Lessons Learned From Market Wizards (With Jack Schwager)

LIZ ANN SONDERS: I'm Liz Ann Sonders.

KATHY JONES: And I'm Kathy Jones.

LIZ ANN: And this is On Investing, an original podcast from Charles Schwab. Every week we analyze what's happening in the markets and discuss how it might affect your investments.

Well, hi Kathy. This week, much as we assumed, and the market assumed, there was no move from the Federal Reserve on interest rates. It was not a really exciting press conference either, but were there any tea leaves to read during the press conference or in the statement that was read, the comp between the latest statement and the one prior.

So what's your take and what are you thinking in terms of what the bond market is pricing and looking ahead?

KATHY: Yeah, it was a kind of a non-event for the bond market. Really didn't move the needle one way or another. And I think that, you know, they didn't change rates, which was right in line with expectations. And I think the logic for a rate cut just isn't there right now. Inflation stuck closer to 3% than 2%. The economy is growing at a probably run rate of 3.5% or 4% in terms of GDP. Fiscal stimulus is coming due to the One Big, Beautiful Bill. And we have a lot of momentum, I guess you'd say, in the economy.

I thought in the press conference, Powell made some interesting points about the labor market, which I would call sort of a conundrum in the sense that the unemployment rate is low, but that's because both hiring and firing are low. We've talked about that extensively. I think the committee is struggling to figure that out, what the signal is from the labor market. We've got both supply and labor declining and demand for labor seems to be soft, but that keeps the unemployment rate low, but it doesn't signal a really strong, growing economy. It's not consistent with a strongly growing economy. Clearly the committee is struggling with the same issues that I think the market is struggling with. But you know, overall, he completely avoided talking about the politics of the moment.

I think that was probably the most frustrated room of reporters during the press conference I can remember. They all were teed up with their questions about that and he batted them away pretty well. So…

LIZ ANN: I can't imagine anyone really would have thought he would have engaged, though. I mean there's always the hope that they'll get the sound bite but that didn't surprise me.

KATHY: He was very composed. You could tell he was ready for it. And he was just like, "No, not going there. I have nothing for you on that," I think he said at one point. So, nothing there. We did get two dissents, which wasn't a surprise, from Miran and from Waller. Probably interesting from Waller because he is said to be on the short list for the chair position.

So again, really not much happened. The bond market took it in stride, sold off a little bit, but nothing major. By the end of the day, the focus really was back on next week and tomorrow and everything that's coming up. I think the labor market data probably is what has people most interested now. So passing it back to you, it looked like the stock market took it well and now we're into earnings season. So what are you hearing from people out there and what are you seeing in the market?

LIZ ANN: Yeah, so earning season is, again, so far so good. It wouldn't surprise me when all is said and done that what is ultimately reported collectively for the S&P 500® will be better than what the consensus was starting, but maybe not to the same degree as we've seen in the last two or three quarters, where first, second, and third quarter of the year, once earning season had been complete, the actual year-over-year growth rates were about double what the estimate was going in. So, you know, first three quarters tracked around 12%, 13% earnings growth. Right now, we're in the midst of earnings season, so this is a perpetually moving target on a day-to-day basis as reports come in. But with the data that we have now, as we're taping this, looking at about a 9% growth rate.

So a little subdued relative to the first three quarters of the year and probably with a spread relative to expectations that's a little bit narrow. And that may be part of the reason why, for the first time in 7 quarters, companies that are beating estimates in the first full trading day after their earnings release, the stocks on average are actually down a little bit. You have to go back 7 quarters to find out, find the last time that the so-called beats were weak on the first day of trading.

Also interestingly, the misses are down more than the beats, but it's the least amount of downside for the misses as we've seen in about three years. So it's almost like we have this narrowing, not as much reward to the beats, in fact actually negative but less of that punishment factor on the misses.

