MARKET
WIZARDS
with
Interviews
JackD.
Top
Schwager
HarperBusiness
A Division
of HarperCoWinsPubltshers
Traders
You've
got to
learn how to fall,beforeyou
learn
to fly.
Contents
\342\200\224Paul
Simon
One
man's
ceiling is
another man's floor.
\342\200\224Paul
Simon
wanted to become a tramp, I would
advice from the most successful
tramp
If I
Preface,
seek
I could
information
find.
If I
wanted
from men who had
advice
seek
to becomea failure,I
in
all things, I would
never succeeded. I wanted to succeed
who are succeeding and doas
me for those
look
would
If
around
have
ix
and
they
xi
Acknowledgments,
Prologue, xiii
done.
\342\200\224Joseph
Marshall
Wade
Own
My
xv
Story,
(as quoted in a Treasury of Wall Street Wisdom
edited by Harry D.Schultzand SamsonCoslow)
PART
I
FUTURES AND CURRENCIES
Takingthe
Out
Mystery
The Interbank
Michael
Richard
Dennis:
3
7
Marcus:
Bruce Kovner:
of Futures,
Currency Market Defined,
Blighting
World
The
A
Legend
Never Strikes
Trader,
Retires,
51
85
Twice,9
Contents
vi
Paul
Tudor Jones:
Gary Bielfeldt:
Yes,
Art
The
They
in Peoria,
Do
PART II
Hite:
117
vii
B. Rogers,
Steinhardt:
They
Want,
151
Weinstein:
Mark
PART IV
The Concept of Variant
\"One-Lot\"
Stock
Marty Schwartz:
FLOOR
345
Pit Trader,367
Triumphs,
387
219
The AH of Stock Selection,
Investment
Champion
as a
Trader,
Treasure
257
THE PSYCHOLOGY
V
PART
David Ryan:
Trader,
THE
193
Tony Saliba:
O'Neil:
Selling
283
FROM
The Fearless
Baldwin:
and
High-PercentageTrader,321
VIEW
THE
EVERYTHING
Jr.: Buying Value
Brian Gelber: BrokerTurned
STOCKS
Perception,
William
OF
Hysteria,
Tom
Michael
A LITTLE BIT
III
James
141
Respecting Risk, 175
MOSTLY
PART
T-Bonds
Trade
Ed Seykota:EverybodyGetsWhat
Larry
Trading,
of Aggressive
Contents
OF TRADING
Hunt, 23?
Dr.
Van
K.
Tharp:
The Psychology
of Trading, 411
The Trade:
Postscript:
Personal
A
Experience,
Dreams and
431
Trading,437
Preface
Final Word, 439
Appendix1:
Program
Insurance,
Appendix
Glossary,
Trading
and
Portfolio
441
2: Options\342\200\224Understanding
the
Basics,
some
are
There
stories here:
amazing
443
out
who, after wiping
a $30,000 accountinto
\342\200\242
A trader
turned
447
\342\200\242
A fund
manager
who achieved
shoestring
from
has
and
\342\200\242
A former
securities
years
analyst who,
average monthly
1,400percentannualized),
primarily
electrical
computerized
astounding
These are but
In his own
way,
each
career,
what
thought
many
of triple-digit
has realized an
\342\200\242
An
his
in
million
percentage returns
small-town America who started out on a
become one of the world's largestbond traders
impossible\342\200\224five
consecutive
\342\200\242
A trader
times early
several
$80
250,000
a sampling
of the
of
return
trading
past
seven years,
25 percent (over
stock index futures
graduate from MTT whose largely
engineering
approach
the
during
to trading
percent
return
has earnedhis accounts
a sixteen-year
over
of the interviews contained
traders interviewed has achieved
an
period
this
in
book.
incredible
success.
What sets these traders apart? Most peoplethink
that
in
winning
the markets has something
to do with finding the secret formula. The
truth
is that any common denominator among
I interviewed
the traders
had more to do with attitude
than approach. Some of the tradersuse
fundamental
and still
measured
analysis
exclusively,
others
others combinethe two. Some
in hours or even minutes,
employ
only
technical
traders operate
while
others
analysis,
on a time
typically
horizon
implement
X
Preface
to hold for months or even years.
the
Although
varied
the
interviews
reveal
methodologies
widely,
forthcoming
certainimportant
commonalities
in trading attitudes and principles.
Trading provides one of the last great frontiers of opportunity
in
our economy.
It is one of the very few ways in which an individual
can
start with a relatively small bankroll
and
become a
actually
multimillionaire. Of course,
a
handful
of
individuals
only
(such as those
interviewed
in turning this feat, but at least the
succeed
here)
opportunity
that they
positions
intend
trading
Acknowledgments
exists.
While
themselves
believe
into
that
I hardly
expect all readersof
super-traders\342\200\224the
world
these thought-provoking
just
this
book
doesn't
interviews
will
to transform
work
help
that
way\342\200\224I
most
serious
and open-minded readers improve
their
personal
trading performance.
It may
even help a select few becomesuper-traders.
JackD. Schwager
Goldens
who pored
like to thank Stephen Chronowitz,
of
a
multitude
over everychapter
helpful
provided
and editing
changes. I am indebtedto Steve for both the
suggestions
I truly
and quality of his input.
believe that whatever the
quantity (hours)
from
his contributions.
of this work, it has benefited significantly
merits
I am grateful
to my wife, Jo Ann,
not only for enduring nine months
board\342\200\224arole
as a \"book widow,\" but also for being a valuable
sounding
with brutal honesty. Sample:\"This
is the worst thing you
she performed
ever wrote!\" (Needlessto say, that item was excised from the book.) Jo
and I usually followed her
Ann possesses commonsensein abundance,
and
First
Bridge,
NY
May 1989
I would
foremost,
book and
in this
adviceunquestioningly.
Of
agreed
I would
course,
to be
interviewed,
large,thesetraders
In many
example,
as
without
need
neither
accounts
own
their
like to expressmy
or are
cases,
their
one
trader
whom
nor seek
already managing
thanks
to all
the traders
would be no
there
publicity,
all
as they
the money
trade only for
they
for participating
were altruistic.
I was starting out,
expressed it, \"When
motives
who
book. By and
wish
to.
For
I found
and
of successful tradersparticularly
helpful,
role in helping
new traders.\"
I wish to express my sincere appreciation to ElaineCrockerfor her
which made some of the chapters in this book
friendly
persuasion,
possible. For
like to thank
advice,
leads, and other assorted favors,I would
Susan Abbott, Bruce Babcock, Martin
Zadeh,
Courtney Smith, Norm
and interviews
biographies
I would
like to play a similar
Leigh Stevens, Brian Gelber,MichaelMarcus,
I would like to thank three traders who were
gracious enough to grant me lengthy interviews, which were not
and Martin
Presler
into this book: Irv Kessler, Doug Redmond,
incorporated
I considered my line of questionin retrospect,
(the former two because,
Presler,
and
Chuck
William
Carlson,
Rafter.
Finally,
*\"
Acknowledgments
ing
too esoteric
did
not
permit
and technical; the latter because
for needed follow-up interviews
time
publication
and
deadlines
editing).
Prologue
The name
ling
of the
and woman
man
book was The Big Board. . . . It was
who were kidnapped
by extraterrestrials.
in a zoo on a planet
These fictitious people in
on display
called
an EarthThey were put
about
Zircon-212.
a big board supposedly showing
prices along one wall of their habitat,
a news ticker, and
a telephone
that was supposedly
connected
to a
and
told
their
that
on
Earth.
The
creatures
on
Zircon-212
brokerage
captives
they
a million dollars for them
back
on Earth, and that it was up to
had invested
when
the captives
to manage it so that they would be fabulously wealthy
they
were returned to Earth.
The telephone
and the big board and the ticker wereall fakes,of course.
to make the Earthlings perform vividly
for the
They were simply stimulants
make
them jump up and down and cheer, or gloat,
or
crowds at the zoo\342\200\224to
to
shitless
or
to
feel
as
contented
or
tear
their
be
scared
as
babies
sulk,
hair,
stock market
in
The
zoo had
and commodity
quotations
arms.
mothers'
their
the
of
well on paper. That was part of the rigging,
ticker
reminded
them
up in it, too. Thenews
that the President of the United
States had declared National
Week,
Prayer
and that everybody
had had a bad week on the
should pray. The Earthlings
market
before that. They had lost a small fortune in olive oil futures. So they
a whirl. It worked. Olive oil went up.
gave praying
course.
Earthlings
And religion
did
very
got
mixed
\342\200\224Kurt
If the
suffering
Jr.
Five
are correct, then Earthbound
delusions as the zoo inhabitants
theorists
random
walk
from
the same
(Kilgore Trout is the ubiquitous
the prisoners
Vonnegut's novels.) Whereas
decisions
were being based on actual
price
believe they can beat the market
life traders
novel.
Vonnegut
Slaughterhouse
science
traders
of Kilgore
writer
fiction
on Zircon-212
quotes\342\200\224they
by their
thought
were
are
Trout's
in Kurt
their
not\342\200\224real-
acumen or skill.
If
xiv
Prologue
markets
are
truly
shortcomings,
and
efficient
are attributing
traders
when
in
their
reality
in every time
or failure to their
random
success
it is all
a matter
span, then
own
these
skills
or
of luck.
the traders for this book,
it is hard to believe this
world. One comes away with a strong belief that it is
that some traders can win
with
such consistency
over vast
highlyunlikely
numbers of trades
and many
years. Of course, given enough traders,
some
will come out ahead even after
a long period of time, simply
as a
of
the
laws
of
I
leave
it
the
for
mathematicians
consequence
probability.
to determine the odds of traders winning by the magnitude and duration
that
those interviewed
here have. Incidentally, the traders
themselves
have not a glimmer
of doubt
of who
that, over the long run, the question
wins
and who loses is determined
not luck.
skill,
I, too, share this
by
After
view
interviewing
of the
conviction.
Own
My
school, I
of graduate
out
Right
analyst. I was pleasantly
statistical
moves.
It was
mind. The only
permit
interviewing
surprised
Marcus
for
was
problem
a commodity
that my
I discussed
my
research
that my economic and
a number of major
that the thought
thereafter
long
to trade.
analysts
Michael
not
to find
predicted
correctly
analysis
landed a job as
Story
price
commodity
of
trading
came
to
department generallydid not
over
frustration
this situation
with
I became friends while
(first interview), with whom
Michael
the research position he was vacating.
said, \"You
know, I had the same problemwhen I worked there. You should do what
I did\342\200\224open an account
at another firm.\"
He introduced
me to a broker
at his new
who
was
to
the
account.
firm,
willing
open
I was earning less than the department
At
the time,
secretary, so I
I
much
risk
had
brother
didn't exactly have
capital.
my
open a $2,000
I acted as an advisor.Sincethe account
had to be kept
account
for which
secret,I could not call in any orders from my desk. Every time I wanted
or liquidate
a position, I had to take the elevator to the
to initiate
use
basement
to
the public phone. (Marcus'solution
to the
building's
same problem is discussed in his interview.)
The worst part of the
not merely the delays in order
situation was
entry, which were often nervefact
that
I
had
be
about the number
but
the
to
very
circumspect
wracking,
I would decide to delayan order until
of times I left my desk. Sometimes,
the following morning
I don't remember
in
order
to avoid
creating
any
suspicion.
my first few
trades. All I
on balance,I did only a little better than break even after
paying commissions. Then came the first trade that made a lasting
I had
market
done a very detailed analysis of the cotton
impression.
I
that
War
II
discovered
the
entire
post-World
period.
throughout
of government support programs, only two seasons
because
of a variety
recall
is that,
any
specifics
about
xvi
My Own
since
1953
could
truly
were
determined
by
and
supply
free markets [markets in which
prices
demand rather than
the
prevailing
a meaningful
seasons, I inferred that
per pound,
prices.
forecasting
these
only
cotton
move
would
prices,
Unfortunately,
higher,
which were
but peak
then
reach the
to
insufficient
these
two
at 25
cents
with
trading
cents.
32-33
around
two seasons
I failed to
conclusion
that existing data were
market analysis. Based on a comparison
significant
permit
termed
program]. I correctlyconcludedthat
government
could be usedin
more
be
Story
of the forecast proved correct as cotton pricesedged
of months. Then the advance
higher
accelerated
and
cotton jumped
to 31 cents in a single week. This latest
was
rally
attributed
to some news I considered rather
\"Close enough
unimportant.
to my projected top,\" I thought, and I decided to
the
go short.Thereafter,
The initial part
a period
from 28
over
moved slightly higher and
This seemed perfectly natural
market
level.
to my
conform
analysis.
then
broke back to the
as I expected markets
29-cent
quickly
to me,
My profits and elation
were short-lived,
to
however,
prices soon reboundedto new highs and then moved
32 cents, 33 cents, 34 cents, 35 cents.
unrelentingly
higher:
with
Finally,
my
account
equity
the position. Not having
wiped out, I was forcedto liquidate
much
in those days may have been one of my luckiest
money
breaks,
since cotton eventually
soared
to an incredible level of 99 cents\342\200\224more
as cotton
than
double
That
few years,
I lost
Two
hand
things
Chronowitz.
At
broke this pattern
finally
the time, I was the
a while. Over the next
a couple of times.In each
box for
and eventually
consolation
was
$2,000
only
of
failure.
analyst.
I hired
Steve
Steve to fill
and I shared
First, I
research
commodity
Hornblower & Weeks,and
precious metals
price!
at trading
much more than
large loss. My
were relatively small.
with not
of a single
because
amounts
previous high
me out of the
I again tried my
I started
instance,
out
the century's
trade knocked
a slot
wiped
that the
met Steve
director
at
as the
department's
the same office,
and
we
became good friends.In contrast
to myself,
a pure fundamental
Steve' s approach to the markets was
technical.
strictly
(The
fundamental
uses economic
data to forecast prices, while
analyst
the
technical analyst
internal market data\342\200\224such as price, volume,
employs
quickly
analyst,
sentiment\342\200\224to
project
Until that time, I had viewed technical
with great
analysis
I tended
to doubt that anything
as simple as chart reading
skepticism.
and
prices.)
could
My
Own
xvtt
Story
be of any
value.
that
my
however, I beganto notice
I became convinced
Eventually,
right.
I realized
of technical analysis was wrong.
closely
Working
that his market
assessment
initial
that, at least for
with Steve,
calls were often
myself,
successful trading;
trades.
I also
fundamental
needed
alone was insufficient for
analysis
for the
to incorporate technicalanalysis
timing of
The secondkey
column
was
successful
lose
market
trading.
that
I decided
on a
everything
view.
that
element
realization
the
single
that
finally put
risk control was
I would
trade\342\200\224no matter
never
how
me
into
the
winner's
absolutelyessentialto
again allow myself to
convinced I was of my
and one of my
my turning point
Ironically, the trade that I consider
had
a loss. At the time, the Deutschemark
best trades everwas actually
an
decline.
Based
extended
out
a
carved
trading
range following
lengthy
mark was forming
market
on my
analysis, I believed that the Deutsche
I
the
base.
went long within
an important
consolidation,
price
placing
simultaneously
low.
I reasoned
Severaldays
the
later,
at a
position
market
that
a good-till-cancelled
stop order just below the recent
if I was right, the market
should not fall to new lows.
plummeted
have wipedme
out;
started
the market
small loss. The
great
falling
thing
and
I was
stopped
out
of my
I was stoppedout,
type of trade would
was that after
like a stone.In the
I suffered only
instead,
past,
this
a minor
loss.
on the Japanese
Not long thereafter, I becamebullish
yen, which
a
had formed
a technically bullish
consolidation,
meaningful
providing
I normally
close point to place a protective stop. While
implemented
the fact that I felt reasonably able to define
only a one-contractposition,
I find it hard to believe that
my risk at only 15 ticks per contract\342\200\224today,
me to put on a
I was able to get away with
that
close a stop\342\200\224allowed
I ended
three-contractposition.The market never looked back. Although
one of the contracts
up getting out of that position far too early, I held
long enough to triple my small account size.That was the start of my
success at trading.
Over the next few years, the synthesis of technical
and fundamental
analysis combined with risk control allowed me to build
into
small
stake
well over $100,000.
my
more impulsively,
Then
the streak
ended. I found
trading
myself
I had just
to follow
the rules I had learned.In retrospect,I believe
failing
I remember
a losing trade in soybeans.
become too cocky.In particular,
Instead
of taking my
loss when
the
market
moved
against me,
I was so
xviii
Own
My
convinced
that I
in a bull market
mistake was compounded
by taking
The
report.
report
crop
government
of
took a dramatic decline. In a matter
was a reaction
The
my position.
of an important
front
substantiallyincreased
this action
decline
the
that
in
came out bearish, and my equity
days, I had surrendered over one-quarter
After
Story
in my
cashing
chips to
of my
cumulative
a house
buy
and later
profits.
a
taking
a book,* my savings
were sufficiently
depleted
I began
to defer my reentry into trading for nearly five years.When
a small amount:
to my usual custom, I started
with
trading again,
typical
$8,000. Most of this money was lost over the course of a year. I added
moderate
another $8,000 to the account
and, after some further
setbacks,
scored a few big winning
Within
about two years, I
trades.
eventually
to write
yearlong sabbatical
once
had
again
stalled
subsequently
up to over $100,000.I
built my trading account
out, and during the past
fluctuated below this
year, my
emotional
level,
given
\"Why,\"
account
equitymuch
that level,
beyond
What are the
own
equity
has
peak.
objectively,
I often view it
with
let aloneby
multiples?\"
any
A desire to find the answers
was one
book. I wanted to ask those traders
writing this
in
account
on an
my trading has been successful,
a sense of failure. Basically,I feelthat
have
done better.
my market knowledge and experience, I should
I ask myself,
\"have I been able to multiply
a sub-$ 10,000
more
than tenfold on two occasions,
yet unable to expand the
Although,
early
who
to your
What trading rules
trading
for
motivations
succeeded:
do you use
approach
to? What were your
had
already
success? What
do you adhere
What
advice would
experiences?
elements
key
markets?
the
of my
you
give
to other
traders?
to
While, on one level, my search
help
surpass
my own barriers, in
asking
Everyman,
the questions
I
for answers
a broader
thought
others
was a personalquest
sense, I saw myself as
would ask if given the
opportunity.
* JackD.
New
York,
Schwager, A CompleteGuide
NY, 1984).
to the
Parti
Futures Markets (John
Wiley
& Sons,
Futures
and
Currencies
the Mystery
Taking
Out of Futures
fastest
market is
the futures
book,
by most investors.It
one of
also
is
the
has expanded
more than
Trading volume in futures
In 1988, the dollar value of
the past twenty
years.
contracts
traded in the U.S. exceeded$10trillion!*
growing.
during
twentyfold
futures
is a
there
Obviously,
lot more
Today's
currencies
than
markets
futures
rates (e.g.,
interest
groups:
pork
trading involved here.
all of the world's majormarket
encompass
belly
T-bonds), stockindexes(e.g.,the
(e.g., Japanese yen),precious
metals
crude oil), and
futures
this
in
least understood
one
probably the
all
discussed
the markets
all
Of
markets
agricultural
had
now accounts for only
past decade,
the
commodities
their origins
about
introduction
in
has resulted
in the financial-type
instruments, and stock indexes)accounting
trading.
growth of many
markets
(currencies,
for
based
futures
approximately
500),
energy (e.g.,
the
Although
commodities,
of total
and spectacular
but conservative estimate
gold),
(e.g., corn).
agricultural
one-fifth
contracts
\342\231\246This
is a rough
(e.g.,
S&P
this sector
During
the
new
interest
rate
60 percent
on 246 million contracts traded
and
interest rate
average contract value well over $40,000. (Excluding short-term
such as Eurodollars, single contract
values ranged from about $11,000 for sugar at
futures,
100/lb. to $150,000 for the S&P 500 at an index value of 300.)
assuming
an
Introduction
4
5
Introduction
of all
futures
half
and metal markets accountfor nearly
(Energy
40 percent.)Thus, while the term commodities is often
become a
to the futures markets, it has increasingly
such as those
of the most actively traded futures
markets,
trading.
of the remaining
used to
refer
misnomer.
Many
financial
the
in
markets
commodity
are not truly
instruments,
have no corresponding
of a futures
essence
The
futures
is in
market
while
commodities,
the
markets.
for a
vehicles
of
contracts\342\200\224Futures
manager to reduce
and
quantity
2. Liquidity
thus,
quality);
specific buyer or sellerin
\342\200\224All
of
order
the major
the trader does not have to find a
or liquidate a position.
to initiate
futures markets provideexcellent
liquidity.
3.
Ease
short
(who
,
before
markets
allow equal ease of going
of going short\342\200\224The futures
For
short
seller in the stock market
as
the
as well
long.
example,
must
for an uptick
wait
is actually borrowing stock to sell)
initiating
markets.
a position;
no such restriction
exists
of
amount
in the
futures
market
In the
futures markets,
index
stock
by selling
exposure
futures contracts
margins
do
than
factor.
very low
a stock
portfolio
the equivalent
dollar
individual
selling
by
stocks.
6. Ease of offset\342\200\224A futures
down. (Somefutures
In casesin which
outside
price
will
Guaranteed
trade.
of the
simply
market
are not
offset
locked
at
any
time
at limit-up
during
or limit-
daily maximum price changes.
forces would normally seek an
specify
the range of boundariesimplied
move to the limit
and virtually
by
price
cease to
limits,
trade.)
futures
trader does not have to be
on the other side of
stability of the person
futures transactions are guaranteedby the clearinghouse
by exchange\342\200\224The
the financial
about
concerned
the
markets
free
can be
position
market hours, providing prices
the market
terms
leads
is largely a consequenceof the leverage
transaction costs\342\200\224Futures markets provide
transaction
costs.
For example,
it is far less expensivefor
equilibrium
are standardized (in
it
stocks.
of futures
variety of reasons:
contracts
in
margin in the futures
to tremendous
confusion with
term
the
5. Low
7.
1. Standardized
of margins
leverage. Roughly
to 5 to 10
equal
transaction
partial payments, sinceno actual
physical
the expiration
are basically good-faith
occurs until
date; rather,
margins
is one of the attributes
of futures
high
deposits.) Although
leverage
be emphasized
that leverage is a twomarkets for traders, it should
sword. The undisciplined use of leverage
is the single most
edged
reason
most
traders
in
lose
why
money the futures markets.
important
In general, futures
are
no
more
volatile than the underlying
prices
for
that
stocks.
The high-risk reputation
cash prices or,
matter,
many
as T-bonds,
counterparts as trading
because
is unfortunate
concept
are usually
not imply
a
commodity, such as gold, or a financial
for a future
date, as opposed to the
delivery
needs
time. For example, if an automobile manufacturer
copper
present
for current operations, it will buy its materials directly from a producer.
the same manufacturer was concernedthat
however,
If,
copper
prices
it could approximately lock in its
would be much higher in six months,
futures
now. (This offset of future
costs at that time by buying
copper
If
climbed
is
a
risk
called
during the interim,
hedge.) copper prices
price
offset the higher
would
the profit on the futures
hedge
approximately
cost of copperat the time of actual purchase. Of course,if copper prices
would result in a loss, but the
declined
instead, the futures
hedge
its copper at lower levels than
it was
manufacturer would end up buying
willing to lock in.
While
such as the above automobilemanufacturer,
hedgers,
in futures
markets to reduce the risk of an adverse price move,
participate
in an effort to profit from anticipatedpricechanges.
traders
participate
markets
over their cash
In fact, many traders will prefer the futures
such
instrument,
margin requirements
the contract value. (The use of
market
many
its name: Trading involves
initial
of
percent
offer tremendous
markets
futures
Leverage\342\200\224The
speaking,
for a
contract
standardized
4.
All
exchange.
futures are closelytied to their
of
are
(the activity
arbitrageurs assures that deviations
minor
and
short
in
moves
futures
will
lived), price
relatively
very closely
cash markets. Keeping in mind that
parallel those in the corresponding
the majority of futures
is concentrated in financial
trading
activity
futures
in stocks, bonds, and
traders are, in reality,
traders
instruments, many
currencies.In this context, the comments of futures
traders
interviewed
Since by
underlying markets
their
very
structure,
Introduction
\342\202\254
in the
following chapters have
have never ventured
beyond
direct relevance
stocks
even
to investors
who
and bonds.
Interbank
The
Currency
Market
interbank
The
The
the U.S.
market
currency
literally follows the
in the U.S. to Australia,
market
sun
is a
Defined
to
exists
to fill
the need
which
market
twenty-four-hour
the world, moving from banking
the Far East, to Europe, and finally
around
of companies
centers
back
to
to hedge
world of rapidly
values. For
fluctuating
currency
electronics
manufacturer
example,
Japanese
negotiates an export sale
of stereo
to
the
with
in dollars to be received
U.S.
payment
equipment
six months
that
is
manufacturer
vulnerable to a depreciation
of
hence,
the dollar versus the yen during
the interim. If the manufacturer
wants
to assure a fixed pricein the local currency (yen) in order to lock in a
he can hedge himself by selling the
amount
of U.S.
profit,
equivalent
dollars in the interbank market for the anticipated
date of payment. The
banks
will
the manufacturer an exchange rate for the precise
quote
in a
risk
exchange
if a
amount
for the
required,
profit
example,
the
their
dollar
a speculator
would
the interbank
expectedthe
future
date.
currency
market
expectations
regarding
who anticipated a declinein
in exchange
Speculators
from
specific
trade in the
interbank
shifts
simply sell forward British
market are denominated
British
pound
to decline
in U.S.
the
British
pounds.
(All
dollars.)
versus the
Japanese
in an effort to
rates. For
pound against
transactions
in
A speculator who
yen would buy
0
Introduction
o
a specific
amount
dollar amount of
of British
Japaneseyen
and
sell
an equivalent
dollar
pounds.
Michael
Marcus
BlightingNeverStrikes
Twice
Michael
Marcus
began his
major brokeragehouse.His
career as a commodity
research
analyst
for a
led
to
full-time
After
a
trading.
position pursue
he
to
work
for
almost
stint
as
a
floor
went
brief,
comical,
trader,
a firm that hired professionaltraders
to trade the
Commodities
Corporation,
one
of
their
most
Marcus
became
successful
company's own funds.
of years,
his profits exceeded the combinedtotal
traders. In a number
his
of all the other traders. Overa ten-year
he multiplied
profit
period,
2,500-fold!
company accountby an incredible
I first met Marcusthe day I joined Reynolds Securities as a futures
research
Marcus had accepted a similar
job at a competing firm,
analyst.
and
I was assuming
the position he had just vacated. In those early years
in both
our careers, we met regularly. Although
I usually
found my own
more
we
Marcus ultimately proved
analysis
disagreed,
persuasivewhen
about
the direction of the market.
Marcus accepted a
right
Eventually,
job asa trader, became very successful, and moved out to the West Coast.
When I first conceived
the idea for this book,
Marcus
was high on
list of interview
candidates. Marcus' initial
to my request
my
response
was agreeable, but not firm. Several weeks later, he declined,
as his desire
to maintain anonymity
his natural inclination to participate
dominated
in an endeavor
he found appealing. (Marcusknew
and respected
many
of the other traders I was interviewing.) I wasvery disappointed
because
him
to abandon
his salaried
near-compulsive
attraction
to trading
Michael Marcus
10
Marcusis one of
Fortunately,
I have
traders
finest
the
additional
some
been privileged
by a
persuasion
That's all you
to know.
friend
mutual
change
helped
his mind.
this
it had been seven yearssince
interview,
in Marcus'
conducted
other.
The
interview
was
we
had
last seen each
in
a
beach
set on a cliff overlooking private
home, a two-house
complex
a massive gate
Southern California. You enter the complex
through
by an assistant who providedme with
(\"amazing
gate\" as described
of holding
that would probably have a good chance
up
driving directions)
attack.
through a panzer division
This
withdrawn.
almost
On first greeting, Marcus seemed aloof,
his
his
of
short-lived
makes
side
of
Marcus'
description
personality
quiet
I met
When
to be
attempt
Marcus for
a floor trader
particularly
however, as soonashe began talking
conversationfocusedon
to be
considered
the most
his
early
He became
animated,
striking.
about
his trading experiences. Our
he
\"roller coaster\" years, which
of his
interesting
Marcus
Michael
career.
him?
paid
there any profit
Weren't
did well?
if he
chips
potato
11
incentives\342\200\224extra
No.
How much
Then what
I had
that
$1,000
About
for trading?
you allot
did
money
saved up.
happened?
trip to a brokeragehousewas very, very exciting. I
got dressed
on my only suit,
and we went to the
putting
up,
Securities
Reynolds
office in Baltimore.
It was a big, poshoffice,
a lot of old money.
suggesting
There
was
all over the place
mahogany
and a hushed, reverential tone
the office.
It was all very impressive.
permeated
My first
focal point was a big
board
at the front of the
commodity
that clicked the old-fashioned
It
way. was really exciting
to hear the click, click, click. They had a
gallery from which the traders
could watch the board,
but it was so far
that
we
had to use
The
How did you first
get interestedin trading
futures?
from
Johns
something of a scholar. In 1969, I graduated
I
Ph.D.
had
a
Hopkins, Phi Beta Kappa, near the top of my class.
to live the life
at Clark University, and fully expected
fellowshipin psychology
named
a mutual
of a professor.Through
John,
friend, I met this fellow
who claimed he coulddouble my money
every two weeks, like
I
was
clockwork.
sounded
That
very appealing
[he laughs].Idon'tthink
John how he coulddo it. It was such an
to
by finding
things
cold feet.
spoil
Weren't
you skeptical?
out
too
idea
attractive
facts. I
many
asked
I even
that I didn't
was afraid I would
Didn't he soundtoo
much
a used
like
want
get
car
never
who was
a junior
in anything, and
my school, to be my
I threw
in free
invested
at
$30 a week.Occasionally,
theory
first
My
soybeanmeal. I looked
confidence
and
\"Do you
that
didn't
John
I remember
78.40.We put
we
you could subsist on
that
diet.
I was very
commodity
I hired
naive.
trading
potato chips and
John,
advisor at
soda.
He had
do
the purchase
recommending
to see an
expecting
[he
It quickly
laughs].
of
expressionof
face. Instead,he lookedat
it?\"
was
scary was
a little
become
might
loudspeaker
on his
should
me
and
asked,
dawned on me
know anything at all.
meal was trading
soybean
quietly: 78.30,78.40,78.30,
the order in, and as soonas we
the confirmation
got
back,
almost mystically, the
was in, the market
\"We're
the
at John,
assurance
think
away
exciting, becauseit
was also very
that things
realization
came over
a voice
when
That
prices.
watching a horse race.
just like
I had good instincts
No, I had
that
binoculars to see the
that I
salesman?
a
kind
the
office,
not doing
prices
started
took that
even
then,
clicking
as a signal
because
too well, let's get out!\"
down. As soon
to start
lost
knew
I guess
descending.
I immediately
We
as it
said to
John,
about $100 on
that
trade.
The
asked me
next trade
whether
we
was
in
should
corn.\" The outcomewas the
corn,
do the
same.
and
the same
thing
trade. I said,\"Well
happened.
all right,
John
let's try
Michael Marcus
22
Did you know
anything
read
about
anything
all about
at
commodities
Had you
what you were doing?
or trading?
you
No,
we
sizes?
the contract
Sowhere
was
it
was
Apparently,
our money.We
us to lose.
Were you
were
work either.
out better,
worked
out after
it
took
After
we went
that,
this
story
days to lose
us three
of days
it took
about a $100loss?
too busy
scrutinizing
was
safe to
never
this
forget
opaque
his fist at
profit!\"
board,
leave. By the
I remember
thick,
guaranteed
the
feeling
the
image
glasses\342\200\224going
it,
and
Later
shouting,
on, I
to
and agreed
but
I will
shaking
idea
to lunch.
out.
wiped
understood the
to go out
we decided
trade, so it
eventually
To this
doubling your
money
I was
I'll never
was wiped out.
I knew
going to fire him.
forget
mistake of your
So
as much
I told
John
that,
as he did\342\200\224which
No more
potato
chips;
He told me, \"You are
him what he was going
his response.
life!\"
I asked
happened
to John?
no idea. For all I know, he might oe
in
living
because he washeddishes.
After
I managed
to rustle up another
that,
$500 and placed a few
silver trades. I wiped
out that stake as well.
first
My
eight trades, five
with
John
and three on my own, were all losers.
Bermuda
trade.
I vaguely
time
about
one trade
although
on that
that
nothing\342\200\224and
What
with
with
to do. He said, \"I am going to Bermuda to wash dishes to make a
Then I am going to become a millionaire
tradingstake.
and retire.\"
The thing
that
amused
me was that he didn't say, \"I'm
to
Bermuda
and take
going
a job to make a trading stake.\" He was very specific;
he was going to
wash
dishes
to get his trading
stake.
lost almost $200.1wasdown to about $500 when
to save the day.\" We would
John came up with an idea that was \"going
bellies because the spread
pork
buy
August
pork bellies and sell February
waswider than the carrying charges [the total cost of taking delivery in
He said we couldn't lose
and redelivering in February].
storing,
August,
first
up
weeks?
no more diet soda.
making the greatest
by the number
success
measuring
knew.
you
thing
didn't
wheat,
getting
always
the only
about
was
Right. Our next trade, in
back to corn and that trade
Yes,
before?
I don't know, but after that trade, I
in light of what happened, I thought
Yes.
that
was
trade
the
tick?
you per
costing
he come
did
two
every
know how much
of
The logic
contract.
February
No.
didn't.
Did you
ever traded
John
Had
even know
13
deliverable against the
flawed in the first place.
No, nothing.
Did
Marcus
Michael
All the
trade.
the
we thought this was
we came back,
time
of
John\342\200\224he
to the
up
was
that
pork
Did
the
for
you?
ever enter your
thought
No. I had always
incredulity.
portly
quote board, pounding
to
anyone want
August
been
lose\"
millionaire
mind that maybe trading was not
I wasjust about
a very
\"Doesn't
learned
was the
a \"can't
dismay, and
of shock,
That
other times we had
I have
day,
as a
of getting
guy
and
make
left
a
$3,000
mother's
bellies were not
i
the
done well at
knack
in life
objections.
of it. My
insurance,
school,
so I
figured
father,
who
which
I decided
died
it
was
to
just
a question
was fifteen, had
cash in, despite my
when I
Michael Marcus
14
needed to learn something
I really
I knew
before
trading
again.
and soybeans, and I also
I
recommendations.
made
to his market letter, which
trading
which was to buy wheat, and it worked.
the first recommendation,
win
I made 4 cents per bushel [$200]on that trade. It was my first
But
ChesterKeltner'sbooks
I read
subscribed
followed
I think
and very
so I
bought
it
made another
and
again
to my original
fell back
market
on
profit
the corn
devastated
blight
Was that your first
big
to it.
I
corn, wheat, and
more
some
buying
on my own
in the letter, and partly
soybeans, partly on recommendations
was over, I had accumulated
summer
intuition. When that glorious
a middle
class
sum
to me, having come from
$30,000,a princely
in
best
the
world.
I
it
was
the
thing
family. thought
How did you
I took
some
on the way
profits?
up and some when
I cashed
down. Overall,
to take
when
decide
in
the
started
markets
coming
well.
very
I
Then
doing the right thing
of
Instead
office
in
going
shockedto
having
find
didn't want
I found
that I
I would often sneak down
Worcester
I was
to
in
myself
time. I
about my thesis.
Paine Webber
think
made a little
cutting classes
blight
this time.
it
laughs].The
one
will
day\342\200\224I
Journal with
Chicago Board of Trade
Wall Street
of the
Floor
Then
either.
in the
market
corn
never
the
forget
this\342\200\224there
Than
sharply lower and fairly
opened
an
was
\"More Blight on
in Midwest Cornfields\"
headline:
the
[he
went
quickly
limit-down.
the maximum
markets,
daily price change is
limit. Limit-down refersto a decline of this
refers to an equivalent gain. If, as in this case, the
magnitude, while
limit-up
equilibrium price that would result from the interaction of free market
forces
lies below the limit-down price, then
the market
will lock limitwill virtually cease. Reason: there will be an
down\342\200\224i.e., trading
abundance of
but virtually
no willing
sellers,
at the restricted
buyers
[In many
futures
by a specified
restricted
price.]
you watching
the market
collapse?
Yes,
I was
in the
brokerage office, watching
the
board
as prices
fell.
to the
money,
not
since
I had
frequently,
dedicated scholar
Hopkins. I realized that
and in December 19701 droppedout
the
wall,
at the Y for a while. When
New York. I stayed
at Johns
the
Worcester,
to trade.
a great
be really positionedfor
then?
even
graduate school
to class,
but
Massachusetts,
I attended
fall
that
winter
that
Keltner
believed
it too. I borrowed $20,000from
my mother,
it
to
and
bet everything
on the blight. I bought
added
the
my $30,000,
number of corn and wheat contractspossiblefor $50,000
maximum
in
Were
Yes.
the grains started getting
interesting
again.
the blight had wintered over\342\200\224that is, it
and was going to attack the corn crop again.
I
1971,
around
think
limit-down
you were
So instinctively,
a nice
Was this Keltner's theory, or just a market rumor?
losing
with
a speculator. It had
I was
that
held steady because there was enough fear
margin. Initially, the markets
to keep prices up. I wasn't making
of the
but I wasn't
blight
money,
crop.
win?
that trade combined
of
spring
a theory
had survived the
I would
decided
article
Yes,
told them
pompously
In the
in the beginning, I
Even
a sense for trading.
to develop
was beginning
liked the feeling of doing things on my own. What happened next was
three
of December corn in the
contracts
just sheer luck.I bought
was the summer
That
on
a
Keltner
recommendation.
summer of 1970,
based
that
I rather
15
buying
own. I felt
my
did,
ring
There was
exciting.
Then between letters, the
price,
wheat
on
MichaelMarcus
the
of
a lot.
I was
people
was on
and moved to
asked
of getting
out on the way
down
before
the market
was
been a
handwriting
school
Didyou think
lockedlimit-down?
me what
I
that I should get out, but
was hoping the market
would
then after it locked
limit-down,
I felt
I was totally
I watched and
couldn't get out. I had all
I just
watched.
turn around.
I
I
paralyzed.
watched
night
and
to think
MichaelMarcus
26
it, but I really had no choice. I didn't
I liquidated
to
had
get out. The next morning,
about
more money and
entire
position on the
my
have
any
opening.
No,
sharply lower again on the opening?
the market
Was
not
just about
sharply,
Howmuch
did
you
2 cents.
lose on
the trade by the time
I lost my own $30,000, plus $ 12,000of the $20,000
me. That was my lesson in betting my whole wad.
was out,\" that meant one thing,
it
meant
something else.
is cloudy,\"
I was trying to write
While
my market
office. When
I was losing, I had
my mother had lent
did
you
do then?
was a
I decided I had to go to work. Sincethere
I probably
I thought
couldn't get a really goodjob and
that even though I
should
try to settle for a lesserposition.I found
I couldn't
I
for
which
was
well
for
interviewed
unusually
qualified,
positions
I
I
these
couldn't
seem to get any job.
jobs
get
finally realized that
I didn't
because
really want them.
One of the best job openings I found was a commodity research
Securities. I discoveredthat it was easier to get
slot at Reynolds
analyst
it. I learned
wanted
because
this
better
they could tell I really
position
much
better
chance
of
stand
a
if you shoot for what
that
want,
you
you
care
much
more.
it
because
you
getting
office and the main
was a glass partition
there
betweenmy
Anyway,
I
sat.
still
had
the
office where the brokers
trading bug and it was very
and whooping it up.
them
trading
painful to watch
I was really
recession at
upset.
I wouldn't
was
It
board
in
I wanted
because
charade.
elaborate
this
this
during
cycle of borrowing
same old
the
peering out
trading
manic-depressive state
to be free to trade
in a
I was
but
making or losing money
Were you
big
weather
time?
and
money
consistently
losing it.
Did you know what you were doing wrong then?
the time,
you were
just doing the research?
to trade. But I decided
were strictly
forbidden
I
mother
me.
from
borrowed
my
again, my
stop
at
another
firm. I
an
account
and
and
brother,
opened
my girlfriend
worked out an intricate code system with my broker to keep people in
from knowing that I was violating the rules. For example,if I
my office
Right,
caught on,
I felt tortured
going through
without
Goodquestion.
doing
the analysts
because
let
one of
I met
office,
wrong.
Who was
successful.
phenomenally
had
the
about
told
group
only
I
attribute
I was
principles;
trading
1971, while at my
broker's
success.
my
me,
and
problem
great trader who hasbeen
met Ed he had recently
graduated
and a
I first
one of
developed
knowledge
Ed
in October
to whom
people
a genius
When
technical
trading
Then
that?
Ed Seykota.Heis
and
the
no real graspof
I had
Basically,
everything
research
While
to
time.
that
\"the
I kept
reports,
on the
prices
said,
I was
ever
anyone
the
if I
while
and when
winning, I tried to hide my elation,
make sure not to let it show
on my face. I don't
the main
throughout
liquidated?
partition to see
the glass
through
I lost.
What
sun
said, \"the
think
you
17
Marcus
Michael
from MIT
and
computer
programs for testing
systems. I still don't know how Ed amassed so much
trading at such an early age.
\"I think you ought
to work here. We are starting
a
own
account.\"
It sounded great;
you can trade your
was that the firm's researchdirector
refused
to hire me.
the
first
Why?
that
I couldn't imagine
pressed
already
him for
know
too
why
since
I wrote
a reason,he told
much and I want
me,
well and had experience.When
\"I can't
to train
hire
you
somebody.\"
because
I
you
I said, \"Look,I
18
will
Marcus
Michael
do anything
was
It
a very
already
want.\"
you
I convinced
Eventually,
great, because I had Ed to
successful trader. He was basically
learn
really
utilized classic trading
as well as the importance
Were you
a trend
who
follower,
cut
my
Yes.
as a
around
you
of money,
a kind
track
to lose,
I continued
initially.
of stubborn
again. I was
$700. Sincethat
even
even with
to wait
enough
Ed
you think of just
Ed,
tailcoating
time?
that
1972
for a
clearlydefined
the
directing
totally
Did
you
bring
ever think
I would sometimes
was very
painful
myself
to do
of just
giving
he was
because
didn't
friend
and, at the
so successful?
think
to keep
that
maybe
on trading?
I ought to
losing. In \"Fiddler on
the
stop
trading
Roof,\"
there
because
lead
looks
joint account?
know anything about the
time, we were under
price
markets. Thiswas in July
The futures market
controls.
price
controls.
Nixon's price freeze?
As
I recall,
newsletter
saying
go beyond
$110, there
even
since
supplies were tight,
prices couldn't
to
lose
short
at $110.
nothing
by going
though
was
it
is a scene
look
up and say, \"Am
up and talks to God. I would
I really
that stupid?\" And I seemed to hear a clear answer
\"No,
saying,
I
did.
You
to
at
it.\"
So
have
are
not
just
keep
you
stupid.
and
At the time, I was befriended by a very kind, knowledgeable,
Amos
successful semiretired broker at Shearson
named
Hostetter. He
a lot of the things
likedmy writing, and we used to talk. Amos reinforced
the same principles
Ed taught me. I was getting
from two people.
wherethe
in this
the plywood price was theoretically
frozen
at $110 per
was
one of the markets I analyzed
1,000 square feet. Plywood
for the
firm. The price had edged up close
to $110, and I put
out a bearish
that.
up
trading
situation.
Yes.
No, I couldn't
a joint
$700.
up
there.
This was
Did
to save
trader?
remember what you were still doing wrong at
I wasn't patient
enough
also put
was supposedlyalsounder
I think
a year, but I managed
to open an account,I opened
$12,500
making
only
wasn't
with a friend who
Yes,my
Do you
I was more patient.
I was totally out
Anyway,
of people who would lend me money. But I still had
confidence
that I could somehow get backon the right
because
and out
Were you
Not
work out?
the recommendations
better
were
They
account
exampleturn
did
how
And
he
For example, one time,
a
a
was short silver and the market
down,
just kept eking
halfpenny day,
a penny
a day. Everyone else seemedto be bullish,
talking about why
it was so cheap, but Ed just stayed short. Ed
silver
had to go up because
said, \"The trend is down, and I'm going to stay short until the trend
he followed
from him in the way
the trend.
patience
changes.\" I learned
Did Ed's
the time?
model.
role
excellent
the firm at
losses,
winners.
of riding
Ed provided an
for
recommendations
making
from,
me how to
He taught
principles.
him to hire me.
and he was
19
Marcus
Michael
did the government keep pricesat
prevented supply and demandfrom dictating
How
It
was
You
Right.
against
mean
the law for
producers
the
set
limits?
a higher
What
price?
prices to go higher.
couldn't
What was happening
though
charge more for
was
that
it?
the price
was beingkept
22
Michael Marcus
artificially low, and there is an^onojrricprinciple that
price will create a shortage.Soshortages^eveTope^nplywood,
also under
pose^Iptn^utu^^SKeTwas
one was
sure; it
the quote
board,
other words,
was
the
the
I started
So
ceiling.
futures
price
calling
around
that
next day
If they let it
anywhere. So I bought
$200.
a matter
corn
it
but
freeze level?
its price
I think
The
day.
After I
it
as
that
bought
contract.
and
first
riding
$110 today, they
Well, ultimately,
contract, and
the position.
after you had
big trade
really
$110.80.1 used
at about
over
just sell futures
to selling in the cash
producers
opposed
and deliver against the
market at the price control
level?
The
the infancy of futures
and most producersweren't that sophisticated.
Some
producers probably weren't sure that it was legal to do that. Even if they
can
thought it was, their lawyers might have told them,
\"Maybe
people
but we better not sell and
market,
buy plywood at any price in the futures
deliverabove the legal ceiling.\" There were a lot of questions.
might
the
let
were
ones
smarter
trading
government ever try
had
but
it was
with the
to interfere
but I will get
into
$12,000 trading
grown
not
Well
that,
learning
in plywood
somewhere
closed
market
the
opened
trade
one
of pyramiding
Was that your first
the
Then
didn't
no
However,
guideline.
at
day, while I was looking
hit $110.10;
then $110.20. In
exceeding
happened.
reasoning:
to
sup-
was trading 20 cents over the legal
to see what was going to happen,
market
nothing
over $110
went
but
Why
contract
Did the
Yes.Anyway,
it trade
gray
this
artificiaUyJ[ow_
One
area.
hit $110.
price
Was plywood the only
following
of a
sort
an
to know.
seemed
nobody
just
Marcus
Michael
20
to that. In just
back
exactly,
futures markets?
a few months,
$700
plywood.
plywood
prices rose, it
been wipedout
was
in
market?
this the
Was
trade
only
Yes. ThenI got the
to occur in lumber.
corn/wheat
had on?
you
bright idea that the
I bet everything
trade, expecting that
situation was going
shortage
on one trade just as I had on the
would also go through
the
same
lumber
price.
ceiling
Yes.
What
Did the cashplywood
market
stay
at $110?
as a
supply
It
The
market
futures
couldn't get
price
last
resort
to users who
a two-tiered
market, a sort
of
legal
black
relationships
the
futures
that they had to
were frozen
out
because
sell at the
have
could get their plywood
at
The producers were fuming
with producers
market.
they didn't
legal
price
ceiling.
It just watched plywoodgo from $110 to $200.
nothing.
both
wood products, and lumber was also in short
reasoned that
after I bought
to what had
lumber
could
lumber
at around
higher
the thought
go way
up\342\200\224andit should
$130,
the
government
in plywood, and they
happened
same
thing happen in lumber.
The day after I went long, some government
an announcement
any
at a
did
were
the
Yes. Those who
in
of
elsewhere.
supplies
it created
Basically,
market?
longstanding
functioned
doing at this time?
was lumber
lumber
who
that
they
were trying to
lumber market
were
run
crashed just
up
on
were
Since
I
have. However,
woke up
finally
determined
official
they
supply,
came
not to
let
out with
going to crack down on speculatorsin
the market like they
had plywood.
The
that
statement.
I was down to
the
22
Marcus
Michael
point where I was closeto being wiped out again. There wasa two-week
The market
period
during which they kept issuing these statements.
stabilized
at a level just above where I would
have
been wiped out. I had
just enough money left to hang on to my position.
The market
was at
when
$130
you bought
it. Where was it
this
at
time?
MichaelMarcus
23
or courage that
it insight
Was
Desperation,mainly,
the
that
year,
$4,000, was now
worth
overtraded
really
1973,the
began
lifting the price
government
numerous artificial
controls
had
created
price
there
a
tremendous
in many
w
hen
were
was
lifted,
run-up
they
shortages,
in
went
Prices
doubled
commodities. Just about everything
up.
many
of the tremendous leverage
and I was able to take advantage
markets,
offered
by
about
wiped out.
office
those
During
Right.
each
two
I was constantly on the verge
two weeks in my whole life. I went
of being
weeks,
the worst
was
It
staying
account
grew
to stop
just
up
the pain,
or so that
would
you
at least
have
something left?
Both.
I was
so upset
that
I couldn't
from shaking.
stop my hands
that
you
come
to being
my
$12,000
At the
wiped out again?
had shrunk to under
time, I was politically
the
debasing
The
say
Yes,and
I never
to yourself,
\"I
believe
can't
did it again. That
I have
done this again\"?
was the last time
I bet
everything
on
one trade.
What
a shortage,
and that
fit
with
being
an
evil government
was
constantly
the perfect perspective for trading
provided
markets of the
the
mid-1970s.
the right theory
were so fertile for
markets
Right.
The
plenty
of mistakes
for the right time.
and still
Tradingstrictly
on
Yes.
was
the
trading
then
I could
that
make
do well.
long side?
happened?
eventually
I managed to
theory
currency
wing
right
that the
$4,000.
It was
Did you
Seykota
off. In 1973,my
Even after
markets.
inflationary
Well,
from
we were
time,
inflation-alarmist.
How closedid
margins. The lessonsI had learned
in markets
with major trends really paid
from $24,000 to $64,000.
futures
seeing something completely new.I
prices had goneup only 10 percent of
like a very large price
their eventual advance, historically,it seemed
further?
move.
What
made you realize that prices could go so much
At
remember
those
Giving
low
to the
about ready to give up.
day just
the
Because
controls.
So even though
the magnitude
of this decline was much
smaller
than
the price rise in plywood, you lost almost
as much money because
had
a much larger position in lumber
than you had in plywood.
you
$ 12,000 and back to under
that scary experience,I never
to over
After
$24,000.
again.
The next year,
About$117.
on?
was a support point on the charts
seem to take out. So, I held on. At the end of
which I had ran up
the $700,
to hold
the willpower
you
there
although
couldn't
market
that
gave
hold on, and the market
and
futures market.
the government
finally
turned
around.
didn't seem to have the will
There was
to
stop
the
Everything
going
up. Although
make one terriblemistake.During
that went from $3.25 to nearly
I was trying
got out of everything.
the
great
I was doing
$12,1 impulsively
to be
very
well,
soybean bull market, the
took
my profits
fancy instead of staying
with
I did
one
and
the
Michael Marcus
24
trend. Ed Seykota never
changed. So Ed was in,
would
while
get out of anything
I was out, and I
trend
the
unless
watched in
as
agony
went limit-up for twelve consecutivedays.I was real
and every
competitive,
day I would come into the office knowing he was in
I was out. I dreadedgoing
to work,
because I knew soybeanswould
bid limit again and I couldn't get in.
soybeans
of not being in a runaway
this experience
Was
as actually
aggravating
and I tried
anymore
didn't
work,
be
as
market
money?
losing
Yes, more so.It was
and
so
that one day I felt I couldn't take it
dull the mental anguish. When that
aggravating
to
tranquilizers
said,
somebody
don't
\"Why
take something
you
stronger,
25
Marcus
Michael
because he was a
Ed, however,
quickly.
in and ended
locked in a limitup
being
stop
major
down market for several days in succession.
Each day, Seykota was locked in a losing position while I was out
situation of the soybean trade,
of the market. That was the exact
opposite
trade
and I was out. I couldn't help it, but I
he was in a winning
when
\"What kind of a place is this that one's
felt a sense ofjoy.I asked
myself,
That
is
found
when
else is getting
screwed?\"
to
be
joy
somebody
greatest
I realized
that what I was doing
was too competitive,
and
was the point
I decided to becomea floor trader at the New York Cotton Exchange
down
I was
and
stopped
It soundslikethe
out
had no
follower,
trend
would
floor
have been
even more competitive.
calledthorazine?\"
I remember
this thorazine at home and
taking
subway to go to work. The subway
down.
getting on and I started to fall
then
on the
getting
to close as I was
I didn't connect it with the
thorazine. Anyway, I wanderedbackhome
and just fell through the
that
was
doorway\342\200\224it
strong. It knocked me out and I missed work that day.
That was the low point
in my trading career.
You never
threw in the towel
just
went
somepoint?
No,
up
mistake,
to $64,000
that
Around
time,
and
screaming.
I learned
that
I
months,
mentioned
you
by
before that you
I would
occasionally have to
like the
It seemed
rush
most
that
market
I go
just
in
I heard
when
place
worth
it went
to
account,
markets,
Around
long coffee.
case
over
go
exciting
I needed to show $100,000
net
outside of my commodity
to make money in the
continued
I had surpassed
the $100,000 mark.
Seykotarecommended
stop in under the
built
your
year-end. What happened next?
no assets
virtually
at
you
wasn't.
So I did,
Cotton
the traders yelling
in the world. But
get in. Since I had
to the
I couldn't
and after
that
but
down. The
market
your
a floor
being
of
field
trader\342\200\224the
opportunity
down
several
Ed
a close
turned
fact
that
to one
market?
I was
a little
worried.
concerned
However,
truth
about it. As it
out, I
turned
the thought of trading
of the matter was that
in
while
should have been very
the ring was very exciting
I was very good at picking
execution part. I was very shy, and I was
too timid to yell loud enough to make myselfheard on the floor. I ended
friend
of mine, who handled them
my orders to a floor trader
up slipping
I realized what I was doing.
until
for me. That went on for a few months
Were
bust at the
the
approaching
on
the
were
floor?
you
you
though
Yes,
a total
but
still
it was
just
out
of
markets as a
positiontrader even
yy
timidity.]
qualify.
same time,
I put
about
concern
were now reducing
trades,I was
have an adrenalin
I would
Exchange.
back into soybeans
afraid of losing.
Despitethat
but it
Did you have any
to me. The
I was
account
maybe,
started
doors
At first,
and
Well,
So, I
Right.
assume that
many
days
you
weren't
even trading.
26
Michael
Was there any
advantage to
No,
But I did
me.
for
not
on the
being
learn a lot
recommendit to anybody who wants to become a better
what I learnedthere for years.
type of things
What
did
You develop an almost
when the
ring
is
But
do
how
floor?
you
later on.
