Jack Schwager - Discretionary Traders vs. Systematic Traders

Episode Overview

• A discussion on the prevalence of discretionary traders versus systematic traders among the world's elite performers.
• An explanation of why the "Market Wizards" book series heavily features discretionary traders.
• The key distinction between traders achieving consistent returns and those achieving spectacular, outlier performance.
• A clarification on the difference between typical systematic trading and the strategies employed by large quantitative hedge funds.

Key Concepts

• Discretionary vs. Systematic Trading: The primary theme compares traders who make decisions based on their judgment (discretionary) against those who follow a predefined, rule-based system, often automated (systematic).
• The "Market Wizard" Profile: Author Jack Schwager explains that his selection criterion for the books is spectacular, dramatic performance, which he has found is far more common among discretionary traders.
• Quant Funds: Schwager distinguishes between common systematic trading and the highly mathematical, large-scale approach of "quant funds" like Renaissance Technologies, which he considers a separate category.
• Outlier Performance: The discussion posits that while systematic trading can be successful, achieving extraordinary, multi-thousand-percent returns, like turning a small account into a fortune, is a feat more commonly associated with discretionary traders.

Quotes

• At 00:32 - "you'll find a heavy preponderance of discretionary versus systematic. And there's a reason for that..." - Jack Schwager explains that the traders in his books are overwhelmingly discretionary for a specific reason.
• At 01:32 - "...it's very hard to find systematic traders...who have spectacular performance. And when I'm doing these Market Wizards books, that's what I'm looking for." - Schwager clarifies that his search for outlier performance is why his books feature fewer systematic traders.
• At 02:16 - "...it does turn out that the traders who have spectacular performance...tend to be discretionary traders, not systematic." - Schwager concludes that based on his extensive interviews and research, top-tier, exceptional returns are predominantly achieved by discretionary traders.

Takeaways

• To achieve truly spectacular, outlier returns in trading, a discretionary approach may have a higher probability of success than a systematic one.
• The strategies of elite quant funds are not representative of what typical systematic traders do; they operate on a different level of mathematical complexity and scale.
• While systematic trading can be profitable, the path to turning a very small amount of capital into a fortune is more commonly walked by traders who rely on their own judgment and decision-making.