And another thing that's interesting that we're seeing is, you and I on this program have certainly talked a lot about the power of the retail trader, a bit distinct from the definition that would represent individual investors. And we know that one of the most consistent mantras since the Covid era for the retail trader has been "buy-the-dip," they are big believers in buy-the-dip. And that is kicking in at the individual-stock level, too. So I get some really good research from the folks at Vanda, and they do a… really better than anybody tracking of retail flows, and they do it at the individual-stock level, they do it at the exchange traded fund level. And they're seeing a lot of fast-moving dip buying at the individual-stock level during earnings season, particularly the stocks that have gotten quite hurt on that first full trading day.

So as I've often said, part of the reason why that crowd feels so beholden to continue to sort of press that view is it's worked. Buy-the-dip has worked. And we know that on some of the weaker overall market days, those tend to be defined by what the institutions are doing, the commodity trading advisors and the big speculators in the in the institutional world and the long-short hedge funds. But part of the reason why we've seen such quick reversals after days like that is because retail traders take advantage of it and buy-the-dip. Now whether that represents complacency and at some point that might not be the right move, they certainly have had the success rate at their back representing that.

KATHY: Yeah, I would say it's sort of one of those things where if you look over history, it works until it doesn't. And it has been working. It's been working great for a long time. So I can see why people are encouraged by it.

LIZ ANN: And you're also seeing it at the factor level, too. As you know, we do a lot of work on factors. And particularly in the small-cap space, one of the most positive factors in terms of where performance has been strongest is the short-interest factor. So it's also still thinking back to the origination of the whole meme-stock craze, which was a lot about "Let's stick it to the man. Let's find where the institutional short positions are greatest," and through things like WallStreetBets on the Reddit platform, "OK, let's really press this" and they, know, the band of retail traders get together and it's interesting that we're seeing that in particular in the small-cap space where that short-interest factor, meaning stocks with high short interest are the ones that are performing best. So again, that approach has proven to be pretty successful and maybe will continue until it's not.

And you know, speaking of traders, retail traders are sort of this new cohort that grew out of the pandemic. But there's some pretty well-known traders that go back as far as both you and I have been in the business. And that's a good transition to you telling us about a really fascinating guest today.

KATHY: Yeah, well I got to sit down with Jack Schwager, who I actually worked for years ago. It was great to reconnect with him. You know, for full disclosure, I worked for Jack for about the first 15 years of my career, and I've always been grateful for the experience because I learned so much from him, and he was very supportive of my career, so it was really a lot of fun to talk with him.

He's perhaps best known as the author of a book called Market Wizards: Interviews With Top Traders, and several other "Market Wizard" books in the series including his latest, which is due out later this year. It's going to be called Market Wizards: The Next Generation, and I'll have a link to his book in the show notes.

Aside from his role as an author, Jack's other career highlights include: 22 years as director of futures research for some of Wall Street's leading firms, including Prudential Securities, PaineWebber, and Smith Barney; 10 years as a partner in Fortune Asset Management, a hedge fund advisory firm; and co-founder of FundSeeder, a firm that provides traders with free performance analytics and the opportunity to be selected to manage assets.

And just kind of one more note to make before we get into it, this is about traders. This is not about investors. Jack interviews and writes about very successful traders. And so this is not meant to be advice for individual investors or for long-term investors, but it is very interesting to, I think, hear about how active traders approach the markets.

KATHY: Well, Jack, thanks for being here. It's really a pleasure to have you on the podcast.

JACK SCHWAGER: Well, great to reconnect after all these years.

KATHY: Yeah. I want to just kind of start maybe at the beginning of the whole "Market Wizard" journey that you've been on over the years, which I remember the beginning of that journey. I remember when you started Market Wizards and were doing some of those interviews, but I don't really recall what prompted you or where you got the idea, why you started this in the first place. I remember it kind of exploded the minute the book came out, but I don't remember kind of the genesis of it.

JACK: Yeah, so actually the genesis predates Market Wizards. I don't know if you recall, but the first book I did, and maybe I made you read it as an analyst, I don't know, was A Complete Guide to the Futures Markets. And that book was very thorough. It's not like a quick read, obviously. Anyway, so that book did fine for what it was. And my goal there was there wasn't a good general book on futures that I thought, so I thought I'd write it. Anyway, I got approached by another publisher. They wanted me to do a whole set of fundamental books, you know. And I said, "Look, I did that, don't want to do it again, but if I was going to do anything else, I'd want it to be more general audience." Basically a book anybody could read, and they said, "Do you have any ideas?" and I said, "Well, yeah, I have this idea that might be fun to write a book on interviewing the best traders in the U.S. and see what makes them different than the rest of us." And they said, "Fine, do it." But as you know, I was research director at the time and having taken over my position when I left, you know, that's not a 9-to-5 job.