I
learned
highs.
man
I
get out
market
by the intensity
is active and
of
on the
the
is running
market
of information
the things you
learned
into
a greater
onceyou
on the
floor.
in the
the voices
moving, and then
not going to go much
further.
loud and suddenly gets very
moderately
the market
is ready to blast off, as you
use that type
You said that
the
gets
Also,
loud,
might
amount
off the
point,
of intraday chart points, such as earlier daily
At key intraday chart
I could take much largerpositions
points,
could afford to hold, and if it didn't
work immediately,
I would
quickly.
choppier?
market reached an
take
off,
and never
chart
intraday
it
point,
look back. Now
it often
answer?
The
the number of trades you make.
down
I mink the secret is cutting
three
for
all
in
have
which
are
the
ones
you:
going
best trades
things
you
the fundamentals
tone.
First,
fundamentals, technicals, and market
which
and demand,
should suggest mat mere is an imbalance of supply
mat
the
market
must
show
could result in a major move. Second, the chart
the fundamentals
is moving in the direction mat
suggest. Third, when
news comes out, the market should act in a way mat reflects the right
should shrug off bearish
tone. For example, a bull market
psychological
newsand respond vigorously to bullish news. If you can restrict your
to
market,
floor helped you
only those types of trades, you
under any circumstances.
have
to make
approach
money,
you
in
any
eventually
adopted?
importance
For example,
position,
at a
instead
critical intraday
I would take a
point,
three to five contractsI could
of the
to hold,
either
took off
using an extremely close stop.The market
and ran, or I was out. Sometimes
I would make 300,400 points or more,
with
on the floor, I had
only a 10-point risk. That was because,
by being
becomefamiliar
with how the market responded to those
intraday
points.
bit like being a surfer. I was
My trading in those days was a little
to hit the crest of the wavejust at the
trying
right moment. But if it didn't
a shot at making several hundred
work, I just got out. I was getting
points
and hardly risking anything.
I later used mat surfing
as a desk
technique
trader. Although
mat
worked real well men, I don't tiiink
it
approach
would work as well in today's
markets.
afford
mat
have become
Is that more restrictive trading style the
the
twenty-contract
might penetrate
comes back.
is the
markets
days, if the
those
hi
Right,
activity
are
the
because
So what
subconscioussenseof
a sign that
think, it actually indicates that
of opposing orders.
of being
instead
I used
trader.
learn?
you
You learn to gauge price movement
the market
ring. For example,when
is
often a sign that it is
quiet, that
sometimes
and I would
27
Michael Marcus
Is that
floor?
the experience,
from
Marcus
mat I should
I enjoyed
the game too much. I knew
No, becausebasically
was a release and hobby for
only be in those optimum trades, but trading
me. It replaceda lot of other things in my life. I placedthe fun of the
of my own criteria. However,the thing that saved me was that
action ahead
enter
five to six times the
when
a trade met all my criteria, I would
I was doing on the other trades.
position size
Were
all
your
profits
coming from
the trades that
Yes.
Were the other trades breakingeven?
The
other
trades
broke even and
kept me amused.
met
the
criteria?
28
Marcus
Michael
keep track of
Did you
on?
so you knew
which
were
which
was
what
going
other trades wasjust to break even. I knew
that met my
big money was going to be made on the trades
criteria. There will always be trades that meet those requirements,but
there
so you have to be much
more
may be fewer of them,
patient.
on the
goal
My
29
the market breaks a key chart point,
in. Nowadays, the moment
of
traders.
a
universe
whole
by
perceived
go back
is
it
Just mentally.
So the
lagged follow-up
Right,
the
trades are no longerthere?
the
that
Why are
there fewer suchtrades?Hasthe
more
gotten
marketplace
Yes. Thereare many more
those years, I had an edge
and Amos Hostettertaught
have
You
days, you
just by knowing
me.
chart
call from
day, the brokerage house would
would get a
operator
up some
market
the
from
people
of
dentists
to buy. At
the
selling out
few
the
that
more. On
that were
world,
who
time,
I was
Now
with
the
wrong,
point.
about
short-term
trades.
I traded
some
major
When
did
you
buy.
com
elevator
The
next
pushing
Is
from
the
it was
ones
Weren't
moves, but many times
that kind of trade.
I would
you trading
make
for the
my profits
in
in just
get back in
Well,
the
the market?
going to keep their
time.
So when the market
wrong
dentists
at the
weren't
with
invested
money
fund
instead of trading by themselves?
even
and
if the dentists
are
there,
still
they
are trading
one-lots,
a
are trading
position
meaningless
have to be contrary. You have to ask,
at a clip. Now you almost
thousand
\"Isn'tit true that all my fellow professional tradersare already in, so who
that before, because there
about
have to worry
You didn't
is left to buy?\"
which
is a
or reacting
information
the
when
was always somebodyleft
Are the
fund
managers
who
to buy\342\200\224thepeople
were getting
the
Now, everybody is just as decisive,
just
slower.
markets more prone to
Yes, much
as
then
systems
I believe so. I believe
unless there is a particular
now?
doomed
to mediocrity?
is over until and
following
market that overrides
[The 1988 drought in the grain belt, which developed
everything else.
this interview, provides aperfect exampleof the type of exception
after
shortly
would be if we were to enter
Marcus is describing.]Another
exception
environment.
or deflationary
a major inflationary
In other
since they were
would fall back, I would
breakouts
false
more.
Are trend-following
overwhelm
buying
their
fast.
get short covering
buying
Right,
they now have
because
that
level
their
don't
the
the right time
to buy because I wasone
game. I would wind
up
that
major moves?
two or three days
buy
grain
trade,
some fresh
finally got the word
traders playing
the
dentists several days later.
You'retalking
the
then
first
would
the
might
we would
day,
and
professional
to the
and he
recommend
third
and computers.
board, and you
An hour later
broker
one of the
angles
knows those principles.
people
bright
his
the
early days. In
that Ed Seykota
in my
than
everybody
the
watched
a key
above
moved
it
traders
professional
rooms filled
trading
In those
when
count because
operator has already bet. The dentists
of trading participation is infinitesimal.
elevator
grain
managers
sophisticated?
of
MichaelMarcus
positions,
Yes.
words,unless
everything
that
the era
imbalance
there
else.
of
trend
in a
is some
very powerful
force that
can
30
Marcus
Michael
Have the markets changed during the
past five
professional money managers now account
proportion
of
speculative
speculatorswho
tend
small
all the mistakes?
to make
The markets
have
changed.
done well for many years,
as opposed to the
activity,
trading
years because
a much greater
to ten
for
The proof
lost over
is that Richard
50 percent on
who has
he was
funds
systems approach doesn't work
defined a trend and taken
a position, everyone elsehas taken
a position
as well. Since there is no
one left to buy, the market swings around
in the other direction and
gets
managing
anymore.
you
in
The
1988.
The
problem
that
you have
once
reason we don't have many
banks are preventing currency
taking
the
other
were
you
the
good
trends
moves
from
is
anymore
getting
on the
hand
side of the trend.
that means
terms
in
trading style changedbecauseof
of trading,
and has your own
Did
opened:
Hong
Kong,
to
avoid
Zurich,
and
London.
the currencies,
It killed my
because I feel it
marriage.
is
did you
trading around the
enough times to make
It happened
a big
be
up
getting
about getting caught
get
enough
caught
times
clock?
me leery.
gap move that you
could have
avoided
by
overseas?
is right.
That
For example,I remember
one
time,
during
late 1978, the
to new
lows every day. This was
getting battered, falling
I
and
was
a
when
cooperating trading as a colleague with
during
period
We used to talk hours every day. One day, we noticed
Kovner.
Bruce
There was an intense price
that the dollar got mysteriously
strong.
We just
be
movement that
couldn't
explained by any known information.
was
dollar
long currency positions like crazy.That weekend,
a dollar support program. If we had waited
announced
of our
President Carter
in currencies.
time, I traded heavily
For example, in the years
after Reagan was first elected
and the dollar was very
I would
strong,
take positions as large as 600 million Deutsche marks between
own
my
account
and the company account.At the time, that was about $300
million worth.
That was a pretty
line. I was probably one of the
good
traders
in the world, including
bigger currency
the banks.
It was very exhausting
because
it was a twenty-four-hour
market.
When I went to sleep, I would
have
to wake up almost every two hours
to check the markets. I would
in every major center as it
tune
Nowadays, I try
worried
major move beforethemarketsopenedin the
trade that way, or
always
you
bailed out
it?
At one
Australia,
were
you
Yes.
trading
think so. If you look at a chart of
debt
held by foreign
treasury
central banks, you will see that it has risen astronomically
the last
during
few years. The foreignbanksseemto be
taking over from private foreign
investors
in financing
our trade debts.
think
of a
side
wrong
There
I don't
you
because
U.S.?
would
do
are
the
that
out of
Haven't they always donethat?
What
banks
central
actively, wereyou
the currencies
trading
night
so that you started
One
by
the
what
trend-following
is
out.
central
to determine
going to do.
through
Dennis,
have
you
situation;
political
When
the
31
Michael Marcus
U.S. trading
That situation
the next
namely,
tip
their
one
have been annihilated.
of the
principles we believed in\342\200\224
the governments,
the big players, including
hand. If we saw a surprisepricemove
against
that
understand,
often
we
I rememberthat
locked
announcement.
we would
session,
illustrates
You
would always
us that
we didn't
got out and looked for the reasonlater.
must
The currency
well.
market
several
for
limit-down
until
have
days
gotten out
in a
right
futures markets
row after
near
the
were
that
top of that
market.
a totally
We
made
a great
exit on
that
trade.
Anyway,
my point
is that
I believe,
32
Michael Marcus
asa courtesy,
the
are
going
we
changes
announcements.
even if
to make, and
often
they
the price
Consequently,
it
are notified about major
act ahead of U.S. policy
move shows up in Europe first,
central banks
European
we initiate.
If it's an action initiated
to occur there first.
price move is certainly
going
to trade are often
in Europe.
If I had a period in
going to devote my life to trading, I would want to live in
is because
of something
the Europeans,
the
I think
the best hours
by
I was
which
Europe.
in
an
to
pay for their
So you
did
you
from
Amos
who had
Hostetter,
befriended me at
some
time, he was alsotrading
money
told me that I would bewell advised
Commodities
as a trader.
Corporation
At the
Corporation.
Amos
their theory
was that
Shearson.
the
time,
be
to consider
You caught
joining
they
traders.
funny.
But weren't they in
business to
make
money
the original
the
along
way?
Did you multiply
After
that
money
the
time,
first
few years,
they
they were always
$30,000into
gave
taking
me another
money
years
and years.
been 1979.It
up
to over
the whole
move?
an incredible
was
year. I
caught
$800.
but I remember
out,
catching big chunks of it\342\200\224$100per
time. It was a wild time. In those days, I would
buy
gold in
it
would
it
$10
go up
Australia, Hong Kong would
higher,
push
up
I
was
able
and by the time New York
another $10 in London,
opened,
a
sell
at
to
out
$30 profit.
I was in
and
at a
ounce
It sounds like there was an enormous
in
the overseas markets rather than
the
to buying
advantage
United States.
in
gold
trading?
They didn't think it was possible to really make money unless you had
a Ph.D. But Amos convincedthem
to give me a chance. I believeI was
the first non-Ph.D.
trader they had ever hired. They started me out with
in August 1974. After
$30,000
about
ten years, I had turned
that account
into $80 million. Thoseweresome very good years.
add
it went
when
gold
the growth
best year?
must have
year
level.
account
given
years,
handicap.
a year for
100 percent
keep your
for Commodities
were
going to hire all these
had
They
people like Paul Samuelson on the board. They brought up the idea of hiring me at a meeting.
The first question was, \"What
has he written; in what journals
articles
has he been published?\" I had a B. A. in liberal arts and that was it. The
punch line was, \"He just trades.\"
Everybody
thought that was very
At
great econometriciansto
at least
that
under
account\342\200\224particularly
best
a year
expenses.
What was your
My
a call
I got
30 percent
the traders
taxed
they
to make 30 percent a year to
return
have had someincredible
had
You must
of your
and
phase,
expansionary
I was making
Let's go backand fill in some of your trading history. Where
go after you decided to give up on beinga floor
trader?
33
Marcus
Michael
$80
million,
or did
$100,000 to trade.
those years, they
out. In
they
After
were
In
those
up
trading
remember
because
days, I had an advantage by being in California,
in Hong Kong when my New York colleagues were
invasion
I heard about the
of Afghanistan
when
and
seemed
nobody
200,000
I called
news.
television
to;
Hong Kong
the
price
to
see
wasn't
ounces of gold before anybody
if anybody
changing.
knew
what
I was
asleep.I
on the
knew about it,
I was
able to
That's 2,000 contracts! Did you have any liquidity problems
their
on that size position in HongKong?
taking
No,
they
was told
gave
on
me the
my
stuff,
but
last visit to
with
they got fried by doing it. I
visit the
Kong that I shouldn't
of course,
Hong
buy
was happening.
34
MichaelMarcus
Some of the
floor.
gold
was on the
They knew who
Yes, they
people
Your transition
episode.
coincided
of the
side
other
No, they
when
started
everybody
on 200,000
Honestly,I think
knew something?
you
It's hard
believe
But a lot
later,
could
you
it
trade off the
was the
That
before.
Yes, I got
up
in a
ended
$750 on
around
out
the
and only
last,
first,
time,
rise and fall.
near-vertical
about
I felt
up.
way
$900. But later when
nearly
better
much
gold market
it
sick, when
back
was
I saw
down to
you
tipped
near a top?
out
One
that
when
we had many
time,
the
have
of measuring
a lot
of
wild
that
situations
of consecutive
was
when
gold
with
became absolutely
limit days. In
a market
was to get
begin to
be
those days, we
would go
limit-up
myself
their fortunes.
time,
in one
but
fortunate.
By
trader.By then,
the markets got
really learned my craft.
the time
I had
I had the advantage of having
two
market: cocoa. For almost
cocoa,
because
of the
become
and
information
help
very
I traded
years,
I got
from
founder of Commodities Corporation].
a book
that was so deep I
expert on cocoa. He wrote
in the
of friends
understand
the cover. Also, he had all kinds
couldn't
and information I got from
Helmut
and
business. With the knowledge
his friends, I felt that I knew the universe of cocoa in a way that I had
Helmut
[the
Weymar
never known
any
market
before.
What
of almost exclusive cocoatrading
obviously
came
to an
happened?
retired from
I assume
Helmut
cocoa trading.
was not nearly
as successfula traderas you
were.
for
a
Let's
just say
that
I traded
much better on
Helmut's
than
information
he
did.
days. On the
very,
day. I just forced
and holding
stories. Fortunes
buying
insane.
third
straight
limit-up day, I would
very cautious. I would almost always get out on the
fourth limit-up day. And, if I had somehow survived with any part of my
position that long, I had a mandatory rule to get out on the fifth limit-up
number
by
success
of other
we were
off that
of my rules
One
markets.
and the momentum
volatility
good, that
an incredible
Helmut
way I had
usedto
again,
That phase
well. What
a good
I was
almost nothing
end.
At
due to
$400,1 felt
it.
All in all, you got out very
I was very
But,
knowledgeable
in time?
out
get
were so
were a lot
didn't keep
people
Also, by that
Helmut
That particular
Didyou
of those
true.
television news.
was
go
during
profit
do it.
I did
to
successful
all that
That's
never done
I had
know.
trader to being very
in
markets
the
phase
commodity
a losing
werebeing made.
I was just
news
broke
ounces.
to
markets
the
lose. There
couldn't
just
difficult
I
being
of your
the early to mid-1970s. How much
early success was
much
was just the markets?
as
a
trader
and
how
skills
your
trade?
crazy, comingin and buying
the
about five to ten minutes
scrambling. I had an immediate $10 per ounce
thought
probably
gold. Then,
but
from
with the big bull
knew.
they think that you
Did
that
remember
still
35
Michael Marcus
out of
the market on that
kind
of volatility.
Excluding the early losing years,werethere any
out as being particularly traumatic?
Well,
I would
never let
myself get caught
up
trades
in potentially
that
stand
intimidating
MichaelMarcus
36
occurred during
worst situation
The
disasters.
my
heavy
MichaelMarcus
currency
to hold large positions. One
doing well and couldafford
marks
when the
time, I had a really large position in Deutsche
in and decided to punish
I called in just
Bundesbank
came
the speculators.
out that I was out
around
the time that all this was happening and found
$2'h million in about five minutes. So I got out, rather than see the $2k
the disturbing
million
loss
to endure
go to $10 million. Then I had
the
of
market
recover
its
entire
fall.
experience
watching
I was
trading period.
How long
after you got out?
It soundslikeas wise
Yes, I was
I am
taken
do you
In retrospect,
that trade?
Yes,but
it still
do you
feel
hurt to
I made
you
realize
Did you invest any of the
keep
out
by that point.
of me
did the
a sense,
you
by getting
thing
right
out of
plowing
that
if I
of losing
money
had sat
out
and
done nothing,
I
$2k million.
were making
you
it back into
it
in your trading,
your own account?
of bad investments and lost a fairly
chunk of the
large
made
I
had
When
was
I
wanted
to have a
I
trading.
money
trading
big,
reason to keep doing it, so I just spent money wildly.
At one time, I
owned about ten housesand ended up losing money on all of them. Some
I sold before I had even spenta singlenight
in them.
I had a planecharter
a number
a lot of money on that.
30 percent
dollar I madetrading,
one point, I figured out that
was going to the government,
30 percent
was going
to support my planes, and 20 percent
was going
to
decided
to sell everything.
support my real estate. SoI finally
service
and lost
for every
At
alive
person
only
lost
large
money
naive
as an
estate
one of them.
of real
number
on all but
claim that
that can
you were
getting
Yes,
repeating the
involved
dubious
didn't anybody
realize
try
analyze
anything.
of your early trading
and
about
you knew nothing
go off ? It almost sounds like
mistake
any
bells
instinct in losing your
I probably
what you're
investments?
in something
Didn't
a self-destructive
absolutely.
I didn't
emotionally.
everything
losing money.
had
so poorly on your
think you did
During this period when
would have been OK instead
or did you
do
experience:
the starch
the
probably
then
had
were
you
distinction.
In
No, they
a trader,
a fairly
Out of
in California\342\200\224I
transactions\342\200\224many
Why
Did you go back in?
were as
you
naive.
incredibly
an hour.
half
as
investor.
I would
About
37
lost more
than
half
money elsewhere.
the money
I made.
doing all these unwise things,
the
shoulders and say, \"Do you
you by
you
to grab
were
doing?\"
Yes, but any time someone on my staff did, I would fire them. At one
or seventy people. In addition
to all my
time, I was employing
sixty
money-losing businesses, I had a huge nut to make to just support the
I made just went
a lot of the money
down
the drain.
payroll.
Frankly,
Did these
losses have
market?
The reason
investment
losses
very
any
of the
I ask
is that
emotional
you
seem
impact of lossesin the
to talk about these
dispassionately.
it hurt
to realize what a fool I had been,
but I have learned not to
I accepted
it as a life lesson.I learned
attached to material things.
I don't
have to own a house in every beautiful
place in the world; I can
a trail there. Or, if I realat a hotel and walk on the beach or climb
stay
Yes,
be as
Michael
38
like spoiling myself, I can
ly feel
charter
I don't
a plane;
Marcus
have to
own
your
makes sense,but
that certainly
suspectthat
if you
have been
would
had lost the
a much
your ego wasn't attached
to
these
other
I think
skill,
trader
think
being
a great
trader
I
getting at is that
experience.
it
trading,
Is that because
is an innate
least,
I was
smart
Having
extreme
the
upper
been through
success, what
or a losing
really
good
at. If
one
not
for
skill?
broker
can hold it.
When you place an order to
get out?
get
is it
a position,
into
by
accompanied
as you
put
Another
it on,
is that if a positiondoesn'tfeelright
embarrassed to changeyour mind and
as soon
thing
don't be
get right
out.
echelon
the whole
basic
trading experiencefrom failure to
advice
could you give a beginning trader
bet less than 5 percent of your
money
thing I would say is always
can
be wrong more than twenty
That
on any one idea.
times; it
way
you
I would emphasize that the
will take you a long time to lose your money.
5 percent applies to one idea.If you take a long position in two different
related grain markets, that is still one idea.
The next thing I would advise is to always use stops. I mean
commits
you to get out at a certain point.
actually
put them in, because that
Do you always picka point
done
stop in because
later it doesn't feel right,
So, if you put the trade on and five minutes
don't think to yourself, \"If I get out this quickly, my broker will think
that I'm an idiot.\"
trader?
always
put a
actually
shoes.
The first
Yes,I have
my
That's right.
at
of successful tradersrequiresan innate
But to be a competent
violinist.
a gift. It's just like being a great
and make
money is a skill you can learn.
to be in
Yes, but
can't
too large.
are
orders
an order to
ventures?
at
I always felt that,
true.
Yes, I'm sure that's
I
am
the
I
is
feel like trading
only thing
thing.
that, I probably would have wound
up shining
Do you
I am
same amount of money
traumatic
more
what
39
imagine in your case you
I would
one.
Right,
Marcus
Michael
where
that. You
you
will get out
have to.
before you get in?
Yes,exactly.
If you
become
unsure about a position,and
what to do, just get out. You can always
get out and get a goodnight's sleep.
come
I've
next day
Do you
everything
was
that
you
don't
in. When
lots of
in
know
doubt,
times and the
clear.
sometimes go backin right after
Yes, often the next day. While you are in,
out, then you can think
clearly
again.
What
done
back
other advice would you
give the
you
you
novice
get
can't
out?
think. When
you
get
trader?
the most important
rule
is to hold on to your
winners
and cut
If
your losers. Both are equally
don't
with
important.
you
stay
your
are not going to be able to pay for the losers.
winners, you
You also have to follow
so many
your own light. Because I have
friends who are talentedtraders,
I often have to remind
myself that if I
try to trade their way, or on their ideas, I am going to lose. Every trader
has strengths
and weaknesses.
Some are good holders of winners,
but
Perhaps
Michael Marcus
40
little short,
but
own style,
you
a
losers
their
hold
may
get
try to incorporate
it
in
a trade
and bad in
someone else's style, you
wind
often
a
winners
is
the
on the
reading
up with the worst
Can you
on a
of any
think
final
same
type
of confidence
The most classic illustration
in the late 1970s.
markets
of
One
shortage.
Bruce is
it. So
in
it,\" then
you might
to hold the
you need to have the courage
comes down to \"I'm in this trade because
analysis,
position and take the risk. If
it
you are
as well not
not
going
in it in
be
was holding
the
the courage to stick with
\"I have
the
place.
news?\"
first
still talk to
other traders about
markets?
maximum
I
When
it has mostly cost me money.
too much. Over the years,
I
the
idea
that
have
conscious
of
I
to
to
other
talk
traders, try
keep very
to listen to myself. I try to take their information without
overly
getting
Not
by
their
opinion.
that we are talking about very
doesn't make a difference.If it is not
I assume
talented
your
and it still
traders,
own idea,
it
messes
up
your trading?
You
Right.
always
ask
need
to be
yourself:
idea?\" You have to
your
the
is very
people are left
whether
consider
world
the market
to
sophisticated and
act on
this particular
has alreadydiscounted
idea.
How can you
By using
tone.
aware that
\"How many
How
the
possibly evaluate that?
classic
momentum-type
many days has
the
market
indicators and observing market
been down or up in a row? What
news is
that
bad
you
speculative
to be limit-up for
Actually, I
the market
up
in
extreme
the
was
weekly
and sales.
someone from
commitments
export
strong
export
limit
size].\" They
three
what
commitment
have a
don't
position
next
the
I said, \"OK,
news.\"
is that the
news
good
bad
permissible
market
influenced
off
bull
soybean
were
soybeans
and
long position in soybeans
called me with the latest export
figures.
Corporation
\"The
time,
pushing
things
good news and I have
The
the
of the
of is one
think
I can
At
indicating
a heavy
Commodities
to have
fantastic.
Do you
of market tone tipping you
good examples
trade?
government reports
Exactly.In the
sentiment indexes?
a lot.
that
you don't have the
isn't yours?
that
their
As long as you stick to your
own approach.
When you
your
41
losses.
because
a problem
may cut
Others
long.
their
quick
the good
of both styles.I've done
Is
too
little
to take
are
Michael Marcus
He
said,
is the
good
I
was
figure
[the
position
were expecting
the
days.
a little depressed that I didn't have a
up being
larger position.The next morning, I entered an order to buy some more
contracts on the opening, just in case I got lucky and the market
traded
before locking limit-up. I sat backto watch
the fun. The market opened
as expected.
a lot of ticks
limit-up
Shortly after the opening, I noticed
being recorded, as if the market was trading at the limit-up.
Then prices
eased off limit-up
just as my broker called to reportmy fills.
The market
started trading
I said to myself, \"Soybeans
down.
were supposedto be
for three days, and they can't even hold
limit-up
limit-up the first
I
called my broker and frantically
morning.\" immediately
told him to sell, sell,
wound
sell!
Didyou
Not
only
get
that,
out
but I
selling.I accidentally
soybeans,
of your
was so excitedthat
wound
which I bought
time I madea lot
whole position?
of money
back
up being
40 to 50
on an
error.
I lost
count of how
short a
substantial
cents lower. That
much I was
amount
was
of
the only
42
MichaelMarcus
Marcus
Michael
just likethat. It was the cotton bull market
reached
$1a pound. To this day, I recall I was
almost
when prices
a half
week's
the
and
export figure came out showing
long cotton
cotton
most
bullish
It
was
the
China.
million bales of exportsto
the next
limit-up
I had ever seen. But instead of opening
figure
export
and
then
150
points higher
day, the market opened only about
started trading off. That proved to be the exact high.
a situation
I remember
Another
very
I remember, occurred when
example,
and all the commodity markets
period
interesting
inflationary
On one
fashion.
lockstep
markets
went
only
of day
light
were trading
almost
in
all the
fell back,
that day, cotton opened limit-up,
market
That
was
the
the
for
day.
higher
marginally
never saw the
but cotton
else stayed lockedlimit-up,
Everything
peak.
day,
in a
On
limit-up.
and finished
powerful
particularly
were
we
again.
Is the implied
markets,you
to sell
you find a common
the one that is lagging
if
behavior between
as
soon
as it starts
go
want
absolutely
relative
to everything
up, then
kinds
What
you
to put down
a bet when
else. When the news
to be sure to be
want
a market
is wonderful
acts terribly
and a market
can't
short.
of misconceptions
about the
markets get peopleinto
is the belief that
disablement
leading causeof financial
if
know the right
It
to
the
on
you
might,
experts helpyou.
you
be
Paul
Tudor
Jones'
to
if
barber, and
For
you happen
example,
expert.
be
a
idea
to
listen.
not
bad
it
the
market,
about
he is talking
might
Your average
these so-called \"experts\" are not traders.
Typically, however,
in
More
a
million
money is lost
broker couldn't be a trader
years.
than any other way. Trading requires an intense
to brokers
listening
and that is what
own homework,
You have to do your
personal involvement.
I think the
can rely
I advise
of the
many
the time,
it wants to
where
and I
world,
than
is bigger
market
the
the
but
go. Thereare exceptions,
Yes. My
best
in terms
result,
as being
as well
with,
How much
of his successdo
was
just
they
in
turn,
goes
long.
best
taught
other
trader
I ever
Kovner.
and how
to your training,
attribute
of
and Amos who taught
to Ed
you,
of his becoming the
a close friend,
is Bruce
you
his own
or later, it
don't last too
sooner
and,
anybody
You haveattributed a lot of your success
the principles
of trading. Have
you
traders?
worked
markets. I have known
can say that 99 percent
in the
is conspiracy
there
great traders in
talent?
he wasa writer and a professor; in his spare time,
some
I was
doing
of trading
trading.
staggered by the breadth
knowledge he had accumulatedin such a short time. I rememberthe first
to impress
him with complicated
day I met Bruce I tried
concepts. Here
I was, a professional trader who, in those days, spent fifteen hours a
day
and analyzing
the markets, and I couldn'tcomeup with
trading
anything
that he couldn't understand. I recognizedhis talent
I first
When
met Bruce,
was
immediately.
trouble?
Well,
The foolishbelief that
he
heading down?
You
misconceptions?
much of it
rule that
want
other
Any
43
people
to do.
That relates to his intellect, but
told you that he was going to be
Yes, his objectivity.
ingredient
the
moment
What
Amos
good
a good
can't be rigid. If you
trader
had
I first
I tried to
taught
me,
met him
do was convey
along
that
he
was
to Bruce
with some
him
about
that
trader?
can find
is really open to
then
seeing anything,
you have
of a good trader\342\200\224and I saw that in Bruce
right
somebody who
from
A
was there something
of my
found the
away.
going to be a great
the principles that
acquired
occurred
when Bruce and I were
trading
collaborating;
There
were years when I was up
phenomenal trading.
he was up 1,000 percent. He had a very
great gift.
skills.
we
300
raw
I knew
trader.
Ed
and
My best
did some
percent
and
get grounddown
Do you feel you
Absolutely.
1983,1
Around
to recharge my
needed
How important is gut
began
Michael Marcus
Marcus
Michael
44
off in
to taper
my
I felt
trading.
I
that
batteries.
in trading?
feel
trader
I don't know of any great professional
Gut feel is very important.
also
takes
t
rader
courage: the
that doesn't have it. Being a successful
and
the courage
courage to try, the courage to fail, the courage to succeed,
to keep on going when the going gets tough.
Do
have any
you
I have taken
goals aside from
years. I
for many
karate
like to get the black belt.Also,
would
traditions and there is a bit more work
am
point?
at a
already
made a
I have
I would
very vague about it. Do you
sound
You
at this
trading
fun aspect still
Is the
a trader?
as
of
study
No. If trading
is
are keepingyour
to
hard
talk
that the
said
Einstein
about
this. Let
single most
universe is friendly. I think it is
that
point where they feel inside
me see how
important
important
universe
the
When
then
Albert
is whether
No.
I started
Do you
off with
see yourself
Yes, it's too
I would
fighter.
cut
much
probably
the
trading
a
ten
that it was an
or
twenty
handle
you
it?
of it?
out
way
back,
typical pattern is:
or sometimes stop, until
The
long have you
How
three,
the
time I would have been better
off
bringing
myself to do that, because
of the
I get
on a
like
hell,
had
a
I am
lose again,
track.
winning
stopped for?
weeks.
four
markets,
Lose, fight
if I
a losingstreak,is it because
or is there a better way to
you
describe
are out
of sync
it?
I think
in the end, losing begets losing.When
that,
start losing, it
you
touches off negativeelements
in your psychology;
it leads to pessimism.
?
unfriendly
years
place.
from now?
give up. I don't want to make a lot more money.
end up losing it in real estate again.
fun to
just
feeling
off
do
to fight your
trouble
the
come to
Usually
started
streak, how
manage
When you are in
not where you
a losing
sometimes
closer.
But that's
in balance,
In the past, I've sometimes
tried
to fight back by trading
even
heavier
after I start
but that usually doesn't work. Then I start
losing,
cutting
down very fast to the point of stopping
completelyif it gets bad enough.
But usually
it never
gets that bad.
with
lot
life, it is
life
do hit
you
Do you
Are you there now?
I'm a
a torturous
your
Sometimes, but most
just stopped. I've had
put it.
for everybody to
is friendly.
a day?
hours
that.
vague?
I can
question
thirteen
kind
of excitement.
But if you
then it is fun. All the successful traders
I'veseenthat lasted in the business sooner or later got to that point. They
havea balanced
life;
You
they have fun outside of trading.
can't sustain
it if you don't have some other
focus.
Eventually,
you wind up
or getting
disturbed about temporary failures.
overtrading
excessively
natural
It is very
there if you are doing it
I
but
spiritual
like to do with
to be
want
high level,
45
There are very
I am
very
difficult to
few
traders
think makes you
do you
open-minded.
accept
emotionally,
who have
been as successful
as you.
What
different?
I am
willing
but
which
to take
I still
in information
recognize
that
is
to be true. For ex-
Michael
46
seen others
I have
ample,
make
much faster
money
I have
than
Michael
only to
Judging by the letters you have mentioned, I take it that
stocks as well. Howlonghave you been trading stocks?
started
losing, they
they
wind
everything back, because when
up giving
able to
been
I
have
bad
had
I
a
streak,
have
couldn't stop. When
losing
a
market
moves
When
say to myself, \"You just can't trade anymore.\"
\"I
had
to
able
been
I have always
say,
to my expectations,
counter
so
it
isn't
but
working,
hoped to make a lot of money in this position,
out.\"
I'm getting
keep track
Do you
equity
on a
plot
I have
done that
in the
a lot
Do you
helpful?
two
last
Do you trade
you
trade
years.
stocks differently
than
trade
you
futures?
I'm more patient.
Is the
a goodideafor
traders
is down,
is a
to
from the chart,
confirmation
for
market action.
plot their
process different?
selection
No, I look
past.
think it's
For about the
47
basis? Do you
day-to-day
it?
actually
Is that
of your
Marcus
Marcus
I think
can trade
you
Do you focus on any
particular
the
anything
and
fundamentals,
the
in
the
that way.
world
of stock?
types
equity?
I think
so.
If the
trend
and reevaluate.Or if
you
it, that
made
in
equity
your
see that
you
would be
that
you are losingmoney
sign to cut back
a lot faster than
a warning.
I don't
each other.
dollar
than
stocks.
Dow
the
trade
not dominated by the
big
I prefer the
professional
The basic principle
is that
the Deutsche mark, and
traders
it
the
Dow stock.
Are
there
any advisors
you pay
attention to?
What
My
of the
knowledge
letter
market
favorite
in terms
subject is
the
of readability,
California
imagination,
Stock Letter
Technology
Publishing
Partners,
155
I also
Of the traders I have
interviewed,
Zweig
is probably
the one most
mentioned.
always
get something
of Marty
Zweig. He
is very
fundamentals
you look
for in
a stock?
use something
I found
in Investor's Daily: the earnings
per
is based
on comparing the earnings per
(EPS). [The EPS ranking
share growth
of a stock relative to all other stocks. For more
details
on
the EPS, see the William
O'Neil
and David Ryan
I
interviews.]
combine the EPS with
share
If a company
my own sense of market
potential.
has already
saturated
their little niche in the world, a high EPS is not that
But, in those issues where the EPS is growing, and there is
important.
still
of pie out there, the situation
is much more attractive.
plenty
I like to
I also liketo
with
of value out
the
share
earnings
You
are
and
Street, Suite 1401, San
Montgomery
letters
market
like
the
put out by Marty
CA 94104).
Francisco,
P.O.
Box
360,Bellmore,
The
Forecast,
Zweig
(TheZweigLetter,
Zweig
Dow
Theory
and Richard Russell (Dow TheoryLetters,
NY
11710)
P.O. Box 1759, LaJolla, CA 92038).
Letters Inc.,
(CTSL
because
ones,
they are
who are like sharks eating
is better to trade the Australian
small
OTC stock than the big
little
solid.
paying
look
at the
price/earnings
words, while I like to see
to know
pattern, I also want
the EPS. In other
growth
for that earnings
growth pattern.
(P/E) ratio
a company
in
conjunction
with a
how much the
strong
market is
So
MichaelMarcus
MichaelMarcus
48
a
like seeing
you
Yes.That's the best
the two on a computerand
I am
combination.
Howabout
performance
the
relative
to all
relative
up
coming
How much common behavior is there between
different
For example, can you trade bondsin thesameway
you
P/E.
a low
with
EPS
high
sure there isa way of combining
with a very good system.
I really feel that
of a stock'sprice
another key indicatorin
is
which
other stocks],
strength
49
[a measure
principles
are
and fear.
It
if you
the
is all
can trade
same.
Trading
the same
in
one market,
is emotion. It
every
you
can trade
is mass
markets?
trade
corn?
them all. The
psychology,
greed,
situation.
Investor'sDaily!
I
has already
figure,
done.
the stock has exhausted
Is there
anything
I look at the
happen
tells
that much. Relativestrength
a
by the time you get high
Frequently,
that helps
think
don't
to be
For what
basic
in
For example,
right
now
[May
shipping
strength
business.
annually.
again.
trading
become more difficult
as the sizeof
the
account
gets
bigger?
Yes, becauseyou
are
being
are
forced
to compete
traded by other big
in
fewer
professionals.
and fewer
markets
that
interesting
that, despite
a number
of painful
experience
actually a
out prematurely. Taking advantage of
trades is not only important
potential
to the mental health
major
winning
of the trader, but is also critical to
In the interview, Marcus
winning.
stressed that letting winners ride is every bit as important as cutting
losses short.Inhis own words, \"If you don't stay with your winners, you
are not going to be able to pay for the losers.\"
Marcuslearned
about
the dangers of overtrading the hard
way. In
one instance (the grain trade in the nonexistent corn blight
an
year),
profitable trade in
are like commodity prices; they
Prices
get high and everyone makes a
a classic cyclical pattern.
follow
down.
lot of money, so they build a lot of ships and prices go
We have had
back
again.
up
are scrapped and prices go
the ships
Eventually
tankers
lot
of
a
and have scrapped
very low rates for many years
of the cycle where prices go backup
part
So we are entering that
Does
it particularly
losses, Marcus' most
trading
rates
Tanker
is more
traders, early failure
the rule than the exception.
an incredible long-term performancerecord,Michael
Marcus
his trading career with
an unbroken
began
losses.
string of trading
he wiped out not just once, but several times. The moral
Moreover,
is:
Early trading failure is a sign that you are doing something wrong; it is
not necessarily
a good predictorof ultimate
failure or success.
potential
I found
1988], I
reasons?
Supply and demand.
For most great
Despite
a stock?
on tanker rates and, therefore,the
bullish
relative
a stock
itself.
else you look for
industry.
you what
had built
which
devastating
was
he got
up from a very
small
stake to $30,000 was wiped out
a
on
by betting
money
single trade. He made the same mistake a
second time in the lumber market, coming to the brink of disaster before
had
a dramatic
narrowly escaping. Theseexperiences
impact on Marcus'
It is no accident that the first rule he cites when
trading
philosophy.
asked
to give advice to the average
trader is: Never commit more than
5
percent of your
idea.
money to a single trade
account
he
all his
Michael Marcus
50
of
In addition to not overtrading, Marcus stressesthe importance
that
He
feels
trade.
to an exit point on every
protective stops
committing
on the trader. He
because they force this commitment
are
very
important
when
to achieve mental clarity
also recommendsliquidating
positions
one
is losing
money and is confused
Marcus also emphasizesthe
decisions.
market
regarding
your own mind
of following
necessity
Kovner
Bruce
when
the advice of others, even
that following
as a trader. He suggests
worst
it
the
as
combines
to problems
leads
often
are
traders,
good
they
of both traders.
elements
Marcus
trader,
strongly
Finally, despite being an aggressive
for
He
advises
in
trades.
believes in being restrictive
waiting
selecting
those
trades
in which all
doing so you
greatly
of trades
the
enhance
key
the probability
when the conditions
Making
lots
in favor
of the tradeidea has more
success.
line up
elements
to do
in
one
direction.
The
Trader
World
By
of success on each trade.
appearto
be
only
with entertainment
marginally
than
trading
may well be the
Bruce Kovner
Today,
interbank
currency
funds.
million for himself and the fortunate
past ten years, Kovner has realized
of $300
in excess
the
During
percent averaged
annual
ten years
$1,000,000
1978 would have
in his
investors
87
a remarkable
Two thousand
return.
compounded
in early
Kovner
with
invested
world's
trader in the
largest
markets. In 1987 alone, he scoredprofits
futures
and
dollars
been worth
over
later.
Despitehis incredibletrack record and huge trading size, Kovner
has managed
to keep a surprisingly low profile.Hehas
assiduously
pursued
his
all interview
by steadfastly refusing
requests. \"You
I
consented
this
to
he said. As a
wondering
why
interview,\"
fact, I was, but I did not want to raise the question.I had
privacy
might be
matter
of
assumed
that
his agreement
years earlier,
our
Commodities
reflected a vote of
had crossed
paths
as
Corporation\342\200\224he
briefly when
the firm's
one of
we
Seven
and trust.
confidence
both
worked at
principaltraders,
I as
an
analyst.
Kovner continued, \"It
the stories
are usually
would help
establishat
Kovner
fits
hardly
holds positions
with
With his incisive
seems
distorted
least
the
a total
intellectand
like
I can't
and fanciful.
one accurate
intuitive
avoid somepublicity,
I thought
record.\"
image of
that
a trader
face value
measured
easygoing
manner,
in
and
this interview
who
billions
he reminds
typically
of dollars.
one more
of a
and
After
liked teaching,
In
campaigns,
abandonedpolitics
desire to
his
work
up the
way
federal
manageda number
a consultant
as
financial
committee
jobs.
for various
state and
studying
markets and the related
he could
to make
get his hands
than
successively
on a
longer-term
maturity\342\200\224for
T-bills\342\200\224the
one-year
slope
judgments
trading
interest
was
is the
curve
himself
in
everything
example,
yield
curve
a higher
provided
maturity
five-year
For
T-notes
would reflect
yield
at a higher
a continually
graph.]
Kovner's study
rate markets coincidedwith the
initial years
in interest rate futures.
At that time, the interest rate
futures
market
was relatively
unsophisticated and price distortions,
would
which
be quickly eradicated by arbitrageurs
today, persisted over
time. As Kovner
becomeimportant
market
hadn't
\"The
it,
explains
for CitiBank or Solomon Brothers,but it was important enough
enough
for me.\"
One of the primary anomalies Kovner discovered was related
to
of the
interest
of trading
spread (difference) betweendifferent
traded
are
for specific months
(for
example,
the price
first
selling
a more
futures
forward
contractbecamethe
spread between the
That
two
contract
the
in
contractand
supply
tightness
the
forward
widen.
and
just according to textbook theory
His second
trade also involved an intra-
as a trader.
[the purchase
spread
would
contracts
worked
trade
first
was hooked
Kovner
often started trading
at near-zero
levels.
a
forward
interest
rate
contract
and
buying
contract, in the expectation
that, as the purchased
contract
with
the
nearby
passage of time, the price
contracts
involved
trade
of one
contractagainst
contracts.
March,
Futures
June, Septem-
sale
the
of another
market]. In this case, he bought the nearby copper
sold
a more forward contract, in the expectation
that
would cause the nearby copper contractto gain relative
to
same
his idea eventually
Although
position.
too early and lost
Kovner
was still
money
on that
ahead, with
his
trade.
original
end
the
At
$3,000
proved
right,
of these
stake
two
having
he
was
trades,
grown
to
about $4,000.
rate theory. \"I fell
relationship between
time to maturity.
and their
securities
government
if each
and he
on.
subject he studied intensively
in love with Haeyield curve.\" [Theyield
a shorter-term
economics
background,
year, Kovner immersed
He read
economictheory.
One
the yield on
right
his
about a
For
appealing.
the
the world
analyzing
his attention
shifted
Kovner
mid-1970s. He believedthat
science educationprovided
found the idea of
tremendously
a careerdirection,
in the
markets
and political
yield
or the
resources,
political ladder from
He
himself.
His
predicted
theory
forward
more
between
market
Still searching for
than
financial
the
political
office
for
running
have
of
agencies.
to the
example,
didn't
\"I
write.\"
this time he also worked
During
life.
page in the morning and
a blank
he didn't
because
Although he
academic
the
with
of alwaysconfronting
Given the prevailing phase of the business cycle,
that the nearby contract (for example,
should
trade at a higher price (loweryield)than
the next contract
March)
two contracts did indeed tend
the nearest
(for example, June). Although
to reflect this relationship,
found that the price difference
Kovner
interest rate
science
political
taught
of Pennsylvania.
University
of something
brilliant to
the early 1970s, Kovner
with
the idea of eventually
thinking
Kovner
Harvard,
the
not enthused
was
he
the process
enjoy
from
graduating
at Harvard and
53
and December).
ber,
trader in the highly
leveraged
currency
professor than a giant-scale
futures markets. Indeed, Kovner
out as an academic.
started
courses
rising
BruceKovner
Kovner
Bruce
52
My
trade
third
is what
shortage
apparent
demand
driven
was
market.
really put me
developing
Every
in the
in
the
business. In early
market.
soybean
week the crush
was higher
than
1977, an
It was a
expected
believed the figures.
the
of soybeans
meal
and soybean oil.] I was watching
the
processed for use as soybean
the old crop July
[the price differencebetween
July/November
spread
contract and the new crop November contract]. Since it looked like we
[The crush is
and nobody
of soybeans, I thought
that the old crop July
its
to
the
new
This
expand
premium
crop Novembercontract.
had been trading
in a narrow consolidation near 60-centspremium
were going to
contract
spread
amount
run
out
would
I could easilystop myself
out just below the
consolidation
at around
a 45-cents premium. At the time, I didn't realize how
volatile the spread could be. I put on one spread [that is, bought
July
60 cents
and simultaneously sold Novembersoybeans]near
soybeans
I put on another spread. I kept on
and it widened to 70 cents. Then
July.
I figured
pyramiding.
Bruce Kovner
54
How big of
did you
a position
I eventually
build up?
aposition of about fifteen contracts,but not before
I was trading
firms. When I started out,
at a
small brokeragehouse.The head of the company, who was an old floor
went over the trades every day and spotted
what I was doing.By
trader,
I had built my position up to about ten or fifteen
that
contracts.
The
time,
on
a
contract
was
while
the
$2,000,
single outright
margin
spread
I had to
margin was
brokerage
$400.
only
intercrop spread, such as long July soybeans/short
can prove to be nearly as volatile as a net long
He was obviously
with the
concerned
quite
Actually, he wasn't that
far
He was
furious. So
brokerage
or short
but
I was
risk in your position.
margin per
spread,
off.
remain
shall
which
soybeans
position.]
I moved
my
to another
account
nameless, for reasons that
will
You were
I
furious becauseyou
felt
he was
I am
not sure I thought
obstacle to
brokeragehouse,and
he was an
market kept moving
my first spread on
$35,000.
up
my
got
he
objective.
a broker
and
February
was
I would
a plan.
had
the market
until
wait
moved
by a specified amount before
turn
out to be the problem.
did
not
pyramiding
had entered
a string of limit-up
The market
and
retraced
then
the market
record high.
a new
hit
up,
or did
up
to a
level
certain
adding another unit.
moves.
My
13,
On April
The commotionwas tremendous.
My
to the moon. It
home and said, \"Soybeans
are going
is
to
follow.
You
is going
and
sure
November
limit-up,
short
the November
contracts. Let me lift your
called me at
looks like July
fool to stay
are a
days, you
November
short
AH of
and
for you,
November
shorts
being unfair,
All
the market
goes limit-up for
money.\" I agreed, and we covered
when
more
make
will
next
the
few
my
position.
it?!
laughs loudly].
Was this a spur of
the
moment
decision?
minutes later, my broker calls me
back,and he sounds frantic. \"I don't know how to tell you this, but the
I don't
know if I can get you out.\" I went into
market is limit-downl
moved
off of limit-down
shock. I yelledat him to get me out. The market
I
a
bit
and
out.
little
got
by
It was
a moment
of
insanity.
Did you end up getting
or\342\200\224
being unfair, but I certainly
I moved my account to
it [he
of
I got
you
Well,
position as the market went
Fifteen
soon
clear.
become
to your
adding
November
that I had only
Yes.He was concerned
put up $400
on a spreadwhich behaved like a net long position.
firm,
just
some plan?
broker
He told me, \"The spreadposition you have on trades like an
I am going to raise your margins
from $400 to $2,000
outright long
position.
are lower than outright
margins
per contract.\"
[Spread
margins,
that a net long or short positionwill be considerably
the assumption
reflecting
more volatile than a spread position.
Reason: In a spread,the long
of the po sition is likely to at leas t partially
contract portion
offset price
movement in the short contract position. In a shortage
an
situation,
however,
right,
Were you
you have
up to
built
switch
55
Bruce Kovner
knew
a major
who was not very competent.
The
I kept adding to my position. I had put on
25; by April
12, my account was up to
out
limit-down
between
the dimensions
November
emotional
of
shock.
of
the
at limit-down?
limit-down. I can tell
I covered my short
I was up about $45,000.
and slightly above
loss.
At the moment
leaving myself net long July,
I went into
the
day, I had $22,000 in my account.
I could not believe
how stupid I had been\342\200\224how badly
position
By the end
out
in spite of having
the market,
failed to understand
and I didn't
for years. I was sickto my stomach,
I
a
had
blown
career
as
trader.
that
my
thought
I had
markets
the
studied
eat for
days.
I
Bruce
56
But you still had
things
Keeping
$3,000.
$22,000 comparedto
of
stake
original
your
you were still
in perspective,
in
Kovner
Bruce Kovner
What
only
57
to the
happened
eventually
good
pretty
The spreadcollapsed.Eventually,
shape.
begun
Absolutely. I was in
good
spread?
it went
below the
level that
first
I had
it at.
buying
but\342\200\224
shape,
you liquidated your position on the day the market and the
spread
topped,
you would have given back a portion of the profits
even if it wasn't for the disastrousdecisionthat forced
you out of the
Since
it the
Was
No,
No, but
the
what
That
of a
bothered
me
that
were
they
gave it to
Actually,
I was
I assume
other
to
the
capable
market streak
way?
lift
of taking
side of my
short
disregard
that
spread position
I had
think
lost a process
I realized
moment,
I
for risk.
that
money away every bit as fast
as
on me.
impression
strong
the
$22,000.
quick action that
probably
day
I multiplied
averted
you
on the
market
gone up. Perhaps, if I hadn't made
the market
made the mistake of riding
went
my
straight
stupid
down.
down
and, psychologically,
it
the
was
as if
felt
I had.
trade?
ended
actually
by nearly
money
my
insanely leveraged,
up making
a substantialamount
of
sixfold on that
understand
I didn't
and
how
I was,
trade.
my
risky
of course,
position
was.
Was getting out of your entire position immediately
after
your
called to tell you the market was limit-down
a matter
of
or
do
think
had
some
instinctive
common
sense
about
panic,
you
you
broker
risk?
a
I'm not
mistake,
bust\" trade. It
my \"going
trade?
sure. At
that
I had blown a great
After that day, the
going
was
that
bust
away.
Even though
controlling
disaster.
Absolutely.
Far and
money
the
you. That made a very
lucky to get out with
that your
that the
possibility
panic showeda complete
so much was the realization
I thought I had. At that
truly
very
the
decision
my
middle
rationality
to
but for me,
ever came to
Was that your most painful
is easy\"?
you think, \"This
thought
go
clearly,
be true,
may
Yes.
give any
markets
had
there
that
ridden $3,000 to $45,000without
closest I
did
up,
couldeventually
complete
the realization
easy.
Did you
of
it was
of pain.
On the way
was
it the
pain?
market.
the money at all. I think
was \"fire\" there. Until then, I had
a moment
in
emotional
such
caused
wasn't
it
really
It
of the mistake or was
stupidity
given back that
money that you had
as fast as it
I might
have
this
day,
when
moment,
deal of
something
and my sense of what
to that event.
the
I was
what
confronted with
I thought
happens to disturb
world is like, I
realization
the
that
I knew about discipline.
my
emotional
close out
all
To
equilibrium
related
positions
58
Bruce Kovrter
BruceKovner
Do you have a recentexample?
That
stock market crash. I closedout all
on October 19 and 20 because I felt there was something
my positions
in the world that
I didn't
understand.
The first rule of
happening
are probably
trading\342\200\224there
many first rules\342\200\224isdon't
get caught in a
situation in which
deal
of money for reasons you don't
you can lose a great
He taught
understand.
It sounds
October
Let's
week
19,1987\342\200\224the
get back
to the
of the
period after
your
start trading again?
a few months
later. After
trade.
soybean
When did you
my account back to about
ad for a trading
assistant
position
at Commodities
I was interviewed by Michael
Corporation.
Marcus in his usual
idiosyncratic manner. He had me return to Commodities
Corporation several weekslater. \"Well,\" he said, \"I have some good
news and some bad news.The bad news is that we are not hiring you as
a trading
the good news is that we are hiring you as a trader.\"
assistant;
About
a month
$40,000.
that
Around
time,
I had
I answered an
much
money
did Commodities
Corporation give
you
to trade?
Thirty-five
Were
you trading
Yes, and
at
the
same
glad about. Commodities
Corporation had
a policy that allowed you to trade
your
personal
well as the company account,
and Michael
and I were very
that
time?
account,
aggressive
traders.
great
you really
use discipline,
and
like he gave
you
He showed
dollars.
could
things
line?
me
that
It is very easy to
me that if you take
happen.
can do it. He showed
make
you can actually
it.
confidence.
critical: You
thing that is absolutely
is
mistakes regularly; there
to make
wrong
have to be willing
nothing
about
me
being
with it. Michael taught
making your best judgment,
third
best
next
your
making
wrong,
being
judgment,
your
making
wrong,
and then doubling
best judgment,
money.
your
also taught
Right. He
me
one other
one of the most successfultradersin
caliber.
of traders of your
a small
number
only
different from the averageguy?
You are
not sure
one can reallydefine
For myself, I can think
do not.
why
of
two
some
the
world.
What
traders make
important
be
thirty
a
people,
and
you
others
elements. First, I have
only
the years, I have
or five of those have
Over
extent.
limited
are
from today
can
prices
and
rational
taught?
as
Only to
There
makes
while
it,
to imagine
ability
Can trading skills
I am very
is something
that
point
punch
make a million
you could
yourself,
applied
is the
configurations of the world different
and really believe it can happen. I can imagine that soybean
double or that the dollar can fall to 100 yen. Second,I stay
disciplined under pressure.
dollars.
your own money, as well,
that
me
miss the
a position
the
thousand
great lead-in. What
is a
if you
I'm
How
59
four
tried to
turned
train
out
perhaps
to be
good
traders.
Were
you influenced by
Michael?
What
Oh, yes,very
much.
important [pause].
Michael
taught
me one
thing
that
was
happened
incredibly
They are
out
to the
of the
other twenty-five?
business\342\200\224and
it had
nothing
to do with
intelligence.
Bruce Kovner
60
When you compare the traineesthat
not, do you
find
They are strong,
take
to
and contrary
in the
some
the majority that
did
extreme. Theyareable
They are disciplined
to take.
are unwilling
A
the right size positions.
trader
greedy
always blows
really inspired traders who never managedto keep the
others
take
out. I know
distinguishing
independent,
positions
enough to
any
it to
made
traits?
don't
at Commodities
Corporation\342\200\224I
they made. One trader
trader.
