.
The best time to make long-term equity investments is after a long period of low returns.
The best funds of the past are rarely the best for the future; With hedge funds, it pays to bet on the worst strategies of recent years.
A long, stable track record is no guarantee for continued good performance.
Correlations alone do not say anything about cause and effect.
Managed accounts make sense only for liquid investment strategies.
Too much diversification leads to mediocre, index-related performance.
Regular rebalancing within the portfolio improves performance in most cases.

The first chapter makes it clear that experts can not be relied on. The author illustrates this with the poor performance of the well-known US TV show ”Mad Money” with Jim Cramer as well as with a former expert index, which turned out to be a contraindicator. The well-known Hulbert Financial Digest, which tracked the performance of stock market letter writers, attested an annual average underperformance of 3.7% compared to the S&P 500 over a 30-year period. This makes the experts even worse than sheer coincidence.

Jack Schwager is not a fan of the efficient market theory, and he shows for that in the following chapter using various examples. Even if all market participants have the same information, that does not mean that they come to the same conclusion as to which pric is appropriate. There is an interesting comparison to the game of chess, where the players know all the rules, but in the end only a few experienced players regularly win by systematically exploiting the mistakes of their opponents. In this way, it is also possible for capital market professionals to beat the markets.

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Large parts of the book deal with minor issues for traders, such as hedge funds, managed accounts, risk adjustment variables, and correlations. For example, hedge funds are described in detail as having hidden risks that only become apparent when a completely unforeseen event occurs. Therefore, the previous volatility in the track record may be misleading as far as the actual risk is concerned. Classic examples include strategies such as the short sale of options or short volatility, but also permanently illiquid markets, excessive leverage and unreasonably high credit risks.

2. CONCLUSION

Some of the points described in the book are interesting, others are more for institutionals, and on some subjects the author could have been (significantly) shorter. This increasingly complicates the reading flow. For example, it is repeatedly stated that one should focus not on the returns, but on the risk/reward ratio. Readers of the well-known Market Wizards series by Jack Schwager might therefore rather be disappointed with the book. However, there is a summary of 32 investment guidelines at the very end where the author brings the essential aspects of the book to the point again.

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