KATHY: Right.

JACK: So it's kind of hard to do a book on top of that. But I wanted to do that book, because I thought it'd be a lot of fun. And I agreed to do it. I basically did it nights and weekends. Back in those days, when I was younger, I was extraordinarily focused. And I could really do a lot. So I could stay up a whole evening and write, I don't know, 10, 15 pages sometimes. In any case, that's how the book started. It was really … I had the idea. I thought it would be fun to do, and fate happened that some other publisher was the catalyst.

KATHY: That's great because I do remember a comment that said, I think, remember you saying the publisher was surprised at how well it did. And you were like, "No, I knew this was going to be popular." And I totally agree with you. But it was also really written in a compelling way that you were personally interviewing these folks. And so household names for people who were involved in the business, it was really exciting.

JACK: And I knew some of those people personally, so before, so that helped as well.

KATHY: Yeah, absolutely. What are some of the … kind of three or four lessons? So if I'm sitting here, and maybe I'm not an active trader, maybe I am, but maybe I'm also just an investor, and I'd like to learn from the most successful investors. What … can you name three or four things they have in common?

JACK: Yes, so trading and investing are really very different items. But let's stick on the trading side, because the advice I'm giving now is not for investing. It's if you're trading. So for trading, the first thing I would stress, and not because it's my opinion, but it's because like 95% of the people I've interviewed over the decades who did great in the markets had the same point to stress. And that is that it's not the methodology that's the first critical point; it's actually money management. And so many people don't appreciate that, because no matter what approach you use, if you're missing the money management, the odds are very heavy that you eventually fail.

So almost all, and there are exceptions, but they're very few, almost all the traders who have been very successful will say that their money management is more important than their particular trading methodology. And I will give one point here, which if anybody listening gets this point, it'll be more than worth your time on this podcast—and a lot more actually. It's one line that Bruce Kovner, who went on to found Caxton, who I interviewed in the first Market Wizards book before he was known, he said at one point in the interview, "Whenever I get into a position, know where you will get out before you get in."

And in the five Market Wizards books I've done, if somebody said you could only give one sentence of advice, that would be it. "Know where you will get out before you get in." Why? Because believe it or not, that single sentence captures 85, 90% of risk management in one sentence, whereas you could read a whole book or several books on it and not get much more than that. If you follow that advice, by deciding what your risk is before you take the trade, you're making that decision when you're totally objective. Because when do you lose objectivity? When you enter the trade. As soon as you enter the trade, if it's bad for your trade, "Oh it's just this one item. Everything else is fine." If it's good for your trade, "Gee, I know it was right." Everything gets colored by the fact that you're in the position.

Before you're in the position, you have no horse in the race, basically. So you don't care, and you can make a rational decision. So I would really say anybody, I don't care what your approach is, I don't care what market you trade, whether you're a day trader or whether you're trading for two years at a time, follow that advice. It's the best thing I can tell anybody. OK, so that's the most important thing.

Second is everybody I've ever interviewed as successful developed their own approach. You don't become a great trader or a successful trader by just trying to follow somebody else because whatever any successful trader does, it's part of his personality. It's what he or she believes in. It's what they're comfortable doing.

Now if you try to follow somebody else's approach, you're not going to make the same decisions. You're going to second-guess it much more, and it's very easy for somebody to try to follow a successful trader, using what they believe to be the same approach, and fail. So it doesn't mean that you can't learn from other people. Certainly some of the traders I've interviewed have had mentors and were instrumental to the success. So you can certainly learn from other people. You can learn from books, you can get ideas, but in the end, make it your own.