The
struck
me as a brilliant
want to mention his name\342\200\224always
ideas he came up with were wonderful; the markets he pickedwere often
markets
much better than I did,
the right markets. Intellectually, he knew
and
was
I
he
not.
was
keepingmoney,
yet
money
61
Kovner
Bruce
as the negotiations
comfortable
completely
saying
days earlier,
of
already
voted.
a
to the
and
I wasn't
hill,
movement
fundamentals
in
direction
which
he
He traded
size.
Position
traded
ten.
each year,
but
much too big. For every one contract
double his money on two different
up flat.
end
still
Do you always use fundamental
your trading
in forming
analysis
I traded,
occasions
decisions?
I almost
always
I use
technical
information.
I can't hold
a position
market view; I don't trade simply
technical analysis a great deal and it is
on a
unless I
understand
terrific, but
should move.
the market
why
on
It didn't have
that virtually
it?
behind
to say
reason
fundamental
every position you
take
a
has
that
think
can often
is a
clarify
fair statement.
the fundamental
But
I would
picture.
add that
I will
give
technical analysis
you
an example.
the Canadian
I had good arguments
for
the past six months,
dollar going
for the Canadian
dollar going down, and good arguments
If you had
It
which
was
correct.
was
to
me
unclear
interpretation
up.
I
a
market
and
forced
me
to
choose
a
to
head
direction,
gun
put
my
During
probably would have said \"down.\"
Then
the entire
the U.S
./Canadian trade pact was announced,
changed
had broken out on the upside a few
market
picture. In fact, the
it
mean you
smart
weren't
enough
to know
the trade
of
submerge
that
way
barriers
top of
in
which
point is
more than
to go,
and
allow
would
are
that
from
imports
some
still
are
there
that
aigued
he
the U.J. to
dollar because
Canadian
the
There
interests.
My
argument.
know much
I couldjust as easilyhave
that way.
to happen
Canadian
analysts
well-informed
who tdhere to
tralers who
I simply put things
Tley knew
together.
Canadian
voted
in the marketplace by buying
I do.
they
dollars.
Is the
I
the
a major
a conjunction of two important
element!:
in
I wasn't smart enough tc know
(although,
would
the market), and a techncal price
impact
pact was negative for
elimination
which
Is that
at
move
the market?
pact announcement would
Since U.S./Canadian trade is so much
of
a larger
component
Canadian trade than it is of U.S. trade, wouldn't it hive been
for the
be
bullish
logical to assume that the trade pact would
Canadian dollar?
the trade
trade
had
marlet
the trade
direction
He would
the
the upside.
on
breakout
ir
we had
because
change
pieces
dollar was
Canadian
the
I felt
inSant,
that
sure whether
it was going to roll backwads or
market moved, I was preparedto go with tlat
the
When
forwards.
What do you
So where washe goingwrong?
agreement, I felt
Prior
up. At
the major
finishing
one of
dollar had just changed, and the
Canadian
the
valuation
were
that
generalization of
fundamental
development
is often
a good tip-off
that
example
of
the
longer-term
leads
Exactly. The market
usually
than you do. For example,the
more
Goodtraderin
which
an importart
direction of the marlet
that when
the initial
occurs,
because
Soviet
markets?
which
In currencies, and grains to
some degree.
move
trend?
there are people Wio know
is a very gocd trader.
Union
62
one know
How does
Because the
hear
the
what
act through
Soviets
are doing?
Soviets
its
own
ask people
if you
Why, or
the
in
that is so poor in
a country
that
me
should be
economy
a goodtrader.
you will find
business,
that
out
they
are.
world.
It
known fact
a well
is
Soviets (and others)are
in
the
Isn't that the
basic rationalization
Technical analysis,
that
is mumbo
capable
is why
I think,
has
a great
deal
analysis?
is right
that
tracks
the
an
edge.
analysis reflects the vote of
the
entire
and,
marketplace
that
By definition, anything
It
is
unusual.
is something
a new chart pattern
creates
very important for
I
if
can observe something
me to study the details of price action to see
the charts is absolutely crucial
about how everybody is voting.
Studying
and
me to
alerts
market
advance.\"
fundamental
reasons?
Yes,
I will do
seen a great
that
deal
to me
behavior.
unusual
existing disequilibria and potential
Do you sometimes
say, \"I'veseenthis
and a great
deal
Does
that
statement. What's
put
on a
pattern
changes.
trade because you look at a chart and
and it is often a forerunner of a
before,
That is, even though
you
may
not have any
as a trader who has
I would only add that,
is nothing
there
in
a
of
and been
lot
markets,
sometimes.
about a price
move out
of a
trading
range
that
nobody
imply
you usually go with
breakouts?
Sure.
right
and
black
what's
But the
more
great
who
technicians
the market to give you
can about
understands.
magic?
There is a
Fundamentalists
jumbo.
an interesting
That's
you
disconcerting
technical
for
a thermometer.
says
that the
community
intelligence
of eavesdropping
on commercial
the large commodity trading
firms
sometimes
use scramblers when
are
sensitive
calls.
they
making very
is that there are thousands of difficult-to-understand
My
point
mechanisms
that lead the market, which
into play before the news
come
reachessomepoor trader sitting at his desk. But the one thing that does
hit the market is a huge
sale or purchase.
That
communication.
who
therefore, does pickup
It is a joke,but perhaps they do read some of our mail. The Soviets (and
other governments) occasionally have
advance
information.
Why
shouldn't they? They have the best developedintelligence
in the
service
activity
is like
some
of
activity
say they
doctor
Technical
how?
future
analysis
past
traders.
of other
to the charts are like a
are not going to pay any attention
of
he's not going to take a patient's temperature.
But,
in
If you are a responsible participant
course, that would be sheer folly.
where the market is\342\200\224whether it
to know
the market, you always want
You want to know everything
is hot and excitable, or coldand stagnant.
who
rather contradictory to
but
For me, technical
what the
about
conclusions
draw
traders may say about the
you
about it.
It seems
63
Bruce Kovner
intelligence to
commercial banks and dealers,and
running
Yes,
Kovner
Bruce
past;
deal
claim
it does
of
hype attached to
that it predicts the
not predict the future.
technical analysis by some
future.
You
Technical
have
to use
analysis
your
own
markets are
that.
often
prone
to false
breakouts.
There has to
to it than
Tight congestionsin
understands
are
which
a breakout
occurs for reasons
usually good risk/reward trades.
that
nobody
be
64
Bruce
breakouts that occur becausethereisa story
How about
Street Journal that
Kovner
in the
Wall
day?
Let's say you
consolidation
less relevant. The Heisenberg
in physics
principle
an
for
the
markets.
If
is
provides
analogy
something
closely observed,
the
odds
are it is going to be altered in the process.
If corn is in a tight
consolidation
and then breaks
out the day the
Street Journal
Wall
carries a story
about a potential shortage of corn, the odds of the price move
being sustained are much smaller. If everybody believes there is no
reason
for corn to break out, and it suddenly does, the chances
that there
is an important
cause are much greater.
underlying
be much
would
tell
do
phase,
on an upsidebreakoutfrom a
starts to move against
you\342\200\224that is,
when to get out? How do you
know
a market
buy
and
the price
range. How do you
between a small pullbackand a bad
into the
back
That
65
Bruce Kovner
difference
the
trade?
I enter a position, I have
a predetermined
stop. That is the
I get in. The
before
I
I
I'm
out
can
know
where
getting
only
way
sleep.
and
the
the
size
a
is
on
trade
determined by
stop,
stop is
position
in
is
the midst
determined
on a technical
basis. For example,if the market
Whenever
of a trading
sinceyou
it makes
range,
are
no sense to put
to be taken out.
likely
stop
your
I always placemy
within that
stop
range,
some
beyond
technical barrier.
It sounds like you
Well,
the
are
move occurring,
price
I do
that.
product
the better
it
less explanation there is for
a
looks.
Don't
you
a price pattern
is observed
by speculators,
to have false signals.The more a market is the
of
activity, the greater the significance
breakouts.
the
systems
greatly increased
increased
I think
so.
The
the
fact that there
developed
are
these
billions
going
moving
to kick in. If
are kicking into
breakout occurs
technical signals?
are billions of
I never think
I've
studied
the
becausethe
out there
trading on
or other simple pattern
many more false signals.I have
I can tell when the other
that
is clear
it
dollars
market,
Russians
that prices are moving
it is a lot less interesting
are buying.
floor
traders
obvious
point,
easily.
To take
averages
approaches
helps produce
similar
systems myself, so
systems
if a
use
trend-following
computerized
of false
frequency
technical systems that
recognition
use of
into
because
than
that a
the problem
and
the
market
the
point
lot of
other
people
may be drawn to
may be
that
stop
level?
the market
Has
run
using the same stoppoint,
The more
prone you are
of nonspeculative
more
technical
think
that the
saying
about
that,
because
the technical aspects of the
shouldn't go there if you are
can get at easily.
if I believe that
for a long
market
Sometimes
it is
a technical
about
too far
right.
I
I may
away
try
to avoid
place my
or
too
barrier\342\200\224and
time\342\200\224isthat
a point that
at an
stop
difficult
to reach
the bonds
an actual
afternoon,
example, on a recent Friday
out of an extended trading
witnessed a high-velocitybreakdown
range.
I felt
As far as I could tell, this price move came as a complete
surprise.
if
I
that
was
right about
very comfortable sellingthe bonds on the premise
it back through a certain amount
the
the market should not make
trade,
of a previous
overhead consolidation. That was my stop. I slept easily
in that
because I knew that I would be out of the trade if that
position,
happened.
Bruce Kovner
66
Talking about stops,I assume
stopsare
Let's put
care
mental
always
it this
stops,
or is that not
way: I've
organized my
are never on the floor,but
of. They
size that you trade,
of the
because
life
the stops
not mental.
so that
are
they
your
necessarily true?
Do you
feel
well as
a good trader?
I
get taken
it is
think
have to
on a major position
trade?Your stop point will limit your initial loss, but if you still
believe in the fundamental
analysis underlying the trade, I assume
that
will try it again. If you are wrong about the general
you
direction of the
At what point
won't you take a seriesof losses?
market,
do you throw in the towel on the trade idea?
all, a lossof
that
you
are wrong
itself slows me down, so I reducemy
situation
the change in the
described,
Secondly,
you
technical
will
if I am bearish
me
second
For example,
picture
give
thoughts.
on the dollar and a major intermediate high has been penetrated, I would
First of
money
be
the
rules
for
trading
is that
have to reevaluatemy
problemwith
of
changing.I
have
time
some
spent
For
good because
expert
developing
and investment
the trading
\"learning\"
working
with
systems
game keep
expert
system
and we concludedthat trading
was a poor candidate for this
because
decisions
of
trading
encompass too many
types
approach,
and
the
rules
for
the
information
knowledge,
interpreting
keep
developers,
changing.
in
There are far
to
trend-followingsystems
managed
Do you
money
market.
of the
portion
Yes, about
Is that
that you had developed your
own
provide an indicator of where the largeamount
under such systems couldbe expected
to hit
so
of
my
and
characteristics,
offer
degree.
fewer markets
your
confidence?
I guess
is not
it
negative
sufficient
with
money are
How much
Over $650
5
last
Yes,
you did
liquidity
for the optimum size
you
managing?
currently
million.
year's
half
profits
of that
is due to
capital appreciation.
alone were about $300 million.
be worse.
What
Overall, my
size than
difficult?
more
it
greater
trades.
I assumemorethan
5 percent.
it could
make
so much
of
the
use your own trend-following systemsto tradeany
money you manage?
the level of
years
early
your
are trading
fact that you
the
Does
view.
you mentioned
Earlier
they
clear. The
\"rules\"
are very
diagnostics
the
are very
a system would
and precedent.
of information
medical
do as
would
Computers are good at
are clearhierarchies
example,expertsystemsfor
of such
features
learning
developed.
highly
very
systemthat
in the
positions.
percent,
because the
unlikely
develop a
to ever
is possible
it
when there
only
What eventually tells you
67
Kovner
Bruce
money,
but
related to risk
problems
diversification
from my
other
systems
make
have
they
control
that
trading,
volatility
I don't
like.
I use
of
are
some markets
insufficient
that you really
have trouble trading because
liquidity?
But, since
them to
a small
of a market
I like
often poor, is copper.In copper,
An example
a great
I am
deal, but
in which
now the
elephant.
the liquidity
is
68
Kovtter
Bruce
can be
of size
kind
What
copper beforeit
moved
comfortably
in
like
a market
a problem?
becomes
a day,
uncomfortably,
copper
is
trading
contracts
interbank
you trade
Can
liquidity,
Yes,I did
a market like coffee,
trade
which
coffee
Now, if I am managing
on coffee trades,it doesn't
have
doesn't
and energy I spend
currency
concentrating
which
markets,
I trade
far more heavily.
have reached
a size levelthat impedes
Since you have substantialpersonal
funds,
trading performance.
you ever consider just
related headaches in
trading your own
managed
unlimited
cost
in
reputation
is a much
your
and
avoiding
all the
I invest a great
is
the
of my funds that
portion
to an option that has
money represents a call. [Analogy
in the event of a price rise,but risk limited to its
profit
potential
of a decline.] I don't say this to be flippant, since my
the event
to me, but a call
my investors is extremely important
among
than
a
better
symmetrical win/loseposition.
position
Is therea practical
limit
In most
commodity
currencies,
interest
futures
rates,
find
to
the
amount
markets,
and a few
I don't.
orders
words,
to
stories about very
hears
down. Doesthat
up or
large traders
work?
think so. It can be done for the short term, but eventually
it will
lead to serious mistakes.It usually
in arrogance and a loss of touch
results
with the underlying market structure,
both
and
fundamentally
traders that I know who thought
too highly
of their ability
and
technically. The
tried to bully the market, ultimately
made
the mistake of overtrading and
I don't
under.
Without
any names,
mentioning
There is a recent example
serious
trouble after they
they succeeded, but then
Although
of money you
market.
often
one
the markets
push
market?
the
moving
bully a
I never
but
that are not among the most
or the major currencies\342\200\224do
you
in markets
not T-bonds
orders actually
your
the future
manage
carefully
can you
provide
an example?
did
money?
managing
but there are severalreasonswhy
deal of my own money in my funds,
Yes,
money
in
liquid\342\200\224in
other
went
you
are very high. I plan to very
size of funds
I am managing.
When you put
trying
in it.
dollars
last year and made a few million
million
in
$600 million, and I kick in $2
profits
even
really matter that much. In fact, it could
be counterproductive, since the time
on coffee diminishes my focus on the
It would appear that
they
Talking about that,
deep
enormous trends?
can develop
sometimes
but
69
in the
They can,
market.
currency
limits, but
growth
you can comfortably move 500 to 800 contracts;
somewhat more than that. But the daily volume of
only 7,000 to 10,000 contractsand a lot of that is local
currently
In contrast, in the T-bond market, you can move5,000
or spreads.
a problem. You can also move
without
very
large size, in the
I would say, in
Kovner
Bruce
can manage?
there certainly is. However,in
commodities such ascrudeoil, there
are
was the end
What
They
You are
hit
trading organization getting
the crude oil market.
lost control and crude oil pricesfell
to corner
probably
a losing
into
first
At
by
$4.
result?
the
more
managing
trader in the world.How
you
they
a British
$40 million and
about
lost
of
tried
do
you
is in
organization
money
handle
trouble.
than any other futures
the emotional strain when
period?
The emotional
burden
losemillions
of dollars.
of trading is substantial;
If you personalize
on
any given
these losses,you
day, I could
can't
trade.
Bruce Kovner
70
Do the lossesbother you
so
me is poor money management.Every
too large. But I never had a lot of
often, I take a loss that is significantly
as long as losses were the
of
the
with
process losing money,
difficulty
outcome of sound trading techniques. Lifting the short side of the
that scared me. I learned
July/November soybeanspreadwasan example
as a day-in, day-out
But
a lot about risk control from that experience.
thing
only
process,taking
Did you
any
not
does
losing
bother me.
back and designeda lot
I went
lost about
19811
Was that due to
year?
Did you go back to the
errors
measured
my
When
trade
you
use
I only
or the
nature
of
the
do you use the
currencies,
systems. I paid strict
that point on,
From
I
interbank marketor the
unless I am doing an arbitrage trade
market,
International
[The
against
Monetary Market (IMM)is a
of the Chicago
Mercantile Exchange and the world's foremost
subsidiary
futures exchange.]
The liquidity
is enormously
currency
better, the
transaction costs
are much lower, and it is a twenty-four-hour
market, which
is important
to us because we literally
trade
hours a
twenty-four
16 percent.
made,
management
market?
futures
years?
you
of risk
correlations of all my positions.
total risk in the market everyday.
to the
attention
markets?
the
interbank
IMM.
the
Yes, in
that
disturbs
that
losses
have
all
board?
drawing
The
71
Was your confidenceshakenat
all anymore?
at
Bruce Kovner
day.
a combination of the
in
first major bear market
It was
different
two.
My main
commodities
characteristics
markets
have
Was
matter of becomingcomplacent
in
an
it a
than
problem was that it was the
I had experienced, and bear
bull
about
markets
always
being
uptrend?
My
money
of your
trading
is in currencies?
about
50 to
60 percent
of a bear market
mistakes
management
did you
make that year?
was poor.
I had too many
correlated
trades.
is
of our
profits
come
from currency
trading.
you are also trading currenciesbeyond
currently actively traded onthe IMM.
I assume
problem was that the principal characteristic
I would
retracements.
very sharp down movements followedby quick
always sell too late and then get stopped out in what subsequently proved
you
to be part of a wide-swinging
congestion pattern. In a bear market,
enter
to
rallies
countertrend
have to use sharp
positions.
other
portion
On average,
No, the
What
What
markets.
We
trade
the
five
that
are
liquid. Virtually all the European
Scandinavian countries), all the major
Asian currencies
and the Mideast
currencies.
Crosses are probably the
most
important
trading vehicle that we use that you can't trade on the
IMM.
are a trade involving
[Crosses
two foreign
countries. For example,
British
and selling an equal dollar amount
buying
of Deutsche
pounds
marks is a cross.]You can't trade crosses on the IMM because
they have
any currency
currencies(including
fixed contractsizes.
that
those
is highly
of the
numberof
IMM
the two
between
contracts
of each
value
dollar
crosson the
could do a
But you
Bruce Kovner
Kovner
Bruce
72
the ratio of the
by adjusting
currencies to equalize the
Is there a reasonwhy
a larger
more exact and
is much
it
example, Deutsche
yen crosses are highly
I assume that
not
direct to use the
mark/British
interbank
it in
You
So actually
sell $100 [million]
worth
all over
of exchange
unit
the
where a
In situations
economicstatistic out
response
in
markets
a very
swift
Will
or
are well arbitraged,
line,
but
the release
of an
price
moments when
are the
some money. The
will make
markets
do get
a
to
be less
events
such
because
and
away
the
what happens on
let the
stops
the
futures
only
thing
have the bank on
who
arbitrageurs
The
run.
the
locals back
that pulls the markets back is
is that the
market
other
most
the
the activity
takes place within
normal
That is, very often, the hedger
wants to show his
that he has a locked-inprofit
so he can borrow against
addition,
interest
banking
it.
Can you talk about your
do you determine what
I
that
assume
then I
the futures market can compete,because
tailor a hedge for any customer.
to
try
the price
figure
fundamental
the
right
for a market
out what
analysis
price
on
for a
How
methodology?
market shouldbe?
any given
day is the
changes are occurring
the jobs of a good trader is to
imagine
form many different
mental
pictures of what
like and wait for one of them to be confirmed.You
one at a time. Inevitably, most of these pictures
is, only a few elements of the
wrong\342\200\224that
picture
I try to
extreme?
Yes,
is no way
market
can
One of
the interbank market priceresponse
of
in several
correct
will
that
price,
alter that
price.
a lot.
not
but
those
efficient
relations.
banking
with expectations causes a sharp
market react less
does the interbank
keep the two
market, or do the arbitrageurs
arbitrageur
out of
bit
little
right. In
That's
commercial
linked?
tightly
two markets
The
is
the dollar
of line
futures
there
interbank
and
marks
of
world.
the
surprise newsdevelopment
currencies,
the
than
violently
say: Buy $100 [million] worth
of yen. In the interbank
market,
simply
not
First,
respects.
dollars,
the
That's right.
capture
and date
hedging usually has a specificdollar
For example,
if I need to hedge$3.6million
requirement.
for April
12, the
bank just takes it. The futures market, however, trades
for
only
specific
dates and fixed contractsizes,so the hedger
is not precisely covered.
mark/Japanese
price
is
market
futures
currency
important
active.
you do a mark/yen cross, you
of the two currencies.
when
For
market.
Deutsche
and
pound
and very
traded
of one
terms
in
percentage
the futures
market hasn't been able to
of world currency trading?
position.
The
But
73
But
then,
all
ten elements
side.
alternative
the
scenarios.
should be
trying them on
turn out to be
world
keep
will
may prove correct.
sudden, you will find that in one picture, nine out of
click. That scenario then becomes
your image of the world
of a
reality.
What
activity,
percentage
or
hedging,
of bank markettrading
vis-a-vis
speculative
is basically
as well
as a few
players
like
myself.
commercial
trades?
on that. I don't have the
Thebanksare the
market.
a hedging
The Fed has donea study
it
represents
figures
principal
on hand,
but
speculators,
Let me give you an example.
The Friday after the October
19 stock
market crash, I had trouble
which is very unusual
for me. But
sleeping,
I am sure I wasn't
the only trader to lie awakethat
All week long,
night.
I struggled with how the events of that week were
to
the
dollar. I was
pictures
was
total
going
trying
on different
panic\342\200\224the
world
impact
visions of the world.
One of these
to
an
end, financially.
coming
BruceKovner
74
In this
the dollar becomesthe safest
could be a tremendous rise in
the dollar did rise dramatically
week,
scenario,
there
as a result,
that
of
Tuesday
withdrew
their
from
money
there was tremendous
started to give ground
then
It was
clear to
me that
dictated
by the
the Bank
as
people
many
three
next
the
week,the
days,
had
dollar
again.
it all
that
in my mind.
coalesced
It
of a need for
the combination
given
became
absolutely
stimulative
tremendous worldwide financial panic, the
of Japan and
to adopt
Bundesbank
German
Baker
solution was for TreasurySecretary
to play the stimulative role, and that
other
the
interestof
the dollar
a result,
that was
the
only
would
and it
drop
would
central banks to defendit. I was
thing that Baker could do.
go. Someone
be
not
all this
realized
You
it
convinced
action
to take
in
the
it
might open
that
tense weekend becauseI realized
I waited for the Far East markets
lower.
a very
was
sharply
of your trading
Yes. First, I have monitors
home. Second,I have
We create a
to open
outsideof
I
everywhere
a staff
U.S.
So your
they
knows
assistant
buy it or
should
But
under
are
is under
week. We
we will do if
what
and
that if currency
X gets
sell it. Thosedecisionshave
to call me if the
instruction
unexpected
to invalidate
Are there times
my home,
go\342\200\224in
on duty twenty-four hours
in my country
You
obviously
your
time to
define
it
breaks
the recent
currency
to 135\342\200\224
made
been
Prime
revaluation,
scenario.
beforehand.
Minister
resigns,
or something else
you
end
up trading
at night?
instructed
to alert you
immediately
in
First
of
out of
instructions
all, we
a range
to call.
have call
that
we
levels in
have
every
previously
can't
trade round the clock. How do you
balance your work versusyour personal
life?
a day.
case
something
currency.
If a
identified, my staff
try
P.M. The Far
active, I will
in Tokyo
breaks
once a
at least
hours?
big happens?
currency
scenario for every currency
for each currency
the ranges we expect
out of these ranges.
I generally
Absolutely.
making?
Yes,a lot.
you do a lot
staff
decision
the dollar
Sunday night.
Is your
the nighttime
that you delegate
saying
you
happens
Do
twice
home
or if there is a major
markets?
Yes, and
of the night?
middle
the
in the
absolutely
late
too
in
and the joke is that
he is allowed to wake me
a
up
year. But it really isn't necessary very often.
Whenever
the markets
are busy, I know
what
is going on all the time.
with trading monitors and direct lines. Also,
My home is fully
equipped
assistant's
my
job is to be up and get the calls. He probably gets called
three
or four times a
night.
at
He
late Friday. Was
get calls
you
I have an assistanttrader,
Are
States.
As
do
of
be the United
would
How often
75
the only
deficits,
the dollar
to let
someone
had
action,
reluctance
potentially
wide U.S. trade
the continuing
and
measures,
inflationary
confusion.
haven, and
In fact, on
political
the dollar.
other places. During
By the end of the
Bruce Kovner
trade
trades
tremendousmovement,
the
next
to keep
East
market
my trading
is very important,
the Far East, which
until
12
P.M. If
confined between8 A.M.
and if the
opens
the markets
currency
at 8
and
a period
and get
and
6 or
7
are very
markets
P.M. The A.M.
are in
go to bed for a coupleof hours
opening. It is tremendously interesting
I will
structure
session
of
up to catch
exciting.
Bruce Kovner
76
To seethe wave
roll
from
Bruce Kovner
Do you
to country?
country
out
Absolutely. When you are really involved, the screen almost reaches
and grabs you. The way the quotes are made changes:They get wider;
all over the world in each of these markets
they get wilder. I have contacts
It
is a tremendously
on.
is
what
exciting game. There
and I know
going
a minute, one of the
for
time.
all the
trading
are
Forgetting
opportunities
of
worldwide
find
the
that
I
I am in this business is
analysis
reasons
events extraordinarily fascinating.
economic
politicaland
The way
you
constant
game, rather than
doesn't
It
describe
feel
like work,
[he laughs]. For
me,
board.
chess
multidimensional
except when
you
market
analysis is
The pleasure of it
trying to figure
faces and how he
it is
example,
work. Do you
out
the
at it that
look
really
like
it feels
lose\342\200\224then
a
like work
problems
to solve
the finance
try
may
itself,
is tremendous
fun.
these varied
tremendousamount
of
to the
attention
So if you see that
at a time
world
economic
I know
markets,
literature.
Yes, much
get
a \"guru
is on
All
the
you read
Do you also
a
pay any
simply
day.
ter, Zweig,
writers who
Davis, Eliades,and
my
gurus,
observing
so on.
following.
can trade profitably
People
like Prech-
impression
That
you
will
are bullish
have
some
stronger
about the
following
the gurus?
feel
by just
is that to make
is very difficult
money,
you
when
any
single
exposure.
to hold
a
you are following
good gurus, however. For example,in the
He uses excellent risk control. Unlike
Zweig.
he doesn't
believe he is predicting the future;
he is
what
is happening
and making
rational
both the importance of risk control
to hold a position.How
having
you typically take on a trade?
of all,
have
some
the conviction
bets.
and
much
the
risk
do
I try very hard not to risk more than 1 percent of my
portfolio
trade. Second, I study
the correlation
of my trades to reduce
We do a daily
to see how correlated our
computer
analysis
positionsare.Through
have a large
bearish,
talk about
necessityof
on
that list?
newsletter
members on your guru list
is not moving up, and you
stronger.
think people
some other
my
Who
reason to be
Probably,but
various market advisory letters?
report\" every
market
position with conviction.
someone else. There are
stock market, I like Marty
First
I
of the
most
the
when
trade?
You
In following all
be right
will
minister of New
exotic.
in
opinion?
contrary
to be
not
try
Do you
For
intellectual.
a measureof
too much of a wiseguy because
during major price moves,
for a portion of it. What
I am really
they
looking for is a
consensusthat the market is not confirming. I like to know that there are
a lot of peoplewho are going to be wrong.
I
like a tremendous
is purely
report as
way?
them. A lot of people will
to
But
me, it isn't exotic at all.
think that sounds
ridiculously
has
he
a real set of problems.
and
Here is a guy running this tiny country
the labor
how
to cope with Australia, the U.S., and
He has to figure
him
unions that are driving
My job is to do the puzzle with him
crazy.
of
the consequences
he is going to decide, and what
and figure out what
That to me,
doesn't
his actions will be that he or the market
anticipate.
Zealand
guru
your
fundamental
make the whole processsound
it, you
use
77
bitter
I have learned that a mistake
in
experience,
position correlation is the root of some of the most seriousproblemsin
If you have eight highly
correlated
then you are
trading.
positions,
one position that is eight times as large.
reallytrading
Kovner
Bruce
78
mean if you are bullish in both
Does that
one
Swiss franc, then you decide which
in
that
entire
currency?
long position
Yes, that
trading a
long
right
now,
short
I am net
although
In
mark.
all
better and
short
the
place your
I am long
dollar,
my trading, if I
am
idea of
is the
related market.
in a
the
For example,
and short
yen
cross rates likethe Deutsche
mark/Japanese
than the individual currencies themselves?
Yes, because there
rates. The general
Your trading
yen move
slower
cross rate was
recently the sterling/mark
It
and
2.96
3.00.
between
approximately
congestion
the
it
it
broke
The
a
month
out,
about
out
challenged
broke
day
ago.
finally
on
of
The
Bank
times.
about
kept
England
twenty
top of the range
cross
as
the
soon
in.
As
of
the Bank
England gave
defending it. Finally
rate pierced the 3.01 level, there were no trades. In fact, there were no
without
a full 1 percent
So it moved
it hit 3.0350.
trades until
virtually
in
trading.
Is that unusual for
interbank
the
It meant
unusual.
everyone realized the
wanted to be a seller.
reliable
of
type
everybody
market?
was
of England
Bank
fewer people paying
less observed, the
is: The
if I
is like asking a doctor whether
he would
prefer treating a patient
or
with
a
chart
his condition. You need both.
diagnostics
monitoring
the fundamentals
But, if anything,
are more important
now.
In the 1970s,
it was
a lot easier to make money using
technical
alone. There
analysis
were far fewer false breakouts.
Nowadays,
are a huge number of technical
trading
has made it much harder for the technical
the
that
think
under
the
watching
was
not
level.
3.00
in,
stepping
Once
no one
most of
violent
and
quick
one\342\200\224much
more
will
trend-following
the weight
these systems are using
work
The only
is true.
that
inflation,
high
However,
again.
have stable, moderate
kill each other
rates
systems.
system approach
of its own size and
similar
straight
up
that
and
change
trader.
will
the
fact
that
approaches?
that will save those technical
thing
systems
when simple trend-following methodologies
there is no question in my mind that if we
of inflation,
the technical
systems
trading
off.
worse?
shift
the stock
conversation
our
to the
market behaves differently
stock market. Do you
other
markets,
countertrends.
After
from
how?
trading
I think
more reliable.
is much
fills.
is a chartist,
everybody
there
Let's
after
cross
the trade.
That
Do you
breakout?
Even though your fills are
Terrible
to the
attention
better
with
will
Yes, it
against
positions
long
a synthesis
of fundamental
and
were to say to you, Bruce, we are going to put
in a room and you can have either all the fundamental
you
information
or all the charts and technical input
you
want,
but
you
want,
only one, which would you choose?
I think
breakout\342\200\224a
a typical
than
better trading
style involves
But
is a periodof
that
a lot
are
rule
eventuallyself-destruct
Is
or
For example,
necessarily.
a yearlong
Very
rates provide
net short
than
currencies
technical
analysis.
Do the
Not
in
the cross
that
believe
opportunities
I like to
something,
long
else.
something
Do you
79
the dollar?
even more important
in one market against a short
the Deutsche
be
true. But
is definitely
and
mark
Deutsche
the
you like
Bruce Kovner
for
are, the better your
of hours between 3.04 and
worse the fills
The
a couple
to 3.11.
trade.
3.02,
believe
that
and if so,
In that
the
case,
rate went
The
stock
market
has goneup, it
has far
always
more short-term
wants
to come
down. The commodity
the market
markets
aw
Bruce Kovner
80
driven by
So if
will tend to
prices
shortage,
keep trending
index market is much
the stock
that
technical
approaches
goods; if there is a
for physical
demand
and
supply
true
higher.
there
are
choppier,
any
can work?
Kovner
Bruce
about portfolio insuranceas opposedto arbitrageinsurance involves systematically
type
[Portfolio
program
trading!
stockindex
futures
as
stock
selling
prices decline (and coveringthose
shorts when prices rise) in order to reduce portfolio risk. Program
refers
to buying and selling stockindex futures
trading
normally
an
when the prices of
against
opposite position in a basket of stocks
Are we talking
the two
Perhaps,
but
keep
they
decision-making
but
changing.
systems will catch the
wide stops.
need
to use very
have
to be
you
I have
that
found
bigger
81
stock market
advances,
way in which arbitrage could be saidto have contributed
than helped
it, is that if it weren 't for program
insurance may never have been developed.
portfolio
The
Right.
to the
only
problem, rather
trading arbitrage,
Soyou
very long term to filter
the
out
noise.
So
the
involves
Much longer than most traders can handle because that strategy
one
of the
approach,
riding out large retracements.As an alternative
to
I know does very well in the stock index markets by trying
traders
seems
to
traders.
It
most
can
hurt
the
stock
market
the
out
how
figure
work for him.
that?
be blamed for the market
insurance
portfolio
possible?
are
arbitrageurs
as
insofar
Yes.If
made
they
only to
decline
the Brady report, you will see that the portfolio insurers
with billions of dollarsworth
of sales in a few hours.
read
you
cameinto
market
the
to absorb it. Portfolioinsurance
was
a terrible
in name only. In fact, it was nothing
more than a
massivestop-lossorder.If it were not for portfolio insuranceselling,the
market
would
still have gone down sharply,
but nothing
like the 500market
The
idea;
How can he quantify
of line.]
out
are
long-term
very
was
it
was
unable
insurance
point declinewe witnessed.
He looks
at market
sentiment
numbers,
but basically
it is
a matter
of gut
feel.
Do
Some critics
trading.
I think
What
two
have attributed the October 1987crashto program
are
different
your
elements
vulnerable
were involved.
to a decline,
fundamental
great
In a sense.By
have a specialtalent?
traders
definition,
there
superior traders, since trading
own feelings?
left the stock
rising interest rates and other
market
feel
you
First,
which
causes.
was accentuatedby heavy selling from pension
in so-called portfolio insurance.
funds
overly
was
Second,
who
high
prices
by
that decline
triggered
were
involved
What is the
balance of
can only be a relatively
zero-sum game.
small
group
of
is a
trading
hard
success
between
talent and
is extremely
unlikely
that you will be
work?
If
you
don't
good trader.
work very hard,
it
a
Bruce
82
Are there
some traders who
can
just
coast by
Kovner
on innate skills?
can
do that
What advice would
I would
First,
you
the novice
give
say that risk
be well understood.Undertrade,
you
piece of advice.Whatever
least in half. My experience
to five times too big. They
when
they should be taking
trader?
management is the
undertrade,
most
taking
1 to
thing to
is my second
to be, cut it at
important
your position
with novice traders is
are
ought
that
they
three
trade
10 percent risksona trade
risks.
5 to
2 percent
holds
is likely
what
mistakes
other
too far away
a
made
which
his approach
concerned
me,
realizes.
trader
the
than
Kovner,
by
in
strong
particularly
stops:
placing
\"I place
my
to reach easily.\"In this
Kovner
maximizes the chances that he will not be stopped out
manner,
of a trade that proves correct, while
at the same time maintaining
rigid
stop
that is
a point
at
or too
difficult
this approach
is
management
discipline. The philosophybehind
that it is better to allocate the predetermined maximum
dollar
risk in a
trade to a smallernumber
of contracts,
while using a wider stop.This is
the exact reverse of the typical trader, who will
try to limit the loss per
do novice
but
contract,
point
traders
are
the
in
in
contracts as possible\342\200\224an approach
which
trades being stopped out before
the market
direction. The moral is: Place your
at a|
stops
will reasonably indicate that the trade is wrong,
as many
trade
results
usually
moves
make?
typically
on
impression
highly
much greater
to be
One statement
not
Besides overtrading,
independently.
that are
positions
than
the
portfolio basis rather
viewing
This is absolutely critical when
one
since the overall portfolio risk
correlated,
on a
risk
money
undertrade
think
83
the need for evaluating
risk of each trade
are a lot of one-year wondersin
for a while.There
that
who has a strong
find
feeling
somebody
trading. It is quite common to
to
widen
sugar is going to 40 cents, or that the copper spreads are going
dramatically, and that one idea turns out right. For example, recently I
this
heard about a trader who made $27 million trading
copper
spreads
all
of
lost
it.
and
then
virtually
past year,
You
Kovner
Bruce
good
many
anticipated
if reached,
that,
dollar amount you
point determined primarily
by the maximum
to
lose
If
contract.
the
willing
per
meaningful
stop point implies an
at a
large loss per contract,
uncomfortably
number of
a smaller
trade
contracts.
They
as a
personalize
the market. A
personalnemesis.The
common
market,
mistake
of course,
is to think
is
totally
of the
market
impersonal;
worst
Kovner's
it
care whether
says,
money or not. Whenever a trader
you make
he is engaging in a destructive
\"I wish,\" or \"I hope,\"
way of thinking
because
it takes attention away from the diagnostic
process.
doesn't
terms it\342\200\224resulted
trading
a spur
from
experienceunderscoresthat
higher
failure rate
trades.
Regardless
than
of
the
trader should stick to his
decisions
In my conversation with
of his
and scope
complexity
Kovner,
struck by the immense
can't
figure out how he can find
of so many
the economies
I was
analysis. I still
the time to follow and analyze intricately
let alone integrate these various analysesinto a single
different
countries,
fundamental
of worldwide
synthesis
picture. Clearly, Kovner's unique
to the average trader.
translatable
and technical analysisis hardly
are key elements in Kovner's
Nevertheless, there
trading
approach that have
to the more mundane trader.
direct relevance
he
as the key to successful trading;
Kovnerlists riskmanagement
He
also
stresses
on
a
trade.
decides on an exit point beforehe puts
always
(for example,
mistake\342\200\224his
of the
Finally,
contrary
is probably
there
impulsive
(not
approach
used,
or her game
to be
plan
putting on an
has just recommendedit; liquidating
stop point is reached becauseof
\"going
intuitive)
the
because
the
trading
a friend
predetermined
price movement).
views a good trader as \"strong,
extreme,\" and points to disciplineand
make (and accept)mistakesas significant
a
with
impulsive
trade
before
with
is selected,
strategy
Kovner
in the
of trades
confused
and avoid
unplanned
adverse
no class
once a
a position
an
trade,\" as he
My own personal
bust
decision.
moment
traits
of the
independent,
a willingness
and
to
winning trader.
Dennis
Richard
A
Dennis became
Richard
while earning
1960s,
intrigued
minimum
the
commodity
by
wage
as a
Legend
trading
runner
on
during
Retires
the
late
the exchange
on his
trading
of 1970, he decided to take a crackat
floor. In the summer
from his family, he purchaseda seat on
own, and with $1,600 borrowed
the Mid America
Exchange.
The Mid Am, as it is called, is a kind of minor league exchange
it trades
traded
because
on the major
pint-sized versions of the contracts
Am
The
Mid
the
tends
to
attract
business
of
small hedgers
exchanges.
and speculatorsfor
large
was
a position.
well suited
afford a
could
a single regular-sized contract representstoo
whom
As a fledgling trader with little risk capital, the Mid Am
to Dennis\342\200\224it was also the only exchange on which
he
seat.
him a scant $400 for trading.
The seatcostDennis$1,200,leaving
Incredible
as it may seem, he eventually
that tiny stake into
transformed
a fortune,
which has been estimatedby some to approach
$200 million.
As his
father
is reported
understatements
bucks up
haul,
pretty
of all
said, in what must be one of the grand
ran that four hundred
time, \"Let's just say Richie
to have
good.\"
successful
Although Dennis has been exceptionally
a few dramatic setbacks. He was
he has withstood
one such downturn
funds managed
at the
by
Dennis
time of our
lost enough
over
the long
in the
midst of
interview. Several of the public
during the late 1987-early 1988
period to
a letter
50 percent
the
trigger
trading. Dennis'
in
Dennis
Richard
86
account
personal
to investors,
loss cutoff point
witnessed a similar
of
the cessation
for
fate.
\"Theseresults parallelimmense
As he
expressed
own
personal trading.\"
most impressivetraits as a trader is his
hard
with
little
emotional
times
to
weather
such
impact.
ability
to
losses
as part of
he
such
learned
has
accept
sporadiclarge
Apparently,
such
remains
as he
the
His
confidence
unshaken,
periods
game.
during
if he stays true to his basic trading
rebound
believes he will eventually
of the
by the mood and confidence
judging
strategy. Had I not known,
have guessed that he had just made a
man I interviewed, I would
sooner
small
fortune
rather than lost one.
Whatever
the stereotype
image of a centimillionaire may be,
is legendary.
In fact, his
Dennis does
not fit it. His low-spendinglifestyle
are
and
charitable
real
his
sizable
only
political
extravagances
contributions. His
views also do not mesh with the popular image of
political
the
of the Roosevelt Center for
rich.
Dennis is the founder
very
of Dennis'
one
Perhaps
a liberal
and he
supports the
years, he has
in
the political
taken
an
sphere, supporting a
Unlike trading,
his win-loss
ratio in politics
of liberal
candidates.
variety
In the 1988 presidential race, Denniswas the
has been disappointing.
for the Babbitt campaign.
national
cochairman
American
concept
Studies,
Policy
think
tax rates for wealthy
active role
increasingly
of higher
In
up a
drawing
Denniswas an
essential
of our time\342\200\224atrader
cited with the phrase,
tank,
In recent
Americans.
list of candidatesto be interviewed
name.
He is one of the foremost
that a number of others interviewed
\"I'm not in his league.\"
for this
project,
trading
legends
book
in
this
I dealt with one of Dennis' assistants.
he told me he would talk to Dennis
to
him,
explaining
one week later, I receiveda call informing
and get back to
forward
for
me that Dennis could see me on a date about one month
I
that
was
to
for
the
hour. I explained
coming
Chicago
primary
exactly one
In setting
purpose
interview,
of interviewing
time to cover all
was
the
up
the project
About
me.
After
all the
agreed,hoping
going well.
the
Dennis and
time allotted;
that
areas.
essential
the
I would
that
one
hour
The response
implicit
get some
message:
more time
was hardly enough
essentiallywas:that
Take
if the
it or
leave it. I
interview
time and was
five minutes
before
the appointed
office.
but decidedly unpretentious
arrived
Dennis
shook hands politely, and sat down at his desk.
hour,
advance
he
if, in the course of the interview,
I arrived about
in my
losses
87
Dennis
Richard
was
ushered into
a large
precisely on the
He apologized in
at the
occasionally
glanced
on
the
interview
in any
orders.
quote screen, explaining
same time, and would
Having
smaller
finitesimally
As the
the
scale),
interview
began,
In my case, I had
parts.
to accomplishthe
a genuinely
task
matter of
to ten
five
After
relaxed,and
the
at hand.
of a
In
the
personality,
minutes,
the
conversation
he had to
tension
ticking
case
clock
was
with
of Dennis,
at least
in
put
myself (albeit on an in-
I explained that I understood.
there was an element ofuneaseon
a sense
shy
keep his mind
me if
signal
of trading
experience
could
he
that
at the
terms
gone, the
both
not enough
our
time
I believe it was a
first meeting.
of a
atmosphere became
flowed
smoothly.
I began to think that things
were
would continue our conversation beyond
Dennis
the
allotted
hour.
At exactly ten minutes
before the end of the hour,
my
illusion was shattered. \"I'veonly got about ten more minutes,\"
he said,
\"so if there's still stuff that's important you may want
to get to it.\"
I
Forty-five minutes
going so well that
into
the interview,
tried to identify some of
my index cards and quickly
I had not yet covered.
Precisely at the end of the hour,
Dennis
said, \"That's about all the time I have, thank you.\"
One
of questions I did not get to dealt with the political
segment
side of Dennis' experiences.
These topics included the Senate
hearings
on alleged manipulation
of the soybean market by Dennis, the Roosevelt
and the various political figures Dennishad
known.
Institute,
Although
these subjects were certainly areas of interest
and color, they were not
I chose
to the primary
focus of this book. Consequently,
pertinent
questions related
to trading before attempting
to turn to anything
politically
shuffled
the
key
through
questions
oriented.
of the interview, I played my final card by saying, \"I
to
related
to the political side.\"\"They're
get
any
questions
not interested
in that anyway,\"
Dennis
as he politely said
replied
and
left
the
office.
goodbye
About
six weeks
later, I requested and obtaineda follow-up
interview with
Dennis.
The portion of the interview
with the budget
dealing
deficit problemand Dennis'
at that
large losses in his public fund
trading
time came from this second meeting.
At
didn't
the
even
end
88
that he was
after our last conversation, Dennisannounced
on
to concentrate
his political interests full-time.
retiring from trading
Will
Dennis
never trade again? Maybe, but don't
bet on it.
A month
How did you
in commodity
get involved
first
Do you
consider
lessons
learned?
graduating
and
I dabbled
was making
in
high school, I got a summer
a little bit. With
trading
trading?
$40
I was doing.
The advantage was that
amounts of money. I like to say the
what
small
and losing
a week,
$40
as a runner
job
minimum-wage
my
an
hour
trading.
I got
at least
tuition
that
on
salary, I
I didn't know
was small for
to new
this
start,
you
it may
traders\342\200\224although
the
not
you ought to be asbad a trader
at that time?
expensive
floor
the
to do
is less
nonetheless, because of
worthwhile,
period
I would say
Yes, in retrospect,
be a reassuringthought\342\200\224when
as you are ever going to be.
Because it
After
89
Richard Dennis
Dennis
Richard
it
Do you know
with
what
I
be too
shouldn't
You
Right.
traders
for
surprised if you
whom
really
up.
proved to be
success
early
screw
their
undoing?
learned.
noticed
I have
I heard
the story that
before
you
father stand in the ring, while
trades to
That
turned
stood
you
twenty-one, you had your
on the sidelines signaling
him.
was in 1968 and
know much about
1969.
trading.
had the
father
My
He
was just
membership
going along with it
underage and wanted to do it. When
twenty-one,
the
hate
happiest
days in his life because he said,\"I really
no idea what I'm doing. It's yours!\"
I turned
but
he
because
it was
this.
didn't
I was
one of
I have
imprinted
But you
consistently
if
a lot
For
of money,
a lot
You're
that
much
because
you were
trading very
they
were
imprinted
with it.
bias to
a subsequent
about
talking
the bullishside because
experience?
What gave you
America
confidencewhen
Exchange
and you were out
a couple
get
mother
Yes.
couldn't have lost very
lost
lot of people who
is their
a warship
lost.
small.
I probably
that
your
of
Sure. We
are a
matter
of traders, it doesn't
so
enough.
young
their
first big trade is successful or not, but whether
their
side.
Those people tend to be
is on the long or short
perennial
bulls
or bears, and that is very bad. Both sides have to be equally
OK.
There can't be anything
more satisfying about one
psychologically
If there is, your
than
the other.
is going to go askew.
trading
I think that's what happened to a lot of peoplein the 1973 runaway
Even if they didn't make money themselves,
bull market in soybeans.
were
to
the
market
mania and see a few people
but
witness
just present
you get them
much whether
first big profit
make
Were you at a disadvantage trading one step removed,with
father
filling the orders?
variations of that. There
You can teach them
ducks.
like
of
thousand
dollars
during
with
of the
you
such a
first
started
small stake?
After
trading on the Mid
all,
one
mistake
game.
that period.
Well,
no,
the advantage
of
the
Mid
America
Exchange
was
that
90
Richard
they traded minicontracts. I had
but not all of them. I don'tknow
have when
to succeed. I mean, if you
were
fact, you should have bet that it
of people
a lot
what
Dennis
I made most,
that I had any confidence.
I just had
they
get in this business: a need to try
on this sort of thing
before
the
betting
wouldn't
work. There is no doubt about
in me, and
mistakes
a few
I wascuriousabout
initial
successful
the
in
first
year.
What were you
doing differently?
the
which was
of 1970,
summer
I had just planned to trade over
in the pit for the first time.
made a big
the three months and $3,000 in profits
and lasted for about
Orleans
me. I went to Tulane in New
on
laundromat
my
I used up all
no choice but
that I didn't capsize even with
that small
doing enough things
right
I was lucky
to stagger into having
the right
capitalization.
enough
on before
positions
the big corn blight
in 1970.
school before
graduate
one week. I used
Once
school despite your
but
summer,
impression
are not
traders
Most
for
up
I traded
when
to graduate
going
your
success.
trading
I signed
the
that.
91
Richard Dennis
the
quarters
and had
quarters
back to
to come
phoning trades
nothing but dirty
into
Chicago.
I had
clothes,
Chicago.
I was
Since then
been a
have
you
full-time commodity trader?
Yes.
luck or foresight?
Was that
I think
it was
the
more foresight.
I had
rules, and attitudes
were right, like go with
ideas,
pale
very
then. But a few that
the market
about
I learned
all closed
highs for the year.
the trend, and the
the trend, the better. I remember
in on the close and just
stronger
getting
a couple
of minicontracts in corn, wheat, and beans. The next
buying
all opened up the limit because
of the corn blight
Monday morning
they
the
grain
I still
believed\342\200\224and
markets
believe\342\200\224that
you
go
at
their
with
trading
experience?
It might
to $400
back.
compared
and decided
what
run\342\200\224I
went
with
have to happen, and if it didn't, it would have set
have taken a lot longer to get to about $2,000,which
was a real grubstake. But, it wasn't like I threw
a dart
I did something that should
to do.
work in the long
the trend.
Is this particular
I then
week's
following
Yes, at
pattern\342\200\224a
strong
very
that you find
price action?
a minimum,
on Friday
alow.
if the
it is
important
market closes at
not
useful as
on a
Friday\342\200\224a
an indicatorof
a short position with a
or a long position if it closes
to have
a high,
close
the
in
get
at
first
the
year.
I had just
quit
bad trade and
graduate
school
to trade.
lost about $300. SinceI
and it was destabilizing.
a very big loss
and losing
position
by reversing my original
I then reversed back to my original
position
the end of the day, I had lost $1,000, or one-
that was
$3,000,
the error
compounded
things
off,
time.
By
entire capitalization.
Since then, I have learned that when
of my
out,
that
head
and
go home,
your
you
are
put
getting
the mixer. Lookingback,I realized
about losses, I wouldn't have had that
you
were
would you say that
so imprinted
with
Absolutely. I learned
losses. I
also
learned
that
magnitude,
that
traumatic
your
experience
percentagewise,
trying to catch
a certain amount
to avoid
beat to death, get
if I had had a
your
that
was one of
that
a destabilizing
loss,
a little time between
have
out of
In retrospect,
because
you
do something, but
take a nap,
next decision. When
make a mistakeof
loss
as your most dramatic or most emotional
a particularly
about
again. To top
and lost a third
trading rule
characteristic
market
was one
had
only
that didn't
Sure
to mind
One day, I made
third
news.
me
comes
There
trend.
One Friday,
I
What
up
experience.
best
or double
of loss
trades
you didn't
again?
that
will
up to
affect
recoup
your
Richard Dennis
92
so
judgment,
you have
to
put
time
some
that loss and the
between
next
93
Dennis
Richard
you a high
Giving
be ahead?
the next day you would
that
probability
trade.
I guess
a corollary of
don't push,
said and done, you
capital for those few
to preserve
try
be: When
would
all is
After
Yes.
that
aren't
things
going
right,
don't press.
to minimize
have
instanceswhen
you
your losses and
can make a lot
of time. What you can't afford to do is throw away
your capital on suboptimal trades. If you do, you will be too debilitated
to trade
when the right position comes along. Even
if you put the trade
on, it will be relatively small because your capital will have been depleted
by the other trades.
in
short period
a very
1973 soybean market your first
Was the
really
big
the
a row.
up
days
Most people thought
was impossible.
It's just an odds play. There
the odds are in your
years you have
In all the
wrong
there
a particular
about
and
that caused
does it. In
those
the
so much catching
market
the
It was
trend.
more a
matter
be a
really
you
bid.
of the markets
market
one
not
that
sideways and
are going
markets
the
but
outcome,
limit
been
there
any really bad
or two that you were dead
bad year?
it is
If one
breakouts.
in the
go long at
is decent, that
is
a bad situation.
any year that
Also, so many
1978was
successfully.
They would
and almost sure to
a hole in
burning
profit.
incredibly bad trades just to take a
was locked limit-up
get out even though the market
the profits
go up the next day. They couldn't stand
their
I
would
in
when
were
to
pocket.
try
get
they
people
would
make
out.
not
a good year
I was in the
for
Was 1978
the year that
In
was
1977,1
mostly
you
and
had
started
a floor trader,
losses
I compounded
trading.
process of making
trader to off-the-floor trader
time
like easy pickings.
stands out?
of
unnecessarilybecause
It sounds
almost all
to avoid
enough
usually
to
periods,
trading
situations,
making lots of false
Is there
getting
had bad
have
market
it
How do you
volatility
when you
traded, have
Was
we
When
lot of
at
limit-up,
limit-up,
pit.
So it wasn't
scalping
is a
favor
know
up the limit ten days
five consecutivelimit-
went
four or
even
that
In situations where a market goeslimit-up,
some point, the market may open limit-down.
recognize or sense
when not to buy at limit bid?
years?
market?
I made enough money in that market to go to the Chicago
Board of Trade
the
next
I didn't make my money
year.
by just going long soybeans. I
was basicallya pit trader, who traded in and out a lot. The markets were
there was excellent order flow.
because
It was a great time
very
good,
to be in
in
some of thesemarkets
to remember
have
You
no idea
trading
and
by
transition
the
how
different
were.
they
from an
1978
from floor
office?
I had
made
the
full-
transition.
Did that switch
cause you
to
become
more
of a
long-term position
trader?
There
a strong
some amount of risk,
trend, it was a deal. They
was
but
if you
were
were disposed to going
giving
you an
with
edge to do it.
Ultimately,
what
I learned
from 1978 is that
you
have
to be
longer term
94
Dennis
Richard
as a desktrader.
3 cents, I would
have
that
to break
pit, if it looked like soybeanswere going
if it didn't break, I would
get out. You don't
off the floor, because you lose the edge when putting
In the
and
sell,
luxury
Also, the judgments
you make looking at prices on the
aren't as good as those made
in the pit watching what
screen
is going
on.
In the pit, there are indicators that you leam subconsciously,
like \"these
three guys are never right at market turns,\"
and
if they all do the same
at
the
a
same
clicks
on.
It
took
me
a long time to
time,
thing
light
realize that
those tools weren't going to be availableanymore.
orders.
the
in
change? You were doing really well
you make the
did
Why
floor.
