ironically, having a method with bigger volatility swings and drawdowns can actually indicate a higher degree of long term fitness rather than lower. there are billion dollar trend following firms that have been around for 20+ years because their strategies are "mitten fit" - loose enough and robust enough to survive the vast expanse of market conditions without changing much of anything. They accept high account volatility in exchange for high survivability. the smoother someone's equity curve is, the more likelihood that their trading strategy is glove fit rather than mitten fit- meaning they have figured out a way to exploit a temporary aberration. the tradeoff for the smooth curve / glove fit is that it won't last - too optimized to current conditions, whereas the robust mitten guys will be able to keep on swingin' as long as they don't hit a drawdown that kills them. then you have guys like PTJ who are so loaded with alpha that all the rules for mere mortals go out the window. To have nearly two decades of all positive returns and yet still be able to rack up gains of 100-200% under the right conditions... awe inspiring.
A quickie observation is that the MW group of supertraders is not so far removed from just about any group of traders. That is, a large percent will fail if given enough time. Taleb's premise, that luck and survivorship bias is the main driving force behind these celebrated folk's success, looms large IMHO. Yes some will always be winners, but that number is dwindling.
Taleb has strong points but I don't think survivorship bias applies so much to the market wizards. Not only were they hand picked by a skilled observant who knew what to look for, they had to have long term track records and an ability to articulate the core of their success, both of which speak strongly against randomness. Losing your desire to trade or seeing a change in conditions that invalidates your edge is different than just being a dart throwing monkey. The managers Taleb talks about never had a real edge in the first place other than right place / right time.
Warren Buffett is old and has a much longer track record than those guys above, not to mentioned that Warren manages about 180Billion in assets or about 2.5% of the S&P500 free float -- MUCH more difficult than cohens 4billion dollar sissy fund (just kidding). If those guys you mentioned above continued to grow their assets under management and trade agressivly they could blow up before they ever reach Warren's personal wealth level. I think it was Kovner who mentioned that he doesn't keep all his personal wealth in his fund because managing other peoples money represents a risk free "call", I think thats a bit of a cop out. I hope I dont sound too critical of these guys because I actually Idolize Soros, Bacon, Cohen, Druck and PTJ.
that's exactly it. in the short run, the market rewards practices that are extremely risky over the long run. i disagree with the phrasing of "the market changes, their systems stopped working", i'm going with Taleb on this one - they were just lucky.
Dark Horse, you make a really interesting point and no doubt valid. Neiderhoffer and many others, however, claim that financial history is non-stationary. To borrow on one of his analogies, its as if the urn containing thousands of red and white marbles has an elf at the back, replacing the mix of marbles. So when you sample the data to figure out its patterns (what percentage each of white or red marbles in the population) you will be right for a while, but in time the population changes. Furthermore, you will lose money for a while because you wont know if something has really changed or if you are just experiencing normal volatility. This is not a contradiction of your "glove vs mitten" analogy. I want to comment on Taleb but I'm getting long winded here so I'll save for later.
he can't have it both ways: he can't claim unknownable levels of non-stationarity in the background and at the same time claim his statistical inferences have tradeable merit.
that is an inherent human trait called "hindsight bias". most of us - most of the time - can logically "explain" our successes.
Hindsight bias typically lends itself to one-off decisions that were poorly thought out, not structured and refined methodology that explains a way of thinking and a process of doing things. There's a big difference between massaging your rationale for an individual decision and explaining the principles and beliefs that act as the foundation for something you've been doing consistently (and successfully) for many years. If the market wizards books were full of hindsight bias instead of valuable observations w/ potential for real world application, they wouldn't be of any real value to traders. I'll grant you that the third in the series was a little iffy, but that was more Schwager cashing in than anything else. The first two are solid.