There's no … what I always like to say when I give talks on trading, I actually begin, usually my first point is there is no true path. There's no secret formula. A lot of people think, "If I could just … there's one way to trade the market." No, there are a million ways. And here I'm quoting myself in one of the books, "There are a million ways to win in the markets, but unfortunately, they're all very difficult to find." But there are just lots and lots of ways to do it. And you have to find your own path. And what you start out as your path may not end up being the path that you stay with or works for you.

I'm just thinking like the most recent book I wrote, lots of the traders—almost all of them, I think—started with one approach and eventually changed and sometimes changed multiple times. So that ability to change, actually, that's a third point, that part of flexibility, the idea that you can change, you can … in fact, not only can you, but many times you need to change because markets aren't totally static. Markets do change.

So what may work in one period may not continue to work, and you have to be aware of that. And flexibility also is very important to being able to change your mind about a market. People who are very dogmatic are not going to be good traders. You have to be able to say not only that you're wrong, but maybe you're on the wrong side of the fence and even switch.

And here's the best story on flexibility I've ever encountered in all my interviews. Stanley Druckenmiller, and this is October 16th, 1987, and for those of you who don't tie into that date or were too young to physically remember it, that is the Friday before the great crash of 1987. So what happens on that Friday? Stanley Druckenmiller was managing multiple funds for Dreyfus. He comes into that Friday net short.

Now lot of people, when they think about the '87 crash, they have this image, the markets all of a sudden just crashed. No, it had been going down for months. And the week before the big crash, it went down a lot that particular week. So Stanley looks at it, and the market had come down to a support level. And he figures, "I've had a good run on this. It's at support," and he basically liquidates an entire short position, OK? But that's not the end of it. He actually decides the market's due for a bounce. So he switches from short to long, and that's not even the end of it. He goes leveraged long, 130%.

So on that Friday, he goes from short to leveraged long. And I used to ask audiences when I gave talks, "Did anybody ever make a worse mistake?" I stopped asking the question, because I realized you can't make up a worse one. You know, if I said, "Make up the worst trading mistake you could do. I challenge anybody to think of a worse mistake than that." So what happens? The interesting thing is, if you look at his record for October '87, he has a small loss, I think. And how is that possible? How could you go leveraged long and come out … and for people who don't know or remember, the next Monday, the market was down, well it was down I think in the cash market like 27, 26%, but in futures which were able to go marked to the market because the tape was running so late, I think the loss was about 29% in one day.

So how the hell does he escape with barely no loss? Well, over the weekend, and he decides he was wrong, that he made a mistake. Why? It's in the book. It's too long of a tangent. But the point is he realizes he's wrong. What does he do? Monday morning, he gets out of his entire new long position, the whole thing at the market, and not only that, he switches back to short. So think of the incredible … this is a market, the Monday morning, the market gapped down, I think like 12% on the opening. So this position he switched into is down automatically 12%. Think about the tremendous flexibility it takes to not only be able to cover that whole loss, instantaneously, not hope for a bounce, not wait and then go back into the original position, because he believes that was what is the right thing to do.

KATHY: We both remember 1987 pretty clearly, you know, and if you're cutting your teeth …

JACK: I remember one trade on that, and I picked some measured move objective with … market was down a lot, and I risked like a hundred point, like a small amount. So I maybe lost a thousand dollars, but I got the trade at market losing a thousand dollars, which was OK.

KATHY: I'd say on that day that was a good loss. That was very much a good loss compared to a lot of things that happened. That was quite memorable.

JACK: That was quite a day.

KATHY: Yeah. But that does make me think about something you mentioned is that markets change over time. And I remember, kind of in the heyday, moving-average crossover systems, trend-following systems. We had Richard Dennis teaching the turtles, that that's the way to do it. It was very successful for a long time. And then I feel like that whole thing changed. And what's your observation about the way markets have changed sort of structurally over the years?

JACK: You probably hit the best example I could think of, and I often give that as a good example, trend-following, because let's think when I wrote my first Market Wizards book, it was 1988, and some of the people in that book were trend-followers, and they had done extraordinarily well, because the '70s and '80s even were just great time for trend-following, but when did personal computers come on scene? I think early '80s, but they weren't being widely used. It wasn't until, I think, well into the late '80s, before people had PCs.