Why switch to a
When
I
desk?
were no
in 1970, there
started
long
took
several
So,it
gold. By 1978,these markets
enough to be viable. The currencies
years to get enough volume.
the desire
was
to trade
in a
single location that
And
the
been listed on
started
in 1974, but
had
resolve
we can definitely
I said, \"Here is a way
hire and train some people and see what
happens.\"
It was an intellectual experiment. We trained
you
could.That
bit
about
was
I
opportunity
right.
surprisedhow
at the
beginning
of
Is your basic contention
intelligent
individual
No. We
screened
and
interviewed.
we
thought
We received
be right.
would
it down to
whom
people
forty
we
ten.
looking
for?
could
physically
like to discuss that
I don't
years earlier.
a trader-trainee
it worked.
well
you
narrowed
we picked
Then
out I
even I am
but
back,
how
a little
It turned
trading.
the
them
taught
can take almost any reasonably
him into a successfultrader?
that
turn
and
for people
it
inundated
program.
because
if I
told
players, and we everdo it
from chess players.
the
key
one
you
chess
was
by resumes
Was intelligenceone of
What
of 1984 and another group
at
again,
things we
would be
of the
we
items?
one of the traits, but it wasn't the essential
that we were looking for, we could choosefrom
We picked the ones with
intelligent
people.
extremely
the
1985.
What
was the motivation
I have
a partner
for this
because
who
has
been
a friend
philosophical disagreementsabout
of these arguments
reduced to a set of
was
whether
rules\342\200\224that
I was
getting
a little
We have
had
could imagine.
One
school.
high
you
everything
of a successful
trader
my point
was something ineffable, mystical,
someone a good trader. This argument
I guess
since
the skills
was
they
were
item.
To find
intelligent
extreme
the
things
or
intelligence
just
available.
program?
you have any
Didn't
and
well
It was
We hired a group
beginning
initiated
management,
say that to pat myself on
it worked.
It's frightening
money
probability,
I don't
as we
I tried to
I thought.
that?
was
year
you
that
understand
the way to do the experiment
right,
I knew
about the markets. We
things
and
Let's
argument.
He agreed.
them as well
was
all the
codify
lookedfor
exist five
didn't
this
ly,
1,000 applications
the
move?
your
95
What qualities wereyou
more marketsthan
motivated
in currencies,
markets
futures
interest rates, or
board
the
on
Richard Dennis
of
view\342\200\224or whether
subjective,or intuitive
had
frustrated
been
with
could
that
be
there
made
a long time,
idle speculation. Final-
going on for
Sure,
but
I don't
reluctance about giving
away
strategies are as vulnerable
them, as most traders believe.
work even if people have a general
think trading
trade
secrets?
to not
you are
it. I
idea
about
is
it
will
doing right,
and
in
no
the
rules
that
could
newspaper
you
publish trading
always say
Almost
and
The
is
them.
follow
one would
discipline.
key consistency
anybody can make up a list of rules that are 80 percent as good as what
workingif people
know about
If what
96
Richard
we taught
our people.
to stick to those rules
How long
the
was
What they
couldn't dois give
them
things are going
bad.
when
even
Dennis
the confidence
We
got good at
really
it
in the
second
year\342\200\224the course
one week.
a trip
turtles;
dropped
results?
three
When you train
100percent
people, you
There
class
was
was:
expected
tell
increased
creating
results
basic approach to the
clones of Richard
twenty
be highly
correlated
with
your
of
I said,
program
\"We
traders.
growing
role doesluck play
zero.
run,
in
Absolutely
in trading?
zero.
because
business
this
on individual
I don't think
they started
anybody
out
winds
up
lucky.
trades, obviously,it
makes
a difference?
trade it is almost all
lies. On any individual
that has a 53
of statistics. If you take something
of working
each time, over the long run there is a 100
If I review
the results
of two different
chance
of it working.
at anything less than one year doesn't make any sense.
looking
before
be a couple of years
you can determine if one is better
luck. It is just
percent chance
percent
traders,
confusion
a matter
It might
the other.
than
You are
the
years
as they
each.
start out with?
have made money.I would
dollars
each.
the
who is both a discretionarytraderand
How would you compare the two approaches?
few people
some very
but they have
intelligent
things,
are
about
what
systematically
they
doing. For
will
not think:
who
do a trade that works
Why
I might
be able to do in another
What did I do here that
did it work?
at another time? There is not a lot of reflection on the process
market,
In contrast, I think
I always
have been analytical about
of trading.
I
ever
a
mechanical
even
before
researched
system.
trading,
traders
Professional
may do
a tendencynot to think
example, most traders
say
on
On
research
thousand
one of
trader.
a systems
are
stakes these traders are using?
over the
about $2 million
did they
from
returned
doing?
are the
It has
One hundred
however,
spread. One of the things that we repeatedly told
\"We are going to teach you what we think works, but
you
to add your own personal flair, feeling, or judgment.\"
large
What
them
trading
twenty,
a huge
How
average
their
Wouldn't
you are
my image
That is where the
other
per year.
profit
markets. Isn't therea risk of
what
do well.The
people who didn't
have averaged about
Dennis?
of a
much
In the long
But
We
I had just
program,
someone about the
total.
in
were the
What
became
that
making money
Twenty-three
trader-trainee
In telling
East.
Far
the
took just
there?
were
trainees
to
are going to grow tradersjust like they grow turtles in Singapore.\" I had
of squirming
visited a farm there and seen a huge vat with thousands
How
How many
referred to as the \"turtles.\"I found
is the origin of the name?
What
amusing.
of traders
group
somewhat
term
When I decided to do the
Then we had them
Shockingly short. In the first year, it took two weeks.
trade for a month
and keep a log indicating
why
they made their trades.
We
wanted
to see if they were consistentin doing
what they had been
taught.
I've heard this
that
process?
training
97
Richard Dennis
the opposite extreme, you have the academic types who
they have ever traded. They lack the seat-of-the-pants
before
knowledge
necessary
to develop goodtrading
systems.
Mercifully,
I did
98
the
Richard Dennis
first.
trading
the research wedo is more
Therefore,
to the
applicable
real world.
Can you
would
As an
me an
give
placementof
real world, it
else has their stop.
If you
to do
you
the
before you
system, you paid closeattention
did right
system that often
will tend to be
signals
a lot
are
they
looks
great
on paper,
but
is
world.
real
a mechanical
developed
to the
trading
and wrong, or was
about
I was
everything
observations
down
write
trading
process. Did you keep
of memory?
it a matter
and
think
them.
about
I thought
doing.
Are
systems trend
most of your
wrong?
Sure. The trading
experience
to want to avoid thinking
tendency
there
is a natural
that
the day is over. I am that way
when things are working.
me to want to
when they are not, it spurs
But,
think
about
what I'm doing and how I might
do better.
When things go
stick their heads in the sand and just hope it gets
shouldn't
bad, traders
is so
about
you are
avoid
thinking
should
saying is that
about
be thinking
the
I don't
markets.
direction?
you can
resolve
that
the
intense
times
the markets
when
at all
it is
most tempting to
are the times when
nature?
I would
to see
is more
trend
and
to weigh
I tend
of trading about
the
equal with
the
technical
element.
the market
display somesigns
around
of turning
commit?
before you'll
What
since
flat,
segment
and trend-following
want
to be
want
probably
likely is that I will be positioned in the right direction of a
to liquidate faster than a trend-following
system would
decide
because of the
intuitive
factor.
with
that
because
about entering
What
I've
of thumb,
Do those type
it\342\200\224that
is,
I don't
of trades
yes,
Generally,
I am
done
certainly
as a rule
a new trade counterto
think
made
you
do more
a prevailing
countertrend
initiations.
do it.
should
trend?
However,
poorly than other trades?
you
about them the most.
have any problem
orientedin
will never
be in the right
direction
at market
So, by definition, they
turns. Yet you, as an experiencedtrader,may sense when a market
In a situation like that,
would
may be prone for a turn.
you be
a
to
because
of
what
see
as
trader
even
buy
willing
you
though
your
system is short?
story
Right.
until
other
it once
better.
What
the
in
Yes.
So you
Is that something you would advise other traders to do to improve\342\200\224
that
are
are
is, keep track of what they
doing
right and what they
doing
point
you do nothing
opposed,
absolutely
psychological,
opinion-oriented
Yes, I would
systems
your
of
have your stop where
system is going to have aboveand adjust the results
that
that
Also,
consistently poorer in
what
there
don't understand
to get a systemthat
You mentioned that
a log of
If
experience
too wise to
not
is
are going
you
accordingly,
a mechanical
where I know
at points
stops
skids.
average
world
real
and
thing
where your feelings as a trader tell
situation
in a
do
one
to do
conflict.
In the
everyone
going
example of how the lackof
researcher?
the
example, assumeI develop
stops.
What do you
you
hurt
99
Dennis
Richard
obsessive about
like
from a high
centsonly
going
of
seven
every now and then
short sugar at 60 cents, which
66 cents in November 1974
although
months
they
may
I did.
give you
a great
[Sugar plummeted
to a relative low under 12
is worth $ 1,120
sugar
later. Each 1-cent movein
100
per
Dennis
Richard
measured
all
honesty,
often
trade
stories
like
positions
that. But
class of
broad
I
in
exception?
idea
The
Right.
had
The short sugar trade is a greatexamplebecausethe market
it took a lot of courage
and
witnessed an incredibly explosiveupmove
take
the flip side when sugar is
in as a seller at 60 cents.But
to step
in a real
bear market and is down to 5 cents; every trend-following
are such
system in the world is going to be short. Yet, if conditions
and the market price is only
that the fundamentals are in transition
a little
over the cost of the bag it's packedin, would
you make an
there wouldn't
Otherwise,
trades I
been profitable.
that have
like
done
in
I've got ten
I don't think
the
of contracts.]
thousands
in
have to tell you,
have
Dennis will
A large trader like
contract.
101
Dennis
Richard
be there if
that one
is much
market
The
illusion.
trade.
in the
risk
much
side of the
else is an
of anything
absence
the
be that
more likely to work
market just wouldn't
guys who went short
true.
of
There were plenty
like
at
because
1973,
soybeans
just
sugar 4 cents couldn't go any
beans at $4 couldn't go any higher.
lower,
Well, not only did they
go
went
to
a
in
of
a
matter
of four or five months.
$12.97
higher,
they
high
There is another point that I think is as important:
Xgujhould^Xiin this business;
Don'tthink in
pect the_unexpected
expect_th^ejctreme.
the market might
do.
Iftnerels
any
terms^fJbojjoJafies^aUunit^'hat
lesson I have learned in the nearly twenty years that I've been in this
business, it is that the unexpected and the impossible happenevery now
was
that
at $4 in
and then.
like that because all the
lost more money in situations
I
cent
and
down
one
more
do
is
market
has to
go
you are out of there.
I
lost
much
more
at
60
but
short sugar
made a lot of money
cents,
going
going long sugar at 6 cents.
I've
Actually,
Right.
And
When
trade like
do a
you
eventually throw
in
that,
\"
is so-called
downside
that
\"
limited,
the
is, buying
do you
a market
just ride
it
because the
out,
or do
be too tied to history?
So don't
yet,
all your
rules are basedon history.
a contradiction
Is there
there?
you
towel?
No, becausea
how do
evidence that the trend has changed. If you had been doing
in 1972, you would
have
concluded
your historical researchon soybeans
that any time soybeans advanceby 50 cents, you might
as well get out,
because
the market had never moved up or down by significantly more
good
trend-following
system
will keep
market
in the
you
until there is
You throw
it
it is
maybe
in.
Because
you
know?
Maybe
it is going to
2 cents;
going to 1 cent.
than
I guessa
concern
main
is that
you are constantly
giving
up
the
forward months. [In a bearmarket,the more
tend to trade at a premium.Forexample,
contracts
forward
May
sugar
at 6\\ and October at 7. Even if cash
be at 6 cents, July
prices
might
futures
would lose 1 cent
remained
stable, a holder of October
premium
between
in the
and
May
you
are
Obviously,
So you
that was
the
$8. A good trend-following
you in for
most of the
wrong
conclusion
because
system, however,
would
it went
have
up
kept
move.
don't want to draw
boundaries from
history
over
market
behavior?
October.]
Right.
Sure,
that.
another
forced
out at
3 and get back in
at 5.
Then it falls to
3 again.
structure
much
The
approach is to say:
up no more, but never
correct
means
and no
more.
This structure
that
means
this structure
up,
and this
means
up
this
102
Richard
you trade a system, do you
out best for the past,
tested
When
that
of the
the version
with
go
or do other factors
Dennis
Richard Dennis
system
Could that
103
been
have
training program\342\200\224to
command
reason for developingyour
a subliminal
the decision-making
to diversify
try
process?
consideration?
of the
to trade is whether
how
toughest problems
from
for the data base, or whether
you start
go with what is optimal
just
than
other
trade
You
something
deliberately
some other premise.
might
best
the
the
with
of
past
set
system
the optimal
[version
parameter
the past in
is going
to be unlike
because
performance]
you think the future
set
is
going to have a
a specific way. By definition,
any other parameter
in
the optimal set. But if the difference
than
performance
One
in
deciding
poorerpast
is
performance
difference if
will
You have
to
we
although
times the
have
currently
In
a very
being
size getsin
the
small trader
way?
Does it become
data,
past
amount
about
trader,
large
Do
you
find
I don't think we have
be tremendously far away
handling now would
$120 million in customer
be
we are
advantage.
In
Is slippage
betweenthe
hit
the
wall
When
therefore,
don't
have
using
all your
many
that point yet,
it. I think about three
We
just about it.
wrong?
orders going
you
tells
What
Do you
to
yet?
at
one
and,
point?
Yes. You have to think about diversification. If you had one method,
amounts
all the decisions,
you couldn't handle
or one person, making
in
and have a diversity
But if you use different
strategies
that large.
major
makers,
problem.
you
a loss on
have
price
by
a
difference
computer
price.]
when
costs
building
significantly
are
define
a trade after a weekor two,
are around
you
has passed,you
get
probably
you
the cost
of
by having
are clearly
breakeven, but a significant
wrong there too.
maximum
your
risk point when you
amount
get into
wrong.
of time
a trade?
you can handle severalhundred
million
dollars
have a worst
case
The only
point.
choice should be
out quicker.
that
am
literature
there
anything
in trading?
Is
a self-taught
trader,
or did
other traders
teach you
were worthwhile?
I would say I
published
decision
assumed
position, at what point do you know you are
to get out of the position?
a major
hold
is the
[Slippage
funds.
different approaches
in
execution
a system.
you
we
money.
trading?
your
actual fill
but it did work to our
some of the traders
way,
to market
We try to
into
lessons
are
that
try
make a hard-nosed
estimate
trading
Also, we reduceour
our own brokers.
No.
Are you largely
Is that because you
in
theoretical
You should always
other words, you haven't
customer
a problem
and the
program
If
No.
any
thought of it
we are going to
hadn't
fact,
have trained for trading
Even when
reached
from
we
more
substantially
trading size?
it would.
may not
to a very
managing outside money.
when you are
be successful
level
some
10 percent
better.
now that you are
that order
At
you
gone from
especially
difficult
the suboptimal
believe
future
the
fit
well be worth that
set, as measuredby
it might
10 percent,
only
you
Actually,
What
self-taught.
there is on
you can
is really
amazing is how
little
trading.
recommend to peoplewho
are
interested
without
I think
Edwin
Lefevre's
Reminiscences
of a
StockOperator[reputedly
a
Richard Dennis
304
semifictionalized biography of
trader] is interesting
and
book was written
captures
legendary
well,
pretty
stock
but that
Would
you
can
the stock
say
you
I think
about
talk
105
also
stock market
market have
ago.
years
sixty-five
the
of trading
the feel
some key trading strategies that
Are there
without
JesseLivermore,
Richard Dennis
it is
own
its
behavior
you
being in
That is a
a trade.
that
do
characteristics you
the trend. Whatever method you use to
thing is that if there is a major trend, your
to define
use
critical
assure that you
that
special
If I
see a
The question
trend
you look
I get
that
using
a simple
I know
in
trend.
get in
for to define
developing,
is whether
earlier
patterns
have their
I could
behavior
common
of beans
own
trade
is there
similar to the
eventually I'll have to get in.
and that might depend
or later,
goes
up when
it should
patterns
bonds,
knowing
the name
of
the
Do
it
go up,
or
Are
the
do markets
market.
than
is true?
they
trends
not
as
commodities
In other words,thereis not
same
you are saying
is that
patterns
in different
we don't
research,
if a system
care about it.
There
information as in
the
enough
not enough
information,
fundamentals. Just nothing
on.
In the
technical
is basically
commodity markets, technical information
volume, and open interest. Sincethereissomuch
information
available for stock indexes\342\200\224advance/decline
ratios,
various
confined
groups
to price,
sentiment
of stocks,
indicators,
etc.\342\200\224doordinary
more
relationships between different
trend-following
systems start
use enough
don't
information?
off
markets are very
similar.
Yes.Inour
flow of
per stock to
character.
markets?
commodity
at a big disadvantage becausethey
So, what
information
them from their random
there are stocks.
the
are
fluctuations
Demonstrably,
phenomenon?
fundamental
enough
to move
price
stocks are random.
explanation for that
that there is
There is not
stocks showsthat
in commodities.
are
and, arguably,
trending
have an
you
going
between markets?
of
are
commodities
aren't as many
personalities?
without
the
the stock
pattern?
on individual
research
my
closer to random
createsufficient
a trend?
see the market reacting to news. If a market
If it goes down when
should go up, I might
buy earlier.
better
defined.
trend
is
I'll wait until the
Well,
I believe
system. Is there
on how I
How much
does
is,
or does
markets,
main
idea.
could easilybe defined
A trend
something
time is
most
should
approach
No.
the
that eventually
gets us in
thing
Being consistent and making sure
than the particular
probablymore important
is the
simple
pretty
all the
enter trades,
a trend
exception?That
separate.
probably
Why would you say that
The market
other
like
any secrets?
revealing
market is an
behave
doesn't work for both bonds and
I'm not sure that is the disadvantage. I think the disadvantage
is that
stock index pricesare too close to random to develop enough clear-cut
beans,
trends
because
the
inputs\342\200\224the
individual
stocks\342\200\224are
mostly
random.
106
Richard Dennis
What are your
107
recent attacks
on the
thoughts
Richard Dennis
against program
How about fallacies
trading?
The
The
that are
people
Do you
mean
Yes. They
of what
complaining
in the
people
have
should
are
they
of themselves.
ashamed
to be
ought
sophistication to
Are
the
understand
that technical
there
are a lot
There
inanity
any analysts
program trading as a convenient
No. When
Sure.
It is a
clients.
The
pockets
of
good excuse for
claim is
the
caused
opportunities
are
they
Howdo you
Cut back.
it is
If
Generally,
it
a
but not
value
in
any
just
really bad,
need
takes
move
Nothing
the stock
If program
way.
provide better
for
those
people
who
but are really traders.
as an input
analysts
a
in
almost like a pitchernot
to stop at least for that second.
pause. It could be for just one
is the
biggest public fallacy
Then
(c) do nothing?
correct because
buy,
(b)
go short,
that
(a)
was
decisions,then
didn't
they
are supposedto
markets
they
have
they
the
didn't
to
question:
indicates
that I'm
a
\"buy.\"
selling. Do you: (a)
eventually understand
their own market
make
program.
Why do you handle other
people'smoney?
on your own.
You
are
doing
very well
is one big
advantage: managedmoney
offers
potential
return
risk. For ten years, people have been
me if I'm getting
asking
tired
of all the risk. Do I think
I'm
going to burn out? Do I think
I'm
going to stop? For the
time I didn't understand
longest
what
were
they
talking about. But I have to admit,
at this
point, I
there
but
you
do need
Before
balking.
That is
for a
markets
what
few days?
to stop for a period
he throws the ball,
I try
to
of cutting down
own
risk.
your
smaller profit and smaller risk.
use that to
just
gives
the
understand
I could
value
have traded smaller and
had
if customer
But
supplement the profitability
deal.
you a better
day.
about
market
behavior?
interview,
influenced
Dennis
by the aggravation
sense.
business,
saying:
his mind on
changed
this
related to large lossesin
\"I found
a
money comes in, I could
and still
keep my risk lower. It
do\342\200\224at
least
management
make
If
I had a hypothetical
the
you
fit into
Dennis decided to extricatehimself
That markets
to trade,
people
everything
you know about
you call the floor and they
tell
Well,
away from the
It is
our
with no
stop and get out.
or two,
we taught
Suppose
In a later
What
outside
trading
streak?
to get
a day
market.
may
trading
systematic
yourself and your
money out of the
stock
the
in
Program
investors,
a losing
handle
sometimes
of time.
are investing
the truth.
or too low, that should
prices to go too high
for the value investor. Of course,it's bad
pretend
Do you
who
from
a bit,
a lousy job for
doing
are taking
traders
program
that
people
could be further
market around
he has
is good.
market?
declining
have
respect?
trade?
a
for
scapegoat
the work of
as the
important
example,
about.
complaining
as
whose work you
of them/Zweig)for
Would you consider
Do you see
factors are not
fundamentals.
financial community?
enough
belief
regardingtechnicalanalysis?
gradually
that
it
was
from
more
subject,
his
possibly
public
the money
trouble than
funds.
it
was
Richard Dennis
108
worth.
material
The
that
costs
follows
The
were
were not financial; they
psychological.\"
is from that second interview.
Dennis
Richard
market is that
right away?
If the
position
Sure. If you
subject, but I've got to
Some of the public funds you managed ceased
ask you about it.
50
trading in April 1988. Is that because they reached the automatic
I know this is not
percent
going
loss cutoff
your favorite
point?
they
were
trading.
Rather
than
liquidated all
positions
Actually,
to be
down just
49
under
when we
percent
stopped
we
point,
trigger the automatic termination
to allow a lower
and resolicited the investors
Do you
then
you
do anything
you
particular
experience?
differently
in
the
future
because
of this
faster
than
I did,
but
the
trades
would still
October
1987
resulted
there?
due to the fact that the market gapped way
For example, on October
short
our
for
our
position.
covering
past
point
Eurodollar
been
of
short
out
our
have
we
would
position
20,
normally
the
market
but
about 40 to 50 points higher,
opened 240 points higher
We blew 190 points in a skid that was absolutely unavoidable.
that
day.
A large part
of that
loss was
a
in
change
think
ten
to
years?
getting
in
is a
we may
victory
trend-following
Are there just too
each other's way?
perverse sort
when
come
will
people
of
technical trading.
that devalues
see the day
trading
many
way, it represents
fundamental
trading. I say
over
longer work?
trend-following
is the
identify
breakouts is relatedto the
computerized
doubt about it. In a
of technical trading
triumph
perversebecauseit
There
The shortsideof the interest rate markets in
went
in one of your worstlosses.What
wrong
were dueto any
objectively
of false
prevalence
is no
ultimate
you
I can
factor
only
recent
during the past five
the same thing,
doing
Do
as possible
as fast
false breakouts.
more
toward
Do you feel the
the
your
trouble.
in big
losses you suffered
sharp
That's hard to say. The
Yes, there
be the
the markets were bad. Well,
claim
said to me, \"You
Someone
same.
since you could have done the exact oppositeand made a lot of money,
weren't they really good?\" I told him that the last thing I would have
side of those trades. In the long
to do was to be on the
wanted
opposite
of money.
amount
infinite
to lose an
run, that is a way
cut back a little
out
getting
are really
of
markets?
in the
in
Would
do you still get out
of line,
doubt about
any
the
think
out
much
tremendousincrease
point.
I would
have
like that,
situation
tendency
cutoff
109
trend-following
a day when easily discoveredand
systems no longer work. It is going
systems
conceived
lightly
to
no
be harder
to
develop good systems.
Given
the
can
that,
same
the approaches
your
beforestillwork with
efficacy?
Actually, I believethat
the fact
you were using
that
advantage.
there
if you view the
are many other trend
I can't
problem correctly,you
followers
get too specificabout
the
in the
solution,
can
make
market work to
because if we
Richard Dennis
110
are
that
right,
always
valuable
is pretty
To
information.
one step aheadof
to be
have
be successful
Yes, but how
you
like you started working on this problemwell
problems began in late 1987.
performance
It sounds
the
During
bandwagon-effect
have been
about
thinking
did
the
arrive at what you
finally
you
it is
has been a
virtual
We
work
in
took
us
considered a satisfactory
right around the
I know you can't
involve
on
depending
your
does
your
the
solution
oriented, so that
more short-term
to false breakouts
you
can
as
short
trading
the vast majority of trend
like the plague.
or as
term
style.
It
followers.
is the
long term
respond
as you
can
The
up
the
middle
up
for there
in the
possible.
not
results.
to
be.
It is
totally
counterproductive
Trading decisions should be made
to get
wrapped
as unemotionally
as
easier after
is like being a
boxer:
Every
wallop. After
twenty
years
Is there
any advice you
emotionally
calm
is a
years?
twenty
now and
you get a
can give
then,
bit
to other
of trading
periods
it into
put
perspective, but
time. Being a trader
over
the
market
gives you
traders
on how to stay
losses?
and
I have mental
Trading
to
scenarios about economicgrowth,
use long-term
the dollar
me
think are
in
your
making
but I
pictures,
is like
loaded a
betting
little
try
on
bit
to use
independent
in your
around
after
you should
inflation,
decisions?
trading
not
a good
punch-drunk.
little bit
Do you
will
you
inevitably
like playing
You can throw your
clubs
golf:
a
bad
but
next
while
are
the
shot
shot,
making
making
you
down
and
head
on
the
ball.
keep your
your eye
It
well over $100
When you talk about the experienceof managing
50
not
to
mention
million and
your
personal
roughly
percent,
losing
detachment. Do you
large losses, you discuss it with great emotional
Isn't there an emotional sideto it?
really take it that calmly?
that
poorly. I wouldn't claimthat I realized
but after you've
done it for twenty years,
into
learn
it
to
you
put
perspective.
years of trading,
drives you crazy, or
during
when things
If
street.
elation
side of
are going
Not necessarily [he laughs]. It gets easierto
has shock absorbers that deteriorate
everyone
stand,
term that picks
best strategy is to avoid
intermediate
I also avoidthe emotional
is no way to play just one
are going well, then
things
are going well. There
you feel too good when
feel too bad when they
that
trap?
is that
side
flip
Does it become
funds.
public
those situations?
is being
secret
time we closeddown
bespecific,but
far
being
more quickly to
I try
but the
it either
Ironically,
avoid the emotional
are able to
that after three
solution?
The
misleading
So you
Yes,
your perspective. Thereis more to life than
mean
being emotionally deflatedwould
lacking
I am doing. I avoid that because
I have always felt
to focus on short-term
results.
to me,
in what
confidence
for a long time. Half the
right way to conceptualize it. It
right questions to ask.
the
do you do that?
to maintain
have
trading. Also,
your
approaches.
trend-following
using
before
this problem
solving a problem is finding
out
years before we figured
When
ten years, there
past
of people
111
else.
everyone
You
That's right.
Dennis
Richard
them
I'm
when
roles
of
the
favor, because you
trading.
dice
that
know
you
some
RichardDennis
112
statistical things
right or wrong,
that
Even if you
basic
your
I
is going to
dollar
the
think
collapse, that doesn't
affect
pattern?
trading
to say it
like
would
if they
even
much
make
they
to be
Long-term scenarios can prove
are right, on balance, I'm not convinced
difference over the term of any individual trade.
the market.
about
but
and I
don't think
The worst thing you can do is miss a profit
losses
you are already disciplined enough to cut your
opportunity (assuming
about
And if you think
it, rigid long-term views are the kind of
short).
For example, if I believe
thing most likely to lead you to that mistake.
the
dollar
is going to weaken, and because of this I ignore a sell signal
in the foreign
risk missing
a large profit. What is my
currencies, I might
if my view was right?
a
small
loss. Therefore, the
reward
Avoiding
in the
probablyhas
past.
is all
risk/reward
do you
major trends
I bet
was
It
require
and
higher
will
government
a tactic which
end of
by the
what
1990.[This
and
to
trying
avoid
inflation?
deficit
\"Well,
think,
notice
words, fear of
easing,which
in
will cause
a recession
will lead to
turn
is,
Whether
unfortunately,
you
a very
tremendous monetary
like it or not,
the
financial
idea,
but
markets
I think
it is
lend
to the
right.
are in conservative
hands. People
money
government and businesswill
easing as a solution to a recession.
buy monetary
who
think
that things
the
they
anybody
of your
foundation
house. You may
not
chunk and the house
gnaw
away
a
take
should
large amount of comfort
a big
appear to be holding
together.
and couldinfluence
if you were President
Hypothetically,
the deficit be the first
would
thing
you would
it is
first ones to
I don'tthink
change,
change?
not
banner
the
using deficit
proposed
He proposedsurpluses
to deficits.
we
will
Surpluses
easy
just admit
that
deficit spending
that
in good
spending in
were
strong
only one side of that equation
to create the surpluses when
times
is admit
that
Keynesian
bad
times.
of the
because
The
lack
So what
is just an
are good.
economics
overspending, and overconsuming. We ought to
and the whole concept of
is a debt junkie
government
money,
the
to be
supposed
times; deficitsin
have
ought to do
really
for
up
ever
Keynes
trouble is that
excuse
especially
pick
times.
economic
of political
inflation?
Republican
I don't
collapses.
in the
fact
we
It
up\342\200\224
like having termites in
them until one day
countercyclical
In other
wakes
everybody
It is
saying that people lookat the deficit year after year and
it can't be so bad, the economy is strong,\"
and
one day
No, that's true.
work.
doesn't
you are
And
it
important for Democrats, since they were
of Keynesianism [the advocacy of
to increase employment], to admit that
while
it
programs
government
be
a
real
it
in
world.
doesn't
work
the
great
theory,
may
a deep
federal
the
to think that since it is not a problem now, that
tend
in our lives, but the economy,
be. We expect continuity
the markets,
are more discontinuous than continuous.
Sure. I think
recession. The
as investors
by
budget
of
real
levels
interest
rates
to buy the debt. The
higher
the economy,
try to avoid the recession
by stimulating
essentially
means
won't
the
force behind that
driving
to be driven by
going to be caused
is going
recession is
the
be
inflation
observer,
the coming years?
in mid-1988.]
conducted
What is going to
market
up over
shaping
at record levels of
will be
we
see
of trading.
type
as a long-time
that caveat,
Acknowledging
interview
wrong for my
which
bomb,
Sure. We
but it
it should,
deficit problem isjust a time
shatter the economy?
Are you implying that the
will eventually
certainly
doesn't,
113
Dennis
Richard
is flawed
in practice.
Richard Dennis
114
mean
You
as it is being applied,
himself purported it?
not
Keynesianism
as he
economics
because
the exact
have
you
opposite problem.
Each $1,000 invested would
were closed. [This works out
the
that
you
feel fits
makes
the times and
sense?
some
its
orderly
just
budget
for a
constant
supply
money
a good
probablybe
of deficit spending.We
way, and the federal government
as the states do. At that point,
get rid
to
have
We
adjusted by a
not
on the
would
factor
growth
your
that's
could
give the
when you are as bad as you
Don't be misled by the
mistakes.
equity.
random
Dennis
nature
announced
political
interests
full time,
an aide who
took
with Dennis'
worth $3,833 when the accounts
a 25 percent annual
been more
double
than
lost a very substantial
portion
net worth during your final year of trading. Are these
or exaggerated?
are
I lost about
10 percent
measuredas a
of my
because
to have
rumored
of the
percentage
charitable
Did your poor
money I had
in the
made
of my net worth,
the
and political contributions
trading resultsduring
Focus on
of any
whether
what
single trade's
you
novice trader?
are
ever
It
made
the
past
figure
that at
of your own
true
stories
markets. Of course,
is much higher
over
the years.
year speed
your career
no difference.
going to
Have you really
is right,
I am
gone coldturkey,
his retirement
are doing
not
outcome.
I called with
some
from trading
follow-up
or
are
you still
trading lightly?
day-to-day
at all.
trading
Richard Dennisis one
After
been
to approximately
transitions?
Trade small because
be. Learn from your
in
to retire
idea.
What isthe most important advice you
fluctuations
the deficit in
should
have to balance
Milton Friedman's proposal
need
peak
equity
have
The figure would have
about one year earlier.]
return.
compounded
You
Is there an economic
theory
in your
invested
fared
is fine, it
theory
funds during your final year as a
How
would an investor have done if
manager
poorly.
money
and kept his money
he started on your first day as a money
manager
until
last
in
that
role?
invested
your
fully
day
Individuals who
Keynesian
just doesn't work in the real world. Therefore, we
to the
use it. Besides,
shouldn't
Keynesian economics was a solution
which
was a fair enough
problem of oversaving and underconsumption,
now
attempt to pull us out of the Great Depression. The problem
Even if
and
is the exact opposite: undersaving
overconsumption.
Keynesianism were politically tenable,you still need a different solution
The
115
Richard Dennis
to pursue
questions.
down the questions. Several days later,
follow.
replies. These questionsand answers
he
his
I spoke to
called
commodity traders of our time.
visualize
long
implementing
large
you might
type
near
market
market
bottoms
near
and
short
tops.
positions
positions
large
of trying to pick
It is thus
surprising that Dennis downplays the value
In fact, he claims that such trades have done little,
major turning
points.
He
back
is the
if anything,
of
of the
legendary
trader
to contribute to his
trading
success.
Richard Dennis
116
Dennis believesthat
is to
miss
a major profit
of his profits
95 percent
Missingonly
worst mistakes a trader can make
to his own estimate,
opportunity.
According
have come from only 5 percent of his trades.
one
of the
could have a dramatic
on performance.
As a corollary, you need to guard against
too rigid an opinion on a market, since such
an opinion
could
holding
easily lead to missing a major trend.
One particularly
useful
piece of advice offered by Dennis is that
the
times
when you least want
to think
about trading\342\200\224the losing
a few
such profit opportunities
negative impact
periods\342\200\224are
precisely
the times
when
you
need
to focus
Tudor
Paul
The
Art
of Aggressive
Jones
Trading
most on
trading.
October 1987 was a devastating
stockmarkets
the Tudor
Futures
Fund,
62 percent
incredible
trading style is unique
managers.
money
with
very low
managed
Jones has always been a maverick
trader. His
is uncorrelated with other
his performance
he has done what many
Perhaps most important,
return.
and
combine
impossible:
thought
equity
for most investors as the world
that rivaled 1929.That same month,
by Paul Tudor Jones,registeredan
month
a collapse
witnessed
five consecutive, triple-digit
(I am fudging slightly;
retracements.
return
years
in
1986,
fund realized only a 99.2 percent gain!)
Jones has succeededin every major venture he has tried. He
in his second year grossed over
started
out in the business as a brokerand
in commissions.
In fall 1980, Jones went
to the New York
$1 million
floor trader. Again he was
Cotton Exchangeas an independent
Paul's
during the next few years. His
of his
though was not the magnitude
really impressive
of
his
three
but
the
his
and
performance: During
winnings,
consistency
a half years as a floor trader, he witnessed only one losing month.
In 1984, partially
out of boredom,
and partially
out of fear of
for a pit trader\342\200\224
hazard
eventually losing his voice\342\200\224an occupational
his successful career for a new venture: money
Jones
again abandoned
Futures Fund in September
1984
He
launched
the Tudor
management.
with $1.5 million under management. At the end of October 1988, each
spectacularly
successful,
making
achievement
millions
118
Tudor
Paul
invested in
of money he managed
$1,000
under
this
new
accepting
$17,482, while the total
million. In fact, the
to $330
grown
would have been higher,
but Jones
stopped
funds in October 1987 and has also made
management
investment
that
since
disbursements
was worth
fund
had
Jones
amount
amount
cash
time.
If one believesin cycles\342\200\224as Jones does\342\200\224itappears
for another career change. It is hard to imagine what he
that he
is due
do for an
can
encore.
Jones is a
sergeant.
one-on-one
dramatizes
Mansion,
he
his
shouts
private
3,000-acre
wildlife
has also
made
he
Jones has emulated
New
York
up a fund to finance the college
school
Stuyvesant
section.
More
he is
drill
involved
the
helping
poor
businessman
education
by meeting
he started
recently,
to $5
rich
to aid
working
Joneshad
beautiful
preserve,
fine
avocation.
women,
a second
Eugene Lang by
of eighty-five
elementary
Brooklyn's
economically
depressed BedfordThis is not merely a matter
of donating
money; Jones
endowment has grown
raises money from the
individuals
In private conversation
with the ferocity of a
in
graduates
has become personally
weekly.
orders
His public image is one of a swaggering,
egotistical trader, but
he is easygoing
and unassuming. The media
usually
the flamboyant elements of his lifestyle\342\200\224Chesapeake
Bay
restaurants\342\200\224but
setting
of contrasts.
compendium
as a trader
but
relaxed,
the
Robin
with his
Hood
students
Foundation,
This organization,
and distributes it to private
million.
adopted
true
to its
groups
whose
name,
and
the poor.
for 3:15 P.M.,a time by which all
except for the stock indexes. Even with
I was a little concerned about the practicality
only one market
trading,
of starting
the interview
at that time, since I knew
that
the S&P stock
index futures
contract
was one of Jones' primary
vehicles.
In fact,
trading
I arrived
when
he was in the midst of trading the S&P.
I waited until he finished shouting
orders
over the speakerphone
and explained that I did not want to interrupt
his trading.
\"Maybe we
should delay the interview
until the market closes,\" I suggested.
\"No
he answered,
\"let's go.\"
problem,\"
As it turned out, Jones was not merely
the S&P that
trading
of a huge break
afternoon, he was building
up a major positionin anticipation
in the stock
market. There is an intensity
in Jones'
placement of an order
is reminiscent
that
of a tennis player aggressivelyreturning
a volley.
the
futures
arranged
markets
our interview
are closed,
Paul Tudor
119
Jones
Go, go, go! Are we in? Speak to me!\")Yet, he shifted
and our conversation.
easily
in the business,
about his first tutor
Jones speakswith admiration
the one trait of Tullis that
the legendary cotton trader, Eli Tullis.Perhaps
emotional
made
the greatest impression on Jones washis steel-hard
how Tullis could carry on a polite, relaxedconversation
control. He recalls
without blinking an eye, at the same time his positions were
with visitors,
in the market.
decimated
getting
Jones' casualnessin seeing visitors, talking to his staff, and
at the same time he was trading a heavy S&P
in this interview
participating
in stock
index futures in the
trait. A rally
the
same
reflected
position
loss in Jones'
a
1
million
caused
over
that
minutes
of
$
trading
day
closing
realize
the
market
had
that
I
didn't
so
he
was
Yet,
composed
position.
the closing prices later that day.
moved against him until I checked
at our first
There was insufficient time to completethe interview
notable
were
later.
Two
about
two
weeks
I
returned
things
meeting.
bearish
been
he
had
whereas
about this second meeting. First,
strongly
at the time of our first
conversation,
and heavily short the stock market
in
short-term opinion on the stock market had shifted to bullish
Jones'
on the
market
to follow through
the interim. The failure of the stock
downside at the price and time he had anticipated convinced him that the
market
was headed higher for the short term.
at our second meeting.
\"This market is sold out,\" he emphasized
(\"Buy
300
at even!
between
trading
time span exemplified
in opinion within
a short
success.
He not only
Jones'
that
underlies
the
extreme
trading
flexibility
to
join the other
quickly abandoned his original position,but was willing
This
shift
180-degree
was wrong. (Yes,
side once the evidence indicatedhis initial
projection
well timed.)
his change of heart proved
Second, Jones had suddenly adopteda very cautious tone
and the economy. He was
p \"rtaining to the stock market
regardingprojections
concernedthat
first
being
a second
October
Carthyism. Indeed, there
During
the
Senate
so desperate
to find
dragged
positions
selling wave
major
hearings
villains
up New York
the price
during
is
historical
held
in
the
responsible
to
Stock Exchangeofficials
collapse.
in
the
stock
market\342\200\224the
of financial Mcfor
such concern:
precedence
members
were
committee
1930s,
for the 1929 stock crash that they
lead
1987\342\200\224could
a type
who
had held
long
Paul Tudor
120
that, as
feared
Jones
economic trends, he
might
witch-hunts.
governmental
a
and
speculator
prominent
by a call
from a prominent government official regarding
his
\"You
trading.
wouldn't believe how high-placedthis person
he
to
me
was,\"
explained
in a voice
with
care
not
to
tinged
incredulity, taking
particular
divulge
specific.
anything
Jones remained
Although
interview
was
replaced
prerecordedquality
example, a questionabout trading strategy
front-nmmng^-an illegal practicein which
of the
directness
the
friendly,
by an almost
in his
was met
with
a broker
some
was being
expectation
future congressional
hypothetical
first
replies.
a response
For
about
places his own order
that
overly cautious\342\200\224if not
a true economic crisis
of bad news\"
does
not really
hearing. I thought
paranoid\342\200\224but
would
seem
that
lead
then
to \"killing
again,
Howcomeyou
did you first
get interested in
that
Jones
the
the messengers
far-fetched.
I was
Exchange.
in
college
I read
was primarily
of your
in the
involved
interested
I was
cotton.
merchandising
business,
uncle?
cash side
in
of the
a trader
becoming
straightaway.
How long did you
work
on the
floor of the exchange?What
I was a floor clerk; that is how everybody begins.But
the market to try to figure
analytical work, watching
and
in
York
for about six months
New
I
clerked
tick.
Eli.
work
for
to
New Orleans
Did you
learn a lot
was
your
about
from
trading
I also
then
of
did a lot
out what
made
returned
it
to
Eli?
trade
fabulous experience. He would
market open interest
the entire
sizes of 3,000 contractswhen
position
trader
He would trade more volume than
any cotton
was only 30,000.
off the floor. He was a true sight to behold.
Absolutely. Working
He
trading?
an article on RichardDennis,which
made
a big impression on me. I thought
that Dennis
had the greatest job in the
world. I already had an appreciation for trading
because
my uncle, Billy
was
a
cotton
successful
trader.In
Dunavant,
1976,after I finished
very
college, I went to my uncle and asked him if he could help me get started
as a trader. He sent me to Eli Tullis,
a famous cotton trader, who lived
in New
Orleans.
\"Eli is the best trader I know,\" he told me. I went
down
to see Eli and he offeredme a job on the floor of the New York
Cotton
When
for Eli instead
to work
went
my uncle
Because
Was he
When
121
Jones
job there?
in frontofalarge
customer
order. This reply virtually
on the
bordered
no customer
absurd since Jones handles
orders. It made as much
sense
as a football fan, who bets in his office pool, denying that he took a bribe
the game.
It sounded as if Jones was using
to throw
the interview
as a
forum for making an officialstatement,
to
be
used
as
evidence
perhaps
in
Paul Tudor
future
any
rattled
particularly
of
forecaster
target for
a convenient
make
Jones had been
Jones
Eli was a
trading futures against cashorjust
was a pure
his own
with
broker
thing
speculator. The amazing
on the floor, everyone always
position was. Hewas very
it, I'm going to take them
So everyone
easy
head
to tag.
on.\"
knew his hand?
Definitely.
But,
No.
apparently,
speculating?
it didn't
hurt
him?
Eli's
attitude
was
knew
that since
exactly
was,
he used
what
his
\"The hell with
Paul Tudor Jones
122
Is that
I try.
an
Do you
exception?
try
to
hide
positions?
your
the guys in the pit who
realistically,
know
it
is
me.
years
Everyoneknowswhen
I learned
the market
from Eli is that, ultimately,
But,
or ten
have been there for five
I trade. The one thing
is going to go where it
Paul Tudor
that I
won't have to worry
point
where
position
Any
new
below
at
out of the entire position
getting
will always liquidate half my
half
remaining
the
that point.
beyond
attribute to Tullis?
you can
lessons
other
about
are being hit. I
highs or lows and the
the stops
to go.
is going
So you don't
it is
think
to hide your
important
By watching
positions?
to make an effort. For instance,my orders used to
be particularly
of 300 contracts.
to read because I traded in multiples
easy
Now I break my orders up; I might give one brokeran order for 116 and
another broker an order for 184.1 have at least four brokers in every pit.
it is
important
learn from
that even though
markets
their very best
time to sell. He
look
the best
be a goodtrader,
you
have
to be a contrarian.
You have
that
else did you
I learned
Eli,
is often
are setting new highs, that
they
to some extent, to
in me the idea that,
when
instilled
I think
What
123
Jones
done tensof
of trades.
thousands
Is there any
single trade
out?
stands
Tullis?
1979 cotton market. Onelearns the most from mistakes, not
accounts
a broker back then. We had lots of speculative
of July cotton. The market had been
and I was long about 400 contracts
I was buying
it every
in a range between 82 and 86 cents, and
trading
of
that
to
the
end
low
time it came down
range.
and
One day, the market broke to new lows, took out the stops,
the reason
the
about
30 or 40 points. I thought
rebounded
immediately
so poorly
was because of the price vulnerability
market had been acting
Yes, the
the toughest son of a bitch I ever knew. He taught
me that
to
be
is
able
to
handle
have
and
trading
very competitive
you
getting
your
butt kicked. No matter how you cut it. there are enormous emotional ups
He was
and downs involved.
That
sounds
specifics
like
character-building lesson. What
a general
Tullis taught me about moving volume. When you
have to get out when the market lets you out, not
out. He
taught
me
about
trading?
regarding
if you
that
want
to move
are
when you
a large
size, you
trading
to get
want
position,
you
don't
market is in new high or low ground
because
very little
volume may trade there if it is a turning point.
One thing I learned as a floor trader was that if, for example, the
old high was at 56.80, there are probably
to be a lot of buy
going
stops
at 56.85. If the market
is trading 70 aid, 75 offered,the whole
trading
thJ market, touching off those stops,
ring has a vested interest in buying
wait
and
until the
liquidating
the
into
an upstairs trader,
I put
to cover a positionin
that
stops\342\200\224that
that
together
type
very common ring
with what Eli taught
is a
of situation,
I will
liquidate
As
practice.
want
me.
If I
half
at 75,
so
successes.
I was
implied by the proximity
had been touched off,
I was standing
outside
told my floor broker to bid
He bid 90
big order.
very
came running
across
the certificated
against
against
stock
July
stops. Now
that
the
stops
was ready to rally.
I
the ring at the time. In an act of bravado,
which
at the time was a
82.90 for 100 July,
the Refco broker
for 100, and I remember
the
market
of
the pit screaming, \"Sold!\" Refco owned most
for
time [the type of cotton available
at that
delivery
the contract]. In
the
well-known
of those
I thought
contract,
an
instant
which
contract.
premium to the October
had
formed
that
congestion pattern
to be a market measurement for the
cents was going to equal the width
that they intended to deliver
at about
a 4-cent
then was trading
It also dawned on me that the whole
between 82 and 86 centswas going
I realized
next
of the
break from
4-cent
prior
trading
range].
move
down [the
82
124
Paul Tudor
So you
knew
you
were wrong
Jones
immediately?
Paul Tudor
Jones
70 percent
of their
I saw immediately
Did that
and
of risk?
that the market was going straight
down
to 78 cents,
that
was
blood
to
it
I
there.
had
come in
my
going
carry
400
entered
another
100
as
a
and a final 100
contracts,
long
trade,
day
on that macho-type
bid that I should never have made.
it was
that
Absolutely. I
No,
realized
I realized
How fast
that you
instantly
that I wanted to
instantly
did
you
wanted to be out.
that
be short.
Almost immediately. When
the Refco
broker shouted, \"Sold,\"
everyone
in the ring turned
and looked at me, because they
around
knew
what I
was trying
to do. The guy standing next to me said, \"If you
want to go
to the bathroom,
do it right here.\"Hesaid I looked
three
shades of white.
I rememberturning
then
down
in sixty
did
When
walking
to sell
broker
my
telling
around,
seconds,
only able to
I was
and
you get out
as much
of water,
and
out, getting a drink
as he could. The market was limit-
of the rest of
sell 220 contracts.
market opened 100points lower and I started
the opening bell. I sold only
about
150 contracts
before the
selling from
market
locked
limit-down
the
time
all
I
it
was
over, ended up
again. By
some
contracts
much
as
4
as
cents
below
the
selling
point I first knew
the position was no good.
you
retrospect,
what
reacted
should
First of all, never play
overtrade.
trade,
equityin
My
major
a big hit. In
you
macho
problem
man
was
not
market. Second,never
of points I lost on
contracts relative to the
with the
the
number
was trading
far too many
accounts that I handled. My accounts
but that I
the
you still took
fairly quickly,
have done?
years had you
lost something
the
like 60 to
much
\"I
trading style in
am
longer.\"
terms
not cut out for this
I was so depressed
my
business at that
time?
years.
up to that
successful
been
in the
been
and a half
point?
had made
clients
money, and I was an
important
for my company.
How about someonewho
So everyone
had
given
you $10,000
at the beginning of
period?
three-year
They were probably
The next morning the
Even though
producer
I said,
demoralized.
can hack it
think I
Relatively.Most of
the
position?
your
Had you
your whole
change
was totally
three
about
Only
single trade.
quit.
How many
react?
trade
I don't
I nearly
in that
equity
particular
business;
Soyou
125
up
who was
about
with
threefold.
you
for
a long
time was still ahead of
the
game?
the interim. That
some intensedrawdowns
during
for me. It was at that point that
cotton trade was almost the deal-breaker
risk
I said, \"Mr. Stupid,
everything on one trade? Why not make
why
of
a
life
happinessrather than pain?\"
pursuit
your
I first decided I had to learn discipline and money
That was when
was
a cathartic
It
experience for me, in the sense that I
management.
as a trader, and decided that
to the edge, questioned my very ability
went
to come back and fight. I
I
was determined
I was not going to quit.
and businesslike
decided that I was going to become very
disciplined
Yes, but I had to suffer
about my
trading.
126
Paul
Did your trading
that point
from
radically
change
style
Tudor Jones
Paul Tudor Jones
on?
One aspectof
127
trading
your
Yes.Now
I guess
you not
Quickerand
make myself as happy
against me, I get right
my day trying to
I spend
can be. If I have positions
are going for me, I keep them.
as I
started
only
going
but also
smaller,
trading
relaxed
and
if they
out;
defensive.
where you
are
out before you put
getting
on?
the
are
What
a trade
stop. If it hits
that
I am
number,
out no matter
trade
I don't
interrelated. I
do you
break
look
it
risk on any
by trade.
trade
down
of what
at it in terms
finish each day
not walk in and say,
is to
with
more
\"I am
the
trades
are
morning. My
I have on
is each
started. Tomorrowmorning
S&P
from
264 and
it
closed
goal
I will
at 257
yesterday; therefore, I can stand a rally.\" I always think of it in terms of
being short from the previous night's close.
most
.Bjskcontrol
isjhe
For example,
importanUhmg_jn_trading.
now
I
am
down
about
6k percentfor the monmTTHave
right
a 3\\ percent
stop
on my equity for
never have a double-digit
the
rest
of the
loss
in any
month. I
month.
want
to make
situations
buy
and
sure that I
rules you live
losers.
increase
where
amounts
by?
volume
when you are
your trading
are
well. Never
when
volume
trading
you
your
I don't
For
have
don't
control.
example,
you
is
of money in front of key reports, sincethat
Decrease
not trading.
If you
have
a losing
position
that
is making
you uncomfortable, the
can always get back in.
you
simple: Get out, because
better than a fresh start.
be too concerned about where you
Don't
got into a position. The
or bearish on the
are
bullish
is
whether
relevant
you
question
only
as
last
think
of
position that
night's close.I can
entry
point
your
day. Always
or
\"Are you short
he
will
ask
because
a
rookie
trader
tell
me,
always
on
market
no
his
should
have
I
or
short
am
Whether
bearing
long
long?\"
opinion.Next he will ask (assuming I have told him I am long), \"Where
are you long from?\" Who cares where I am long from. That has no
or bearish
is bullish
environment
the market
relevance to whether
right
balance
of a long position at that moment.
now, or to the risk/reward
rule of trading is to play great defense,not great
The most important
I
assume
offense.
every position I have is wrong. I know
Every day
There
equity
my
than I
short
the
All
in
significant
what.
trade?
single
average
gambling,
solution
much
How
trading
poorly;
trading
risk
a mental
to
Otherwise, I will keep cutting
change my mind, fundamentally.
When I am trading
I
trades.
losing
my position size down as have
I will be trading my
I keep reducing my position size. That way,
poorly,
size when my trading is worst.
smallest
position
Don'tever
have
attempt
making
Do you always know
I
a contrarian
Let's
Until I
quicker?
I am always thinking
about
losing money
Back
in
that
cotton
then,
money.
trade, I had a
vision
of July going to 89 cents and I thought about all the
I was
money
to
make on 400 contracts.
I didn't
think about what
going
I could
lose.
more
as opposed to
style is
say you are looking for a top and go short
turning
points.
then
with
a close stop when the market reaches a new high.You
get
will
times
trade
how
On
a
out.
idea, many
you try to
single
stopped
before
a
you
give
up?
turning point
pick
sell
is very
is nothing
Paul Tudor
128
my stop risk points are going to be. I do that so I can define my
drawdown. Hopefully, I spendthe rest of the day
possible
that
are going in my direction.
If they are going against
positions
where
maximum
enjoying
me, then
you
a game plan for
I have
Don't have an ego. Always
ever feel that you are very
good.
Don't
ability.
Jesse Livermore, one of the greatest
that, in the long run,
you can't
reportedlysaid
was a devastating
quote
that you
idea
The
That is why
a goodtrade,
confident
now
than
I am
more
scared
always
and
you do,
second
The
your
sense of
you were
is a
great
playing
the
into
frightening prospect.
If you make
defense.
uncanny foresight.
it in check.
keep
Aren't
for years.
markets. That
getting
some
have
you
confidence, but
successful
of all time,
speculators
ever win trading
markets
guiding
philosophy is
think
it is because
don't
But you have beenvery
that
yourself
question
like me, just
for someone
can't beat the
my
maintain
Always
because
more
you
before?
now than
I was at
any
point
since I
began trading,
how ephemeral success canbe in this business.
I know
I have to be frightened.
to be successful,
have
hits
My biggest
after I have had a greatperiod and I started
come
to think that I
I recognize
knew
something.
Is it a
your decision-making
process that
allows
you
to get
market
near
What
in
is it
so close
about
to the
turns?
matter of doing a seriesof
Exactly.I consider
I have
market
market
the
until
probes
a premier
and
myself
until
standpoint
That
opportunist.
I
means
a very-low-risk
it from
pursue
repeatedly been
hit it?
you finally
proven wrong,
or until
I change
my viewpoint.
In other words,it makesa better story to say, \"Paul Jones buys the
T-bond market 2 ticksfrom the low,\" rather than, \"On his fifth try,
Paul Jones buys the T-bond market 2 ticksfrom
its low.\"
I think
made at
tops and
strong
views of
the
long-run
direction
of all markets.
I also
I may
short-term horizon for pain. As a result, frequently,
trades from the long side overa period of weeks
in a market
repeated
try
continues
to move lower.
which
a very
is certainly
trader,
turns.
market
the
part of it. The other part
that I believe the very
and you
bottoms
is that
best
meaning
Everyone says you
make all the money
killed
get
by
I have always
is to be
money
catching
trying
to pick
in
the trends
the middle. Well, for twelve years, I have often been missing the meat
a lot of bottoms and tops.
in the
but I have caught
middle,
If you are a trend follower trying to catch the profits in the middle
of a move, you have to use very wide stops. I'm not comfortable
doing
15 percent of the time; the rest of
that. Also, markets trend
about
only
the
time
they move sideways.
What is the most prominent fallacy
in the
public's
perception
about
on Wall
can be manipulated. That there is some group
controls price action in the markets. I can go into any market
create a stir for a day or two, maybe evena week.If I go into a market
markets
That
Street that
and
at
very
that
been a swing
the
have
129
Jones
markets?
My impression is that you often implement
positions
turns. Sometimes your precisionhasbeenuncanny.
I have
Tudor
dead.
are
business.
Paul
develop an idea on
out.
getting
be a hero.
Don't
your
Jones
the right moment, by giving
of a bull market. But,
illusion
just
I stop
second
open
the
a wonderful
to
buy
the
most
buying,
beautiful
summer
clothes,
the
is going
price
Saks
I can create
little gas on the upside,
unless
the market is really sound, the
it a
Fifth
Avenue
to come
down.
right
in Anchorage,
menswear department, but
you will go broke.
unless
You
Alaska,
somebody
can
with
wants
130
Tudor
Paul
do peoplehave
other misconceptions
What
The idea that people
affiliated
with Wall Street know
mother is a classicexample.Shewatches
\"Wall
Street
with
a
takeseverything
almost
fervor.
they
say
religious
you could probably fade \"Wall
in
Who
a point
a winner?
I want to be with
the people who have the best
to
of talking
I will
been bearish
was bullish,
he
day
given
Are
Marty
and
and
Zweig
Prechter is
the
What do you
The
allows
is the
the fact
best
that
seen. Although
bet that
I would
because
track
records.
I make
a great
I had
Wednesday,
the midst
of a $2 advance.The
during that period. Becausehe
news
bullish
oil was
crude
out to be
any market
there
bullish
was
to stall and
started
I knew
was coming
a low-risk
that
instant\342\200\224
of
out
short.I sold
one
the
because
out
the
ultimate
market
is the
champion.
opportunist.
mean by opportunist?
he has
been so successfulis that
Wave theory
the Elliott
incredibly favorable risk/reward opportunities.That
Wave
same reason I attribute
a lot of my own success to the Elliott
reason
one
approach.
to create
does the
best researchon
I don't think
the
well known,
he is
stock
market
he has
received
that I have
the
deserves.
he
Any analysts
you consider
you be
Judge not,
least
Very few
traders
makes
you
I think
overrated?
one
judged.
reached
have
level
your
of achievement.
What
different?
strengths is that I view anything that has happened up
the
present point in time as history. I really don't care about
mistake I made
three seconds ago in the market. What I care about is what
I
am going to do from
the next moment
on. I try to avoid any emotional
I avoid letting my trading opinions be influenced
attachment to a market.
I may have made on the record about a market.
by comments
of my
to the
No
to
loyalty
is obviously
positions
an important element in
your
trading.
It is
is really
what
clean
completely
horizon
to
you a wide open intellectual
in
a
It
allows
to
come
with
happening.
you
in choosing the correct
for that particular
forecast
it gives
because
important
figure out
trade.
are great; BobPrechter
he is
recognition
underrated?
consider
OPEC
hell
advisors that you pay attention to?
Ned Davis
Davis
I think
she
them
last
Then the market
I am going to go flat here.\"
time\342\200\224that
it turned
it was
in
went short.
\"I think
said,
right at that
it,
I know
I never
particularly,
of
oil, while
crude
oil trader
crude
best
a perfect example.Until
give you
on
Ned
My
from
confusing
your own
keep all theseother opinions
vision? Let's say you are bearish on a market and 75 percentof the
do you do?
you talk to about that market are bullish.What
people
wait.
you
something.
How do you
I
advisor
Week\" and
major market on an
about
being on the
to fade
wants
Any
131
Jones
every
virtually
almost daily basis. Are you uncomfortable
oppositeside
of the fence from these people?
Yes.
Paul Tudor
Week.\"
Street
talk to traders
I know you
markets?
the
about
Jones
slate
market.
Has the tremendousgrowth
it
It has
made it
Do you
return if
Without
to trade
difficult
more
tremendously
think
you
question.
you
were
could
trading
of
the
money
at the samelevel
more
you are
managing made
of profitability?
difficult.
a substantially higher
smaller amounts of money?
make
percentage
Paul Tudor
132
Do you
ever
the detrimental
whether
question
outweighs profit
performance
fees
incentive
impact of
earn
you
size
Jones
on your
Paul Tudor
for
foresaw
October
about
that
what happens
Have you
by
your book is
time
the
be interesting
to
funds?
time
Becausethe
ago.
been both a
You have
compare the
jobs?
relative
broker and
a money
and
advantages
manager.
disadvantages
How do you
of these two
record volume day on the downside.
two days before the crash. Our
thing
happened
model
to 1929 had the collapse
nailed. [Paul Jones'
analog
perfectly
analogmodel,developedby his research director, Peter Borish,
the
1980s market over the
1920s
market.
The two markets
superimposed
demonstrateda remarkable
of correlation.
This model wasa key
degree
Do
out
you
of the
keep your
I would say
primarily
that
because
get
my
percent
I believe
in
of my net
that
I am
funds?
own
your
safest place
so defensive
You did extraordinarily well during
traders.
other
was a disaster for many
in
and
in my own funds,
world for it.
the
October1987,a month
Could
you
fill
in
of the
details?
The week of
I
which
some
in
crash
was one
of the most excitingperiodsof
my
life.
in 1929,
stock
Jones'
of
because
dollar
death for
index
We
actually
the
day
its
Treasury
Secretary
no longer support
Germany was the
U.S. would
the
West
with
disagreements
the
kiss
of
cover your short position?
covered
of the
most
that
1987.]
during
trading
market.
the
did you
When
our shorts and
crash itself
of your
somewhat
went
long
on the
close of
[October19].
profits
in
October
due
to your
short stock index
we also had an extremely profitablebond position.The
day of the
crash we put on the biggest bond position we ever had. The bond market
had been acting
all day long on October 19. During
terrible
the day, I
was very concerned about the financial
of
our clients' and our own
safety
assets.We had our assets with various commission houseson the street,
and I thought
those
funds could be in jeopardy.
It was an intolerable
No,
situation
the
was a
position?
that I
conservative
Friday
Baker's weekendstatement
Were
is invested
worth
is the
going to be
back.
money
really believethat
will
85
money
previous
exact same
tool
brokerage business becauseI felt there was a gross
If you are charging a clientcommissionsand he loses
conflict of interest:
aren't
penalized. I went into the money management
money, you
I had not
to be able to say that
if
I
lost
business because
money, I wanted
me a bundle
cost
it
would
for it. In fact,
gotten compensated
probably
Zoo. I never
the
Bronx
out
becauseI have an overhead that would knock
I
win.
I don't get paid unless
because
apologizeto anybody,
I got
you so sure?
made
What
The
Yes, a long
we
19,
see
published.
new investment
accepting
stopped
day. It is going to
every
question
a major stock market
since mid-1986
collapse
of
because
the
plans drawn
up
possibility we
a financial meltdown. When we came in on Monday,
knew that the market
was going to crash that day.
expecting
and had contingency
money?
managing
I think
been
had
We
from
133
Jones
that
for
me.
I kept on thinking:
is the Fed reaction going to be? I thought
What
thev would have to add massive amounts
of liquidity
to create a very
Paul
134
rosy environment,
I couldn't
all day,
poorly
acting
instantaneously.
bond position. During
started to
turn
up,
actions that
take
soon as I saw
the
and
bond
you believe that
more negative times
Do
in
since bonds had
myself
pull the trigger on a long
to
of
act
upsurge
in
October 1987 was an early
bond
prices.
went
wild.
I
faces
the
financial
of my
That
current
of
ahead?
a hundred
one day to tear down something
It takes
to build. If the economy starts to go with
it, it will deteriorate so fast that people's
in my
gut
I know
societies.We
from
it,
but
that
have
is what
studying
We
might
the
heads
kind
it is
of leverage
will spin.
borrowed
time.
great
years
Reagan
I hate to believe
kills all great
sure
that
the
our way
in office by borrowing
the future, and soon we will have
term
his
against
to pay.
but,
cycle
super
responding
fell prey to, whether
civilizations
see any blueprint
I don't
it
the Romans,
was
Spain, eighteenth-century France,or nineteenth-century
that we are going to be in for a period of pain. We
financial
what
Do you
We
one
every
reasons,
What type of realm doesit
I think
Britain.
are
to relearn
going
about.
system under
sun
the
well. It is a very
actually works
I can't tell you
that
sixteenth-century
at all?
systems
trading
tested
have
found
is all
discipline
use
of our
out
macroeconomic forces at work that are
that we don't have any control
over. Perhaps
to the same type of cyclesthat most advanced
there are
Maybe
more
much
into:
fall
and,
we have
amazingly,
but for
system,
good
about it.
trend following?
contrarian?
Trend following.
that
basic premise of the system
If there is a suddenrange
move.
they
The
when
has
been
narrowly,
you get a range
the
very loud, clear signal that
direction
of that expansion.
trading
When
move.
Are you
a portion
trading
human
expansion,
market
is that
expansion
is to try
nature
the market
is getting
of your funds on that
markets move
in a market
to fade that
is sending
price
systemat the
a
you
ready to move in
the
present
time?
Are you blaming
I think
scares me so much.
is what
sharply
made
a deep
is in
that
American Expresscard and
taken out our
essentially
built up.
have taken ten
I think is going to happen.
history that credit eventually
we are going to have a
said
would be great during
economy
into prosperity.
times faster than
that
we can solve our current problems
recession, or even depression?
in which
way
into
dilemma.
obvious
destroyed
135
any
go
part of a larger
we are simply
signal
warning
to
friends.
gets
see
beforewe
As
community,
Everything
Jones
Do you
particularly Wall Street,wasdealt a lifeblow on October 19,but they are in shock and don't realize
threatening
over
the time I got run
by a boat, and my backside was
it. I remember
chewedup by the propeller. My first thought was, \"Dammit, I just ruined
afternoon because I have to get stitched
up.\" Because I was
my Sunday
I
was
until I saw the
cut
how
even
realize
I
didn't
up
badly
in shock,
I think
Paul Tudor
suddenly
Fed was going
a moment,
for
right
bonds
trading,
that the
mind
my
a tremendous
market
been
However,
half hour
last
it clicked
create
would
the
bring
Tudor Jones
the current situation
Reaganomics?
We just started
Reagan madeus feel
in terms
on
of economics,
good
as a
he was the
country\342\200\224and
biggest
that
disaster
is
wonderful\342\200\224
that ever
hoodwinked
us
to cut
system
about six months
ago, and so far
it is
struck.
the deficit, and
I think
by
promising
basically
of
this country. I
the
in
history
on
the
then
went
biggest spending binge
because
with
it,
have
everyone
could
away
don't think a Democrat
gotten
billion
deficit.
a
about
$150-180
would have been very vigilant
he
doing
the
trading
very well.
Do you
feel
a good
A good system may
trader because it has
system can
be
able to
compete with
trade more markets
of unlimited
the advantage
a good
trader?
effectively
computing
a good
After
power.
than
Paul
136
all,
trade decision is
every
otherwise.
or
process\342\200\224human
the
of
product
some
usually
complexity
Tudor
Unequivocally.
move as I will,
can
will
A
good
during
diversify?
help
months;
it is
the
the ease
today
but
same,
percent of the
times as much
a market
time
of the
is
price
a major
in
interview
If the
The following sectionof
the
had
two
reversed
his
bearish.
What made you
later.
weeks
on the
bias
trading
stock
to bullish.
bearish
Two weeks
was conducted
interview
the
Jones
interim,
market from
ago you
were
very
change your
mind?
years?
the perception is going to
other people were hurt,
firm,
because
we had some
knowledge. It is not that we had any unfair knowledge
that
other
didn't have, it is just that we did our homework.
people
People
don't
want
to believe
that anyone can break away
just
from
the crowd
and rise abovemediocrity.
I understand
your
mean besides
I was
that
The first
thing
I
the
Wall
Street
Journal
article
that
you
first
Do you mean that
and
if you
go down.
believe
come second.
fundamentals
were right,
prices should have
enough,
while
similar to a number of other traders
I have
a group of apprenticetraders.What
that,
have
deep
trained
down
gone
When I was twenty-one
years
old, a guy took me under his wing
and it
was the greatest thing
that
ever happened
to me. I felt an obligation
to
do the same thing for other people.
How did you
find
the
people
you trained?
didn't?
Countlessinterviews.
One of the things that Tullis taught me wasthe importance
I trade, I don'tjust use a price stop, I also use a time
of time.
becauseof
the
much
stock
we
market
break.
are diverging
easier availability
from the 1929 modelis
of credit today.
Volvo
We
have
When
a
stop. If I think
I
even
if
am
not
I
will
out
it
often
and
should break,
market
doesn't,
get
According to the 1929 analog model, the market
any money.
losing
This was the first time during the past
should have gone down\342\200\224itdidn't.
three years that we had a serious divergence. I think the strength of the
economy is going to delay the
I believe onereasonwhy
was
motivation?
to the
publicized
didn't
short 2,000 S&P contracts?The market
I
the
railroad
tracks.
do is put my ear to
always
move
that prices
and;they
ten
comments
before the start of our
like you are paranoidbecause
of your
misery in this country
gets
we did well as a
trading
interviewed,
world
preliminary
make it sound
a carfor
a car loan was twenty-four
the final bottom
line will be
the process relative to the
success.
be that
You
Who owns
phase.
trending
During
that!
of credit will delay
cash economy.
your
today
about
of
length
I think
months.
fifty-five
we had a
when
Someof
will catch ten
system
the 15
137
car loans.Think
years ago, the average
Twenty
1920s,
But a goodsystem
Jones
out 120-month
in
a good trader
market
patterns,
interacting and changing
be able to outperform a goodsystem.
defining
Paul
Jones
problem-solving
because of the
However,
Tudor
is giving
How many
About
Have
have
traders
been deluged by
applicants.
you hired?
thirty-five.
they been
Some have
done
successful?
very
well, but
overall we have
had
mixed
success.
Paul Tudor Jones
138
Doyou
is because
that
believe
a good trader?
to be
talent
takes
it
Paul Tudor Jones
most
the
is
What
139
advice you could
important
give
the
average
trader?
I
never
about the
of other
ability
Have
sponsorthe
education
of a
inspired by the \"60
Minutes\"
we had
months
in
thing that really
for its multiplicative
turned
an impact on his family and
We have also recentlyset up
other
potential
have
We are
Foundation.
who are
people
than
part of
so. The markets
have
give back something
I am
right
time,
Is the
positive intensity
of
There
is nothing
the
difficult to hold
more
is all
so I
your
of winning
the
We
poor.
are on
are seeking
no budget at all,
deploy
the
money
the
out
rather
so good to
that
By the
me that
I have
effective-
I should
I feel
obligation
as the pain of
in the
to share.
losing?
a bad
any
time
because
an
incredibly
intense
live
on the
extremes.
you feel
that
feeling of what
success.
only
Jones'
been successful
grace of God, I was
as strong
and losing days
it any
ten
or
fifteen
years
down the
road?
other way.
much
life
trader
from
his start
in
the
business,
but, in the
early years, his performancewas volatile.
It took a traumatic
trading
to permanently
experience
forge the importance of risk control
into
mind. Since that gut-wrenching
cotton trade in 1979, Jones has managed
the
trading day. You feel so low that it is
I could
also have a
head
up. But, if I knew that
the
take
I
would
of
the exhilaration
winning,
gives you
about. Emotionally, you
alive. Trading
who
people
feel a tremendous
winning
worse than
similar experiencein
combination
else.
have
Paul Jones was a winning
Hood
Robin
the
life?
your
been
anybody
called
virtually
I can't say
in return.
better than
right place at
fund
which often do not
become a major
I would say
because
with
I wouldn't
his
net profitability,
while
his risk way down.
bringing
risk control is the essence
of Jones' trading style and
Today,
He never
thinks about what
he might
make on a given trade,but
on what he could lose.
marks
each of his positions to
mentally
excellent
to maintain
program
out and
used to working
can
kids.
a new
food and shelter to
the bureaucracies,
Has this
three
the show, and within
I have always beena big believer
me on about the program was
impact. By helping one kid,you
seek
to
trying
in providing
frontlines
the
set up
area,
after
week
the
sticken
a poverty
Do you still see yourself trading
Eugene Lang?
about
show
The
leverage.
the
group of kids from
own program.
our
particularly
optimistic,
which you have pledged to
in
Program,
to talk to him
I went
Right.
a Dream
One of
to succeed.
people
Was your I
that now.
to believe
starting
that I always tend to be too
is
weaknesses
my
but I am
that before,
thought
He
No matter
market.
how large
a profit
his entry price was the
assures
that there is never
mind
he
may
have in a
position,
in
Since this
a cushion
in his trades, Jones never
approach
about
gets complacent
any of his positions. He not only watches
the risk
of each position,
but he closely monitors the
of his entire
performance
If his total equity
portfolio in real-time.
1 to 2 percent
a
drops
during
well liquidate
all of his positions
single trading session, he might
to cut his risk. \"It is
easier to get back in than to get
instantaneously
always
out,\" he says.
If Jones'trading
starts
reduce his
going poorly, he will continually
size
until
he
is
on
track
position
again. That way, when he is trading his
his smallest.
worst, he is also trading
In any month with net trading
losses, Jones will automatically
reduce
his risk exposure to make sure
he never
a double-digit
loss in a single month. After big
registers
he is particularly cautious about
streaks,
winning
overconfident.
getting
In short, Jones maintains
risk control
in a dozen different
As
ways.
he puts it, \"The most important rule in trading
is: Play great defense, not
great offense.\"
previous
night's
close.
Gary
Bielfeldt
in
Peoria
Yes, They Do TradeT-Bonds
years, I have heard the
in the futures
markets,
players
For
name
BLH
particularly
as one of the
T-bonds, the world's
mentioned
major
largest
BLH was a huge trading
but in
corporation,
best traders, I discoveredthat BLH was
seeking out the country's
individual: Gary Bielfeldt.
basically a single
is Gary
Who
Bielfeldt? Where did he get the capital
to rival the
Wall
as a major force in the T-bond futures
Street institutions
primary
market? Bielfeldt beganhis trading
career
twenty-five
years ago, with a
mere $1,000 investment. At first, his capital was so limited
he confined
a single
himself to trading
corn contract\342\200\224one of the smallest futures
in agricultural
contracts at a time of relative stagnation
prices. From this
modest
Bielfeldt
built
his
account up to
start,
extremely
eventually
futures
staggering
market.
I assumed
proportions.
did he
do it? Bielfeldtdoesnot
in diversification.
believe
His
you pick one area and become expert at it. For
much
of his trading career, the soybean complexand,
to a more minor
that
focal
extent, the related grain markets
provided
point of attention.
the
Bielfeldt
had
desire
to
becomea
full-time
trader
from
Although
the beginning, his tiny capital
base restricted his trading
to a part-time
a small
endeavor. In those early years, he earned his living
running
he faced
withwas how he, a trader
brokerage office. The problem
How
trading
philosophy
is that
Gary Bielfeldt
142
out
a professional
become
his
independent
any
base prompted him to
capital
stake
funds, could develop a sufficient
desire
trader. Bielfeldt's strong
take a large, if
By 1965, Bielfeldt had painstakingly
to $10,000. Based on his fundamental
not
to
this leap in
imprudent,
risk.
up his
built
base
capital
to make
evaluation
initial
$1,000
of the
soybean
by his former agricultural
opinion
believed
Bielfeldt strongly
Hieronymus,
professor,
that prices would go higher.In an all-or-nothing
play, he bought twenty
his
an extremely high-leverage position given
contracts,
soybean
have
would
decline
mere
10-cent
size.
A
account
price
$10,000
decline
out his account, while a considerablysmaller
wiped
completely
a
to
sufficient
would have been
forced-liquidation margin call.
generate
to
close
came perilously
Bielfeldt
and
did move lower,
Initially,
prices
reversed
that damaging margin call. But he held on, and prices eventually
the position, he had more than
to the upside. By the time he liquidated
on that single trade. That trade launched Bielfeldt
doubled his equity
a full-time
trader.
his much
toward
sought after goal of becoming
Bielfeldt built his account with unerring consistency. By the early
to the point that government1980s, Bielfeldt's
trading size had grown
in
the
limits
established speculativeposition
soybean and grain markets
aided
This
an impediment.
factor,
were becoming
by a particularly bad
to shift
his focus
in
Bielfeldt
1983, prompted
tradein the soybean market
no
the
time had
futures
position limit.
to the T-bond
market, which at
in the T-bond
a position limit was eventually
implemented
(Although
in
limit dwarfed the 600-contract limit
contract
market, the 10,000
market, as well as
the
concurring
Thomas
economics
The 1983
happened
bottom
to Bielfeldt.
in
that
soybean loss may have been the best
His shift to T-bonds coincidedwith
market.
T-bond position at
the
He became very bullish
right time. When the
and
T-bond
thing
that
ever
an evolving
built
major
up a huge long
market
exploded
to early 1986 period, Bielfeldtwas perfectly
during the mid-1984
to stay with a major positionfor
positioned to garner
huge profits. His ability
move allowed him to leverage his well-timedtrade to a much
a long-term
have been achieved by most professional
greater degree than would
was
same
initial
with
the
traders
position. This long T-bond position
new
echelon.
him
into
a
That,
and
ever
best
trade
Bielfeldt's
catapulted
trader became a T-bond fucorn
is the story of how a one-lot
in short,
in the
trader
tures
same league as the
most
market
institutional
prominent
participants.
Bielfeldtcould not
a large-scale trader in
from
removed
further
be
the
popular
image
of
One
highly leveraged sphere of futures
trading.
would hardly expect to find one of the world's largest bond traders
in
Peoria.
Bielfeldt's
attachment to his home town
is so strong that he
refusedto consider becoming a trader on the floor of the Chicago Board
of Trade because it would have meant giving up his cherished lifestyle.
He is the epitome of the small town model American citizen: honest,
hard
devoted to family and community. One of Bielfeldt's
working,
of his trading-derived
wealth
major goals has been to plow backa portion
into
benefiting
projects
the
his home town.
I interviewed Bielfeldtin
The huge, wraparound
screens. Despitethis
He rarely
vast
desk
vast
his
of quote
array
machines
furnished office.
comfortably
flanked
was
by ten quote
large,
configuration
array
glanced at the screens
it is hard to visualize
and
office,
of electronics,
during
him
Bielfeldt was low
the afternoon I
trading
frantically
keyed.
spent in
his
at any time, the
notwithstanding.
Bielfeldt is a soft-spokenman of few words. He is also a very
modest
man who consistently hesitated talking
about
his achievements,
lest it sound like bragging. His very conservative nature
led him to avoid
even seeminglyinnocuous
For
at
one
in
subjects.
example,
point
the
discussing
me to
turn
reasons
off my
for his net
losses
trading
tape recorder. I could hardly
in a
given year,
imagine
what
he asked
he might
measure. The off-the-record
out that his trading
lossesin that year were influenced
an overextension
into other
by
his membership
on the Chicago
Board of Trade Board
commitments, including
of Directors,a position
which
required
frequent travel to Chicago.
he
reluctant
be
was
to
because
he did not want to make
Apparently,
quoted
it seem
that he was blaming his other responsibilities\342\200\224which
he deemed
of
his
natural
his
losses.
part
obligations\342\200\224for
trading
The combination of Bielfeldt'slaconicnature,
and
modesty,
this a very difficult
conservatism
made
interview.
In fact, this was the only
interview
I conducted in which
the average length of the questions
was
the
longer than the average
length of the responses. I considered
deleting
interview
from the book\342\200\224a tempting
choice
since I had an excess
say
that
comments
soybeans.)
143
Gary Bielfeldt
necessitated
proved
this
far from
precautionary
shocking.
It
turned
144
Gary
However, I
of material.
character so strong
that
compromise,I weighted
I always
and his
so compelling
the
easy
side
out. As
way
and limited
in
and
analyzing
the
the markets?
trading
since
However,
analysis.
primarily on fundamental
it was very difficult to know all the fundamentals\342\200\224usually
I found
you
it
if you have 80 percent of the pieces\342\200\224I thought
well
are doing pretty
to fall back on in case
was important to have something
my
try
to lean
was
fundamental
analysis
I assume you
wrong.
are referringto
Do you
this
trade
system
in any
as a
analysis
my own trend-following
I developed
Right.
technical
is your
What
primarily
system
as a
supplement.
system.
best
systems a few years ago and found that they
trades. If a system trades
too frequently,
the
generally
transaction costs will be too high, a factor that will significantly
reduce
the probability
of the system working.
I think to be viable, a
has
to
be
medium
to
trend-followingsystem
longerterm. The more sensitive
systems just
too
much
commission.
generate
of an
think
made too many
to
when
get out
the
start
of 1988,1
example?
bond
March
early
you
the
primarily because I was
seemed
to be on target until
At some point,
down.
edging
started
to say you are wrong. In this case,
rationale
for getting out of my losing
that
provided me with
my system
have
What went wrong with
Basically,
thought
October
that
1987
there
stock
would
market
position.
than
words, they
using
their
should
it with their
to combine
half the
trade
own judgment,
just
in
money on a
case
the
working.
I usedto
focus on
pay
my
more
actually
than
factor
I had
left
to systems
attention
than
I do
now. Basically,
I just
your own
been
judgment
working
as well
is more
as they
reliable, or
used
because
to?
anticipated. I
over from
materialized.
haven't
trade?
own judgment.
Is that because
trade?
was a lot stronger
be a bigger fear
crash
isn't
Is that the way you
systems
the economy
good trading
provide an
market
expectinga weaker economy.Everything
when the bond market
learning
systems can
advise anyone who developsa system
own judgment. In other
and the other half
system
was long the
for
approach?
trading
I would
system
At
of these
at some
looked
of a
position.
Can you
have an opinion about systemssoldto the public?
Do you
I
anyone
thing
works.
Besides providing a training
vehicle
habits, do you feel that trend-following
consistent way?
backup to tell me
systems?
can do when starting
out is to learn how a trend
a
trend
for a while will teach
a new trader
system
Trading
system
the
of letting profits run and cutting
losses short. If you can just
principle
learn discipline by using a trend-following
it
system, even temporarily,
will increase your odds of being successful
as a trader.
The
effective
I use the
of trend-following
opinion
a
few excerpts.
basic approach
is your
What
story
reluctant to take
to the narrative
chapter
this
to a
section
interview
Bielfeldt's
found
I was
145
Gary Bielfeldt
Bielfeldt
the
They haven't
people
using
worked as wellas they used to
too many people
them. Whenever
because
there are too many
the same thing,
are doing
146
Bielfeldt
Gary
the market
will
go
of adjustment.
a period
through
Do you
didn't
you
the
the key
are
What
factors you focus on in fundamentally
I turned
The economyis definitely
important
balance, and
the
the
as the
stands out
the time,
at
over
for
twenty-five
years\342\200\224a
other traders. Is thereany
much
that
trade
single
There are
a few
quite
out most prominently
market in 1983 and
stands
that
the bond
When did you
start
was
qualify
to pick
my attempt
the
one
traded
1986,1
questionthat
was
that
auctioned
off five-year
they
in banking since 1974,and at
borrowers for three-year loans
selling at
this was at a time
notes
five-year
level.
Moreover,
in Peoria: Unemployment was
crisis was worsening.I felt that
recession
and the farm
From that point on through
gone high enough.
T-bonds heavily from
the long
side. There is no
ever.
my best trade and longest trend
elements of goodtrading?
are the
What
the bonds?
buy
a bottom
to pick
percent
had probably
rates
of a
height
20
approaching
most
The
I started trying
point where
of
bottom
the
1984.
to
trying
but
as dramatic,
involved
point above that
the
we were at
April
would
1984, when
been
we couldn't find any qualified
Yet here were government
full percentage
interest
trades that
13.93yield.I had
13 percent.
when
longer
dramatic?
most
at a
positioned
got
finally
in May
bullish
really
notes at a
nearlya
than most
time period
most important factor. Four other
expectations, the dollar, the trade
deficit.
budget
been trading
You have
single
inflation
are
elements
remember when you
have to get out?
evaluating
market?
T-bond
147
Bielfeldt
Gary
when
the
were trading
bonds
the
in
63-
winners
thing is to have
rid of your losers.
important
and
getting
a method
for
with your
staying
66 area.
How much risk dia you
is equal
So
from
anywhere
Generally
to 32
if you
ticks.
A
\\ to
1-point
tried to pick
you would bail out
and
when
allow
Vk
move
a spot that
try
on a
putting
points.
point in T-bond
[One
is equal to
looked
and it didn't
work,
spot?
declined into the 50s, I
bonds
had a
few strikes against you
eventually
before
you
finally
guessyou
went long
place.
Yes, there
must
in
losses
over
a period
of time.
you
stay
with a
trend? Howdo you
of taking
profits prematurely?
avoid
position
winning
the
temptation
the
have
right
to learn discipline and patienceis to think through
it on. You need to develop a plan of
thoroughly
putting
for
various
your
strategies
contingencies. That way, you won't
get
news
item
that
hits the market and causes pricesto move
swayed by every
to have a long-term objectivethat you
up or down. Also, it helps
greatly
have derived by really doing your
You combine that longhomework.
term
with a protective stop that you move as the position goes
objective
to
your
way.
Alternatively,
you could use a trend-following
system
I know
way
a trade
signal
when
objective
were several
do to makesure that
the longer-term
Thebest
Right.
Since
do you
to exploit
futures
$1,000 per contract.]
good
again at another
What
trade?
changes,
positions.
before
you should
and
having
you
get
out
of the
a strategy for
greatly increase
the
trade. By
getting
potential
having
out
thought
in case
for staying
out your
the market
in your
trend
winning
148
Why do
Speaking personally, how
most traders lose?
means that
which
overtrade,
They
to be
have
they
right a lot just to
I judge successby
cover
things
commissions.
we
The
most
Second,
to be
is
important
you have to have patience;if you
with
it. Third, you need
stay
able to
and courage comesfrom
a willingness
seem fairly
Those elements
willingnessto
You
any
a losing trade
Can
you talk
get to you
courage to fade that
How do you
judge
him,
stop
if
that
capitalization.
Fifth,
for the
except
In
a trade
loses,
you
handle
can
do the next trade. You
can't
it
major
have
the
courage
175-pound
into him.
the markets. If
in
to be able to participate
and the yen is sharply
dollar,
lower,
consensus
and buy the yen.
it takes
success?
success
do in their field. A
by how well they
success
do and how they
how
well
the
students
judge
by
A
life.
trader
would
he
success
go through
by whether
probably judge
wins or loses in the market.
Most people
teacher
would
will
that
the
When
you
because
selective
were to
as far back as the early
become successful,I would
1970s.
set
up
community.
motivation
it helped.
advice do you
take
if I
think this long-term goal wasan important
success as a trader?
What
to
and
projects
your
Yes,I think
to go
different
evaluating
the idea
about
thought
I had always planned
a foundation to help
Do you
a hands-on
have
set up this foundation?
But I had
1985.
let
by courage?
through the line and a
he has to
of courage
the
mean
you
just fund, or do you
it?
running
My family and I are directly involved in
deciding which ones to fund.
leading to
is running
fullback
linebackerhas to
You need that kind
everyone is bullish
have
you
into the
emotionally.
more about what
If a 260-pound
go
that you
one
in
When did you
come back to
and
problem
adequate
straightforward,
the attitude
have
should
without
to
expound on that?
Can you
lose.
also relatedto
One
of the
the money I accumulate.
have done is to establish
a foundation
so that
some of our successwith the community
by supporting
and I
foundation
relationship
to win.
desire
my
success'.
judge
you
I do with
what
wife
share
could
Is this
that.
you
market,
courage
must
have
Fourth,
you
capitalization.
adequate
that is
to lose;
you need a strong
everyone tells
have a good trade on,
sure
am
discipline\342\200\224I
that
do
various programs.
of a successfultrader?
are the traits
What
149
GaryBielfeldt
GaryBielfeldt
are
it
the
trader?
beginning
out, it is very important
difficult to fight
back.
Most
starting
is very
risks
have for
that are
enough
about
point,
Bielfeldt
too large at
when they
the
beginning.
too far behind
have a tendency
They tend not to be
not
to get
traders
take risks.
judge
At
this
about
the
relevance
reason for keeping
asked me to turn
and
the
application
comments
off
the tape
of poker
off-the-record
recorder. He talked
strategy
was that
to
trading.
His
he didn't want
150
GaryBielfeldt
to contribute to
analogy
record.
the
and
apropos
particularly
to play
between
at a very
poker
of gambling.
finally persuaded him to
Could you explain your analogy
I learnedhow
as a form
of trading
image
father taught
My
age.
it on
the
and poker?
trading
young
I found his
put
Ed
me
the percentage hands. You don't just play every
hand
and
stay through every card, because if you do, you will have a
of losing. You should play the good hands, and
much
higher
probability
of
out
the
the ante. When more of the cards
hands,
forfeiting
drop
poor
are on the table and you have a very strong hand\342\200\224inother words,
when
in
the
feel
are
skewed
and
raise
you
your favor\342\200\224you
percentages
play
that hand to the hilt.
the
concept
If you apply
the
same
principles
of poker
of winning significantly.
of patience in mind by waiting
your
odds
I have
Everybody
always
The portion
an inspiring
Bielfeldt's
interview
between poker and trading.
of Gary
his analogy
compare Bielfeldt's key point
offered
by James
come along.
Rogers:
Have
in
the
this
analogy
patience
most
also interesting to
I found
that
It is
to
to wait
the
advice
similar
for
the
right
They
Want
but to most of the
not only to the public,
must
achievements
Ed
Seykota's
community
In
the
of
traders
our
time.
best
of
the
him
one
rank
as
early 1970s,
certainly
He
and
conceived
firm.
a
hired
was
major brokerage
by
Seykota
commercial
trading system for
computerized
developed the first
as well,
clients'
managing
quite profitable,
trade
to
money
but
impeded
for Seykota
catalyst
is attainable
provides
example of what
story
one
and
an
on
the
hand
on the
given patience
aggressive trading
style
other. Here is an individual
with
a
minuscule
of
amount
who,
starting
of
benefit
staff or elaborate
money,
working independently, and without
most successful traders.
technology, becameone of the world's
Moreover,becauseof his long-term goals and actions, his ultimate
success positively
an entire community.
impacted
insightful
was
What
unknown,
completely
Although
financial
significantly
Bielfeldt's
Gets
it
to trading,
strategy
tried to keep
the
for the right trade, just like
concept
for the percentage hand
in poker.
If a trade doesn't look right,
wait
you
it's precisely
loss;
get out and take a small
you
equivalent to forfeiting
the ante by dropping out
On the other hand,
of a poor hand in poker.
when
in your favor, you should be
the percentages
seem to be strongly
aggressiveand really try to leverage the trade similar to the way you raise
on the good hands in poker.
increases
Seykota
of playing
in the
interference
futures
and
His
markets.
second-guessing
This
its performance.
on his own.
out
system proved
by management
experience provided the
going
years,
Seykota applied his systematized approach
that
and his own money.During
of
accounts
period,
trading
an absolutely
witnessed
astounding
the accounts Seykota managedhave
as of mid-1988, one of his customer
For
rate of return.
example,
was up over 250,000 percent
started with $5,000 in 1972,
which
accounts,
the account
for
withdrawals,
on a cash-on-cashbasis. (Normalized
theoretically was up several million percent.) I know of no other trader
of time.
this track
record over the same length
who has matched
on this
when I first began working
I had never heard of Seykota
times during my interview
book. Seykota's name had come up several
in
as the person who was most influential
of MichaelMarcus
said reflecMarcus
our
After
interview,
successful
trader.
him into a
In
to
transforming
the
ensuing
a handful
152
EdSeykota
\"You
tively,
know,
you really should
Ed
interview
He is not
Seykota.
he is a mind.\"
only a great trader;
Marcus provided an introduction
over
the phone, and I briefly
outlined the concept
of my book to Seykota. Since I was already
out West,
it was most convenientfor me to interview Seykota on the same trip by
to New York via Reno. Seykotawas agreeableto
rerouting my return
but seemed skeptical of my ability
to complete
the interparticipating,
vie w in the space of two hours (the time available in order for me to make
I assured him that, although
it was tight, I had
connections).
my
flight
donea few other interviews in that space of time. \"It is feasible as long
as our conversationremains
I explained.
focused,\"
very
I cut my arrival at the airport extremely close,having
to
forgotten
revise my ticket to reflect the change
in itinerary.
After a vociferous
with
a ticket agent who
insisted
I didn't have enough time to
argument
catch my
she nearly made self-fulfilling\342\200\224I
raced
flight\342\200\224acontention
the
through
airport, reaching the gate with only seconds to spare. By the
I arrived in Reno, the tension from
time
my near-missed
flight had just
about dissipated.
I
a car.
rented
into the
station
mountains
I found
to Seykota's
house was
too far for a cab,so
It was very early morning, and the highway
winding
up
offered
vistas below. The classicalmusic
spectacular
on the
was
combination
The drive
radio
was playing
Mozart's Clarinet Concerto.The
glorious.
borders
Lake
Seykota works from an office in his house, which
Tahoe. Before beginning
the interview,
we took a brief walk
out onto
the beach behind his house. It was a cold, clear morning, and the view
was idyllic. The contrast between his workplaceand my own\342\200\224anoffice
in the Wall Street area,with
a prominent
view of an ugly building\342\200\224could
have been more striking.
I plead
hardly
guilty to jealousy.
In contrast to virtually
all the other traders I had interviewed,
Seykota's deskis not flanked by an array of quote screens, or, for that
even a single screen. His trading
is largely
matter,
confined to the few
minutes
it takes to run his computer
program which generates signalsfor
the
next
day.
of
engineering from
screen,
computer
by one
generated
designed. Yet, in
another
of trading,
human behavior.
would
of
the
when the
moment,
he
psychology
up a three-dimensional
bringing
MIT),
reveal great
many
looking
at things
moment, he could be talking
appear as the consummate
I was
odd
from a unique
about
scientist
analytical
struck by
combination
vantage
the
intensity
I thought. He
At one
point.
and would
techniques
(he holds a
of
degree
in
electrical
diagram on the
he had
programs
conversation turned
and
sensitivity
to the
into
insight
Indeed, in recent years, Seykota has become very involved
to me that psychology, and its
psychology. It appeared
in the
field of
in helping
application
element
important
that
would
Seykota
solve
life than
people
in his
probably
their
find
had
problems,
market
analysis
contrast
this
a more
become
and trading. I suspect
somewhat
artificial, in
are one and the same thing.
and psychology
that to him, trading
as I had intended it to be. In
Our conversation was not as focused
fact, it went off in so many directions that we had barely scratched the
I continued on,
surface
by the time the two hours had elapsed.
it turned out, the flight
As
later
catch
a
that
I
would
flight.
merely
assuming
that I had missed was the last direct one from Reno to New York.
Seykotalater told me that he knew in our first phone conversation
about
perceptive
spending the day. Heis extremely
asked
in
our
one
conversation, Seykota
point
people. For example,at
that
I would
me,
\"How
end up
many
minutes
particularly
question
able to pick up
been
was
also
particularly
fast do
set
you
your
I
watch?\"
found
this
striking in that in our brief time together,he had
on one of my basic character traits. The question
timely, given
my
near-missed
flight
earlier
that
morning.
Seykota's successgoeswell beyond his trading. He impressed me
as someonewho had found meaning in his life, and was living exactly
the life
How
In the
he wanted to be
did
you first
living.
get involved in
late 1960s, I decidedthat
silver
trading?
had to
rise
when
the
U.S. Treasury
to take full
convinced me
margin
stopped selling it. I openeda commodity
While I was waiting,
of my insight.
my broker
advantage
to short some copper. I soon got stopped out and lost some money and
for the start of the big,
So I went back to waiting
virginity.
my trading
Much
the day arrived. I bought.
bull market in silver.
inevitable
Finally,
started falling!
to my amazement and financial detriment, the price
account
In my conversation with Seykota,
both his intelligence and sensitivity\342\200\224an
has a way
153
Ed Seykota
154
Ed Seykota
impossible to me that silver could fall on such a
deal.
Yet the price was falling
and that was a fact. Soonmy
stop
education
about the way markets
got hit. This was a very
stunning
discount news.
I became more and more fascinatedwith how markets
work.
About that time, I saw a letter published by Richard Donchian,
which
that a purely mechanical trend-following system could
implied
beat the markets.
This too seemed impossible to me. So I wrote
to test the theories.
(on punch cards in those
computer programs
days)
his
theories
tested
true.
this
To
I'm
not sure I
Amazingly,
day,
understand why
or whether I really need to. Anyhow,
the markets,
studying
and backing up my opinions
with money, was so fascinating
compared
to my other career opportunities at the time, that I began
full time
trading
for a living.
it seemed
first
At
bullish
What was your first
job?
trading-related
155
Ed Seykota
There was
a reorganization.
through
advantage of the lack
to test trading
systems
by using
the weekends.
during
markets. [Broilersare
with
broiler
chickens
dressed
up to 2\\ pounds
weight.
broilers and eggs have since disappeared
as
waning
trading
activity prompted their
by the parent
delisting
that an entry
level
like
me was
exchanges.] I found it interesting
guy
in charge of dispensing trading
advice.
I once wrote
immediately
placed
an article recommendingthat traders
for a
stay away from the market
while. Management censoredthat comment
from the market letter\342\200\224
because
it didn't promise to motivate
much
likely
trading.
I wanted to start applying
to
the business of analysis.
computers
The
those
in
Remember,
young
for both
markets
futures
computers were
days
devices used for
accounting. The guy who
seemed to see me as a threat
department
repeatedlychasedme off
that
announced
in to
I was
find out
his
going to
why.
It was
turf.
quit.
still
was running
to
After about
his job
a month
the
head
computer
security, and he
at that job, I
of the
talking to me.
I
went
to
for another
brokerage house, which
was
I took
They had an IBM 360
the course
of about a
of four
simple
the same
of data on ten commodities. Today,
systems
results.
I
PC.
on
a
one
They
got my
Anyway,
day
job takes about
from trend-following
there
was a possibility of making
confirmed
money
for
ten years
about
systems.
of systems was not part
What were you actually
I take it that computer
testing
since you did it on weekends.
the week, my normal Clark Kent
onto the Reuters machine when
paper
off the news
for
also responsible
tearing
During
type
of
the
so as to
a smooth
get
The trick
edge. The
would read the news sincethey'd
see the pages. So I started
reading
One bonus of this
to the brokers.
brokers'
trading
BecauseI knew
did,
or what
Why
didn't
funny
have
the
job
in
job was
of your
job,
hired to
do?
to load new
rolls
turned pink. I was
margin
them up
and
hanging
strips
was
to tear
between line-feeds
thing
was
that hardly anyone
to
over the machine
and
news
personally delivering it
was that I got to observe a lot of
to lean way
styles.
Your officialpositionsounds
accept such a menial job?
were an
I wanted
like
to be
in
a glorified
the
business,
office boy.
and I
Why
did
you
didn't care what
I
I got paid.
going
you
pressures
computers
stay at
your original position?At
least
there
you
analyst.
environment. I disapprovedof management
a stultifying
there were no trading
I thought
to recommend trades when
access to the company
allowed
Also, I saw that
being
for testing trading
(my real desire) was a dead issue.
systems
Becauseit was
opportunities.
work
so
computer
accounting
card
department calledme
time he had ever been interested
in
The
the first
punch
typically
the
up a large air conditioned room. Over
variations
half year,I was able to test about a hundred
took
which
on the wall behind the machine.
I landed my first job on Wall Street in the early 1970s as an
analyst
a major brokerage house. I was assignedto cover
the egg and
a lot lessmanagement,
of supervision
156
Ed
could have accessto the computerat
you know that you
job?
Did
new
No,
since
but
most of the
much
of a
What
became
your
the company had just gone through
a major
shake-up and
had been fired, I figured there wouldn't be very
management
bureaucracy to interfere
with
use of
my
the computer.
market
the
As
computerized trading systems?
the
the sugar
market peaked
I developed
money.
program
the
equity
under
in
the
of the
agents
million
was several
management
of money
amount
by several hundred
marketed
was
profitable
of a theoretical
lost
get management
return
money.
They were familiar
was doing everything
already
Richard
with
large
by
to the
disposed
favorably
Also, at
manage money.
from second-guessingthe
and decided not
higher,
developed,
they
came
pullback
they
thought
take
to
signals.
a buy
generated
5 cents. Management
point
systems
trading
to
that
do?
program
trading
signal
that
that
the rule to
couldn't
management
keep
example, I remember one time
for sugar when it was trading
around
the market was already overbought
When
that
they
the
buying
on
market
kept
buy on
would
[100 points equal 1 cent]. When
modified
interference, the most
As a result, instead
quite a few accounts
one of the main reasons
money.
year,
was
me to
change
more
generating
the
would trade more
income. I explainedto
so that it
system
commission
be very easy to make such a change, but doing
seriously impede performance. They didn't seem to care.
that
it would
What did you
do
after
so
you quit?
I just quit the research
accounts. After about
manager.That
shift
commissions,
which
money
but I stayedon as a broker managing
to become a money
I gave up brokerage
from
me to get away
earning
my living from
a
to
can be
counterproductiveincentive
department,
two years,
allowed
I think
for clients.
I switched
a pure
to
profit incentive
fee
Did
you
continue
trading
the system
after you
left?
For
the signal.
up with the rule
have been
arrangement.
The program did fine; the problemwas
program
were
they
were so new
computers
the error
time, he
the
exposure,
of this
because
that
year ended up losing
of 60 percent for the
This type of meddling
wanted
making
How did your
the
although,
concept of using
time,
a pioneer in
at
well\342\200\224a
signal
guess,
might
They compounded
which also would
the other reasons?
Management
would
buzzword.
a great
was
\"computer system\"
the
extent?
who was
Donchian,
trading systems,
hand.
Because of that
trend-following
developing
you to that
As you
point.
quit.
actively,thereby
to support
that
at
of the
I eventually
them
How did you
long
firm, and
dollars\342\200\224a
1970s.
early
as
line was
bottom
What were
The
retracements,
meaningful
any
thereafter.
shortly
sell signal
trade
why
large scale?
without
profitable.
actually
do you mean by
What
commercial
large-scale
system.
trading
computerized
first
the
managed
the
The
managing
accounts
They put
very
research resultsfor
in using my
got interested
management
Eventually,
kept moving higher
100 points. Finally,
and eventually
they changed the rule to 50 points
decided
that it was a bull
around
9
with
cents, they finally
sugar prices
much higher.
before
went
had
and
that
better
market,
buy
prices
they
by ignoring
work on
of your
157
Ed Seykota
Seykota
no
the first
such
the
on going
first
Yes,
although
I substantially
revised the
system
over
the years.
What is the performance track record?
20-
pullback
30-point reaction.
I
my track record other than
customer
accountthat started
is an actual
do
not
publicize
my
\"model
with
$5,000
account,\" which
in 1972 and has
158
EdSeykota
$15 million.
over
made
larger
many
multiples
With
performance
receive
requests,
how come you
and
interviewing
and attitudes
of the client.
found
have
with
been
deluged
accounts. If I do,
to determine
screening
I have
it is
over
methods
can be
dozen back
a half
About
did
you originally
in
the
Were you
of thoseaccountsare still
money
decided
One client
made about
What source
did you
I was inspired and
and
Operator
learn
million
$15
and manage it himself;
to buy a houseon the
another
beach
from
you?
and decided to
over $10
was
your
his
million
and
by the book Reminiscences
Richard Donchian's five- and twenty-day
average crossover system and his weekly rule
system.
Donchian to be one of the guiding lights of technical trading.
What
withdraw
designing your first
influenced
also by
first trading
system?
of a Stock
moving
of
first
system
was a variation
with
trust
that
literature
your original
is for
a trader to
develop a
system?
system?
would work.
systems
trend-following
they don't. Also, it
\"proving\"
sit there and
to just
not
There is
of my
out the
with the
a waste
seemed
to figure
try
of trading
became more confident
with
more
comfortable
I
became
trend, and more ableto ignore the news,
trader
more \"expert
to incorporate
the approach.
Also, as I continued
became more compatible with my trading style.
rules,\"
my system
What is your
My
trading style?
trend following, with
algorithms.
management
is basically
style
recognition and
Without
as I
Eventually,
money
I consider
of Donchian's moving
average
system.
I used an exponential averaging method becauseit was easier to
calculateand
errors tended to disappear overtime. It was so
computational
My
changed. The trick
compatible.
intellect and MIT education
and retire.
before
he is
which
didn't really
made
needed to be
system
system
markets.
Four.
changed
eventually
you
your
rules that didn't
was very simple with hard-and-fast
I found it difficult to stay with the system while
allow for any deviations.
I kept jumping on and off\342\200\224often at just
disregarding my own feelings.
At the time, I
better than the system.
I knew
the wrong time. I thought
start out with?
with
when
know
you
incompatible
original
plenty
How many
the
a
1970s.
early
system impliesthat
to be
need
don't
with
system
the
as
of mouth
word
by
changed?
My
accounts
How did
Systems
get too concerned
they
to a first
the
people I
my performance.
that the
being passed around
it was
system.\"
reference
Your
hindrance.
Howmany
time that
new at the
systems.
rarely accept new
I very
but
159
Seykota
\"expedential
haven't
effects
on
subtle, yet very important,
If, for example, they are able to support me and my
long term, then they tend to help me. If, however,they
with the short-term ups and downs of their
account,
associate
been
requests to manage money?
after considerable
only
motivations
would have
had there
like that,
with word-of-mouth
I do
Theoretically, the total return
been no withdrawals.
Ed
divulging trade
standard
outperform
spectacularly
The key to long-term
money
management
old traders
bold
traders.
old,
There are
secrets, how
survival
have
some
you
trend-following
and
prosperity
special
pattern
been able to
so
systems?
has a lot to
techniques incorporated into the
are bold traders, but
and there
do
technical
there
with
the
system.
are very few
160
EdSeykota
and
Witty
There are
rules; why
I seemto
has
a lot
but the
true,
systems
trend-following
many
have
done so
you
I think
a gift.
have
question remains,albeit
to do with
loving
translated
in
with money
form:
management
much better?
related to my overall philosophy,which
the markets and maintaining
an optimistic
it is
as I keep
Also,
mechanical
part,
follow. SometimesI trade entirely
off
I override the signals based on strong
I always
definition,
sometimes
sometimes I just
quit
The
altogether.
feelings,
trading result of
immediate
and
this
breakeven to somewhat negative. However,
if I didn't
allow myself the freedom
to discharge
my creative side, it
build up to some kind
of blowout.
might
Striking a workable ecology
seemsto promote trading longevity, which is one key to success.
How
would
of systems
you compare the
relative advantages
and
disadvantages
trading versus discretionarytrading?
discretionary. The manager still has to
decide how much risk to accept, which markets to play, and how
and decrease the trading
base as a function
of equity
aggressively to increase
These
decisions
are
more
change.
quite
important\342\200\224often
important
than trade timing.
Systems
is ultimately
trading
Do
systems?
No. All
percentage
over
changed
Over time, I have
more trusting
your
trading
is systems
in
of
more
become more
trend
prevalence of
trend-following
use will doom
their
on some sort of system,
is done
of the
Many
itself is
based on trends.
going.
Companies
Birdsstart
trends
in
for the
south
and alter
trends
track
move
protozoa
Tiny
are basedon following
good systems
conscious.
or not it
whether
their
Life
winter and keep on
accordingly.
products
chemical
along
is
trends.
and luminescence
of trading
systems seems to move in cycles.
successful
will
which
trend-following systems arehighly
during
users
of
number
As
the
increased
their
lead to
system
popularity.
to directionless
and the markets shift from trending
price action,
increases,
The
based? Has this
profitability
Periods
these systems becomeunprofitable,
will
traders
inexperienced
get
that you
already
the
discounted
valuable
key
about using fundamental
read about are typically
price, and I call them
catch on early, before
if you
and
undercapitalized
shaken out. Longevity is the
What are your thoughts
input in trading?
Fundamentals
and
others
to success.
as an
analysis
as the
useless
market has
However,
\"funny-mentals.\"
then you
believe,
might
have
\"surprise-a-mentals.\"
answer
is a bit
technical
analysis?
I am
primarily a
facetious. Doesit
that
imply
you only
use
time?
mechanical,
since
(1)1
have become
and (2) my mechanical
have
programs
\"tricks of the trade.\" I still go through
periods
of thinking I can outperform
but such excursionsare
my own system,
often
through the process of losingmoney.
self-correcting
factored
for
prospects
the growing
think
you
trading
Your
What percentage of
the presentand future
gradients.
the
is probably
around
jumping
What are
them to eventual failure?
is the
trading and learning, my system (that
mechanical
computer version of what I do) keeps evolving. I would add
I consider
that
as a kind of system which,
myself and how I do things
by
attitude.
161
Ed Seykota
trading,
and more
years
twenty
long-term
to
buy
or
Way
down
quite
likely,
trend
In order
trend, (2) the current
sell. Those are the
in very
on balance,
distant
touches
with
trader
of experience.
chart
pattern,
three
fourth
of hunches based on about
of importance
and (3)
place
me
are: (1)
the
picking a goodspot
of my trading.
components
are my fundamental ideas and,
primary
they have
to
cost me
money.
Ed Seykota
162
By picking the right
reaction
at which
point
you
price
major
missing
spot to buy,
will
do
you
If so,
buy?
mean
determining
how do you
will
or
always
will you
I try
to
in
strong
don't try
Can you
wait for shortsometimes buy
a reaction?
am bullish, I neither
already in. I turn bullish
If I
bullish until
buy
at
sell stop is
my
hit.
reaction, nor wait for strength;
the instant my buy stop is hit, and stay
bullish
and not being long is
Being
on a
I am
you
ever use
For example,at
Sometimes.
the speakers
bottom.\"
[The
no,
the
a recent
were bearish. I saidto
market
did indeed rally
Would you
Oh
contrary opinion as an aid
buy
of that
because
trend was
still
down.
goldbug
myself,
after
to
your
conference, virtually
is probably near a
all
it might
is a
great
most
my
dramatic
or emotional
trading experience?
experiences tend to be negative. Pride
peel, as are hope, fear, and greed.