And perfect example, first book, Ed Seykota, he started using trend-following back, I think, in the late '60s or something like that. But when he started out, he got a job at some … one of the brokerage firms, so he could use their mainframe on the weekends to run this trend-following thing. And he was basically using just an exponential moving average, and he jokes that it was like so new that, when he told people about, it they would call it the "expidential," as opposed to the exponential, moving average. The people had no idea. So there was complete lack of sophistication about anything to do technical and especially trend-following, which at that point was like the vanguard of mathematical trading, I guess, which of course now it's like the simplest approach you could possibly use.

So once it became popularized, when everybody could use it, there were 500 trend-following systems being sold. There were software programs that you could buy that would do this stuff. And there were stories like the turtles and Richard Dennis, and that enticed people. What happened? Too many, lots and lots of people, started using it.

So when Ed Seykota is the only guy, one of the only people doing this thing, he did phenomenal. But he continued to do well because he adapted. But back then it didn't require more than just the moving-average system. But the markets changed because once people start adapting too much, or computer power gets into the hands of everybody, then the markets will change. They don't stay the same.

KATHY: Yeah, so it's just an efficiency thing. Markets pick up on those patterns, and it's so easy to do.

JACK: And Kathy, so let me add one more thing here. Markets still trend for very good reasons, and I'll get to in a minute why they don't, why it doesn't work as well anymore. They have to trend because if the central bank … and you will appreciate it being, you're more of an expert on financials than I am, but when central banks change their policy, they're not going to change back in two months. So once they change their policy, it's going to be like that for years.

So once there's a major sea change like that, it's clear that the reason for markets to trend … and that affects interest rates, affects currencies, and those affect other markets. If you get a shortage in something like copper, let's say, well, if there's more demand for copper than is available by the open mines, you're not going to get mines opening up next week to supply that extra copper.

So there's lots of good reasons why you have trends, and they still exist. But the market will behave in such a way that it will cause the most people to lose. So the trend will still exist, but you'll get these violent whipsaws that will knock out the trend-following systems because it'll go down enough to switch the direction, and then it'll pop right back up. So while the trend over time continues, the markets behave in a way that they create a lot of losses for people trying to follow those trends. And even if you're right about the trend, you could still end up losing money. And occasionally you get a market like gold now, where you just get this runaway smooth trend. And those things offset a lot of the losses in trend-following. But on balance, the whole approach, the return to risk is positive, but nothing like it used to be.

KATHY: Yeah, you know, what do you think, though, also about the availability and speed with which information is released or moves? I mean, you know, back in the trading floor days, you know, it was … it's a whole different story, right? And now I feel like all of it's instantaneous. But of course, you don't know what's true and what isn't anymore. But the instantaneous information is got to be a huge factor.

JACK: That definitely changes things because you get moves that are immediate. Humans can't beat the machines in terms, you've got firms that are using systems that will basically … are designed to just catch a single word or whatever on any announcement and instantaneously transact the order. Nobody, as a human, you can't compete against that. So an approach where somebody was watching, let's say, a Fed chair talk, and if he was extremely sophisticated and was prepared and knew what to do, he's still going to miss that initial spurt. You just can't beat the automated machines on that. So that's a change. So you have to adapt. So I've interviewed people who use that approach, and they have to take into account now that there's going to be an initial swing that they can't possibly beat.

KATHY: Yeah, so in all the work that you've done on this, what's maybe the most surprising thing?

JACK: The most surprising thing for me is that nowadays we're dealing with, you've got, I don't know untold, I don't how many firms you have now with 100 or more PhDs doing quant stuff, and you're competing against that. And those firms have super computing power. And despite all of that, like these last two books I interviewed individual traders, just solo traders, the guy in his own living room or whatever, his office, home office, trading. And I've found people who've just done extraordinary, I mean crazy results, triple-digit average percent returns over more than 10 years.