My biggest slip-ups
I got emotionally involved with
after
positions.
emotional
banana
occurredshortly
far
seems
it
to be
pick
Mostly by my
flash
are
elements
and (3) cutting
losses was
first
so many
I also
into
my
in
protective stops so as
hold momentarily and
times
by silver spikes that
I worked
silver,
and
blood
to avoid
then
I started
on myself with
avoidedwalks in
the
full
moon.
will
get
So
working.
your
trades?
although
system,
trading
and override
the
pull my
it would
werewolf.
of
imagery.
positive
my
my system.
elements
of good
losses.
do
any
of good
I
occasionally,
Fortunately,
I don't
an
take
usually
lasting damage to my portfolio.
trading?
losses,
trading are: (1) cutting
If you can follow these three
(2) cutting
rules,
losses,
have
you may
a chance.
What was your
and
and
The
up
short position.
Dramatic
I was some kind
hypnosis
What
lighten
me to
from?
mistakes that you learned
It seemed to get
losses.
getting bear-raided. Naturally,
I got killed
some
more.
collapse
on a big enough positionto
conference.]
get me to
many of my worst
hypnotize me. It inveigled
I tend
years. One of
for silver for
a \"thing\"
impulsive
type of input?
But
trading
specific
as were
How do you
trading?
\"Gold
that
I had
describe
thinking
illogical.
Do
to cut bad tradesas soon
to
After
as possible,forget them, and then move on new opportunities.
I bury a dead trade, I don't like to dig up the details again\342\200\224at least not
after
in print. Maybe someevening,
dinner,
sitting around a fire, off the
the
Tahoe
in
winter...
record,
deep
not to dwell on past situations.
I prefer
that if you are bullish, you
imply
term strength beforeenteringa position,
stories\"?
avoid sometimes
Oh no. If I were buying,
would be above the market.
my point
a
at
which
I
to be
identify
point
expectthe market momentum
the direction of the trade, so as to reduce
risk. I
my probable
to pick a bottom or top.
on
How about someactual \"war
a
moves?
Doesthat
163
Ed Seykota
trading
Howdo you
handle
a losing
streak?
down my activity. I just wait
I handle losing streaks by trimming
a
is emotionally devastating.
to
trade
streak
during
losing
Trying
to play
\"catch
up\"
is lethal.
it out.
Trying
Ed Seykota
164
Since you
system
primarily
no changes
imply
trader, wouldn't
a systems
are
of trading
was
What
worst
single
your
loss?
market\"
\"thin
periods?
losing
during
activity
a
following
165
Ed Seykota
are too thin when I want to get out of a
have, on occasion,moved
hurry.
rapidly
to surprise news. As soon as the news is digested,the
All markets
I have
incorporatedsomelogicinto
the
modulating
trading
need
decisions
important
boundaries, such
some
are at
performance.
so after
is
tendency
to
position
mechanical
to alter my
account
are too
markets
or when
limit
system
for a growing
diversification
I tend
Psychologically,
market behavior. Still,
activity depending on
to be made outsidethe
as how to maintain
positions
my
such as
programs,
computer
depending
activity
when
thin.
on
more aggressiveafter I have been winning, and less
a costly
losses.
seem OK. In contrast,
These tendencies
with
an
even
to
then
over
a
and
emotional
loss
get
try
get
I tend
Most markets
up again at a new level. During the big
moved
from 10 cents to 40 cents, I was
you a self-taught
worthwhile lessons?
Are
have enjoyed the
different?
you
traders
few
Very
What
makes
trader, or did
trader
another
teach
you
who is
trader
a self-taught
my life. I have a
or even a careerchoicefor
both
studying
continually
myself
decide
where
you are getting out
before you get in on a trade?
I normally move
I take
Sometimes,
these stopsin to
trend
continues.
't
me
out
doesn
any
get
profits when a market gets wild. This usually
better than
for my stops to close in, but it does cut down on the
waiting
calm my nerves. Losing a
of the portfolio, which
helps
volatility
position
thousands
[Each
position.
prices
of contracts
cent in sugar
spectacularsuccessyou
have.
protective
at the same time
lock in a profit as the
stops
is aggravating,
whereas
What is the maximum
individual
I intend
nerve
your
percentage of
a trade.
equity
is devastating.
you
will risk
to risk below5 percenton
taken
a thin market to
losses
jump
through
my
stops.
a.
Cut
Ride winners.
on
any
you live
rules
trading
b.
I am
not a casual
a hobby
is what
I
by?
losses.
c. Keep bets small.
d. Follow
the
without
rules
e. Know when
to break
Your last two
rules
break
allowing for poor executions.
news
above that amount when
major
a trade,
What are the
Seriously
trade?
OccasionallyI have
caused
losing
I enter
markets.
my life.
with
do
of the
for trading. It is not merely
passion
me.
There is no question that
this
and
other traders.
Do you
from my love
comes
success
It is
trader.
am supposedto
set
carrying
when
to be
I feel my
I
bull market
and I gaveup several cents getting out of my
is equivalent to $1,120 per contract.]
thickens
market
sugar
position.
overlylarge
I am
bad position in a
me due
against
now,
just get
am
cute because
are
do you
they
are
contradictory.
believe: Followthe rules,or know
when
to
the rules?
I believeboth.
I sometimes
rule. Sometimes
I
which
question.
the rules.
out
ready
more explicit
Mostly
find
I follow
a new
rule
the rules.
which
breaks
As
I keep studying the
and then replaces a
markets,
previous
to a personal breakpoint. When
I
that
happens,
of the markets
and
take
a
vacation
until
I
feel
that
altogether
to follow the rules again. Perhaps
some
day, I will have a
I get
rule
for breaking
rules.
Ed Seykota
166
rules for very long unless they
a breaking
point is reached
their own trading style. Eventually,
reflect
and the trader has to quit or change, or find a new set of rules he can
of a
of evolution and growth
of the process
seems to be part
This
follow.
I don't think
can
traders
follow
trader.
It might
be
though,
if you
the
size
of the
go
something
you
is gut
might be better off
trading
just
\"M.\"
feel?
If ignored, it may come out in subtle ways by
and
meditation
be dealt with through
coloring your logic.
it
be a
then
it
If
behind
it.
what's
determine
might
to
persists,
reflection
it
subtle
information.
of
some
Otherwise,
valuable subconscious
analysis
andl
for
desire
excitement
an
inner
of
sublimation
a
be
dangerous
might
differences
Be sensitive to the subtle
conditions.
not reflect market
It can
and \"into
like
trend
wishing.\"
What was your worst year?
went
wrong?
years was 1980.The bull markets had ended, but I keplt
on
and buy back in at lower prices. The markets
hold
keplt
to
just
trying
I
was
all
so
bear
market
a
seen
I
never
before,
had
major
on breaking.
educational
experience.
setup for an important
1980?
Did
to the
money management
rules in your systemirn
you override them?
of tlue
out
even though my system was largely
to trade
continued
I tried to pick tops and bottomis
markets due to the enormous
volatility.
Thie
markets.
oversold
and
in what I considered grossly overbought
I saw the futility
I
lost
a
lot.
and
on
Eventually,
markets just kept
going
and quit for a while.
of my approach
I
to be
trader?
for
and then
him,
successful
a subset of charting.
trading?
is a
Charting
little
a lot about the physics of tides,
to catch a good wave. You just
have to know
don't
then
have
the drive
to
1987?
October
of the October 1987 crash.I also made
money
and
for the year, as well. I lost on the day after
whole,
the
since I was short the interest rate markets. Most trend
crash,
however,
traders
were likely either out or short stocks and stock indexes during
I made
money on the
for the
month
the
day
as a
crash.
markets different now
because
What
trading
used for
average
the
and fluid dynamics in order
resonance,
have to be able to sense when it's happening and
act at the right time.
Are the
One of my worst
happened
can be
reading
following
You
surfing.
of
What
trader to do his
loves to do.
What was your personalexperience
in
feel is important.
\"intuition\"
a superior
he really
chart
believe
I consider
idea depending on the reason for doing so. Consider,
had a successful modification policy, say \"M\" for
How important
between
That he should find
find
advice you can give
most important
bet?
a good
\"S,\" then
system
changing
trading successis varying
167
is the
What
Do you
How important to
Gut
Ed Seykota
much
the
greater
than
were five to ten years ago
participation by professional
they
current
managers?
No.The
because
they
keep
Does trading
It
without
moving
access to
What
changing\342\200\224just
like
becomemoredifficult
more
becomes
same now as they
are the
markets
difficult
the market.
five to
ten years ago
as
your
size increases?
because it is harder to move large positions
It becomes easier because you have more
competent peopleto
support
do you
mean?
type of support
were
they did then.
you.
of experienced brokerswith professional
attitudes.
Experienced'
traders can be very supportive
there
for sharing
and
by just being
joys
A team
Ed Seykota
Ed Seykota
beginnings
usually
168
sorrows. Also, the
and
moves.I also
endings
friends, associates,and
receive
advisory services?
press or hearing
when
except
of outside
of a lot
track
keep
The stock market
from
they
advisers,mostly
start to
the business
reading
by
break
The services usually
are
headed
for
likely
they
my brokers.
gloat, then
to demand for news about
it is because
even,
trouble.
industry,
is often a
writing
trade. Goodletter
Good traders
traders.
or do you
respond
there are certainly
job
beginning
inexperienced
traders
opinions
of
traders
other
non-
market\" ?
in making
ignore
advice
from
they are on to a \"sure thing.\"
there is a chance of so and so,\"
\"maybe
what
winning as
the
point did you get
a trader?
between(a)\"I can
lucky.\" I sometimesget most
I vacillate
especially the
who
ones
who talk
old-timers,
are often right and early.
The
How
similar are the
Common
patterns
bond prices have
is part
of the
eventually
get
at the
invested
time of
and
down
a wall.
for inflation,
outlook
time.
A
debased\342\200\224like
that
in
the
easily
the dollar, and
on winning,\" and (b) \"I have just been
of my ability just before a major
sweep away the old
it or not. Compute
Christ, compoundedat
gold on
been collected
near
refined,
up,
dug
of all
entropy
lot has
societies
way
has anywhere
nobody
a central world
gold?
in
the
3 percent
per year.
Then
days.
again. The
decrease over
and then buried
to
seems
planet
I project
vaults.
one penny
these
amount
that
order. All
the
trend
as one
toward
gold stash.
Do greattradershave
talent
a special
for trading?
confident
Goodtraders have
good athleteshave
pricepatterns in different
transcend individual
in common
a lot
from itself
from
repeat.
exactly
Gold tends to be
streak.
losing
market behaves differently
differently
long-term
considerwhy
about
confidence that you could keepon
keep
behaves
seldom
geographical
At
the market
understand
rather
trying
trading decisions,
Inflation
other traders,
\"The stock
mean,
you
identifiable
patterns
solo?
completely
operate
usually
believe
would
than
letters.
write
writers
do
stock
The stock market
in the
or
What
currencies
I
of people
lot
think
I don't
futile.
the stockmarket
to understand
trying
also
to understand,
money.
What is your
Do you use the
the markets is a bit
to understand
trying
makes
markets and it
is hard
If this
market.
stock
the
markets?
other
from
from all other
differently
from
any more sense
to understand
music. A
it
they generally
Although
activity.
be handled by
as such may
and
since
market
the
recent
letter
exceptions,
important
a trade.
letters?
market
letters tend to lag behind
Market
behaves
differently
than make
Howabout
side of
stock market behave differently
Does the
behaves
I
to take the other
one around
no
from my
support
important
family.
use any outside
Do you
able to smell the
to be
seem
old-timers
of major
169
market
with
the
markets?
behavior.
way
absorbed
For example,
cockroaches
Unfortunately for cockroach
crawl
followers, there
a special
by the talent.
talent for trading
just as good musicians and
fields. Great traders areoneswho are
for their
talents
They don't have
What is the balancebetween
talent
the
versus
talent\342\200\224the
work
up
is
I don'tknow
where
one
starts and the other
stops.
talent
in trading
has them.
success?
EdSeykota
170
role does luck play
of a
much
How
in
Ed
success?
trading
How about a seriousanswer?
an attitudinal
proclivity
I think most good
One tends to do well at one's calling.
for mastery.
are natural
Some
have
a little extra spark about trading.
traders
people
it is difficult to
or analysts. I think
or salesmen
musicians or painters
for trading.
talent
However, if it is already there, it can be
acquire
and
discovered
\"gift\"
words
are
indicating
developed.
effect has
What
My
or
or \"smarts\"
trading had on your personallife?
life is integrated
personal
with
my
trading
joy of
The joy
of
and
winning
the pain
as the
of losing are right
losing?
there
up
the joy
with
the
you
made
experience, not to avoid it.
overtrade and have
also need to
probably
you
your
this
with
emotions
drama
the
could be
One alternative
is to
to systematically keep reducing risk
during
drawdowns.
That way you approach your safe
equity
money
and have a gentle financial and emotional
asymptotically
touchdown.
keep bets small
and
then
I notice thereisno quote
on your
machine
desk.
Having a quote machineis like having
a slot machine
on your desk\342\200\224
end up feeding it all day
I
you
data
after the close
long.
get my price
each day.
so many
do
traders
fail
in
the
marketplace?
same reasonthat most baby turtles fail to reach
maturity:
Many
and few are chosen. Society works by the attraction
of the
many. As they are culled out, the good ones are left, and the others are
releasedto go try something else until they find their calling. The same
For the
life.
pain of
to emulate his
necessary
would
fired up
simultaneously
burning desire to \"win it right back.\" Acting out
it also seems terribly
However,
exciting.
expensive.
Why
with the pain
joy and pain
of losing. Also to considerare the
to
tend
The relative strengths of these feelings
from his commitment to being
distance of the trader
and
of winning
of not participating.
increase
as intense
winning
be
you
while
wipeouts,
called
are
Is the
171
winnings would
Furthermore,
Some people were
success.
Luck plays an enormous role in trading
and got
smarter
even
while
otherswere
bom
to
be
smart,
enough
lucky
bom lucky.
\"Luck\"
Seykota
a
is true
for
What
can
other
fields of
a losing
pursuit.
trader do to
transform
himself
into
trader?
a winning
trader.
When
your first few million,
A
did you
lock
some
of it away
was a famous
the JesseLivermore
[Livermore
experience?
and
lost several
who
made
twentieth
of
the
century
early
speculator
to avoid
fortunes.]
I
feel
the
had
little
reading
that
then
find
was a function
experience
with the location of his assets.In
Livermore
to do
Jesse
Livermore
a key
when he
used to lock
neededto
get
some of
at them.
his psychology
I remember
fact,
of
his
winnings
Therefore,
and
away and
locking up
losing
A losing
of thing
trader can do little
to transform
himself into a winning
trader.
trader is not going to want to transform himself. That's the kind
winning traders do.
How would
you
and market analysis
the relative
rate
to
successful
importance between psychology
trading?
of analysis and
Psychology motivates the quality
is the driver and
is
the
road map.
Psychology
analysis
puts
it to
use.
focused
have
You
talking to a
winning
or
a lot on the
personwhether
that
Can
psychology.
would
person
you tell by
be a
probably
have
whatever
at
winning
field
excuses
entirely.
life. People' s trading
performance
than
like
would
to admit.
they
I think
for
to
identify
of the most flamboyant
than profits alone; they
excitement. One of
trader
the winning
and
personality?
1.
loves to
He/she
2. He/sheloves
trade; and
to win.
all traders want to
Don't
win?
gets what they want out of the market. Some
peopleseemto like to lose, so they win by losing money.
I know one trader who seems to get in near the start of every
of
move and works his $10 thousand
substantial
bull
up to about a quarter
and
his
he
Then
months.
of
a million in a couple
personality
changes
I
Once
loses it all back again. This process repeats like clockwork.
I
doubled
traded with him, but got out when his personality changed.
I was doing,
I told him what
while he wiped out as usual.
money,
my
I
fee. He just couldn't help himself.
and even paid him a management
to. He gets a
He wouldn't want
don't think he can do it any differently.
his
from
lot of excitement,he gets to be a martyr, he gets sympathy
he
of
attention.
center
the
Also,
he
to
be
may
and
possibly,
friends,
gets
financial
to people if he is on their
plane.
be more comfortable
relating
Win
or
lose,
On some
everybody
level, I think
I think that if
he
getting
that,
on balance,
getting what
they
want, even
all
including
though
they
wants.
he
what
people look deeplyenough
find
they
is really
into
their
trading patterns,
goals, they are
may not understand it
their
really
or want
to
admit it.
A
used her
others
condition
around
of mine
friend
doctor
her.
to
As
demand
tells a
story
attention
an experiment
a cancer
about
and,
in
to dominate
general,
prearranged
with
patient who
her
family,
the
their
breathing,
traders
didn't
is
also playing for
to do goal setting
and subconscious
of traders
in
with
to
order
priorities
pacing,
Surely, some people losebecause
they
want
to
win.
really
is a happy circumstance that
when
she also gives us the means to satisfy
It
lack
traders are
interesting
probably
conscious
a number
her
and align their goals.
I use a combination of
visualization,
gestalt, massage, and so forth.
more
or (2) realize
successful,
usually either (1) get much
really want to be traders in the first place.
examine
hypnosis,
they
the
align
and
are
increase profits
ways to
worked with
I have
profits.
The
best
the
in order to
visualizations
making
probably
avoided
than
their priorities more
reflects
some
that
more
for
playing
do you look
traits
usually been
was available which
would
cure her. She
to avoid appearing for the shot and eventually
her political position was more important
Perhaps
her a shot
told
doctor
found
constantly
it
trader?
losing
traders
Yes, the winning
they are in for years.
What
field of
173
Ed Seykota
EdSeykota
172
skill can get
I sometimes have
market.
Although
uncannilythey
often
someone with
nature
skill
the skill,
lack
gives us
them.
to help
Those
true
even
they
though
burning
who want to
desires,
win
and
them.
to the impending direction of
tend to be very infrequent,
right. Have you had any similar
experiences?
related
dreams
a
these dreams
prove
several peoplewho claim to have market insights
dreams.
during
one of the functions
of dreams is to reconcile information
and
which
the
conscious
mind
finds
intractable.
I
For
instance, once
feelings
told
a lot of my friends that
I expected
silver to keep on going up. When
it went down instead, 1 ignored the
and tried to tell myself it was
signs
corrertion. I stood to lose face and money. I couldn't
just a temporary
to be wrong.
afford
Around that time, I had dreams of being in a big,
I know
I think
shiny,
silver
aircraft
inevitable crash.
short,
and the
that
stalled
I eventually
dreams stopped.
out and started going down toward an
my silver position, even went
dumped
EdSeykota
174
How
judge success?
do you
I don'tjudgesuccess.I celebrate
finding and
following
one's
it.
I think
calling regardless
success has to do with
of financial
gain.
the humor
in Seykota's comments; there is a great
by
wisdom in his pithy replies. For me personally,the most
what they want out of the
comment was: \"Everybody
gets
striking
he was
market.\" When Seykota first made this remark, I thought
I
soon
realizedhe
was
serious.
cute.
But
deadly
My reflexive
merely
being
all
want to
was
disbelief:
It
that
losers
to
this
implies
premise
response
are
who
fall short of their
lose and all winners
(like myself)
goals
inner need for a constrained threshold of success\342\200\224a difficult
fulfillingsome
to swallow. Although
my rigidly
logical mind would
proposition
for
the idea, my respect
dismiss
Seykota's knowledge about
normally
truth of the
and people forces me to considerthe potential
markets
out of the market\342\200\224a most
want
statement that
everybody
gets what they
Don't
deal
be fooled
of serious
provocative
concept.
Hite
Larry
RespectingRisk
Larry
Hite's
interest
in the financial
course,but his path to
Land of Israel.His early
Wall Street
adult
markets was sparkedby a college
was as circuitous
years did
not
offer
as
any
to the
Moses'
clue that
this
was
man headed for eventual major success.First, his academic
was
Then he went
performance
a string of odd jobs,
inauspicious.
through
never
to
hold
for
into a
managing
any
very long. Eventually, he drifted
dual career of actorand screenwriter.
While not recording any major
he managed
to support himself, and enjoyedhiswork.One of his
successes,
movie scripts, which never found
its way into production, was optioned
so often that he began to view it as a source of steady income.
One day, Hite heard H. L. Hunt on the radio describing how he
madehis fortune
which
buying
up lots of cheap oil right
options,
gave
him the opportunity
for occasional
windfall profits with minimal
risk.
That same night,
Hite briefly
met Brian Epstein, the manager
of the
ideas
fused in his mind, leadingto another
career
Beatles,at a party. The two
He
\"Here
is
to
rock
himself,
change.
thought
something [a
promoter]
a minimal
that has the potential for making a lot of money
with
investment.\" Although
he landed a few record contractsfor some of his groups,
none ever reached true stardom.
Once
again, although his success
he managed
was limited,
to earn a satisfactoryliving
in a self- employed
a young
position.
176
Hite
Larry
real interest remained
Hite's
Meanwhile,
\"You often
hear about people
screenwriters.I may
working
in
the
Wall
on
Street
to become
person who ever workedas an actor and
a scriptwriter to pay formy Wall Street career,\" he says jokingly. In 1968,
While fascinated
Hitefinally decided to pursue his primary
interest.
with
he
didn't
have
how
the
futures
the
idea
to
break
into
markets,
slightest
as
a
that
so
he
stockbroker.
Several
he
became
field,
began
years later,
a
the only
be
More than a decade passed before Hite, convinced that he had
learned the ingredients necessary for successful
long-term
trading
the initial steps that led to the ultimate formation of Mint
took
performance,
Investment
He realized that his trading ideas
Company.
Management
needed to be subjectedto rigorous
scientific
testing. With an offer of
who
Matthews,
partnership,
pay, he enlisted Peter
held a Ph.D. in statistics.
One year later, he hired Michael Delman,
a
of
for
a
defenseelectronics
firm.
Matthews
computer systems
designer
own
ideas to the table, but perhaps
and Delman brought their
even more
the mathematical proof that Hite's
significantly, their work provided
were indeed statistically
Hite
is emphatic
sound.
concepts
trading
success
that
Mint's
would not have been possiblewithout
Matthews
and
no immediate
but
atop
We took
clouds.
and finished the
Windows of the World
it was blanketed with
the last ones left in the restaurant
over lunch at
conducted
was
World Trade Center, on
New York's
the
we were
when
hint
office.
in Hite's
interview
a day
get interestedin markets?
How did you first
broker.
commodities
full-time
Our interview
markets.
financial
177
Hite
Larry
I took a businesscourse with a professor
who
To give you an example, he also worked
an audit,
examiner.
One day, before leaving the bank following
The
man
to the bank president and, as a joke, said, \"Got
you!\"
in college,
I was
When
had a trenchant
asa bank
he turned
of humor.
sense
had a heart attack on the spot.
that the bank president had
day,
this
so
of them
most
\"Now
trade
Thesepeople
borrow
somereason,the
whole
The
that.\"
we
craziest
to the
come
one
class
stocks,
market
on only 5 percentmargin\342\200\224and
class laughed, except me.
on 5 percentmargin
of trading
idea
in
all the financial instruments:
he says,
on. Then
of all\342\200\224commodities.
found
and
audit
embezzled$75,000.Anyway,
is reviewing
professor
bonds, and
that, they did another
After
made
For
sense
perfect
tome.
Delman.
Mint's objective
was never
to make
the largest percentage return.
was to aim for the best growth
rate consistent
Hite's
philosophy
with extremely rigorous risk control.It
relative to risk)
that Mint really shines. From
Rather,
1981
through
of over
return
impressive:their
30 percent. But
returns have
60 percent.Their
only 15 percentand
calendar
Mint
annual
of plus
a best
mid-1988,
under
the
an average
registered
it
this perspective (return
of trading
inception
is in
is their
consistency
ranged from
largest
1 percent
loss
a worst
in
any
Not
in
April
annual compounded
that is most
of plus
six-month
in any twelve-month
13 percentto
period
period
(not
was
just
years).
Not
surprisingly,
Mint's
stellar
performance
has resulted in
a
under management. In April 1981, they began
with
over $800 million.
$2 million;
trading
today, they manage
is no evidence that
there
the surge
of money under
Significantly,
management
has had any deleterious effect on performance.Hite believes
that
spectacular
Mint
growth
of equity
can ultimately
for a futures
fund.
manage $2 billion\342\200\224an
unprecedentedly
When did you
large
sum
until
many
weekend,there
years later.
Although
I was
three
were
groups I managed
change careersand
were
pursue
I was a
rock
promoter
separate shootings
I decided it was
working.
my true
really interested
in
markets?
in the financial
get involved
first
interest\342\200\224the
futures,
I didn't
at the
in
time, and on one
markets.
financial
have
the
time to
at which
clubs
an opportune
any
idea
how
to
look for a job in that field. So I decided I would start out as a stockbroker.
Street
was with a very old-line Wall
firm, with
My first interview
hushed
tones.
The
made
feel
in
offices that
like you should
speak
you
who
interviewed
me was the kind of guy [he adopts a pompously
man
who talks with his teeth together and lives in Connecticut.
refined
voice]
He tells me, \"We only
buy blue chips for our clients.\"
with
the term
I was unfamiliar
Not having
a financial
background,
odd to me in the context of a staid investment
\"blue chip,\" but it sounded
I found that the
So after the interview, I looked up its derivation.
firm.
Larry Hite
178
of the
origin
in
Monte
all
be tracedto the
said to myself, \"Aha,
term could
Carlo. I
I threw
about\342\200\224gambling.\"
[Principlesof Security
considered
Analysis,
market analysis] and bought
came away with the idea that successful
if
methods
could
that
beat
that
game
you
I
Dealer.
the
was really a matter
could find and test
at $207. It eventually dropped to
stockcalledTexasInstruments
trading
$49, a decline of 77 percent. If you think we have gotten more
sophisticatedin the
1980s, all you have to do is look at silver prices, which in
fell to $5, a 90 percent
1980 reached a peak of $50 and subsequently
decline.
develop methods to
would
I was trying
have noticedthat
is poor.
I understood
try
it all then,
are inefficient.
to explain
to do was futile,
everyone
He argued
so could
who
that
others, and
to me,
because
but
we
the years
I have a
have done
it would
in the
will perform
system
as if
me that
is an
the
child, why
are efficient.\" I
markets
could develop a winning
would all cancel each
past
future.
you
use
test a
can
and get a fairly
good
That
is our edge.
system and see
of how
idea
that
it
can change and
the markets
that
possible
the
future
When we
were
will
be
past?
I came to
to a
talking
the
in
same, if you
the
put
who
friend
\"the markets
has ever told
if I
over
are the
The point is that because
people
methods
to
avoid
hindsight,
rigorous
sufficiently
Isn't
markets
the
economist. He
computer,
is
how
you could
that
by
called Beat
odds,
this
very different from the
I don't know
realize that
efficient
the
what
of Graham and Dodd
many to be the \"bible\"
investment
compute
the market.
What made you believe
odds in your favor?
what
a book
could
you
most expensivechip
I know
now
my copy
away
of stock
of odds,and
of the
color
179
Larry Hite
system
are
on a
other out.
The
markets
may change,
testing
stage, before
partner
Michael
periods
as a measure
we
but
started
actually
came
Delman
won't.
people
up
managing
the
with
concept
any money, my
of using holding
of system performance.Evaluating
on a calendar year basis is very arbitrary.
are the odds for profitableperformance
What
in the
still
solely
systems
you really
to know
want
in a holding period of any length.
simulations, Peter determinedthat 90 percent of all the six- month
and 100
97 percent of the twelve-month
periods,
periods,
holding
After
over seven
would
be
the
of
percent
profitable.
periods
eighteen-month
to
be
90
turned
out
percent, 99
yearsof actual trading, the numbers
In our
is wrong
What
with that argument?
Becausepeopledevelop
and people will make mistakes. Some
systems
or
from
to system as each one has a
system
jump
system
Others
will
be
unable
to
resist second-guessing the
losing period.
I go to a money management
Whenever
conference
and sit
trading signals.
down with a group to have some drinks
at night,
I always hear the same
story. \"My system worked great,but I just didn't take the gold trade, and
that would have been my biggest
winner.\"
There is a very important
here: People don't change.That
message
is why this whole game works.In 1637,
tulips in Holland traded for 5,500
florins
and then crashed
to 50, a 99 percent
loss.
Well, you might say,
will
alter
their
then; these people were primitive;
was
still
in
its
capitalism
infancy. Today we are much more
sophisticated.\" So
a stock
like Air Reduction which
you go to 1929 and find
traded
at a high of $233 and after the crash fell to $31, a decline of 87
percent.OK, you might say, \"The Roaring '20s were crazy times, but
now things are surely
different.\"
ahead to 1961 and you find a
Move
\"Trading
was
relatively
new
percent,
100 percent.
and
I
tell
will
evaluation
you
process.
a colonel
the
I
the future validity of our
works for us who used to be
of
am
is a fellow who
army. His service specialty
in the British
all over
bombs
how confident
There
I asked
world.
him,
\"How
did
was
dismantling
you do it?\" \"It wasn't
of bombs; a bomb in
East. You go there and
that difficult,\" he says. \"There are different
styles
is different from a bomb in the Middle
Malaysia
see what kind of bomb it is and take it apart.\" I said, \"Let me
What happens
question.
know?\" He
looks me in
when
the
hope it is not your
I came into the office
and
impression
individual
turned
virtually
out
that
dramaticallyreversed
you
eye and
come
says,
across
\"You
a bomb
record
that,
your
ask you
you
a
don't
first
last.\"
this same steel-nerved
and found
him
what was wrong. It
brink of tears. I asked
which
the Fed had made a major policy change,
our
which
market
trends.
fund,
Overnight,
many major
on the
one day
Larry Hite
180
had fallen back to
had gone from a starting value of $10 to nearly
$15,
a major Swiss bank as an account.
under $12, just after he had opened
on the phone.\" \"What?\"
he asked
them
somewhat
I told him, \"Get
and emphatically],
\"G-e-t
confused. I repeated[speakingmore
slowly
t-h-e-m o-n
when
they
you
p-h-o-n-e.\"
So I get the
show that
this
of event
in nine
tone. I assured
Well, the
immediately
clients.How
What
makes
what
will
that
this
tomorrow,
long
The insurance
will
be
alive
olds, you
can
one year
later.
work
and
up on
their
investment,
I
those
while
you can have a very
high.
my
own
surprised
fund
of our biggest
systems were about.
you may not know
and the
idea
good
business providesa
perfect
However,if you
estimate of how
do the same thing;
sense, we are trading
we
analogy.
idea what
take
many
let the
the
what will
Take one sixtyare that he
odds
100,000
sixty-yearbe alive
of them will
law of
large numbers
same.
bad will ever
is that,
while you
can't
you
a friend
your
happen to you. Second,if
quantify
me
lifestyle, from a
two
trading
you
know
freedom.
gives
you tremendous
can
reward,
you
quantify risk.
this advice
is. One of the
example how important
world's
coffee traders invited
me to his house in London.
When
largest
I walked into his library, I noticed he had just about every bookever
written on power.
He took me to one of the finest
I have ever
restaurants
beenat. At dinner, he asked me, \"Larry, how can you know more about
coffee than me? I am the largest trader in the world. I know where the
boats
\"You are right,\" I answered, \"I don't
are; I know the ministers.\"
know anything about coffee. In fact, I don'teven
drink
it.\" \"How do you
\"
trade
it then?\" he asked. I told
I just look at the risk.\"
Well
this
him,
I did,
great meal lasted for severalhours. Five times he asked me what
and five times I told him that I managed the risk.
you an
give
Three months
that he had blown $100 million
in the
market. He obviously didn't get the message.
And you want to
know something? He doesknow
more
about coffee than I do. But
the
point is, he didn't look at the risk.
I heard
later
coffee
actuaries.
friend who went broke trading futures. He can't understand
I can trade by following
a computerized
how
system religiously. We
how
were
tennis one day and he askedme, \"Larry,
can you trade
playing
I told him, \"I don't
trade for excitement;
the
way you do; isn't it boring?\"
I trade to win.\" It may be very dull, but it is also very lucrative. When I
start
war stories
with other traders and they
exchanging
get together
I
To
all
are the
have
to
our
trades
about different
me,
trades,
nothing
say.
I have a
The truth
I will
is one
account
that
you have absolutely no
We
in a
asked
he
that?\"
add to
that
bet
never
information
what
I have
you can be wrong.
of $100 million. He taught
in excess
you
to
average?
industry
know. No matter
are doing,
you
possible outcomeis, it
what the worst
run.
one year later.
get an excellent
for us. In a
some money to
up. Today
what
so sure? I knew
business so fabulous is that,
happen
happen over the
nothing
the
above
we don't
that
what
who has amassed a fortune
lessons. First, if
simulations
to a new
be back
will
fund
did
really
straight
I be
could
year-old guy
the
our
that
once every few years and
ratios far
achieve return/risk
basic
I did.
doubled
account
shot
months
\"You
fund.\"
him
will occur
just borrowed
have
\"I
phone and explain
on the
account
in the
investment
systems.
standpoint,
type
am confident that
\"In fact,\" I said,
systems\342\200\224and quite
have, no matter
trade?\"
in that
are many money managers who
use
trend-following
a few of those don't second-guess
their own
What
Mint different?
makes
How have you been able
There
Because we know
a broker,my boss taught me that if you don't call your
when he is losing money, someoneelsewill.
to be honest,
And,
I was a broker, I did the
same
thing. When I called prospectsand
about their broker, I would
say, \"Oh, how could he put
complained
I was
When
client
t-h-e
181
Hite
Larry
percent
So the very first
of total equity
is absolutely
account
that
critical.For
withdrew
his position
size in
the
money.
we live by at
any trade.
By
Mint is: Neverriskmore
trade. Keeping
example,
half the
this
risking
only
your
1 percent,
than
1
1 am
small and constant
I know had a large
risk
one manager
money he was trading.
Instead
the
same
of cutting
number of
manager kept trading
of the original money became lOpercent
Risk is a no-fooling-around game; it does not allow for
contracts. Eventually,
of
on
individual
to any
indifferent
rule
half,
that
half
182
Hite
Larry
If you
mistakes.
do not
the risk,
manage
eventually
they
will
carry
out.
you
we do at Mint is that
we always
follow the trends
deviate from our methods.In fact, we have a written
agreement that
none of us can ever countermand
our system.
The trades are
all the same. That is the reason why we have never had a bad trade at
Mint.
There are really four
kinds
of trades or bets: good bets,bad bets,
and
bets.Most
bets,
winning
losing
peoplethink that a losing trade was
a bad bet.That is absolutely wrong. You can lose money
even
on a good
bet. If the odds on a bet are 50/50 and the payoff
is $2 versus a $1 risk,
that
is a good bet even if you
lose.
The important point is that if you do
or bets, eventually
enough of those trades
you have to come out ahead.
The third thing we do to reduce
risk is diversify. We diversify
in
two ways. First, we probably trade
more
markets
worldwide
than any
other
best system.
money
manager. Second, we don't just use a single
To provide balance,we uselots of different systems
ranging from short
term
to long term. Some of thesesystems
not
be
that good by
may
we really don't care; that is not what
themselves, but
they are there for.
The
fourth
thing Mint does to manage risk is track volatility.
When
the volatility
of a market becomes so great that it adversely skews the
return/risk
expected
ratio, we will stop trading that market.
we never
Essentially, our approachhas three
acceptance
of
When
the
signal,
but
trading
signals.
When
light
is yellow,
we will
we will
we liquidate
not
put
existing
on
the
light
liquidate
a new
positions
lights
position.
in determining
the
is green, we take all signals.
an existing position on a
Finally,
automatically,
when
and we
the light
do not
take
is red,
any
new positions.
back
For example,in
to $1.00, we got
of the key differencesbetweenyou and other trend-following
is that you have developeda way of defining when not to
So one
managers
The secondthing
and
183
Hite
Larry
1986,
when
coffee went
from $1.30 to
$2.80
and
long positions on the way up at $1.70
and didn't trade the market
for the rest of the price
climb and subsequent
collapse. Now, while we may have lost some additional profits, being
of markets
out
like that is one of the ways we are able to achieve such
out
of our
play?
In
any
of players:the
you
weakest
the
player\342\200\224even
a positional
can define
advantage for any
one. In trading, you can define three categories
The trade has the best
the floor, and the speculator.
For
and the best ways of getting out of positions.
or game,
situation
trade,
knowledge
in the
if they are caught in a bad position
example,
can offset their risk in the cash market. The floor
product
speed. You can never
have
doesn't
when
odds
the
faster
be
knowledge
product
than the
or the
markets,
has
the advantage
can
choose
trading a market.How
to stop
determine
your
Anywhere
from ten to
When
say ten
to be
mean
frames within
you
or do you
We look
at
to only
bet
signal
use
to
filter?
volatility
100 days.
to 100, are you trying
you use different time
different
of
advantage.
positional
as a
before that you used increasedvolatility
data
do
of
you
past
many
days
You mentioned
they
the
floor. While
speculator
speed, he doeshave the
having to play. The speculator
are in his favor. That is an important
not
of
advantage
the
futures
time
windows
deliberately
that
ambiguous
range?
in that range.
1 percent stop-loss rule.
are stoppedout of a
However,
my
question
position without
the system providing an oppositesignal,* what
gets you
direction?
back into the trade if the market reversesto its original
that you could get stopped out on a moderate
Isn't it possible
price
reaction and then miss a subsequent
major move?
I
understand
fully
the
one
rigid risk control.
If the
market
makes
a new
of your
is: Once you
logic
high, we get back in.
rule without
out on a money management
if a long position is stopped
in
and no buy
a
mode
will
still
the
be
long
system
actually being generated,
signal
a sell signal were
no matter how high prices go. (If, however,
signal will be generated,
generated, the system would begin monitoring for a buy signal.)
*For
a sell
example,
184
Larry Hite
But suppose that
not
you
get continuously
the position
reentering
That
happens,
You
have
events
personal
goes into
market
the
but not
a wide trading
range,might
whipped between beingstopped
at new highs?
enough to be
risk. Were
there
ingrained you
became involved
bellies
pork
bought
always made
put
the
At
know
a profit.
in September and sold them
So I formed
a fund with
about
anything
before
that if you
you almost
July,
a group
I felt
I doubledthe money.
I had a friend who followedthe
time,
I have
I noticed
commodities,
It worked.
this trade.
on
in
corn
of friends, and
like a genius.
I didn't
market.
pork bellies.Hetalked
the old crop. Since this
that I was offsetting
my
I only knew about
corn;
I
me
buying the new crop com and selling
was
to be a relatively
safe
supposed
trade, in
long
with
a short position in another
position in one contract month
I
month,
the government
really loaded up. Shortly
thereafter,
released a
In response, the month
estimate.
surprising
I was long went
crop
limit-down
and the month I was short
went
limit-up.
into
I was
and
such
in
literally
getting
I don't care how
At
debit.\"
remember
walking
out
to the
stairway
on my knees and saying
out loud, \"Dear God,
I lose, but please don't let the account
go into a
I was working
I was making
for
a sophisticated
providential
my
the staircase.
down
walking
much
the time,
and just as
that I
despair
down
To
this
day,
international firm,
plea, a Swiss
I still wonder what
banker came
he must
have
thought.
Were there
failure
to
other
personal
market
risk?
any
heed
traumatic
experiences
caused by a
was
father
into
option
Well, he
witnessed
failure
you.
but
examples
to respect
throughout
of other
risk. If you
my financial
people
don't
that
take
career, I have
I have
a hard
known being
look at risk,
ruined
it
will
by
take
a
the
with
are
example\342\200\224you
who owns
$1,000
in
$20,000
started
estate he bought
may have beena great
\"I am
me,
not
right to me. Besides,almost
Not only didn't he take the
Sure enough,
\"The
market
the
market
he didn't
Well,
Now he lives in
made
that
system
sell
turned
but he
arbitrageur,
the
taking
in England.
signal
in gold;
it
signals arewrong
50 percent
of the
signal,
he actually
down.
I told him, \"Get
back.\"
out, and he lost the
box on a streetwith
to be
money. One day
sell
went
out
wound
up
out!\"
doesn't
look
anyway.\"
going
but
long.
he
will come
get
a rented
mansion
a hundred
and everything
else.
other ticky-tacky
houses. To this day, I still remember the name of his estate: \"Beverly.\"
He is still one of my best friends, and his loss of that huge house had an
all
on me. He had it and lost it all! And
enormous emotionalimpact
he
his
followed
if
he
had
is
that
The
system,
trade.
of
one
because
irony
would
have
made
a fortune on
that
trade.
a cousinwho turned $5,000 into
$100,000 in the option market. One day I askedhim, \"How did you do
\"It is very easy. I buy an option and if it goes up, I stay
He answered,
it?\"
I am at least even.\"I told him,
in, but if it goes down, I don't get out until
is just not going
that strategy
and I can tell you
\"Look, I trade for a living,
I will
tell
you
another
story.
I have
have
it doesn't
in the long run.\" He said, \"Larry, don't worry,
I am doing.
what
a million. I know
the long run, just till I make
I just nevertake a loss.\" I said, \"OK...\"
worth of Merrill Lynch options,
In his next trade he buys $90,000
and
down, and down. I talk to him about
it
this time,
down,
to work
continually
who
at a palatial
him
to work
Not for myself,
guy
trader. He developeda trading
he saidto
insisted,
sake of
the
as the
from very humble beginnings;his
he is a very bright
guy and he got
a sanitation man. Anyway,
a fortune. I
made
at
it
and
He was extremely good
arbitrage.
a goodfriend
remembervisiting
a bad
for
when
silver.
of
worth
up
risk position
same
the
exactly
I first
these numbers
making
that
attitude?
When
an older friend
you are on
The same lesson
I had
motorcycle,
me, \"Larry,
who would always get into fights.
a motorcycle,never argue with a car. You will lose.\"
will lose.
If you argue with the market, you
applies to trading:
once asked
Somebody
The Hunt brothers are a perfect
example.
Let's say
me, \"How could the Hunts lose? They were worth billions.\"
of silver\342\200\224Iam
worth
you have a billion dollars,and you buy $20 billion
any
with
first
He told
a problem.
an incredibly
strong respect for
in your trading career that
a kid and got my
I was
When
and
out
185
Larry Hite
only
in
goes
186
Hite
Larry
later, and he tells me he is in debt for $10,000.1 said, \"Wait
a minute.
You had $100,000 and you bought
in options. That
$90,000
should still leave you with $10,000, even after they expired
worthless.
How could you have a deficit of $10,000?\"He said,\"I originally
bought
the options at $4k. When
the price went down to $1,1 figured out that if
I bought another 20,000, all it had to do was go back to $2^ for me to
break even. So I went to the bank and borrowed $10,000.\"
it applies
to any type
Respectfor risk is not just a matter of trading;
of businessdecision.I once worked for a firm where the company
one
month
president,
stable. One day
a losing
hired an option trader who was brilliant,
nice guy,
a very
the
position.
trader
option
The
but
not
disappeared,
leaving the firm stuck with
was not a trader, and he sought
my
president
I should
think
do?\" I told him, \"Just get out of
the position.\" Instead,he decidedto hold on to the trade. The lossgot a
little worse, but then
the market
came back, and he liquidated the
advice.
position
at a
small profit.
After
this
answered,\"We
middle of
a mine
it. He
now
little
out,
have to
that
thinks
in options
for
small
another
find
job.\"
same firm,
\"Why?\" he
asked. I
man who has just found
himself
in the
he did was close his eyes and walk
through
whenever
of a mine field,
you are in the middle
what
is to
man
close your eyes and go forward.
Less
had to liquidate a huge delta neutral
[a balancedposition
price moves
to get out
liquidating that
he decided
he finished
friend who worked at the
for a
work
field, and
the proper technique
year later, this same
position
I told a
incident,
are going to
we
\"Bob,
do you
what
\"Larry,
in
whose
either
of the
he
one
spread
will change very
of just getting
at a time. By the time
had gone through
all of the firm's
direction].
position
position,
value
than
Instead
one leg
capital.
Besides errors in risk control,why
of
people
lose money
trading?
name
the
Obviously,
are based on a personalbias,instead
trades
of
For
there
is a regular panelist on \"Wall
approach.
example,
Street
Week\" who is about sixty-five or seventy
old. On the show
years
one day, he said that the lesson his father taught him was, \"Bonds are
the cornerstoneof your portfolio.\" Think about that! Since this man first
he has seen interest rates go down
once out
got into the business,
only
a statistical
a very
You trade
wide
rates decline.]
the reality.
go up when interest
a lot more to him
variety
than
Do you trade them
of markets.
all
the
same way?
We don't trade
our marketing
of
this firm
money. Mickey Quenington, who is
introduced me to a former chief executive
to which Hite gave 50 percent
firm
we trade
markets,
once
director,
[E. F. Man, the
for financial
backing].
company in exchange
\"How
do you
asked
and
he
Irishman
me,
old
guy
I answered, \"They
between
differentiate
gold and cocoa in your trading?\"
He
He
was outraged.
me.\"
to
are
the
same
are both a 1 percent bet; they
see
me
that
don't
tell
to
mean
shouted back at me, \"You
you
practically
I think if it wasn't for the fact
any difference between gold and cocoa?\"
he would
have thrown me out of his
that he liked Mickey so much,
ownershipin
This
his management
was a tough,
office.
is always concerned
once
interviewed by a
family
the
about
me what I thought
asked
who
the
London
from
Times,
reporter
I don't
cocoa market. I told him, \"Frankly,
future direction of the London
I was the last person
and
see markets; I see risks,rewards,
money.\"
finished
it by saying, \"Mr. Hite doesn't care
article.
He
in
that
quoted
the cocoa
about
My wife read the
market, all he cares about is money.\"
able
to
be
I'll never
Now
article and said,\"Great.
go home; this will just
all along.\"
that they were right about you
prove to my family
a very proper English
considers me a bit
I married
that
her
I assume that if you
many
in
I was
trade all marketsthe
of a
system
for
same,
refers
[Optimization
optimization.
variations
who
woman
crass.
the
past
you
to the
and then
probably
process of
don't
testing
selecting the best-
this
fineactual trading. The problem with
and
future
link
between
is
that
the
tuned approach
performance
past
is often a very rough one.]
performing
Sometimes,becausetheir
years. [Bonds
\"bonds\" means
eight
every
believe
do
187
Larry Hite
Absolutely.
version
We
have
get by
not being
we are
looking for the
a perfect
system
for
a saying
perfect.\"We
hardiest
for the
past.
here:
are
not
method.
how rich you can
the
for
method;
optimum
looking
Anyone can sit down and devise
\"It
is incredible
188
Hite
Larry
indicators that
any technical
there
Are
you
have
Jack had been putting
that
many years. I found
to be
found
overrated?
Overbought/oversold
None of
them seemto
prove
it. You
out in
of indicators
types
Any
you consider
particularly valuable?
there
are two that come to mind.
really trade off of them,
market doesn't respondto important
news in the way
that
it
it is telling
For
you
something
very important.
example,when
of the Iran/Iraq war first came out over the
newswire, gold was
should,
news
up $1.1 said to myself,
the gold market
market broke sharply
to move
able
East war has just
$1; it has to be
a great sale.\" The
after
that. The second item is
that Ed Seykota
something
a market
makes a historic
taught me. When
it
is
high,
how
telling you something. No matter
many people tell you
the market shouldn't be that
or why nothing has changed, the
why
high,
mere
fact that the price is at a new
tells
has changed.
high
you
something
broken
and
out
Any other
the best
lessons that
Ed Seykotaactually
of
percent
but
from
learned
do is
can
go
up
that
his philosophy
one day: \"You can risk 1
can
risk
5
you
percent, or you can risk 10
better realize
results are going to be.\"And
the
that
he
more
was
you risk,
absolutely
the
more
have to do is this.\"
up on his desk. He said,
all you
market
is going,
floor
and jumped
you!\"
he meant get a perspectiveof
the
big picture.
I don'tknow
of too many people who get rich by taking
From
forme.
with
small
Boyd was extremelyimportant
profits. Working
to
do it.
the
his
was
I
knew
that
way
the time I met him,
right
approach
Right, because
In other words, I knew
with
your risk, and went
controlled
traded across the board,
I
seeit
could
had
to
work.
trend, it just
if you
that
the
clearly.
absolutely
final words?
Any
I have two basic rules about winning
you don't bet, you can't win. (2) If
Ed Seykota?
explained
capital,
your
you
you
\"A Middle
it will tell
by that,
I assume
if a
First,
percent,
at it,
\"Look
I don't
Although
only
in
you want to know where a
his charts on the
He threw
testing.
the
have to picture
for his firm for
recommendations
trading
followed all of his recommendations,
you
did
Jack
how
he
I
asked
every
year. Finally,
if
Jack
was six foot-four. He said, \"Larry,
out
if you
made money
have
would
indicators.
189
Hite
Larry
in trading
you
lose
as well as in
all your
chips,
life:
you
(1) If
can't
bet.
the
volatile
to Hite's trading
First,
elements
philosophy.
that the
convinced
Hiteis
of
academics,
firmly
many
opinion
that
a
method
if
can
that
T
his
means
inefficient.
are
develop
markets
you
to
be
have
it
doesn't
much),
in
favor
by very
(and
your
places the odds
an effective method is a necessary,but not
you can win. Second,
and thrive
at trading, you also
to win. In order to survive
sufficient, condition
sooner or later, it will get you.
have to respect market risk. If you don't,
Hite controls risk rigorously
by applying four basic principles:
There
right.
are
two
basic
contrary to the
Besides your partners, who I know were integral in developing
trading systems, were there any other
traders
who taught you
valuable
lessons?
Jack Boyd, who hired me as a
Absolutely.
broker/analyst.
that Handy and Harman had said in their annual
report that
totaled
either
three billion or seven billion ounces,I wrote
the silver market
in
there is either twice
half.\"
job.
your
That
report
I said, \"According
much
silver as some
which
as
went over very big
with
Jack
to
Handy
people think
and helped
Having
read
silver stocks
a report
on
and Harman,
or less than
me land
the
1. His
system
exceptions,
2.
never
and
trades counter to
he always
The maximum risk on
equity.
follows
the
the
market
trend.
There are
no
system.
each trade is limited
to
1 percent
of total
190
3.
Larry
a combination of many
individual
extreme. First,
to an
diversification
carries
Mint
different
performance,
systems,
for their
also
but
their
is really
system
not
selected
Hite
for
only
their
degree of lack of
Part
systems. Second, Mint trades in an
of
wide
markets (nearly sixty in all), encompassing
extraordinarily
spectrum
in
and
the
U.S.
five foreign countriesand diverse
market
exchanges
stock
interest
raw
rates,
currencies,
indexes,
groups including
other
with
correlation
industrial
4.
selected
is continually
Volatility
or
signals to liquidate
where the risk/reward
One
some
observation:
final
colorful
ratio
of Ed
nature
gives us
Seykota's
After
merely
true
in
to generate
markets
those
limits.
earning a modest
at
living
rock
actor,
promoter), Larry
he had the
single endeavor for which
I found this to be a striking
manager.
burning
order
in
trading
well-defined
exceeds
comment:
market
suspend
temporarily
in the
enthusiasm\342\200\224fund
example
satisfythem.\"
in each
tracked
careers (such as, scriptwriter,
Hite succeededspectacularly
greatest
commodities.
and agricultural
goods,
Mostly
\"It
desires,
happy circumstance
it also gives us the means
is a
when
that
to
Stocks
II
Steinhardt
Michael
The
Concept
of Variant
Perception
Michael Steinhardt's interest
in the stock market dates back to his bar
gave him 200 shares of stock as a present. He
recalls hanging
out in the local brokerage officeas a teenager,
watching
the ticker tape along with the old men, while his friends were out
A very bright student,
his education
Steinhardt
completed
playing stickball.
from
the Wharton
School of the
at an accelerated pace, graduating
in 1960 at the age of nineteen.
of Pennsylvania
Steinhardt
University
headed straight
for Wall Street, landing his first
as
a
research
job
assistant. In subsequent
and
years, he held positionsas a financial
journalist
a reputation
as a talented
a research analyst. In 1967, having
established
firm
and two other partners founded the investment
Steinhardt
analyst,
when
mitzvah,
of Steinhardt,
his father
Fine and
Berkowitz\342\200\224the
to
predecessor
Steinhardt
Partners. (Fine and Berkowitz left the firm in the late 1970s.)
In the twenty-one
years since its inception, Steinhardt's firm
achieved
Partners
percent
(just
a
truly
has realized
under
fee). In comparison,
fees).
a compounded
record.
annual
25 percent after subtracting
the S&P 500 index
compounded annual
period. One thousand
would have grown
incentive
track
remarkable
rate
growth
To put
that
rate
growth
a 20 percent
registered
only
time,
of over
30
profit incentive
an
8.9 percent
the same
in 1967
by Spring 1988 (after deducting profit
the same $1,000 investedin
perspective,
$93,000
in
has
Steinhardt
(dividends included) during
with the firm at its start
invested
dollars
to over
During
that
194
Steinhardt
Michael
195
Michael Steinhardt
a basket of S&Pstocks
part
of the
consistency.
both
cases,
would
only have grown to $6,400. Gain is only
story; Steinhardt's track recordalsodemonstrates
admirable
Steinhardt Partners has only witnessed
two losing years. In
the net loss was under 2 percent before
incentive
fee
profit
adjustments.
Steinhardt's superior performance
He is
of approaches.
myriad
trader; he is as comfortable
been
achieved
investor and
has
a long-term
both
by using a
a short-term
them; he will shift
into other investment vehicles, such
major chunks of the firm's
capital
as treasury
if he feels that is the best investment choice.
securities,
To be sure, Steinhardt
Partners'
track record is not a solo
performance. In addition
to his cofounding partners, over the
the firm
years,
has employed numerous traders and analysts.
there was never
However,
that Steinhardt
doubt
was clearly in charge.
any
He reviews the firm's
several
times
each
portfolio
he gives the firm's
day. Although
traders
latitude to make their own judgments,
Steinhardt will require a trader to
his position if he has qualms
rigorously
justify
about
that position. If he
feels strongly
Steinhardt
enough,
as buying
stocks
shorting
will override
the
and
trader
the position.
the
are
What
The
word
the
sense
word
trading
elements of your trading
major
is not
\"trading\"
would
\"investing\"
implies
an
long stock
I go
if
will
tomorrow\342\200\224that
position
I went
of
I think
of a
anticipation
tomorrow's trade number
much
way
I may
things.
be a trader
of transactions is relatively
high,
apply just as much, if not more. In my
that my frequency
example,
my
the
philosophy?
duration
longer
long
the
debt
and for
markets
sale at
index
futures
be bullish
time
of purchase.
tonight
because
the
for
the
market,
but
in
the
mind,
For
I expect
plan to sell
do is for a
and I
I
The bulk of what
is trading.
when
more complexreasons.Forexample,
in 1981,1 held that position
for two and a
half years.
Well,
for
of this
purposes
book, I would
still
call
what you
are doing
trading.
liquidate
Steinhardt's extreme scrutiny
and
of the firm's portfolio
control
him
a
of
a
given
reputation
being very demanding man to work for\342\200\224
too demanding
for many of the traders who have left the firm
obviously,
over the years. Keeping in mind
that Steinhardt's
wraparound desk has
been constructed
in the
shape of a ship's bow, it is not surprising that
How
then
do you
define
the
difference
between
trading
and investing?
has
one journalist
a profile tagged him with
doing
the sobriquet,
Captain
Ahab. However, Steinhardt's tough
side
is very much related to his
job
role\342\200\224much as in football
coaching, toughness is probably a virtue
in
a group of traders.
managing
I never
relaxed,
interviews
were
possesses
saw
soft
Steinhardt's
spoken,
patient,
I interviewed
tough side. The man
and good humored. (Of course,our
conducted outside
sense of humor. He
always
a keen
impersonating an IRS
agent, deliberately
of market
hours.)
has been known
mumble
Steinhardt
to
fictitious
brokers
before
the market close, and double-talk in
right
Corey-like manner when he wishesto pull the leg of an analyst
who calls him. His conversationis also
liberally
sprinkled
dishisms\342\200\224\"proprietary
newfangled
fund
products.
dreck,\"
for example,
is how he
was
call
friends
orders to
a Dr.
Irwin
I make two key distinctions.
as long. In contrast,the
mutual
manager of a typical
First,
a trader
investor\342\200\224for
fund\342\200\224will
will
go
example,
always
short
the
be long.
as readily
portfolio
If he
is
he may be only 70 percent
but
invested,
market,
I
is
a
trader
is
The
second
make
that
he is always
distinction
long.
the
market.
Is
the
about
the
direction
of
concerned
primarily
market, or stock,goingup or down? The investor is more concerned
about
the best stocks to invest in. Thereisno value
judgment
picking
involved
in my distinction between traders and investors, it is
focus
for this book. In
a matter
of maintaining a certain thematic
merely
I
as a trader.
would
on
both
counts,
case,
qualify
you
certainly
any
would
define
How
To get back to my original
your
question:
you
uncertain
the
about
philosophy of
trading?
or reporter
with
refers to
Yid-
My particular
number
one
from that of most people.Concept
style is a bit different
I
to develop
that I
is variant perception.
try
perceptions
196
Steinhardt
Michael
believe
are at variance
variant
perceptions
Couldyou
me an
give
market view. I
are
no
longer so.
they
the
with
general
I feel
until
example of variant
will
those
play
in the markets,
to get in the
you have to be willing
I
have
tended
to
short
stocks
that
were
favorites
way
always
danger.
and backed by a great deal of institutional
enthusiasm.
Generally
of
perceptionin
the
current
speaking,I
biotechnology
will produce many
that
company
revolutionize the
will stay short.
a stock
products that
as my view is a variant
As long
industry.
clear example,but
That is a
short
Genentech
and months
months
because of your
a question.
raises
it
variant
perception,
are
going
to
perception,
I
Let's say you go
and the position
don't
the more it goes
goesagainst you. If the fundamentals
change,
the
attractive
more
the
short
side
would
Yet
against
you,
appear.
from a money management standpoint,at somepoint,
the position
would have to be covered.It seemsliketheremight
be two basic
trading
There are certain
may
or may
there is a
already
stock
not
be
and
is already
that
you
you
are
shouldn't
evident
until
which
example,
it has
the
go short until
for all to see. In some
to
Maybe that is a superficiallysafer
way
that
sleep more comfortably using
approach.
can
never done it
that
way.
My attitude
has always been
in
skew
may
too
short
short
my
a bit,
If I
Of course, if
to take the
I see nothing
pressure
but
buyers.
make some money.\"
In
have a fundamental
that
I am
though
the
will
hang
horrible, I might
a little bit. I would
Why don't
a matter of
view, which
the short-term
from
even
think
is triple
it
down
short
that
variant
a
perception
intensity
tough
trade
around
this
the position
looks
awful;
see if I
can
myself.
I
in my heart, but I try to separate
I may see in the market. So
of situation,
type
as you
no matter how
fundamentals,
say, \"OK,
I join the buyers and
speaking, I dichotomize
I believe
fervor and
in
as my
started
and it goes up
wrong, I'm wrong.
Are you saying that as long as you
perceive them, are unchanged,you
much the position goesagainst
you?
Right.
have usually
a stock
short
as long
but
If I'm
short.
stay
and, therefore,
early
positions.
my exposure
I'll
is unchanged,
I might
be
periodically
a buyer.
Might you actually go net
long
between
fluctuate
just
position
those
during
fully
short
and
periods, or
does your
flat?
that type of buying
is
It wouldn't even remotely approachflat, because
take
or 40 percent
on very short-lived perceptions.I might
20,30,
based
of the
and trade
position
negative
very
bearish
necessarily
that.
understand
you
For
short a stock
shouldn't
reflecting problemsthat
I have
of trading,
but I have not followedthem.
accurate,
started
exist in the world
down\342\200\224that
short stocks and
However,
losses
If you are
that
shibboleths
general view
peaked
sense,I can
here.
in conflict
principles
lot, it
tended to
have
off with
for a year and a half. Therewasa period
when we losta lot of money in that position. But
I stayed
short because I continued to have a variant
about the
perception
future of their drug, TPA. [TPA can be injectedintravenously
to dissolve
in a year or two, TPA will
blood clots.] It is our perceptionthat,
be a
minor drug that will be supplanted by more effective drugs
that also cost
of the entire company has been based on
substantially less. The thrust
this one drug. If our perception is correct,this
will be earning
company
20 or 30 cents per share and selling for under $10. The stockis
at $27
[June 1988], down from a high of $65. [By late November,
currently
Genentechhad fallen below $15 and Steinhardt
was
still short.] But I
is a first class
think
the general
perception is still that Genentech
of
make money
that to
marketplace?
We have been short
197
Steinhardt
Michael
yourself by buying
with it.
and
short
in a
particular stock, but are not
on the industry, might you sometimes
in that group against your
stock
another
hedge
short
position?
I have tried
What
it
tends
that
at times,
your
skimpy
problem
generally found
it to
be unsuccessful.
is give me two problems
Usually, your
second
stock on the other side will tend to be
because
you are just grasping at it to use as a hedge. If
is so great that you need to hedge it, why not address the
to do
knowledge about the
relatively
but have
instead
of one.
MichaelSteinhardt
198
separate position? Let's
are roaring, so you
stocks
and
the
a
stock
are
short
paper
you
paper
say
short
stock will go up
it.
stock
another
your
Maybe
against
paper
buy
If you have
Who
knows?
more.
will
stock
the
other
more;
go
up
maybe
don't compound it.
the mistake;
made a mistake, deal with
rather than
directly
problem
on
taking
a totally
Michael
Steinhardt
A common
elements of
perceptionconcept,what
risk controlrule,it
rules about
any
You
Charts
pattern.]
this,
on
buying
use charts
don't
at the
stock. It
and then if it goes
blah, blah, blah.
But just
a quick
from
and
By watching
up
They all
an
easy
stocks
stop-lossordersor such.I don't
or strength. I don't look at
use charts.
at all?
[He adoptsa JackieMason-likespeech
a fantastic chart. The chart has a baselike
me blank.
leave
just
I look
weakness
I don't
or breakdowns.
breakouts
I don'tuse
distinctive.
is so
that
use
has
a little
seem
bit more, boy it
the same to me.
this
way to
is a
real breakout, blah,
don't you use
standpoint,
see where a stockhas
as closely
over
traded
as I do, I getsome
say you know that a stock
from
to you how it went
matter
Let's
think
don't
charts as
the years?
of price
sense
levels,
has gonefrom
I
if the
won
plaintiffs
the plaintiffs
lost, the
to
that
$10 to
to $40,
$40?
wouldn't
of
your
would
some
unknown
Contributing
A
phrase
one
perception.
my original
if
the
since
another
was
but
wouldn't
It will
theory
be
was
story headline from screen],
to Smoker's
Death.\" You
like that will scare somebody.
let's say you are short a stockbecause
and the stock is goingagainst you. How
discussion,
analysis
when your
because
is [reading
Liable for
lose anyway.
our
know
you
lose,
Found
fundamental
too much,
go up
case and winning
of a variant
will
reasoning
My
ago.
would go down a lot,
example
be much. Here it
I won't
what,
wouldn't
much I
see how
Group
\"Liggett
is an
month
the stocks
case,
never lost a
had
it wouldn't
know
the
stocks
really be news. That
interesting
stocks about a
the tobacco
short
went
that
Going backto
$10
a call on
the speakerphone.
The caller is giving
news
a
decision
in a lawsuit
late-breaking
regarding
\"The verdict
against the tobacco industry.
is back. Everyone was cleared
exceptthe Liggett group who had to pay a $400,000fine and no
punitive damages.\"
Steinhardt
a decision
replies, \"So it was basically
in
favor
of
the
defendants.\"
slightly
analysis is wrong becauseyou
important
have
element?
to me.
That
have any trading
rules that
you
could
define?
situation
a trading
rule.
happens
act the way
day.There
Give me an exampleof
objectives. I simply
some
overlooked
Do you
stops or
about
rules
there is
point,
Steinhardt
tobacco
companies
informational
It makesno difference
I know
have to be a
a position,
into
necessarily
be\342\200\224
terms.
uptrends, ranges, and all that.
it
could
any
It doesn't
out.
other
At
Nothing
have
I don't
No,
be: BeforeI get
philosophy?
trading
your
of the
some
are
example might
exactly where I am getting
in those
Besides the variant
199
responsiblefor.
you
are
fairly
many
often. You buy
I go through
or sell
it should.
think
stocks in the
For example,
portfolio
someone else is short
my
that
I am
Time,
a stock and
portfolio
it
doesn't
six times
a
not directly
Inc. They are short
MichaelSteinhardt
200
the magazine
because
acting really
to the
over
go
strong
business is lousy, and this or
where
and is up 10 percent from
person responsiblefor
world?
the
this
that
are we going to get something
is something going to happen that will ease
is ripe for a takeover?
company
If there is a
monitor of the portfolio.
a negative
am
or when
lousy
If a
stock is not
that
be
the
that
is going
their
That makes
it very regularly.
go through
when
to
I
talk
because
things
people
here,
only
like
should.
not
are
stocks
they
acting
I will
acting like
type of
on its
based
it should
market action that
would
fundamentals, would
your thinking?
change
I try to assume that the guy on the other side of a trade knows as least as
goes down
much as I do.Let'ssay I buy Texaco at $52 and it suddenly
was
that
a
had
at
$52
soldTexaco
Whoever
perception
to $50.
from mine. It is incumbent on me to find out what his
different
dramatically
perception
201
OK, that answers
short
shruggedoff
cover
the questiontoo
news
today's
Assume
simply.
you wanted to be
longer-term position and the market
and closed higher tomorrow. Would
you
as a
stocks
tobacco
the
then?
When
In a sense,I
problemwith a position
mea very difficult person
are
stock is
we shorted
When
severalkey questions:
to surprise
the feeling
But the
it. I will
Life position and ask
Time
the
that.
Steinhardt
Michael
was.
It depends on my reasons.
If I wanted to be short
the tobacco
companies
because I felt tobacco consumption was going to decline much more than
it wouldn't matter that much.
If the market rallied
presently
perceived,
tomorrow, I would
have
So you wouldn't
should
have,
was still
valid.
Yes, but
if the
it
understand
variant
care if
as long
to take
the
sell some
and
news was terrible and
the
stocks
the
has
market
more.
react to the news the way
didn't
market
it
as you felt the main reason for
why. Sometimes
action is really telling
But haven't
advantage of
being
short
were up, I would try
more information and
to
the
something.
you
there been instanceswhereyour
was
analysis
completely
wrong?
if you
What
The
can't explain it?
or serious,but
be superficial
might
explanation
Sure.
you
can usually
get
something.
go down
would you
cover
the
of
I would cover it
only
modestly
your
somewhere
the road?
down
companies. On balance, the
sounded bearish.If the tobacco
and then come right back,
tomorrow
tobacco
At
this
conversation
position?
anyway.
So oncethe news is out,
That
it
the close
after
explains
Right.
realized
Yes, and not necessarilysoquickly.
Let's take the situation
news that came out
stocks
And you
was
the only
I would
the
game
cover
the
is over
reason I was short.
position
for you.
on the
point, Steinhardt gets a phone
is filled with non sequiturs
to me his occasional habit
call
and
his side of the
He then
practical jokes on callers.
in which
deliberate
of playing
mumbling.
news.
For example,I get a call from a broker who I haven't
and
then
long time. I swooshsome papersaround
shares of ZCU [mumbles another sentence].\"
Didyou
I said?
spoken
say,
\"Buy
understand
to for
30,000
what
a
No
Michael Steinhardt
MichaelSteinhardt
202
[I laugh].
he calls
legitimate didn't it? Anyway,
He
calls
I'm
in the bathroom.
secretary
I am
and
the
before
minutes
close,
it is five
because
back again, frantic
\"Haven't
and
back
Then at 3:58,1 call him
you
unavailable.
say,
still
Of
Just do the damn thing!\"
that order yet? What's the problem?
done
him
So I tell
[he
catch the name of the stock.\"
he says, \"I didn't
course,
else.
he can say anything
and hang up before
another
mumbles
sentence]
That is exactly right, but
me back, and I have my
it sounded
tell him
and that is really the key element.
That flexibility could include
manager,
being able to short stocks as well as buy stocks, use options, futures, and
so on. That is what a hedge fund is in general terms, but the variations
on the theme covera very wide continuum.
What
The
happened
aggressive
fund is
than
differently
often labeled asa hedgefund because
mutual fund. Could you
a typical
it trades
very
elaborate
on
the
meaning of a hedgefund.
has been given
the term referredto a
Jones Group
A.W.
The
fund.
Originally,
the following:
said
essentially
have
functions
of
We
in
the
credit
precise
world
the ability to forecast trends in the
are largely
of a host of variables that
for being
concept,
the first
which
hedge
of money management do not
stock market, which are
beyond
the consistent
ability
we as money managers can do,
to anticipate. But, what
as to which
to
make
accurate
is
judgments
analysis,
are not. So, if one balanced long
those
that
versus
well
doing
with short
in stocks
that were perceived to be relatively
strong
individuals
entrepreneurs
companies
are
positions
risk would
be
poorly, the market
General
and
hated
if you loved Ford
For example,
eliminated.
totally
Motors,and for every dollar long Ford you were short a dollar of General
Motors,you might lose on your shorts, but if your judgment was good,
of a hedge fund
come out ahead. So, the original
would
concept
you
to
stocks.
the
pick
ability
emphasized
totally
positions
Doesanyone
in
stocks
to act
expected
that
trade
No, today, the term
now refers to a limited
hedge
way?
fund is
partnership
money
performance basis, as opposedto more traditional
of a
the
assets
on
are
manager
who
managed.
Typically,
paid
managers
a traditional
than
money
hedge fund has a great deal more flexibility
typically
paid
on a
fund?
attracted
numerous
hedge fund structure
young,
in the 1960s because it allowed
them an
The people that
into the hedge fund
came
business
were
not
theoretical practitioners of the idea of hedging, but were more interested
in the idea of
to be long
being their own bosses, and having the flexibility
a lot of stock.Although
also
had
the
of
they
flexibility
being short, they
didn't use it in any serious way. The word hedge has a
very
specific
in the English
In most of these hedgefunds,
meaning
language.
you could
ask,
seriously
So
were
they
Correct.They
embarrassed
by
the
trading
were
rooting
of mock
is the
\"Where
funds
hedge
only?
call themselves hedge funds;
they were
The term had a connotation
of being
short, and
short side had an anti-American ring
to it. It was as if you
for disaster. So they started
using the term [he adoptsa tone
seculartrends of
private partnership.
the
with
and
make more sensethan
of the hedge fund
any practitioners
is a
very restricting
be? They are
have to put up
in some
How
ineffectively.
both
some
of the relatively
1960s, the concept of a true
it did in its early
days. Why
disintegration
1950s
the
long and a dollarshort
dollars
in name
even
wouldn't
pomposity]
Becauseit
hedge?\"
the name.
Ironically, today,
there
The term
somewhat of a misnomer.
in which the general partner is
a hedge
start their own business at an
early age in a way that wasn't
otherwise possible. Those were times of great stocks with wonderful
stories. There were quite a number of stocks showing
terrific
growth.
fund may
still
original conceptof
to
careful
through
to the
of the
flexibility
opportunity
Your
203
dollars
in its
approach. The premiseof
related entity requires
using
hedge
aren't
pure form?
being
a lot
a dollar
of
are Ford and GeneralMotors
to
going
the
same macroeconomic factors.If you
by
for the long and some dollarsfor the short,
different
affected
concept
smooth
Michael
204
you
be lucky to
may
realize a
10percent
a period
over
difference
Michael Steinhardt
Steinhardt
of a
you are right.
with
on the West Coast that
group we are associated
stocks.
The
has been mentioned
in
specializes
thought
shorting
exclusively
neutralize
their market exposure by being
that maybe they should
long
in
are short
in the stock indexes as they
an equal number of dollars
to the party is the special ability
what they bring
because
individual
stocks,
closest
to
this concept I have heard
That
is
the
shorts.
to pick
thing
but they don't do it.
recently,
is,
year\342\200\224that
assuming
How does your own
spend
exposure
risk,
and
deal of my time
and adjusting
a good
40 percent
the
It is really
beyond definition,
variables, with
some
our
overall
about
thinking
for it. In the
funds has had an
time.
Does
that
selection
as
No,
net market
not a
that
have
doubt
that the
most conservativeof
average exposureof
been
less
than 80 percent
40 percent net
about
flexibility
One
of the
to
shift
investment management
of being
short
typical
during
perhaps
arsenal.
more
80
long. What
range
look back on
too
a few
our
approach
it an
meaningful\342\200\224tool
is its
percent
exceptionally
in
the market
bias of
is
market
right
to your
the
factor
largely
right
went
side
down
in this
as a
soon
weight
well
of
the
on
of the
we were
enormously,
There were other
bonds.
Anyone
I think
who
up
periods
there is a
thinks he can
racket is deluding
it changes
because
himself,
formula is right for any length of time, its own
of its inevitable failure.
made
you sufficiently
in 1973-1974?
our
of a
set pattern
years, we did
market. For example,
In other
of our money was made in
fact that there is no real pattern:
success
The anticipation
years, there is no
we were net short.
because
successcarriesthe
short
it
time, or anything
years, we did particularly
stocks.
the bulk
message in the
What
twenty-one
we were on the
when
1973-1974,
past
In some
well-chosen
because
too quickly. As
as well as net long?
the
activity.
formulate
net short
of the
performance?
successful
in
edge, but
a 1 percent
than
speaking, how important is the
direction versus stock selectionasa contributing
As I
stock
anticipated
that.
approaching
strength of
at one point, and, at another
things I would emphasize about
market exposure so as to make
meaningful\342\200\224sometimes
It is
facetious.
bit
big advantage like being right
substantially,
net
I rememberbeing 15or20percent
net
100
over
time, being
long.
percent
Yes.
being a
I was
when
flexibility
imply that your main profitability comesfrom
to net exposure adjustments for
in the broad market direction?
opposed
overallsuperior
encompass?
So you have the
right
Relatively
years.
On average, you
to say that there are a host
of
except
more important
and they change
than others,
done it as long as I have
me the opportunity
gives
rather than 50 percent right.
sometimes
Having
51 percent
have some
twenty-one
here has averaged
exposure
all the
to be
well
exceptionally
does
outlook for the general market
a very critical element of your approach?
your
is obviously
that
changes
concept?
net long?
I would
last twenty
this,
fund
actively. We always
and planning
Yes. In contrast,
mutual
is used
shorting
years that I have been doing
about 40 percent.
mean
the hedge
fit into
fund
the sense that
shorts.I also
You
determine
direction, since
is a
There
It fits in
How do you
205
recession.
confident of lower stockpricesto go
net
Michael Steinhardt
206
Michael Steinhardt
on what?
Based
life doesn't work that way.
Well,
bonds
when interest rates
plenty of contrarians who bought
to 8 percent for the first time, and 9 percent, and 10percent.There
a great deal of money lost by people
bonds at what were then
buying
rates of
inflation
that
lead to higher
would
period
would slow down
in rum,
the
went
was
economy.
all-time
Were
on the stock
you negative
major 1982 bottom
as
market in
the
period
preceding
the
well?
in 1981
But
lower
competitive, stocks had to sell so much
that
it wasn't even worth
on which
focusing
stocks to buy\342\200\224although you might focus on the short side. What was
of a turn in interest rates in
unique in that period was the inevitability
it was simply a matter of timing
for anything else to be worthwhile;
order
had a clear
turn. In contrast to most other periods, this
that
period
fixed
income
securities were by
unidirectional message: U.S. Treasury
far the quintessential
value of the time.
had to look at
with any sense of contrarian
mentality
Anyone
securities,
to be
order
in
they were
selling
at
a potentially
great
early 1980s as presenting
to ease as soon as business
started
have
knew the Fed would
opportunity. You
to run into trouble. In addition, we had already seenan important
topping in the rate of inflation.
interest
So,
in the
rates
of the
some
pieces of the puzzle werealready
that
it
is too
You mention
have
is as
justified
much as
you
can
for, because
hope
when
courage,
requires
I assume that
a while in that
it did. It
investors were
about
the world
they
Absolutely. People
all, what is a contrarian
a cliche that
almost
think
that
but
the
crowd
being
someone
but
much
type of thinking
lower
rates.
that
a contrarian
is always
wrong\342\200\224so the
do
The process
of
understanding
in
own
your
painful period,
concerned,I was
you
equity
investor.
Kaufman
an
more
point
can speculate: it
finance as much
real
you
is called
as 98
Not
I
was
only
raises
always
position?
your
times the firm's capitalin
a policeman
who tells you how
margin requirements.
percent
know
was telling
who
enormous size.
than 100 percent on
have
of my
as most
three to four
I had
In stocks,
quite
an institutional
with
those
for
What did I
were going to the moon?
than in the past, which
doing it in an
leveraged
becauseas far
I to contradictHenry
rates
interest
that
market run against you
of
your
purchases,
But
in
treasuries,
five-year
much
you
you can
on maturity,
depending
constraint.
could
implies victory. After
crowd. It
that goes against the
an
doing something that was different
the antennas of investors\342\200\224particularly
so thereis no
a contrarian mentality,
trying to pick a top at
a very
was
Who was
bonds?
had the
probably
trade.
you
Right,
Yes, at one
late.
and
commitment,
as a
a position
if you
on
psychology.
Were
are all
and
theoretical
win
contrarian,
you
right timing
you have to put
the appropriate size.If you do it too small, it's not meaningful;
it too big, you can get wiped out
if your timing is slightly
off.
I was
mentality\342\200\224but
in place?
terms. In orderto
with it in practical
dealing
need the
being a
between
difference
important
very
and
maturities.
Yes, and
in place,
yields.
high
There is a
contrarian
and 1982,1 made an enormous
of
amount
strongly.
in
one
notes.
a
leveraged position
treasury
Although
money by having
it was
couldn't predict the end of the rise of interest rates timing-wise,
rates
came
other
areas
had
to
be
that
unless
interest
clear
down,
in long-term
unattractive.
When
treasury
relatively
you could get 14 percent
Not as
than
crowd must always be right.
the
against
There were
I felt that the higher
interest rates, which,
207
long was the period between when
treasuries and the market bottom
[interest
How
is
guy who stands
I started
buying
in the
September 30,1981.
spring ofl981,andI
think
you
rate
started
buying
peak]?
treasuries
bottomed
on
208
I don't recall,but
of my
the size
move against you
did rates
much
How
rates
year?
backed off during that period?
So you
given
especially
painful,
your first major
had primarily beena stock
foray in
have
on
Here
trader.
out by incurring
of self-doubt?
started
you
treasuries,
substantial losses.Didn't you
periods
Did that
prove to be the
to much
higher
had held
ever
saying, \"MaybeI am
your position?
close to
come
at least
or
multiples,
I would
all cases,
in almost
better off sticking
been
have
it
it
surprising,
What
to
you
the
worst
market
But I
Obviously, you had lots of company.
have
you being such a contrarian. I wouldn't
be heavily long in a year with such bullish euphoria.
career.
in your
expected
1987was one of
that October
mentioned
You
find
and
wrong,\"
decreasing,
because stocks eventually went
move,
or would you have been better off if you
right
out.
experiences
liquidating,
of money.
on?
In hindsight,
the worst experience
of my
All
the time. The summer of 1981was
A number of thoughtful,
investors
were really very
business life.
intelligent
so sure myself.
with
what I was doing\342\200\224and I wasn't
unhappy
Did you
because we were losing a lot
we did,
times
At
209
position.
this time, you
Up until
be
up enough to
went
first half
that
in
Michael Steinhardt
Steinhardt
Michael
happened?
No, never.
One
of your
you are fundamentally
there been any
change your
seemsto be that
basic principles
will stay
you
right,
but the
view,
long
with
a
believe
as you
Have
position.
didn't
in which you
markets
is,
exceptions\342\200\224that
fundamental
as
loss just got too big?
in the
Actually,
the reasons
why
in
the
market.
was trading
the
have
There
some
been
was
true
particularly
With
phenomenon.
situations
hang
in
growth,
traded
stocks
when it was
absurd;
it
then
track of reality,
between forty
different
almost
it
the height
at
1972,
didn't
matter
at multiples
that
sustain
of the
were
you
of the
paid
That
position.
occurring
the
probably
was a theory
that
above-average
for it.
crazy. We went
which we
earnings,
Many
short
just
growth
on
the
secular
growth
any multiple That is how
rate estimate,
people
were
thinking
you
could
in those
with
a more
justify
days.
in
the
the
single
that
existed
this
situation?
of equitiesoutstanding,
coinciding
As long as banks were
was
and corporate
junk bond market
good,
the
important reason in
most of 1987.
through
question
important
The answer
the
seeming
countercyclical fiscalpolicy during
of 1987,
not
only
strengthening\342\200\224so much
thing
I felt
to do,
That
to me was
overvaluation
of stocks
was: What was going to change
whenever
that recession
was a recession.And
would come, its impact would be horrendous
didn't have the flexibility
to fight
it since
fall
substantial
debt.
toward
most
Therefore,the
of
combination
markets\342\200\224a
equity
in the amount
liberal attitude
money,
American
managers saw repurchasingtheir shares as the right
there would be an unusual upward bias to equity prices.
Polaroid
was
selling at sixty times
thought
to lose
went to seventy times earnings.The market
seemed
is the difference
and we found ourselves asking, \"What
and eighty times earnings?\" By putting
a
times
earnings
number
reduction
continuous
comfortable
lending
\"Nifty-Fifty\"
was
substantially
how much
didn't
short and simply
the full-boat
the exception of October1987,that
life. At the time, there
investment
worst period in my
as long as a company continued to
secular
I was
when
in with
quintessential issue wasa unique
that the
conclusion
phenomena
have enough courageto
at
of 1987,1
wrote a letter to my investors stating
I was cautiousand substantially
reducing
my exposure
Having done that, I kept thinking about why the market
a level that was too high
standards
I came to
by historic
spring
was
the
so that the
the
because
they
expansion
economy
had
the government
phase. But
the
during
not weakening,
Fed tightened.
a
from
deviated
it
was
210
What I didn't anticipate was that
less-than-dramatic
have as large an impact on the market as they did. What
Fed tightening? Ordinarily,
decline
in the stockmarket,
the
of
importance
100- or 200-point
In
the
of history,
what was the
criticism of
Germany?It was
light
Baker's
of
valuation
proper
that
a 500-point
significanceof
Secretary
Treasury
as to the
In retrospect,
a disagreement
merely
event.
a unique
currencies\342\200\224hardly
a
decline.
created
have
real world after October 19? Almost
nothing.
was internal
in some sense, you have to conclude that this problem
it wasn't that the market was forecastingan imminent
the
market;
or great recession.
financialdebacle
what
to the
happened
How then do you
extreme
the
explain
So,
that led to
problem
relatively
mechanism to deal
during
the
institutional
the
system\342\200\224had
been
Do you believe portfolio
[Portfolio insurance is the
reduce the
risk
Appendix
greatly
in a
that occurred
changes
reduced
sale
mostly
investor
individual
of stock
the
decline?
index futures to
stock portfolio as pricesdecline.
See
more detail.]
That was one of the new
the elements of stability.
On one hand, you had a reduction in
On the other hand, you
of the
had the creations
asset
insurance,
1980s\342\200\224portfolio
program
trading, and global
tended
to exert a unidirectional impact. By that,
I mean that
allocation\342\200\224which
tend to be buyers and sellers at the same
participants in these strategies
was not prepared
time. The stock market
to handle it.
Where
I came
were
in
very
my exposure
elements.
you, positionwise,
much
during
long
the
coming
exposed\342\200\22480
day.
in
on
October
19?
to 90 percent\342\200\224and
I increased
your
long position?
the next
it throughout
and
decline
the extraordinary
Did you
that
think
your
two
change
affected me as well. I thought
with a lot of cash rather
situation
it was
than
in
months.
confidence
magnitude of the
it engendered
that
better to sit back
try to hang in.
premise for
basic
The
and rethink
the
being long wasno longer
valid?
and
in importance.
exacerbated
insurance
systematic
exposure
1 for
inability
of
markets'
the
of
with
stay
No, I reduced
was the combination
of stability\342\200\224the
The elements
1980s.
the specialist
with
changes and an
still bullish?
you
trade in the sense that
a contrarian
My increasing exposurewas strictly
when the markets have an enormous
move, most of the time, it is right
and extremism
in that
to take the view that there is a lot of emotionalism
move. If you can maintain a bit of distancefrom the emotionalism,
you
I would
have done on any
that day is what
tend to do well.Somy buying
300-,
400-, or 500-point down day.
Did you
nature of the October19price
19 collapse
October
the
world
real
modest
Were
to
break?
The
Why?
real
was the
might
not
but
could
events
211
Michael Steinhardt
Steinhardt
Michael
that I had
I thought
market
diminished
underestimated
percentage
I was down
20 percent
As you
impact
of the
forces
loss
for
during
believe
a very
had
the
October 1987?
month.
are
there
look back on the October1987experience,
that you
that
stability.
What was your
over
the
you
learned
mistakes
from?
who
I speak to frequently
investor
said, \"All I bring
good
I
believe
he is right.
is
of
mistakes.\"
really
party
twenty-eight
years
subconscious
that
When
make
a
there
is
some
mistake,
phenomenon
you
mistake
it
less
for
same
One
of
the
makes
to make
that
again.
likely
you
a
of trading the way I do\342\200\224being long-term
investor, shortadvantages
market timer, sector analyst\342\200\224is
stock
term trader, individual
selector,
I have made so many
that it has made me
decisions
and mistakes
that
wise beyond
my years as an investor.
There is
to the
212
The
you
mutual
typical
that
think
to a
adheres
fund
approach. Do
buy-and-hold
a flawed
is basically
concept
Michael
Steinhardt
Michael
too
although
flawed isn't
growth of American
when
is fine,
decline,
equities
Yet, the vast majority
I guessso,but
less
of all
funds
is an
It
incomplete
fall into that
it is
say
the long-term
in
those periods
through
so much on the
it leaves
but
table in
terms
strategy.
I first
terribly
market
well,
Do you
The
but because
the
think
fund
mutual
the investing
mutual
industry
public to find
fund
of
enough to the whims
will meet contemporary needs.
that
handle
a losing
answer or
so many other
formula.
There
is
for
enough to lead
others in
questions
nothing
a certain
that
this
can
business,
be
had very
there is
articulated
no pat
precisely
Correct.
an
as good
did you
why
experience,
in
think
you managed that
those
goods
other
two
more
became
very
little
become the trader?
other two.
as the
analyst
well asa trader.How
there is an
I got that
talent
from
do
you
of experience?
benefit
without
life.
element of gambling
a gambler all his
been
I feel
has
you did very
years,
early
My father
justify it,
I can't
Although
in this
remotely
business.
Maybe
my father.
You have traded the stockmarket for
noticed any significant changesduring
of intellectual power on
minimal
first
that
trading
institutional
twenty
years.
Have you
time?
desks twenty
traders
years ago
were
who could hardly
the language,
made a
speak
and had very little discretion.
So when I
it was like taking
from a baby.
candy
of money,
trading,
I remember
was at
over
Brooklyn,
amount
started
the
The
to today.
compared
from
minimum
direction.
In other words, one losingperiodmay be sufficiently
different
from
another so that, even for yourself, there may be no generalwisdom
applies.
little
wasn't
At the
Central.
that
an
cyclical
Rhoades.
Even
was
period?
in
had
and
trading background.
kids
typically
As is true
late 1960s,I only
equipment
agricultural
My business was started with
fellows who
were also analysts. As our businessgrew,
trading
had
important. I became the trader for the firm, having
The amount
Howdo you
in the
business
an
I was
change?
sensitive
is certainly
products
is going to
industry
this
into
at Loeb
analyst
I probably
not
timing,
trader?
paying
that
are necessarily
they
qualified to do it
what a buy-and-hold
they have cometo recognize
approach means.When I was a kid, it was common advice to buy a stock,
about it. You don't hear that sort of concept
and forget
put it in a vault,
We
lost
confidence
in the long term.
have
anymore.
attention to
got
analytical
background.
If you
category.
More and more peopleare
before.
than
suffer
to
professional management.
of potential
use. I would
of participating
equities, willing
as a fund
strategy?
I would
word
The objective
a strategy.
limiting
the
quite
get started
did you
How
When
Yes,
213
Steinhardt
7, and
once a trader
time,
the
seller
the
stock
didn't
needed
was
to sell
700,000 shares
in Chapter
already
bother to check the
board.
of Perm
11. The last
trade
I bought 700,000
of stock at less
relieved to sell that amount
and sold
a dollar
under the last trade. Meanwhile,I turned
around
than
the 700,000 shares at 6\\. I could have sold three times that amount
at
that price. I madea half million
dollars
on that trade, and it took me all
of twelve seconds.
shares
at
6\\.
The
seller was
214
How
long did that
Until
the
the
competition;
environment last?
consolidated
on the
people
diminished
greatly
The
change
products.\"
Perhaps
the
much more short
are
investors
change is that the world has become
All sorts of people who used to be
important
oriented.
The
traders.
in their
to predict
ability
they
thought
in a
growing
could
estimate
the highest
by
report
up
to
when
they
confidence
People's
In 1967,
diminished.
greatly
as
themselves
rate of return,
investors.
trends has
secular
be typical to see a
McDonalds' per share earnings
it would
define
now
institutions
enterprises whosegoal is to achieve
used to define themselvesas long-term
a brokerage
firm estimating
the year 2000. Those people
long-term earnings because companieswere
and
predictable way. They believedin America
to the same type of
Today, stocksdon'tlend themselves
stable and
steady growth.
secularanalysis.
The
in
the
implication
1970s
of secular
and 1980s
and 1960s,the
heroes
growth
relates to
were
the
trend
question
the long-term
There are peoplelike
analysis
worked
In the 1950s
not having
of trading.
investors; today, the
heroes
are
who lauds the virtues of
Goodyear.\" What did he do
there
for seven months, made eight
zillion
dollars for himself,
and left the management after taking
He talks
greenmail.
about what he did for Goodyear, because he is uncomfortable
and has to
somehow associate himself with the capitalist
process. He and these
other peoplehave to bitch and moan about management, but they don't
know their ass from
their
elbow
about running companies. With
the
of
breakdown
certain laws, peopleare allowed
to do things they
weren't
allowed
to do before.
the wise guys.
capitalism.He talks about
for Goodyear? Hewas in
\"what
Goldsmith,
I did for
is and
what
What
would
of takeover
reinterpretation
Department's
definitionof
is not
laws; the
monopolistic.
be the
most important
advice
give to
could
you
the
layman?
of the
One
most
term
now
Justice
referring to?
in importance.
The market has becomeinstitutionalized.
Individuals
buy stock through
mutual
funds.
firms
don't
sell
customersstocksso much as
Brokerage
funds
and other awful things they
call
they sell those horrible mutual
\"financial
215
laws are you
What
tape in 1975. Now there is a lot more
desks
are much brighter. Another
trading
retail buyers and sellers have
is that
MichaelSteinhardt
Steinhardt
Michael
is that sometimes
allures of this business
because
do very well. That is unfortunate
ignoramus
can
impression
that
and
is a
that
you don't
necessarily need any
great trap.
that this is a
Recognize
So
very
the
I would
business,
competitive
greatest
the
well,
to do
professionalism
advice
major
the
it creates
give
is:
anybody
and that
when
you
with people who have
to buy or sell a stock,you are competing
a good portion of their lives to this same endeavor. In many
devoted
side of your trades and,
these
are on the opposite
instances,
professionals
decide
on balance,they
Is the
implicit
be better
are
that, most
message
off having
to beat
going
his
money
you.
of the time, the
professionally
novice
trader
would
managed?
The term professionally
managed
implies a credit I am not sure I would
in
this
business. My point is that you should
the
average
professional
give
have a goodreasonto assume that you are going to achieve a
If you can get 9 percent or 10
return for investing in stocks.
significantly
superior
in
T-bonds
and
7
by investing
by investing
percentor 8 percent
percent
in
should
stocks to offset the incrementalrisk?
in T-bills, what
you get
that number
much higher. You have to decidewhat
something
Probably
it.
should be, and whether
you have a realistic chance of achieving
Don't
underestimate
the
difficulty
Right, and forget the shibboleth
of the
that
game.
stocks
are
going
to give
you
216
a higher rate of return
are more risky;
to get a higher
by
Steinhardt
Michael
because
therefore,
of return
rate
in some
investing
are more risky. That is not true.
they
They
you have to be convincedthat you are going
in order to play the game. Don't assumethat
mutual
fund,
get a higher
are going to
you
rate
of
return.
demonstrated by the equal ease
as his willingness to trade markets
of
his perception
though? Historically,hasn't the
market
stock
rate returns?
interest
beat
but
there
is a lot of statistical mumbo
involved.
jumbo
Average
return calculations depend heavily
on the starting
date. If you start in
1968 or 1972, for example,the numbers
look a lot less appealing.
True,
\"The
participation
off you
better
on\342\200\224the
Goodtrading
is a
ideas and the
in something,
number
and
is best
humility
mistakes. There should
the
trade.
Always
know that
you can't
numbers
or
ask yourself:
you
have
the
measures
of
bullish
your
to sell? What
all great traders are
consensus.
and
experience
intellectually
by just
between
side of
on the other
person
he want
does
to be
The balance
extensive
through
perception is basically
be a successful
contrarian
other
Why
In my judgment,
variant
Steinhardt's
of times.
be a respectfor
I don't? Finally,
others.
yourself and
but
learned
to follow
conviction
when you have made a mistake.
at the same time, you
are going
recognize
a considerable
wrong
confidence
to
flexibility
trading?
balance between the
peculiar
to believe
need
You
to be
of good
elements
the
are
a contrarian
honest
does
he
position
seekersof
I have
approach.
using sentiment survey
The markets don't pay
But
off
is always very bullish
at tops and very
easily.
Although
bearish at bottoms,
extreme
bullish
and
bearish
unfortunately,
readings
are
also
characteristic
of extended trends. The trick is not being a
but being
a contrarian at the right time. Such judgments cannot
contrarian,
bemadeon the basis of simple formulae. The successfulcontrarian
needs
to be able to filter
out the true opportunities.
Steinhardt's filters are a
combination
of a keen sense of fundamentals
and market
timing.
Flexibility is another essential key to Steinhardt's extremely
favorable
characteristics. This flexibility
is
return/risk
performance
that
sentiment
bring
you
markets, futures
by
to the
market
noticed
1981 and 1982is a perfect
notes during
in treasury
essential
to the
amazing
resolve
of this
example
he was convinced
staying
interest rates in
against him, but
1981,
also
it is
but
has repeatedly demonstrated
Steinhardt
note position during
remaining
to the
trader,
immune
psychological
not
the
only
climax
six-month
to the
market
in
move
pressures of complaining
into treasuries
after a career
held
built
his
Steinhardt
and
even
on,
Throughout
his
he
was
Without
that
convinced
because he remained
right.
would
never
heard
world
have
the
sense
of conviction,
probably
who
questioned
asa stocktrader.
position,
he
his treasury
for any
quality
difficult
times, as
large positions during
was still right. Witness his convictionin
in maintaining
with
investors
trader.
contrarian
long as
of Michael
truth.
as well
long,
warranted
characteristic.
strong
with
more things
in bond
Conviction is probably an important
What
or
stocks when
are,\" he says.
of the great traders is their
among a number
when they
and ability to take on a particularly
large
position
willingness
to step
nerve
and
skill
The
a
required
trading
opportunity.
perceive major
that
time
is certainly one of the elements
at the right
on
the accelerator
t
raders.
Steinhardt's
from
traders
heavy
exceptional
separates good
and so
One trait
Isn't that true,
than
other
fundamentals.
the
he goes short
at which
hedging,
table\342\200\224shorting,
trading,
significantly
217
Steinhardt
Michael
his sudden
transition
it all,
Steinhardt.
Steinhardt also stressesthat there are no absolute formulae or fixed
and
the successful
trader
The markets are always changing,
patterns.
needs to adapt to these changes.In Steinhardt's
view, traders who try to
to failure sooner or later.
find fixed approaches will be doomed
William
O'Neil
The Art of Stock Selection
of the
is an unreserved optimist and ebullient fan
economic system and its possibilities.O'Neilsays, \"Great
occur
opportunities
every year in America. Get yourselfpreparedand go
for it. You will find that little acorns can grow into giant oaks. Anything
is possible with persistence
and hard work. It can be done, and your
own
determination
to succeed is the most important
element.\"
O'Neil
is living proof of his own words:
a classic American
the lean Great Depression years
success story.
Born in Oklahoma during
he went on to build
and raised in Texas,
dual
fortunes
as both an
investor
and
a
successful
businessman.
immensely
highly
profitable
O'Neil began his financial career as a stockbrokerfor Hayden,
Stone and Company in 1958. It was there that he first began the research
of his investment strategy.
that
led to the formulation of the key elements
William
O'Neil
American
proved remarkably effectivefrom the start.
the profits in three exceptional back-toback trades\342\200\224short Korvette,
and long Syntex\342\200\224he
long
Chrysler,
to
an
initial
investment
into
$5,000
$200,000.
managed
parlay
In 1964, O'Neil usedhis investment
to
winnings
buy a seat on the
York Stock Exchange and to form William
New
and Co., an
O'Neil
firm.
firm
institutional
research
His
was
a
in offering
leader
brokerage
O'Neil's
trading
During
1962-63,
concepts
by
pyramiding
220
William
of
most
the
stock market information
respected securities research
highly
William O'Neil and
and
accounts
and
computerized
comprehensive
28,000
firms
in
O'Neil
today is one
the country.
Co. servicesmore
individual
service. The firm's data
base
than
500 major institutional
subscribers to their Daily Graphs charting
contains
120 different statistics on eachof
7,500securities.
was certainly his boldest endeavor, in 1983,
O'Neil
Investor's Daily in direct competition
with the Wall Street
Journal. He financed
the newspaper
with his own funds,
that
knowing
it would be many
before
he
could
to
break
even.
years
hope
Skeptics
abounded
when the paper began with a press run under 30,000 in 1984,
to over two million
for the Wall Street Journal. By mid-1988,
compared
Investor's
had expanded to over 110,000,and the
Daily's
subscribership
in
circulation
was
breakeven
growth
accelerating.The estimated
point
of 200,000 subscribersno longer seemsfar-fetched.
O'Neil
believes
Investor's Daily can eventually
to 800,000 readers. His unflagging
grow
in the paper stems from
confidence
the fact that Investor's Daily's
financialtables
contain
statistical information unavailable anywhere
else\342\200\224
and
volume
earnings
per share (EPS) rank, relative strength,
percent
in the interview.)
change. (These measuresare discussed
In 1988, O'Neil combined
his concepts
in the book How to Make
in
McGraw-Hill.
The
book combines clarity
Stocks, published by
Money
and brevity
with excellent and very specific trading
advice.
It was the
In
what
launched
book
of the year.
best-selling investment
O'Neil's various business ventures
performance as a virtuoso
stock investor. During
averaged
Some of
a 40
over
percent
profit
annually
the
impeded his
past ten years, O'Neil has
on his stock investments.
not
winners were the Canadian oils during
the 1970s
and Price Co. during
the late 1970s and early 1980s.
most famous market calls were two full-page
Wall Street
Perhaps O'Neil's
Journal ads heralding imminent
bull
markets.
The
of these
major
timing
ads could hardly
have
been better: March 1978 and February
1982.
William
O'Neil and Company is a no-frills
operation.
Rarely have
I seen a more crowded
office environment.
O'Neil, however, does not
himself
out for any special
In what must surely
be a
single
privileges.
he shares
his office with two other
rarity among chief executiveofficers,
O'Neil impressed me as being articulate,
confident,
employees.
his
biggest
I think
as
individualistic
opinionated,
bullish
on
America.
approach
your
develop
trading ideas?
I went
few
the same
through
were
not
very
a
in 1959,1 did
Back
the market.
only
managing
the
doubling
that
At
about
didn't
approach
of
study
price/earnings
$15 million. Jack
of all of his
results
worked?
that
the people
the Dreyfus
time,
low
sound.
did you first find an
When
I subscribed to a
that
well. I found
do.
people
do too
most
that
of them
low-priced stocksor stockswith
like buying
(P/E) ratios
process
and most
letters
investment
theories
fund
that were doing very
was a very small fund,
Dreyfus,who
well
the fund,
managed
competitors. So I got
in
was
of their
copies
plotted on charts precisely where
reports
quarterly
There were over 100 of these
their
stocks.
of
each
had
purchased
they
I made my first real
a
them
on
I
out
when
laid
table,
and
securities
when
had been bought
stock
but
not
Not some,
most,
single
every
discovery:
prospectus and
and
to a new high
first thing
it went
price.
to
buy
about how to get
I learned
So the
that are
stocks
near their
superior performance
to buy stocks
but
lows,
that
are
to
to make new highs
broad bases and beginning
of a major
the preceding price base. You are trying to find the beginning
in a stock that is
sitting
move so that you don't waste six or nine months
nowhere.
going
I studied
find
relative
out of
coming
and Pic'n'Save
and very
describe your stockinvestment
and original. Where did you first
be fair to
it would
is not
have
221
O'Neil
William
the
the
successes.I didn't
I examined
ratios;
the
real
stocks
world
that were
they had
characteristics
just
a
limit
big
myself
years and tried to
they became major
in past
winners
before
common
in
to preconceived notions like P/E
a model based on how
develop
lot of variablesto
worked.
Can you describe this
model for
picking
winning
CANSLIM.
I use the easy-to-remember
acronym
chief
characteristics
one of the seven
represents
Each
of the
stocks?
letter of this
all-time
name
great win-
222
stocks during
huge advances.
their
ning
The
showed
earnings per
major advance. I am continually
and even pension fund
or lower current quarter
unchanged
investors,
research
a stock
to go
share
per
The
\"A\"
up
the
demonstrated,
they advanced rapidly
earnings? So, our first
earnings
if the
amazed
managers,
is a
is absolutely
large
as our
before
increases
profit
no
settle
for mediocre
why should anybody
basic
rule in stock selection is that quarterly
should be up by at least 20 to 50 percent year to year.
in our formula stands for annual
earnings
per share. In our
unique
earnings
average
There
in price,
annual
stocks
earnings
compounded
at their
growth
early emerging stage was
share
per
show an
should
year's earnings.
combination of both strong current earnings and high
growth that creates a superb stock.The EPS rank,
which is published
inlnvestor'sDaily,
a stock's
combines
percent
the past
two
with the past five-year average
during
quarters
and compares that figure to every other stockwecover.
percent
earnings
An
EPS
rank of 95 means that
a company's
current and five-year
earnings increase
historical
earnings
The
be a new
management.In
\"N\"
have
in our
95 percent of all other companies.
outperformed
formula stands for something new. The \"new\" can
product or service,a change
our research
we
found
that
in the
industry,
95 percent
of
the
or new
that
fell
within
these
greatest
stocks
of 87
strength
formula
in our
\"L\"
performing
the
during
stands for leader or laggard.The 500 best1953-1985
period had an average relative
major price increaseactually
s priceperformance
during
before their
[The
began.
twelve
strength
a relative strength of
months compared to all other stocks.For example,
80 would mean that the given stock outperformed 80 percentof all other
rule in stock selection is
basic
stocks during the past year.] So,another
the
ones
with
the
stocks\342\200\224the
to
high relative strength
leading
pick
I
to
restrict
stocks.
tend
the laggard
values\342\200\224and avoid
purchasesto
relative
with
strength ranks above 80.
companies
a stock'
measures
relative
the formula stands for
\"I\" in
The
institutional
by far
are
buyers
Leading stocksusually
institutional
some
have
the
or the
institutional
stocks
largest
large
the past
The
sponsorship.
stocks.
of demand for
source
However,
backing.
is desired,
be a sourceof
the company
institutional
institutional
sponsorship
it would
because
although
is not,
excessivesponsorship
selling
if anything
went
wrong
with
in general. This is why the most widely owned
a company's
be poor performers. By the time
obviousthat almost all institutions own a stock, it is
market
can
is so
performance
too
late to buy.
probably
stands for market. Threeout of four stocks
in the market averages.
move
as a significant
and volume on a
to
learn
how
need
to
interpret
price
you
has topped.
for signs that the market
in the entire
time, less than 2 percent of the stocks
given
The \"M\"
will go
in
That is
daily
the
why
basis
At
winners
also
categories. The \"new\"
for
the
stock.
In
our
seminars
we
find
that
98
price
to buy a stock at a new high. Yet, it is
percent of investors are unwilling
one of the great paradoxesof the stock market that what seems too high
seems
too low usually goes lower.
usually
goes higher and what
The
\"S\" in the formula stands for shares outstanding.
Ninety-five
of the stocks that performed
best in our studies had less than
percent
million
shares of capitalization during
the period
when they
twenty-five
had their best performance.
The average capitalization of all of these
stocks was 11.8 million
while the median figure
was
shares,
only 4.6
had something new
refers to a new high
to only
eliminate
purchases
The
investors handicap themselves by restricting
large-capitalization companies. By doing so, they
some of the best growth companies.
institutional
Many
for the
the prior
over
million.
automatically
earnings are poor. If,
current
24 percent.Ideally, each year'searnings
It
best
year before they began
by how many individual
stocks with
buy common
earnings.
best stocks had
studies, the prior five-yearaverage
rate of outstanding
performing
increase
made
they
the prior
in
quarter
their
reasonfor
before
share. The
a 70 percent averageincreasein earnings
for current
the same
over
quarter
stages, just
developing
early
223
William O'Neil
their
stands
\"C\"
stocks
performing
current
O'Neil
William
any
fit
will
market
restrictive
in our
same
the CANSLIM
because
players
recruiting
of .200hitters,
formula
direction
you
for a
or would
want
formula. The
to pick
only
the
is
formula
very
baseball team, would you pick
you try to get as many .300 hitters
doyou
use such a restrictive selectionprocess,
trades?
percentage of winning
Since you
I guess
actually
over the years, about two-thirds
at a profit. However,
closed
of my
I have
deliberately
If you were
an entire lineup
best.
as possible?
have
stock purchases
found
that
a high
were
only one or two
224
O'Neil
William
I have bought
of every ten
stocks
have
out to
turned
be
rally is
truly
most of the indicators in your
CANSLIM
such
formula,
as EPS, pick up a stock before it goes to new highs? Why not just
for it
buy the stock when it is still forming a base instead of waiting
to go to a new high?
Wouldn't
initially
out. You
break
buy when
base, the
is the
there
will
stock
You have
frequently
stated that
or
to
vulnerable
as
of 99
strength
a sharp
of
because
a base
soon as well
a stock may
as too late. The
a loss.
If
you
fluctuate 10 or 15percent
buy
idea
is to
within
the
in normal
easy to get shaken out of the position. But if I
time, the stock is usually not going to go down
the
higher.
theresucha thing
relative
probability
7 percent
maximum
figures\342\200\22480
too
least
the right
at exactly
to my
can buy
it is very
and
trading action,
buy
a breakout from
to anticipate
want
don't
never
stop-loss point.
superior
Although
it being too
have high relative
high relative strength
stocks
strength
is good,is
high? In other words,might
indicate that the stock
correction?
a
is overextendedand
surges
for several
days,
but
there
is
closes.
upside
price progress as measuredby market
when the market
there may not be a pickupin volume
case,
on the way up.
since the distribution has taken
place
tops,
the
the
market
is to
to
determine
direction
of
Another
general
way
if
any,
focus on how the
are performing.
stocks
leading
been leading the
start breaking down,
market
If the
stocks
that
have
is a
major sign the
is
Federal
to
watch
the
Another
factor
topped.
important
Reserve
discount rate. Usually, after the Fed raises the rate two or three
times, the market runs into trouble.
to
indicator
The daily advance!decline line is sometimes a useful
the
line illustrates
watch for signs of a market
[The advance/decline
top.
of New York Stock Exchangestocks
difference
between the total number
the
each
advancing
day versus the number declining.] Frequently,
and fail to
market
line
will lag behind the
advance/decline
averages
penetrate prior peaks after the averages reach new highs. This indicates
in the market advance.
that fewer
stocks are participating
bull
that
has
market
You
vulnerable. Second,volume
very little,
In this latter
outstanding.
225
O'Neil
William
When you believe that
phase,would
you
advise
the
market
has entered a bearish
rather
than
short
merely liquidating
general
going
longs?
You have to look at a chart to make that determination.
The key point is
how
is, but rather how far the stock is
high the relative strength
extended
its most recent price base. You
stocks
that have a
beyond
buy
if
are
relative
to
from
a sound
high
just beginning
strength
they
emerge
I
would
not
a
stock
with
base-building period. However,
generally
buy
a high relative
is
than
that
more
10
strength
already
percent
beyond its
not
prior price base.