In this book I just completed the manuscript on, two of the people I interviewed, one went from literally $40,000 to a half billion. And the other one worked for a hedge fund and was trading and built up money. And after he had about 6, 7 million, went on his own and also made a half billion. And the fact that they were able to do that, and despite this extraordinary competition … and those results are, in terms of returns are, and to risk, are just way beyond even the best hedge funds. Now, admittedly, they couldn't manage $30 billion doing this, right? So it's possible because they are dealing with small sums, but nonetheless they did it. And for 99.9% of the people listening or involved in markets, they're not managing billions of dollars.

So theoretically, they're showing that it is possible for the individual trader to take a small sum and make a fortune. And I'm surprised by finding so many people who've had that level of success.

KATHY: Those are phenomenal stories, but we know that this is only a small number of people who are capable of those kinds of returns. Tell us a little bit about what the cemetery of failed traders looks like so people have a realistic point of view.

JACK: Yeah, so the people I interview are by far the exceptions. I mean, that's why they're called market wizards. I mean, not everybody is a market wizard. In fact, not only is not everyone a market wizard, but the vast majority of people don't come remotely close. Moreover, most people who try to beat the markets realistically end up doing the opposite. And there's lots of statistics available on this. There's any number of studies you can find which will compare how people who made their own decisions in trading with brokerage firms versus, let's say, just any standard index-following fund did, and you will always see, always, that the vast majority of traders doing their own thing underperform indexes. So that's the reality.

All my books demonstrate that it is possible for some people to be extraordinarily successful, but it's not realistic for anybody to think that they are in that group because it's only a very small percentage. No more than if I was talking about marathon runners that it would be realistic for any man in the audience to think he could run a 2:05 tomorrow or a woman thinking she could run a 2:20. It's only very exceptional people that have that ability. And you can train as much as you want, it will be an impossible goal for most people. It's just that success requires some innate talent. It's not just like anybody can do it.

KATHY: Do you think the fact that we've had a fair amount of volatility in the last couple of years, do you think that that has helped promote this? Because I remember a conversation, something you taught me very early on, is that volatility is good and bad. That people often talk about volatility like it's a really bad thing, but it's actually an opportunity, right?

So do you think the kind of bout … I think of the last couple of years as bouts of volatility. We'd go through low-volatility periods in markets, and then all of a sudden, you know, like crazy stuff would happen, and volatility would spike. Do you think that's a contributing factor to their success, or is it they did this despite those bouts?

JACK: Well, an interesting thing, and I'm thinking now of the most recent book, several traders in that book started out, believe it or not, on the short side. And so on the short side of what has been predominantly a long-running bull market. Yes, we had some bear phases, but on balance, the last 20 years, even with all the bear markets, have still been very good markets. And so ironically, some of them actually made the money, not because of the volatility on the upside, but because of the volatility actually in both directions.

In their case, since they were going short, this is how they started, they eventually evolved, but their early money they made that allowed them to get bigger was actually in finding stocks that were sort of pumped or hyped without good reason, and knowing those stocks had no reason to be up, and it takes a lot of courage to trade that way, but to be able to go short into those 300, 400% rallies on stocks they believed were really worthless. So it wasn't the volatility. It was actually the research they did and they controlled the risk obviously, or else they wouldn't be where they are, but to still trade markets with that type of open-ended risk.

KATHY: Yeah, wow, that's impressive. So your new book is individual traders and …

JACK: Yeah, it's individual traders, and more than half the traders in this coming book were in their 20s and 30s. So it makes it lot more relatable to young traders today.

KATHY: Yeah, yeah, well, I mean, certainly trading, you know, we see it a lot with our population here and clients. There's a lot of active traders who are young and have been trading since, you know, high school or whatever. So I'm happy to hear a lot of them are being successful because I think over the years it took me a long time to learn a lot of lessons trading. So …

JACK: Well, there's also a tell. One that I've discovered in doing these books is that a lot of traders I interviewed got their interest in markets very young. So based on my empirical observation, the fact that you got your interest in high school, that kind of says there's some … something internally in some gene in you that predisposes you to be more successful than most people in the markets.

Oh, I have one thing on the investment side, so I should make this clear. People have to differentiate between trading and investing. And while I've made a career of interviewing highly successful traders, the truth is not everybody is cut out to be a great trader, and maybe even more importantly, everybody thinks they want to be great traders because what they really want is to make a lot of money.

You know, "I'll make a lot of money easily," which it isn't, but that's what they think, so they're attracted not so much to trading as a passion for trading but really a desire to make a lot of money, more than they could make in any other way. But the truth is that a lot of people, when they try it, will find … and I'm not a trader, and I found for myself, I'm just, whatever it is, I'm just not cut out to be a trader.

I find the emotional downs, for me, are much worse than the emotional ups when I'm successful. Whenever I make money, yeah, it's like nothing, but if I lose it, that really bothers me. And I've discovered that that's not the career path I followed, so I've done lots of other things, but I've never been a trader other than a hobby, occasionally. So you have to discover that for yourself.

Now, if you don't have a particular talent, which you have to find out, or you don't have the particular desire, then you become an investor, and the advice for investing is very different than the advice for trading. For most people, the best advice is basically just invest in some diversified index funds and just leave it there, with one caveat.

And I wrote a book over ten years ago called Market Sense and Nonsense, and in one chapter, what I did is I got data back to something like the 1850s, and I analyzed what do the next five, 10, 15, 20 years look like based on how the past five, 10, 15, 20 years would look like. And without exception, a strong message comes across. The very best returns are when the last 5, 10, 15, 20 years were lousy. The worse they are, the better your outlook.

The worst returns were when they were really good. So while I'm telling everybody who's just an investor, just put all your investment money into a diversified group of index funds and leave it there, right now, and I don't mean this second, I mean in this particular window of the next couple years, if we're going to look forward five, 10, 15, 20 years, I think they're going to be underperformance as opposed to overperformance.

So the other piece of advice that goes with that is, yeah, do what I just said, but ideally, try to bias the investments to how bad the markets have been over the last five years. So should we have a drawdown at some point, and the last five years, 10 years, start looking poor, great, that's when you should plow in. So it's a combination of those two things. If you're a trader … but recognize you're not a trader, and you're an investor.

If you're an investor, you're not going to beat the markets. Just go into a diversified group of index funds. Hold it for your life, especially if you're young, but emphasize investing when the recent markets … by "recent" meaning, not last year, but five, 10, 15, 20 years, but when those returns are at least below average as opposed to way above average. That's the advice for investors.

KATHY: Yeah, we talk a lot about that with our clients because you develop these capital market expectations for the future. And if you're starting at a high price, naturally the expectation for returns in the future will tend to be somewhat lower than they've been.

JACK: Yeah, and the other thing you can do is if you're going in after the markets have done extremely well, is it probably, for investors, probably makes more sense to forget about trying to capture the huge gains than whatever was the popular market at the time. Because ultimately, those markets are going to have the biggest drawdown. But go into stuff that'll test the best chance of holding up reasonably well if there is a really bad time.

KATHY: So be flexible, know yourself, the way you want to invest, and be conscious of risk, risk management. I think that that's probably the big one. Well, over the years, I've learned a lot from you. I'm very grateful. I had the great good fortune to start my career working for some of the best minds in the business, and I don't think I'd at all be here if it hadn't been for you. So I really appreciate the time, and this was great.

JACK: Well, I just remember that when I decided to leave, that of all the analysts I had, the only one I was fully confident turning it over to was you.

KATHY: Wow, thank you. Well, it's been a good run. I think we both had a pretty good run, so I appreciate it.

JACK: Great. I enjoyed speaking again, Kathy.

LIZ ANN: So Kathy, looking ahead to next week, hard to believe it's February, but what are you going to be watching?

KATHY: I can believe it. This year has felt, year-to-date has felt like 10 years.

LIZ ANN: January is the longest year I've ever experienced.

KATHY: Yes, exactly. So I'm glad we're turning some page of the calendar at this stage of the game. But, let's see. Well, in terms of economic data, the one I'll naturally will be keeping an eye on is the employment data that we'll be getting. And really hard to say how that's going to turn out. We should be getting kind of full, normal numbers these days after all the distortions, although we may get a government shutdown again so I don't know what that's going to do to the data but since that's a big part of the story here in terms of what the Fed is watching, I'll definitely will be keeping an eye on that one.

And then we have, now that the Fed meeting is over all the speakers will be out talking and we'll get some sense of who… where they sit, although it looked like the majority, the vast majority were on board with keeping rates steady, but always interesting to hear what they're keeping an eye on and what they're thinking about. And then just in the global markets, there'd been a lot of noise around the Japanese bond market and what's happening with the dollar and precious metals and people kind of weaving together a story about that. Going to keep an eye on that.

And the main reason is, I'm not in the doom-and-gloom camp about this, but Japanese bond yields were anchored near zero for so long, they helped hold down global bond yields because Japanese investors are huge investors in the rest of the world since their yields were so low. And now that those yields are moving up, I think there's a lot of nervousness about repatriation by Japanese investors, which is, I think, probably contributing to some of the upside move we've seen in yields. I don't want to overplay this. People have built big stories around this. And I think it's more just a logical outcome of this policy shift.

But on the margin, it does mean you get further upward pressure on global bond yields, all else being equal. So we'll be keeping an eye on that, because we've seen a lot of disruption in the dollar-yen trade and to the point where it looked like maybe there was some intervention or threat of intervention in the market, so something to keep an eye on because it's a potential source of volatility.

How about you Liz Ann? What's on your radar?

LIZ ANN: Well, certainly the jobs report. Also, as we're taping this next week will be another update on the trade balance and details on imports and exports. And we're all essentially waiting for things to, for lack of a better word, normalize, or at least post-tariff world normalize, because of what happened last April when the administration made the decision to delay the, by 90 days, the initial roster of what they called reciprocal tariffs. And what that put companies in a position to do is give them a window to massively front-run ordering of imports so that they could build inventories at a low cost basis.

And then in turn, we saw a big decline in imports because there was less of a need to build those inventories, having already done that. We're not quite at some equilibrium state where it's normalized for those shifts, but so we'll have to start to see when we can put maybe more faith in those numbers on a looking forward basis. We also get the Producer Price Index, so it's not quite as widely followed as the Consumer Price Index, but that any kind of inflation data in this environment is important.

There's two versions of the Purchasing Managers' Indexes that are coming out in the next week and a half, as well. So Institute for Supply Management does a version and S&P Global does a version, in each case, both on manufacturing and services. And that's where we've seen some of the biggest divergence within the economy is ongoing strength in services and ongoing weakness in manufacturing and at least via the ISM manufacturing index, just this struggle for the reading to get back above 50, and 50 is considered the dividing line between expansion and contraction, another way to highlight the rolling nature of these recoveries and recessions at the sectoral level within the economy.

And then we also get the Job Opening and Labor Turnover Survey. That does lag all other employment data by a month. The Fed does pay attention to it. I'm not a huge fan of that data, in part because of the lag, in part because over the last 10 years the response rate to that survey has been cut in about half, and the whole nature of how job openings are posted and how long they can stay there has changed quite a bit. But the Fed focuses on it. So frankly, it doesn't matter whether I think it's a great reading or not. We should all pay attention to what the Fed focuses on.

And then we also get the Challenger job cut layoff announcements. And that is, for very obvious reasons, a leading indicator of what's happening in the labor market. Those have been relatively benign. But certainly in the last few days, we've seen some fairly high-profile announcements of companies doing some layoffs, so I think that should be on everybody's radar as well.

So that's it for us today. Thanks as always for listening. As a reminder, you can keep up with us in real time on social media. I'm @LizAnnSonders on X and LinkedIn. Make sure you're following me and not one of my many imposters.

KATHY: And I'm @KathyJones on X and LinkedIn, and that's Kathy with a K. And you can always read all of our written reports, including lots of graphs and charts and illustrations, at schwab.com/learn. And if you enjoyed the show, we'd be really grateful if you'd leave us a review on Apple Podcasts or a rating on Spotify or feedback wherever you listen. And please tell a friend about the show. We'll be back with a new episode next week.

LIZ ANN: For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.