The \"M\"
can
buck
in
CANSLIM
the
a general
in theory than in practice.
a market top and
between
Top formations
First,
the
average
Thistells you
that
in
formula
makes sense sincefew
bear market. However,
After
a normal
all, how
bull
that
rule
sounds
do you tell the
market
stocks
easier
difference
correction?
the market
averages occur in only one of two ways.
but does so on low volume.
moves up to a new high,
the demand for stocks is poor at that point and that the
short unless they are professional
I
tricky.
myself have only made significant
the
last nine bear markets.
the
short
side
of
two
of
on
profits
its price looks too high.
A stock
because
should never be sold short
at the top, but at the right time. Short selling
The idea is not to sell short
market
stocks
should
of individual
only be considered after the general
a
shows signs of a top. The best chart pattern to short is one in which
base and then fails.
or fourth
stock breaks out on the upside of its third
the low end of its previous
The stock should be breaking down toward
the first serious
base pattern on increased volume. After
price break
I don't
normally advise
traders.Sellingshort
base,
base
now
bought
in
eager to get out
also provide
sell
The prior
will usually be severalpullback
attempts.
all
who
an
as
investors
area
of
overhead
supply,
provide
of them will be
that zone will be losing money, and a number
belowthe
will
peopleto
is quite
there
near
good
breakeven.
timing
Therefore,
for short
sales.
pullbacks to failedprice
bases
226
of unlimited risk
the element
Does
present any
in
problem
special
short selling?
away
me, I
risk. If a
unlimited
take
out after
be
will
the
6 or
first
stock short, you should
decide
if
a
loss
occurs.
position
Besidesthe
CANSLIM
selection process,
risk
control
overall strategy.
Can you
the price
formula,
short
7 percent
you will
which
at
against
goes
position
loss. Before you
sell
cover
that
any
short
is critical to your stock
which
obviously plays an important
a little bit more about that
talk
role
in your
element
of
trading?
My philosophy is
all
that
stocks
are bad.
There are no
stocks
good
price. If they go down instead, you have to cut your
in the stock market does not include
losses
fast. The secret for winning
being right all the time. In fact, you should be able to win even if you
are right only half the time. The key is to lose the least amount of money
possiblewhen you are wrong. I make it a rule never to lose more than a
maximum
of 7 percent on any stock I buy. If a stock drops 7 percent
below
sell it at the market\342\200\224no
my purchase price, I will
automatically
unless
they
go up in
no hesitation.
second-guessing,
a
Some people say, \"I can't sell that stock because I'd be taking
doesn't
loss.\" If the stock is below the price
give
you paid for it, selling
you the loss; you already have it. Letting losses run is the most serious
mistake made by
most
investors.
The public
doesn't really
understand
turkeys
any
One day,
going back to
without
again
on the
lurking
he had a
the
the
would
which
box,
door,
scare
outside.
in his box. Then one walkedout,
dozen turkeys
have pulled the string when there were twelve
he thought,
\"but maybe if I wait, he will walk back in.\" While
inside,\"
he was waiting for his twelfth
to return, two more turkeys
walked
turkey
out. \"I should have been satisfiedwith
he thought. \"If just
the eleven,\"
one of them walks back, I will
the string.\" While he was waiting,
pull
three
more turkeys walked out. Eventually,
he was left empty-handed.
His problem was that he couldn't
give up the idea that some of the
would return. This is the attitude
of the typical investor
original
turkeys
who can't bring himself to sell at a loss. He keepsexpecting
the stock to
recover. The moral is: To reduce
your stock market risk, stop counting
\"I should
eleven.
leaving
turkeys.
for selecting
stocks, and
you use your CANSLIM methodology
out if you are wrong. Howdo you
your 7 percent rule for getting
decide
when to liquidate a winning
stock
position?
OK,
First, you should hold a stockas long as it is performing
Livermore
\"It is never your
that makes big
said,
thinking
Second,
sitting.\"
Therefore,
top.
after
upset
Your
writings
properly. Jesse
money, it's the
you have to realize that you will never sell the exact
it is ridiculous to kick yourselfwhen
a stock goes higher
goal is to
The
sell.
you
be
not
of cutting losses quickly. If you don't have a rule like
7 percent, then in bear markets like 1973-74, you can lose
in that
70 or 80 percenton your holdings.
I have seen people go bankrupt
If
then
type of situation.
you
you aren't willing to cut your losses short,
should
not buy stocks. Would
drive
probably
you
your car without
open it
box. However,oncehe shuts
into the
wandered
have
turkeys
he can't
No, becauseI never
227
William O'Neil
O'Neil
William
if the
make substantial
price continuesto
profits
after
advance
on your stocks and
you get out.
the
philosophy
cutting a loss at
and
diversification,
what you
is wrong
In my
Why You Win
book, I
repeat a story
or Lose,
told
that provides the
typical investor procrastinates when
decision.A man has rigged up a turkey
box with a
connected to the door,
a big
C. Kelly,
best exampleI know
it
trap
comes
with
the
author
thesesubjects.Let's
of how
many
with
the conventional
with
P/E
wisdom regarding
ratios.
of
the
to making a selling
a trail of corn leading
man holdsa long piece of twine,
can use to pull the door shut once enough
door. The
hinged
that he
by Fred
that
Could you explain
indicators.
overbought/oversold
think
number of factors
including P/E ratios, dividends,
important,
start
brakes?
into
people
for a
disdain
express
consider
To say
that
a stock
is undervalued
is nonsense.In our research,
between the P/E ratio and
stockshad
had
P/E
P/E
ratios
ratios
of 50.
the
of 10 when
During
because
it
we found there
the
best-performing
started
they
thirty-three
is selling
at a low
was a very
stocks.
low
P/E ratio
correlation
Some of
these
their major advance; others
years in our survey period
228
[ 195
3-1985],
the
average
P/E ratio
for
the
an
William
at their
The final
the same time. At
Jones Average during
an
had
stocks
these
expansionphase,
average P/E ratio
that
if,
P/Es,
above-average
best-performing
in the
you
past,
you
were
the
of
approximately
willing to
not
buy
most of
eliminated
automatically
P/E ratio of
end of their
average
Dow
This means
stocks
best-performing
early emerging stagewas 20, comparedto
the
O'Neil
William
stocks
15for
45.
with
the
make
is to buy a stock
mistake a lot of investors
a very good reason
is usually
ratio looks cheap.There
to
I
first
when
was
is
low.
ratio
a
P/E
beginning
ago,
Many
years
why
and
watched
times
I
at
four
the
market,
earnings
bought
Northrop
study
declined
to two times earnings.
in disbelief
as the stock eventually
is selling stocks with high P/E ratios. I
mistake
common
Another
friend's
in 1962 when an investor barged into
remember
still
my
was
in
that
Xerox
a
loud
voice
drastically
office, declaring
brokerage
overpricedbecauseit was selling at fifty times earnings. He went short
to $1,300,
at $88. Xerox eventually went
adjusting for stock splits.
conventional
most prominent
of your
list
is diversification.
targets
Diversification is a hedgefor
owning a few stocks and knowing
you are much
deal about
a great
off
better
them. By beingvery
your chances of picking
superior
much more carefully, which
you increase
those
I think
ignorance.
performers.
stocks
is important
You
in
controlling risk.
the P/E
Your thoughts
There is no
on
and
performance. In
weaker their posture
a stock's
the
pays in dividends,
interest
rates
to replace funds
paid
pay high
that
are
is
naive
to
hold
stocks
in
It
dividends.
out
going down because
a 4 percent dividend and the stock
If you are getting
pay dividends.
they
is a 21 percent loss.
net yield
goes down 25 percent, your
a company
have to
may
more
about
I rarely pay
For an
would
issues
with
investor
four or five;
you advise
the subjects
you
consider
a major
Most
investors
a typical investor
one or two; $10,000,three
$5,000,
$50,000,five
from
Aside
attention
a well-known
indicators. I oncehired
to overbought/oversold
who specialized
in
such
technical
or
six; and
at any
to hold
or four;
$25,000,
$100,000 or more, sixor seven.
we have just discussed,isthereanything
public misconception?
else
really accelerated.
were
oversold,
think
are hocus-pocus.Only about
Even a lot of professionals
that charts
understand charts.
about charts. Just as a
of investors
totallyignorant
X-rays and EKGs, investors
provide valuableinformation
obtained
different
would
be foolish
to use
not
10
are
not to use
Charts
be foolish
would
doctor
5 to
charts.
about
what is going on that cannot
be
other
allow
to
a
follow
number
easily
any
way. They
you
huge
in an organized manner.
stocks
averages
about
talked
you
were topping.
trading individual
using
Do you
volume as
also
use
a clue that
volume
the
of
market
indicator in
as an
stocks?
indicators.
professional
At the very point during the 1969 market breakwhen I was trying to
to liquidate stocks and move to cash, he was
convince portfolio
managers
said the market
telling them it was too late to sell because his indicators
was very oversold. Oncehis indicators
percent
Earlier,
indicators?
overbought/oversold
any
How many
one time?
dividends?
correlation betweendividends
because they
How
229
item on my
selective,
A common
the
wisdom
can also watch
securities.
solelybecause
fact,
O'Neil
the market
break
The volume
is beginning
at least
in a
stock is a measure
to move
50 percent
into new
over the
volume at a key point
is ready to move.
is an
of supply
high
average
ground,
daily
extraordinarily
and demand. When
volume
volume
a stock
should increase
in recent
by
months. High
valuable tip-off
that
a stock
230
William
can also
Volume
manner.
a reverse
volume should
an advance,
after
consolidation
be used in
words, there should be very
a consolidation, declining
During
market.
dry
little
In
substantially.other
When prices
up
William
entera
is going.I remember
a $100 stock one time
and it eventually
selling
went
to $1.1 didn't have any idea it was going down that far, but what would
have happenedif I had held on to it? One mistake like that and
you can't
come back.
In contrast, in a mutual fund, you should sit through
the
bear
markets.
Since most funds
will
be diversified
in 100 or more stocks
across
the American
economy, when stocks recoverafter a bear market,
very
into
coming
selling
the
volume is generally
constructive.
How
If
handle a
do you
a
hit
you
wrong,
is not
it
these
what
because
are
you
is
doing
the whole market may be going bad. If you have
if it is time to start
losses,
you want to pull back to see
tells
that
you
five or sixstraight
of the
out
being
bear
market\342\200\224at
Since most
phases.
remain
markets,doesthis
on the
least
mutual
that
imply
long
long-term
is down
it be
very structure,
their
by
funds,
throughout both bull and
mutual funds are a
believe
you
bear
poor
funds are an absolutely
to surprise you. I think mutual
should own their own
that
I believe
every
person
outstanding
way to invest.
or own
account
stock
individual
own real estate, and have an
home,
substantial
make
any
Those are the only
funds.
mutual
ways
you can
funds are an excellent
above
income
Although I think mutual
salary.
your
the
investment,
is that
problem
them. The key to successin
a fund,
buy
you
you will make the
courage to sit through
diversified
but
the
individual
stocks
I mean, they
but liquidate
it
growth
will
almost
decide
good,
have
to. Unfortunately,
to switch,
diversified
ruining
growth
in
their
fund
decline
So you treat a
big
fund
and
not to
up
75
to 100
20 to 30 percent
very
differently
in
that is
of the emotional element, most of what
exactly right. Because
the market is wrong.
people
do in
Along
that
line,
make?
In my
book
I have
what
are the biggest
mistakes investors generally
a chapter on eighteencommon
mistakes.
think. When
is how
the
need
percent in a bull market,
a bear market.
from
to
mutual
to handle
15 years or more. That
in it for
fund will go
by only
sit
how
money. But in order to do that, you
four, or five bear markets.The typical
three,
stock
is to
funds
mutual
to be
want
really
most peopledon'tknow
tend
their
public tends to treat funds
and stocks like they should
funds?
hold on to their losers in individual
funds
when they are down
general
sharply.
is going
This
well\342\200\224they
fair to say that
should
stocks,
Yes,
investment?
you
like they
By that
major
side\342\200\224during
stocks
in
invested
heavily
formula emphasizes the importance of
CANSLIM
in your
\"M\"
as
recover
most people get scaredand
a
holding
plan. Actually, when
should
more.
sharply, you
buy
market,
Would
The
will
funds
a bear
231
cash.
into
moving
losing streak?
losing streak, and
O'Neil
O'Neil
an individual
stock
The following list of commonmistakesis
from
O'Neil's
book
excerpted
How to Make Money in Stocks, published
by McGraw-Hill in 1988.
1. Most investors never get past the starting
gate because they do not
use good selectioncriteria. They do not know what to look for to find a
successful
stock.
Therefore,
they buy fourth-rate
\"nothing-to-write-home-about\"
stocks that are not acting particularly
well in the marketplace
and are not real
market leaders.
account?
Very,
very
differently.
have a stop-losspoint,
With an
individual
because
you never
stock,
have to
you absolutely
know how far down
the
stock
2. A good way to ensure miserableresults
is to buy on the way down in
stock
seems a real bargain becauseit's cheaper
price; a declining
than it was
a few months earlier. For example, an acquaintance
of mine bought Interna-
O'Neil
William
232
William
tional Harvester at $19 in March 1981 because it was down in price sharply
and he made the
This
was his first investment,
a great bargain.
and seemed
the
low
for
its
near
a
stock
He bought
year. As it turned
classic tyro's mistake.
at
the
was
and
in
trouble
was
serious
headed,
time, for
the
out,
company
possible
bankruptcy.
3. An
up.
If you
even worse
buy
a stock
is to
habit
at $40
and
average down in your buying, rather than
out your
buy more at $30 and average
and
mistakes
losers
putting
good
by
your
then
you are following up
after
bad. This amateur
strategy
money
few
losers.
a
down
with
big
you
cost
at
$35,
4. Thepublic
loves
it's
They incorrectly
100 or 1,000shares,and
feel
to buy
can produce
buy
more
shares
at low
prices per
of stock
in
round
share.
lots of
price!
costs more in
usually
and your risk is greater,
It
stocks,
commissions
since
cheap
and markups to buy
stocks can drop 15 to
low-priced
20 percent
will not
stocks. Professionals and institutions
faster than most higher-priced
a
have
much
so
and
the
$10
grade
$5
stocks,
poorer
you
normally buy
earlier,
for these low-quality securities. As discussed
and support
following
needed to help propel a stock
is one of the ingredients
institutional sponsorship
higher
buy company names they are familiar with, names they know.
you used to work for General Motors doesn't make
General
Motors necessarily a good stock to buy.
Many of the best investments
will be
names you won't know very well but could and should know if
you would do
a little studying
and research.
because
makes
off buying
be better
company's past
inferior.
8. People
weigh
more important.
them feel better,
perhaps
sounder
30 or 50 sharesof higher-priced,
must think in terms of the number of dollars you are investing,
companies. You
of shares you can buy.
not the number
Buy the best merchandise available,
The appeal of a $2, $5, or $10 stock seems irresistible. But
the poorest.
not
the companies have
because
stocks selling for $10 or lower are there
most
been inferior in the past or have had something
either
wrong with them
else. You can't buy the best quality at the cheapest
are like anything
Stocks
recently.
You would
this
233
7. Investors
second-rate
stocks because of dividends
buy
or low
price/earnings ratios. Dividends are not as important as earnings per share; in
fact, the more a company pays in dividends,
the weaker the company
may be
because it may have to pay high interest rates to
needed
replenish
internally
funds that were paid out in the form of dividends. An investor
can lose the
amount of a dividend
in one or two days' fluctuation
in the price of the stock.
A low P/E, of course, is
low because
the
probably
record is
Just
cheap stocks selling
wiser to
serious losses and
O'Neil
9. Most investors
are not able to find
information
and advice.
good
if they had sound advice, would
not recognize
or follow it. The average
friend, stockbroker, or advisory
service
could be a source of losing
advice.
It
is always the exceedinglysmall
of your friends, brokers, or
minority
advisory
services
that are successful enough
in the market themselves that merit
your
consideration. Outstanding stockbrokersor advisory
services
are no more
are outstanding doctors, lawyers,
frequent than
or baseball players.
one outlJ
Only
of nine baseball players
that sign professional
contracts ever make it to the
big leagues. And, of course, the majority of ballplayers
that graduate
from
college are not even good enough to sign a professional
contract.
Many,
10. Over 98percent
of the masses are afraid
to buy a stock that
go into new high
It just seems too high
ground,
pricewise.
Personal feelings and opinions
are far less accurate man markets.
beginningto
11. The
speculators
want to
make a killing
in the
market. They
the necessary study and preparation
doing
for an easy
methods and skills. They are looking
learning
make a quick buck without
really
any time or effort
spending
too fast,
much,
the
acquiring
they
are
or
without
essential
losses
want
way
to
when
12.
and
in buying on tips, rumors,
stories,
6. Mainstream America delights
to risk
advisory service recommendations.In odier words, they are willing
than on knowing
on what someone else says, rather
their hard-earned money
and even if a
are
Most
rumors
are
themselves.
false,
for sure what they
doing
the stock
ironically
will,
in many
cases, go down
in price.
of
unskilled
are small
investors
and
reasonable.
stubbornly
hold onto
They could get
they keep waiting
out
and
their
cheaply,
hoping
dearly.
what
doing.
is correct,
majority
the losses
but being emotionally involved and
human,
until their loss gets much
and costs them
bigger
hold their
tip
to them.
in price.
5. First-time
too
is
procedure.
In a similar
vein,
investors
losers. This
tactic
is exactly
Investors
will sell a
stock
in small, easy-to-take profits
the opposite of correctinvestment
a profit before they
will sell one
cash
with
and
with
a loss.
Your
13. Individual investors worry
too much about taxes and commissions.
be to first make a net
key objective should
Excessive
profit.
worrying
William O'Neil
234
taxes
about
leads to
usually
At other
too long, trying
tax shelter.
on
past,
investors
lost
hope of
themselves
by
holding
even
ego,
taxes\342\200\224strong
weak judgment.
Commission costs of buying
a
or selling stocks, especially through
minor factor, compared to more important
the nght decisions in the first place and taking action
aspects such as making
stock over real estateis
of owning
of
the
One
needed.
when
great advantages
and liquidity.
marketability
lower commission and instant
the
substantially
or
to
take
cost
at
a
low
advantage
This enables you to protect yourself quickly
evolve.
as
trends
new
continually
they
of highly profitable
discount
14. The
is a way
who has spent a lifetime
stocks
researching
American economy, do you have any opinions about the
research
provided
by Wall Street firms?
As someone
are a relatively
broker,
to get
multitude
in options
speculates
rich quick.
When
they
too
buy options,
much
they
because
incorrectly
they think it
concentrate
volatility
options that involve greater
lower-priced
entirely in shorter-term,
works
time
The
limited
period
in
options.
and risk rather than
longer-term
what
also
write
holders.
speculators
short-term
options
Many
option
against
a great risk
which are nothing but taking
are referred to as \"naked
options,\"
for a potentially
and, therefore, a relatively
reward
small
unsound
235
a
achieving
a good profit
investors,
Some
long-term capital gain.
they can't sell becauseof
to get a
convince
erroneously,
in the
investments
unsound
in the
times
O'Neil
William
investment
the S&P
derperformed
brokerage
a few
has
insufficient
Another
I would
80 percent
is written
on
over
the
wrong
of
un-
of
Each
companies.
or her quota of reports, even though
in each cycle. There is
which reports should actually
be written.
are leaders
Street
the consistency
twenty-five
years, that
given
walk
top-rated
the
to turn out his
to determine
assume,
for
random
the
generally
major problem with Wall
sell recommendations.
provides
investor
that
analysts
groups
industry
screening
found
average. One major problemis that
research
firm
analyst
industry
only
World
in Financial
article
An
and
quality
research
is
that
it
seldom
of your successas a stock
don't
think very much of
you
theory.
procedure.
price limits on their buy-and-sell orders.
the investor
This
orders.
market
procedureis poorbecause
place
rarely
They
than
rather
a
emphasizing the
and quarters of point,
is quibbling for eighths
result
orders
Limit
movement.
eventually
overall
and larger
more important
out of stocks that should
not
and
market
the
getting
in your completely missing
15. Noviceinvestors
be soldto
avoid
like
to put
losses.
substantial
making decisions to buy or sell. In other
because
and can't make up their minds. They are unsure
words,
they vacillate
a set of
a
have
do
not
are
plan,
know
what
don't
doing. They
they
they really
of what they
or rules to guide them and, therefore, are uncertain
16. Someinvestors
trouble
have
principles,
should be doing.
17.Most
and
hoping
opinions
is more
rather
frequently
18. Investors
such as
firm or
than
there
because
strong
In
always
look at stocks objectively.They
and personal
hopes
they rely on their
of the marketplace, which
attention to the opinion
are
cannot
favorites,
paying
and
right.
are usually
influenced
stock splits,
advisory recommendations.
increased
dividends,
crucial,
that are not really
by things
news announcements, and brokerage
nor random. It is not efficient
conceived
many poorly
opinions;it is not random
investor
emotions can create trends.
is neither
market
efficient
are too
success requires three basic
process, risk control, and discipline
to adhere to the first two items. William O'Neil providesa
perfect
illustration
of the successful
trader. He has deviseda specific
for
strategy
selecting stocks (CANSLIM),he hasa rigorous
risk
control
rule, and he
has the discipline
not to deviate from his selection and
risk
control
the
most
components:
detailed
regarding
particularly
general
an effective
sense, trading
trade selection
In addition
strategies.
investors
having
The stock
because
in
to
stock
selection
methodology
and investors should find the advice
common mistakes, listed near the end of the interview,
this
useful.
chapter,
the
traders
specific
David
Ryan
Stock Investment as a Treasure
Hunt
stocks. But that was
low-priced
Ryan does not believe in buying
the
not always the case. He remembers
Wall Street
flipping
through
a $1 stock. He ran with
Journal when
he was thirteen years old and finding
David
in hand to his
the paper
a dollar,
and
asked,
\"If I
A
few
found
go up to my room and get
that it didn't quite
I buy this stock?\" His father
told
him
\"You have to do someresearchabout
way.
can
work that
you invest
Ryan
father
in
the
stock,\"
days later,
an article
a company
before
he explained.
the
leafing through
on Ward Foods, which
Wall
Street Journal
made
Bit-O-Honey
again,
and
like a perfect investment, sincehe ate a
Chunky candy bars. It seemed
set up an account for him, and he bought
lot of candy. His father
ten
his
friends
shares
all
to buy the candy
of the stock. He recalls getting
bars so the company
would make more money and his stock would
go
start of Ryan's career as a stockinvestor.
up. That was the official
in the stock market
as he grew older. By
interest
increased
Ryan's
the
time
he was sixteen years old, he was subscribingto a weekly
chart
investment
service and attending
seminars
William
O'Neil
and
other
by
In college, he read every bookon the stock market he
market
analysts.
could find.
in 1982,
was Ryan's idol. After
William
O'Neil
graduating
college
he decided to try to get a job at O'Neil's
He told the
company.
in O'Neil's work and his willingness to accept any
receptionist of his interest
David
238
Ryan
job, no matter how menial, just to get his foot in the door. He was even
to work for free. Ryan
was hired,
and within four years, his
willing
success
investment
led to his appointment as the youngest
vice-president
as a portfolio
of the company, with responsibilities
manager and as
clients.
O'Neil's direct assistant in stock selection for institutional
he won
when
in
his
own
achieved
of
fame
a
regard
Ryan
degree
a
contest
the
1985
stock division of the U.S. Investing
Championship,
run
by
former
University Professor
Stanford
that year was a
phenomenal 161 percent.As
Ryan
What
kind of
239
I would go over our
you
studying?
I studied the company's past
models of great winning
stocks
to ingrain in
stock looked like before it made
a major move. I tried
where I was looking at the exact
same things O'Neil
charts.
historical
I studied
recommendations.
my mind
were
things
a
what
to get to the point
did. He was my role
model.
that his
demonstrate
if to
return
His
Zadeh.
Norm
David
performance was no
fluke, Ryan reentered the contest
one-year
with
a 160 percent
duplicating his previous year's performance
once again with
return
finish. In 1987, he won the contest
second-place
his
another triple-digit
return
year. For the three years as a whole,
in 1986,
you trading at this
Were
time?
virtually
compounded
return
Although
none have
the
hunt
whole
the
was
a remarkable
most
of the
as he
enthusiasm
unbridled
process
1,379 percent.
traders I interviewed have a love
of stock
selectionis like
describes it\342\200\224andhe
still can't
for
a terrific
Ryan,
How did you
believe he is getting
paid
to do
I ran
Initially,
The officesof the traders I interviewed ranged from the unadorned
staked
elaborate, but Ryan clearly had the low end of the spectrum
I was surprised to find
out. Instead of an office, plain
or otherwise,
a noisy,
floor-sized room. Ryan
to be a cubicle within
Ryan's
workplace
I suspect that as long as
seem to care about the lack of amenities.
didn't
he was suppliedwith his charts and computer runs, he would probably
it
Yes. I
be content to work
1983 through
to the
Did your original
a hall
job
closet.
William
O'Neil
& Co.
I just started
studying
and
at
involve any market
analysis?
No,
but
once
I was in,
On your own
Yes.
I would
studying.
time, I take it
take stuff
home every night
and
account
shortly after I started
working
for
the
do?
game\342\200\224atreasure
it.
in
a $20,000
[1982].
company
trading,
by Ryan. To
demonstrated
Yes,I opened
on weekends.
all
back,
account
was
account
the
up to
including some of
down to $16,000.
Do you know
what
sat down
you
and
the
did
about $52,000 by
my
starting
capital.
June
1983.
Then I gave
By mid-1984, my
wrong?
every mistake that I had made from June
of 1984. Probably my biggest mistake
was that
a moderate
bear market\342\200\224the Dow came down
studied
middle
even though we were in
from 1,296 to 1,078\342\200\224Icontinued
the bull market from August
mistake
of buying stocks that
as aggressively as I had during
June 1983.1 also made the
were
overextended.
By that I mean I was
stocks
that had already moved 15 to 20 percent
buying
above their price
bases. You should only buy stocks that are within a few percent of their
the risk is too great.
base;
otherwise,
I turned
it around by learning
from
all the mistakes that I had made.
In late 1984,1 solda pieceof real estate I owned and put all the money
in a stock account.
to play
1982
through
David
240
you confident,
Were
despite your
1983 to mid-1984, becauseyou
were
you
during
performance
poor
felt
that
you had figured out
Ryan
David Ryan
mid-
Any
others?
what
Stocks
Performance
hard and was determinedto be
do
very well. So in 19851 entered the
disciplined,
that year with a
the stock division
I
won
U.S. Investing Championship.
in
the
I
contest
reentered
subsequent years and
161 percent return.
and 1987 as well. I was
in
1986
returns
100 percent
exceeded
substantially
stocks
I was buying
same thing over and over again.
the exact
doing
had all the characteristics I liked.
when
they
Yes, because I had
are
How
studied
this year
doing
you
very
I was going to
I thought
[May 1988]?
this
I am
year,
down. We
Markets (Dow, Jones-Irwin,
trader?
stock
Essential
All
Money
in
on top of
Stocks
(McGraw-Hill,
that is must reading
lot
of people
Another
by Edwin
himself wrote
laugh
list
that
(Lyle
is O'Neil's
New York,
is How I Made
Market by NicholasDarvas
at
the
Two
1988).
fun
Another
in the
Dollars
Inc., Secaucus,
Stuart,
title, but it is
NY
Million
book, How to
Make
book
Stock
NJ, 1986).A
learn a ton.
and you
reading
recommend is Reminiscencesof a StockOperator
Lefevre [reputedly about Jesse Livermore].Livermore
for
How to Trade in Stocks
(Institute
a very good thin volume,
book
I would
Economic & Financial
Research,Albuquerque,
NM,
1986).
Classic
Timing
1988),
NY,
York,
Elliott
on
Finally,
Cliffs,
NJ,
has
which
Wave analysis,
some
which
Wave Principle by Frost and
is Elliott
Inc.,
Library,
by an English
it
those
books
are good,
Every time I buy
pulls out a binder
itself.
[he
cement in
my
mind
important,
Gainesville, GA, 1978)and a book
fellow named Beckman(Milestone
it
but
you
leam
a stock,
I write down
containing
annotated
the characteristics of
helps me learn from my
kind of things
What
the most
the
from the
reasons
charts].
a winning
why
Doing
stock.
market
I bought
this helps
Maybe
even
mistakes.
did you learn by keepingyour
trader's
diary?
overextended stocks,using O'Neil's
criteria
for stock
as disciplined as possible.The more disciplined
you can
the
are
better
in
to
the
do
market.
The
more
listen
to
get,
you
going
you
and
the
more
to
lose.
rumors,
tips
money
you're likely
Not buying
selection,
reading
Super
Publishers,London).
more
book
every
You mentioned earlier that for a while you read virtually
would
list
What
you give to
reading
on the markets you could find.
a
someone starting out who is serious about becoming successful
New
good sections on short selling.
I think
has some validity,
there
called Super
in the
by Richard
The book has a
greatest
winners of all time.
Another good one on picking
stocks
is Profile of a
Growth
Stock
by Kermit Zieg and Susannah H. Zieg (Investor's
Larchmont,
NY, 1972). I would also recommendMarty
Intelligence,
Zweig's
book,
Books,
Winning on Wall Street (Warner
Inc., New York, NY,
and Stan Weinstein's
Secrets for Profiting
in Bull
and Bear
1986)
in a
are
for in individual stocks is
Love (Prentice Hall, Englewood
on some of the
great
study
look
to
what
1977).
Prechter(New
different type of market: Stocks
last three years. I am
have
as quickly as they
aren't
moving
I think the potential
because
this year,
a much smaller amount
playingwith
more limited.
is much
for making a lot of money
Sofar
one on
A good
wrong?
doing
241
and
being
Has keepingthis
diary
been
an important
part of your success?
Absolutely.
Can
I
start
with
you
describe
your procedure
for selectingstocks?
through the stock charts and writing down the stocks
technical
action. In other words,I write down all the stocks
strong
out
by going
DavidRyan
242
to take a
I want
closer lookat.
Your company
follows
on a
charts
I don't look
7,000
you can't
stocks;
but in a
7,000,
week I probably
go through
the data base. Keep in mind
4,000 charts. So, I seea majority
are probably about 1,500 to 2,000stocksthat
at those
look
possibly lookat
What are you
Doesn't that
are
they
under
about
there
$ 10, and I don't
In
stocks
usually
under
$10?
But
a lot
sometimes
those
buys\342\200\224the
of
the
stocks
that
no one
is
The
of those
rather
years. I would
the $15 to $20 range.
wait
After
you
have
interest you,
I
until
stocks
stay
down
there
they prove themselvesby
for years and
up to
moving
down
the stocks that
the charts and written
you look at next to screen your selection?
do
and the last two quarters
record
five-year earnings growth
relative to the previous year's levels.The quarterly
in the earnings growth
deceleration
show
you if there is any
comparisons
the last five years may
rate
over
a
30
For example,
rate.
percentgrowth
in
the
last
two
but if
look
quarters earnings were only
very impressive,
it warns
growth
period
you that the strong
up 10 percent and 15 percent,
factors\342\200\224the
two
earnings
five-year
may be over. Of course,those
during the past two quarters\342\200\224are corngrowth record and the earnings
look
at the
the
99.
One
anticipate.
think
would
price of
starts
growth
earnings
that
thing
that the
to be
a stockto
the
through
market
stock
broad
weight of
the roof.
from taking off in
the
else
The relative
are
screen
in many
just
sit despite
weak and
too late to buy
in analyzing
cases,
that
type
these
the
stock;
hundreds
had
earnings
earnings?
back the stock, but
stocks just go right
would
keep
the stock
of situation?
not believe that the earnings
had in the past.
you using besides the EPS
your stock selections?
are going to
and the earnings
is very important. [The relative
strength
price change relative to all other stockssurveyed.
chapter for a detailed definition.]
stock's
the
very good
holding
off,
stock market is OK? What
might
to
that,
comes
as they
breakdown
However,
may be
continue as strongly
What
say, \"It's
market
Perceptions\342\200\224people
of earnings
They
table.\"
for a while.
table
How about if the
reviewed
what
preferably above 90.
rank of
usually
of peoplethink.
are alreadyon the
biggest winners, we found
What would cause
once
many
chapter for
figure?
EPS is that I
well before the
a lot
is what
That
paying any attention to?
Sometimes.But
an EPS
markets
the earnings
of the OTC stocks?
the best
the O'Neil
[See
80, and
above
have
me about the
would run up
stock
an EPS
in
least
I buy
of stocks
smaller OTC stocks.
of the
aren't
looking for
experience,
my
been on
Yes,
(EPS) rank.
EPS.]
extremely positive.
down there for a reason.
a lot
of the
as possible\342\200\224at
high
surprises
the
out
knock
As
a lot
Actually,
anyway.
Is that a goodrule:Avoid
Yes, because
trade
per share
7,000
regular basis.
through
243
Ryan
bined in our earnings
a detailedexplanation
of
like to
David
strength
See
ranks
the O'Neil
a
David
244
are you looking
What
for in
relative
Ryan
David Ryan
above 80, and
Yes. Investor's
I would almost think
Intuitively,
\"It has
usually
that\342\200\224
stronger.\"
any
relative
to
Well, not necessarily that it can't
get any stronger, but it seems
a high relative
me that, by definition, every stock has to have
the highs,
strength when it tops. How do you avoid sometimesbuying
if you
are restricting yourself to
I am usually
relative
high
mat because
to avoid
able
stocks?
strength
first
step of
screening the
overextended from their base.
in
my
I generally rule out stocks
mat are
the
the
with
relative strength continue to
often
stocks
highest
Very
and
For example,Microsoft
the
market
for
months
months.
outperform
charts,
strength of 97 when
a relative
a share.It
at $50
it was
had
your next
step?
I checkthe
number
I would
Yes,
once the
So you
but
itself,
with
strength
not
relative
I going
in the
how you filter
eventually
strength
right
it is
I usually
better?
get
out
However,
of the stock.
else do you
What
still well
order,
initial
to relative
stock
place relative strength
takes off before that
Are
For
I would
then
be
big
earnings
but
higher,
1 percent
there
ownership, because they really power a
want too much sponsorship. I would
to 20 percent mutual
fund
is the ideal range.
sponsorship
institutional
some
want
other
any
don't
you
elements that go into
important
should be something
example, Reebok had shoes
There
Doesn'tthat
strength,
in
terms
of
Yes. You
usually
then
is
the
stock
out
that
was a
Microsoft
rule
new
people to that stock.
were
hot. Compaq had a fantastic
leader in the software field.
attracts
that
most companies
that have
been around for
a
while?
list?
first,
what
selection process?
Yes.
above 80.
EPS
stock's
look at?
portablecomputer.
an uptrend,
the
strength,
stocks.
value
strength.
breaking
relative
industry
have already split a few times.It is a caseof supply
and demand:
Because
have
more
it
takes
a
lot
more
you
supply,
money to move those
say
than 95.
attention to the relative strength
starts
strength
strength the
of 99
strength
starts falling off,
down your
I would probably
relative
a relative
trend of the relative
very cautious, even if
Am
the relative
higher
only paying
also the
If the
Right.
go
rather
relative
are
the
checking
and the
EPS,
0 and 200.1
between
top 50.
of shares outstanding. I am looking for stockswith
million
shares and preferably
thirty
only five to ten million
shares.Stockswith more than thirty million shares aremore mature; they
stock
that
the
than
less
You
implying
groups
industry
group to be in
screening process,after
the
strength,
ranks
moved
to $161.
Are you
Daily
the industry
want
To continue the
can't get
gone too far. It
already
as a filter in your
industry
90.
above
preferably
of the
selection?
stock
At least
relative strength
also use the
Do you
strength?
245
EPS. Many
times the
report comes out.
don't
nothing
want
to
be playing
really hot or
brand
General Electric
new
going
are exceptions.For example,General
sideways for the
last
their situation around.
five
years, and
it
Motors
looks
like
because there
on. Occasionally,
is
there
has gone virtually
to turn
they are trying
246
DavidRyan
General
With
might the
Motors,
\"new\"
be
the
recent
shift to
high
247
David Ryan
How long do you
a stock?
hold
typically
styling?
but in most
Yes,
entrepreneurial
cases,
are
you
going
number that meet your
a large
the
new
in emerging
I usually
aren't
hold
that
7,000stocks,there must
be
quite
Do you
pick an objective on the
No. I usually
there are probably only about seventy stocks that meet the
it is tough
because
to meet
all the conditions. Then I cut those
down to about seven.
seventy
How do you
I pickthose
base
doubled
already
You
that
actually prefer
to a stock that
opposed
to buy
is in
a stock
a long
that has
already doubled as
base?
Yes, because that shows me there is something very unusual
going on,
and if the situation
is that good, a doubling
be
the
may just
beginning. It
is probably going to double again. To sum it up, I am looking for the
stocks in the market, in terms
of both earnings and the
strongest
technical
picture.
an extremely rigorousselectionprocess,
doyou
percentage of winners in your stock picks?
you use
Since
a high
No,
only
maximum
lot
loss
quicker.
about
triple in price.
losers.
weeks.
because I cut the losers very quickly. The
is 7 percent,and usually
I am out of a losing stocka
make my money on the few stocks a year that double
and
in those
buy?
you
trades easily
make up for all the
That is
think
is just
that
market
another
builds
up,
only use
should
people
runs
base, and
then
could put
in
I liquidate.
when
market orders?
and
back
trading
forth, you
a
think the stock is going to make a big
limit order. But if you really
to
be the only reason
should
move\342\200\224and that
you are buying the stock
of a point.
begin with\342\200\224then there is no reason to haggle over an eighth
Just buy the stock. The same thing applies to the downside; if you think
the stock is going to drop, just sell it.
I learned the lesson about market orders in 1982 when I was trying
at $15, for $14%. The next day it
which was trading
to buy Textone,
to buy the stock at $16k
I
and
couldn't
Vh
bring
myself
points,
jumped
when
I could
went
to $45.
have bought
One element of your
new high. Wouldn't
it
trading
style
is buying
the fundamental
place
well
In somecases,they
might
earlier. That stockeventually
a day
at $15
a stock when
it makes
conditions
screening
a
you use
that point?
before
have
50/50,
The profits
Do you
have been in
I allow
I
stocks
the stock
until
wait
down.
breaks
In a dull
I also
the
has
seventy to seven?
have all the characteristics plus a great-looking
look at how the stock has done in the past. For
stock doubled before? A lot of the stocks I buy have
and tripled before I buy them.
stocks
pattern.
example,
from
down
cut
about
strong
that
stocks
two
criteria.
On average,
criteria,
winners for about six to twelve months,
three months, and my losers less than
my big
companies.
growth
imagine if you go through
I would
to find
small
you
have
the
low
who
have
been. But
chance of making
a base back to the
the most
end
bought
of
it near
the
highs
and
those people are going to be happy
lot of overhead resistance.
I am trying
When
money.
high
end, there
to buy
a stock
when
a stock is coming off
will
be
a lot
a loss for months.
out at even, and that
of people
sat with
Some
to get
creates
of
a
248
David
So, a
stock which is at new highs has much
more
of an
open
Ryan
If
running
field?
it
top
no one
because
Right,
first
the
David
ahead of
But the downside of that
a lot of times the market
do you
avoid
has a profit;
Everybody
opportunity.
to
wants
is if
you wait for
pull
at
get out
is happy.
everybody
will
a breakoutto
new
highs,
trading range. How
those situations?
into the
back
in
whipsawed
getting
a loss and
is at
you
249
Ryan
of the
end
base, or do you
by the
a lot
to a new
stock
moves
in the
stock and
volume. If the
it is
high,
a lot of peopleare
important as a filtering
just
the
I
to new
moves
stock
the
10 percent,
be
would
high
ground,
to avoid
top of the
base,
Do you
volume is
only
up
wary.
I want
to buy
to
new
highs,
it as
soon as it
use the table
Do you
to new
at
what
at new highs
a stock
buy
assumea stockthat
$21
and
to
you
buy
decide
it
has
it
was
first
day you
in
Investor's
percentage
levels?
In fact,
that you are
them.
buy
indicators
that lists the stocks with
to the past fifty-day
Daily
volume
in
best
the
relative
to help
using
you
spot stocks
it to verify
that
are
just
about ready to
take off.
stocks you have alreadypickedout?
highs.
then
pulls
back into
the range,
breakout? For example,
between
$16 and $20 goesto
trading
it. What do you do if two days later the stock is back
do you
point
and
base a
volume
Yes.
If you
back into the
going
price
the
profit
increase
Yes, I use it
Are
goes
your losses quickly.
to cut
or do
consolidate
to
will
That's
reenter.
not
but
on the first day is one of the
having a profit
to
make
money on the trade.
going
greatest
first day the stock breaks out
for a few days?
it the
buy
want
be at a
should
Stocks
Yes.
average
you wait for it
penetration?
bearishindicator?
process
but the
some cases, it
the base. In
reenters
From a technical perspective,is the
interested
getting whipsawed.
Yes. If
below the
the
it.
buying
becomes very
So volume
telling you
one day and
doubles
volume
minimum
some
require
if it is just
even
mean
break out and come
fine, and I will stay
back to
with the stock. But if the top of the base was $20 and it breaks
the
stock
didn't
the
because
half
of
at
least
I
to
sell
want
$193a,
position
it
into
its
back
a
stock
base,
when
drops
Frequently,
keep on moving.
In
the
the
base.
of
end
to
the
lower
example,
goes all the way back down
to $l93/i, it will often go all the way back down
if it goes from $21 down
No, if it
back to
to $16. Therefore,you
You can tell
Do you
at all?
its base
reenters
a false
interested
timing
After
I have
in buying,
done my weekly screento
I sometimes
for
the stocks
select
the stock
to
hit
that
I am
column
as a
signal.
been
Can
wait
you elaborate
on using volume as a trading tool?
$19?
When
If it
position.
reenters
its
base,
I have
a rule to cut at least
50 percent
a stock
see volume
of
the
volume starts
blast off.
that has
been moving
up
starts
dry up. You should see a downtrend
picking
up again,
it usually
consolidating,
in volume.
means
the
stock
you
want
to
Then when
is ready
to
250
David
consolidation phase, decreasingvolume
is
see very high volume, do you
start
thinking
So, in the
to
continue
Ryan
You
want
as the
volume
in
a lot
in volume
an increase
a decrease
that
shows
of peopleare
the
when
getting
out of
breaks out,
stock
but
the stock.
want
you
in
volume
other
the
When
signals
or a
market,
an
stocks?
ratio
P/E
high
The most profitablesituation
trend
earnings
is trading
that
you look
for?
from
avoid
want
you
of further
absence
to see
increased
price progress on
the
For example, if the Dow declines
from 2,200 to 2,100, trades
down
to 2,085 the next day, and then
closes
higher on increased volume,
It
that
there
it demonstrates
are a lot of buyers coming
support.
suggests
a little
was
in line
that have
wouldn't
stocks,
prevented you
of the
because
different
fact
that
whole
the
group was
P/E ratios.
at high
trading
P/E ratio
biomedical group move?
the whole
catching
That
ratio
P/E
high
you find
is when
at a
ratio.
stock consolidates.
stock, is bottoming,
volume combined with
I do.
cases
many
a stock with a strong
with the broad market
If you
Any
avoid
top?
potential
Yes,
Yes, becausethat
251
therefore
Do you
If you
good.
David Ryan
downside.
Does that
that
imply
exception made for
be an
should
there
a new
industry?
in.
The screensyou
described
have
O'Neil'sCANSLIMmethodology.
definition.]
Did
you
add any
in selecting stocks are
[See the O'Neil
chapter
of your own elements to
Yes, I learned that most of our greatest
off with prices under thirty
times
[price/earnings]ratio
ratio
is a lot
higher
earnings.
important. I think
lower P/E ratio stocks.
it
for
I guess
I'm
When
a P/E
ratio.
ratio
So
not too low
started
O'Neil
says the P/E
success
is, in that your
talking
that
if the
buy stocks with
beyonddouble
exact.You are
stocks.
P/E ratios?
about lower
Yes, the
is between
even and
up
to
two
stocks
times the
rules.
these
with
all.
it
up
one of
the
that
have
S&P 500 P/E
S&P 500 is at fifteen
times earnings,
you should try to
P/E ratios between 15and 30. Once you start going much
the S&P 500 P/E ratio level, your
has to be more
timing
bound
to make a few moremistakeson higher
P/E ratio
I
need
about.
Instead
year
growth
stock should
to hit new
any
time
more
I think
1980s versus
the
best
after
time
winning
in 1980 and
stocks
time. It
hasn't changedat
1960 and line
stocks from
they
are
going
to have
characteristics.
same
short,
same in the
1960s?
the
same types of stockswork
one of the greatest
with
the
stayed
can take
We
Do you have
P/E ratio stocks,I mean
absolutely rigid
basic market behavior
the 1970sand
exactly
But
to be
want
don't
you
Has the
approach?
recommendations
winning
is not
on
his
Yes,
essentially
on the
thoughts
to study
it
be
lows.
losing
relative
more
and
you need to flip
of a good growth
record and quarterly
subject of short
all
these
record,
selling?
However, to pick
experience.
we were talking
characteristics
you
earnings
a
should look for a poor fivethat are decelerating. The
strength, breaking uptrends,
and
starting
252
David
Do you
think that short
superior
performance
Yes,
I think
if we
selling may
element for
a critical
be
go into a long
David
Ryan
about three times
help.
as hard
will tell
O'Neil
Bill
But,
that
you
do you
How
is
shorting
Bill says he has made
substantial
in
two
of
the
bear
nine
markets. He thinks
money
only
past
best thing you can do in a bear market is just sit it out.
as
stocks.
buying
the
rally;
the
previous
rally.
too late?
it's
before
By how well my
start
it indicates
losing,
have five or sixstocks
up.
else
What
do you
in a
row that
the Dow
net
get stoppedout,
a caution
the
phase,
If I
flag goes
line [a graph
the number of New York
stocks advancing
Stock
Yes,becauseI have
Dow
only
you
going
the market.
have the
almost
be able to trade successfully
every
long. Do you
that
year
defined set of principlesthat will
for years to come. Also,
a very
established
successful trading
I
stop learning.
to never
Yes.If
stabbed
really
business
the
the foundation for
provide
that
are
better
getting
as a
trader?
learn from everysingletrade
get better and better as time goes
try to
to
that
you
make,
you are
on.
The
declining].
the
will
you
Do you feel you
advance/decline
daily
between
each day versusthe number
advance/decline tends to top out a few months before
Exchange
bull
the
is developing.
signal a bear market?
and
difference
been in
in the
very few stocks that participated
did not move as high as it did on the
rate was raised for the first
the discount
time?
a long
plan
look for to
between
Divergence
of the cumulative
are doing. If, during
that a bear market
stocks
individual
August,
years. I think
that
confidence
line
in late
Also,
were
there
that
advance/decline
in three
time
for
the leaders
fact
and the
You haven't
recognize a bear market
was on low volume?
the rally
Because
bear market?
Yes,
it would
253
Ryan
Why are you
does.
so much more successfulthan
the
typical
stock
investor?
Did that
happen in 1987?
doing something that I love to do and find fascinating.
nine
hours at work, I go home and spend more time on
or
eight
I have the charts delivered to me on Saturdays, and I go through
markets.
if you love what you
on Sunday. I think
hours
for three or four
them
successful.
doing, you are going to be a lot more
I am
Because
The
advance/decline
before the
out during
peak in August.
topped
market
stock
Were you looking for
a top
because
the
first
quarter
of 1987,
well
of that?
After
A lot
Not at that point, because
very well. The big clue that
Dow came off its high at
rally, and
juncture,
then
I decided
the
market
it was
a lot
the
of the
market
was really
2,746, there was
got hit for another
time to move out
stocks
individual
of the
topping
a very
feeble,
were still doing
was after the
low-volume
90-point loss. At
market.
that
of people who
and still
That
have
is probably
only
it.
mediocre,
because
picking stocks.They
stock, I'll buy it.\" Or
use
invest
read
or even
they have
an article
they buy
spare time to study the
their
not
the
are
market
losing, results.
found
and say,
a disciplined
\"That
a stockbecausetheir
sounds
broker
system for
a good
like
recommends
254
David Ryan
would
advice
What
most
The single
you give
I can give anybody
is: Learn
to
become a successfultrader.
way
only
from your
The greatest thing about the market is that it is
always fun to be looking
for that next big winner\342\200\224trying to find the stock with all the
characteristics
that are going to make it have
a big move. The feelingisn't
any
different
now
than when I was only
500 shares. There is still the
trading
same satisfaction
of knowing
found
a stock before it made
its big
you
move.
to
chart
weekly
in here
and
[he pats
I am trying
for less
than
trading
learned
help
Ryan
usually
will
be summarized
not consider
as: Buy
buying
any
high
stock
Ryan
and
sell
selling
is basically due to using aprecise methodology and
to follow it. As Ryan
has clearly
demonstrated,
doesn't
have
to
be
to be extremely
methodology
original
that most of his approachhas been
Ryan
readily
acknowledges
from
the
and teachings of William O'Neil. With
directly
writings
of hard work and in-depth study,
he has been able to
apply
success
great
successful.
His philosophycan
$10.
Ryan's
applying
is
by the semi-facetious
would disagree.
higher. In fact,
the
Somewhere
wisdom about how to make money in stocks
advice: Buy low and sellhigh. David
conventional
summarized
a
hunt.
treasure
book] there is going to be a big winner,
it.
find
The
a game.
a giant
is like
To me it
is.
It
the
like
sound
it
O'Neil's
trading
discipline
philosophy
When traders
with
deviatefrom
great effectiveness.
own rules, they invariably tend to
During mid-1983 to mid-1984,he witnessed
a period of extremely poor performance. He let his previoustrading
success go to his head
by repeatedly breaking one of his own cardinal rules:
Never buy an overextended
stock [a stock that is trading
far above its
lose. Ryan
is no
Every
time
reasons for buying
exception.
their
he buys
the
stock.
a stock, Ryan
Whenever
annotates
the chart
with his
he liquidates or adds to an
This
comments.
chart is includedwith updated
of
characteristics
in
mind
the
his
reinforce
has helped
key
Ryan
approach
entries
has
his
more important, reviewing
stocks.
past
Perhaps,
winning
mistakes.
him avoid repeating similar trading
helped
is to buy
O'Neil's
basic approach, like William
approach,
Ryan's
on the very best stocks
and strength. He also believesin focusing
value
observation
his portfolio. One important
as opposedto diversifying
Ryan
his
trades
is
that
best
find
traders
other
which
made,
helpful,
may
many
reservation
winners
are
right from the start. Thus, he has little
usually
risk
maximum
he
will
The
a
of
trade
about getting out
quickly.
losing
is
an
rule
A
on any trade is a 7 percentpricedecline. rigid stop-loss
existing
You make
255
Ryan
made a lasting
most recent price base].The 1983-1984
experience
that
mistake.
has
not
and
he
on
repeated
Ryan,
impression
element of Ryan's
is an essential
a trader's diary
Maintaining
approach.
comments?
final
Any
trader?
advice
important
mistakes. That is the
the novice
David
essential
position,
ingredient
a new
to the
trading approach
of many
successful
traders.
Schwartz
Marty
Champion Trader
I
interviewed
Marty
him to be very
Schwartz
opinionated
over into
anger when
the
philosophy
of trading.
nerve is hit
a raw
trait
I found
hours.
subject
admits
trading). In fact, Schwartzreadily
in trading.
with
None of this \"going
In his view, the marketplace
for Schwartz.
as program
a useful
about
spills
occasionally
intensity
office after trading
at his
and intense
that he
This
(such
finds anger
the market
is an
flow\"
arena and
other traders are the adversaries.
I was also struck
dedication to his daily work routine.
by Schwartz's
I arrived
and continued to run
He was doing his market analysis when
I left that evening,
his
calculations
our
interview.
When
through
during
was still
his analysis
no
that
doubt
followed
his
daily
unfinished.
he would
Although
finish his work
that
work routine religiously
he appeared very tired, I had
Schwartz
has
evening.
during
the
past
nine years.
Schwartz spent a decadelosing
on his trading before he
money
as a remarkably successfulprofessional
found
his stride
trader.
During
his earlier years, he was a well-paid securities analyst,
as he
who,
describes it, was always broke because of market
losses.
he
Eventually,
in
his
the
of
changed
trading
methodology,
process
transforming
a repeated loser to an amazingly consistent winner.
Not
himself from
only
in every year since he
has Schwartz scored enormouspercentage
gains
turned
full-time
more than
trader
3 percentof
in 1979,
his
equity
but
he
on a
has
done so
without
month-end to month-end
ever
losing
basis.
258
Marty Schwartz
of the
matter
Schwartz tradesindependently
from
an office at home. Heis proud
fact that he has no employees. Solitary traders of this type, no
how
are usually
successful,
to
unknown
the
In nine of
of astounding.
entered (typically
ten
four-month
stake of $400,000),he
contestants combined.His average
experiences
made
he
more
in
return
contests was 210percent\342\200\224nonannualized!
(In the one
four-month
contest
he
witnessed
a
near
breakeven
In his
remaining
result.)
in
a
he
scored
a
781
contest,
return.
single entry
one-year
percent
Schwartz's
entry into these contestsis his way of telling the world that
he is the best trader around. In terms of risk/reward
he may well
ratios,
be.
do you
From whenever
you
me
about
want me to
think
early days.
your
go?
is appropriate.
is very relevant to go back to my childhood,
quite frankly. Should
I lay down on the couch? I grew up in New Haven in a family of modest
means.I was very hard working. When I was seven or eight I would go
with
out
a snow shovel and come back with
$10 after a snowstorm.
Even now, I still put in about twelve hours a day. I feel
not
uncomfortable
my
than
the work;
doing
calculate a lot
own
charts.
that's
doing it now as you
ratios and oscillators,
I am
why
of mathematical
My attitude is
I'm
someone
competing
I always
that
against. The
want to
way
are
sitting
and I post
be better prepared
I prepare
myself
is by
doing my work each night.
As
because
I grew
it was
an honor
up, I realizedthat
emphasized
strongly
student
top half of the
the
in high
school.
education
in
my
was my
family.
ticket, probably
I studied
hard
Amherst
and
was
which was
College,
to freshman
my life. When I went
half
left and right and realize that
class and half of you
of those who
5 percent of their
matriculated
are
there,
one of the
great
they said,
are
you
going to be
to be in the bottom
orientation
of
going
myself, were
including
in
school class. Perceiving
going
high
realization.
first
everything was a difficult
had to get a
It was the first time in my life I had to struggle. I even
the concept.
But when I
for calculus
because I just wasn't getting
tutor
bulb
clicked
on, it was like looking at a
finally
got it, when the light
I really experienced the joy of learning and working
magnificent
painting.
to an end; now, I found
a means
there. Before, studying was only
hard
had a profound
influence on
itself was a real joy. Amherst
that learning
top
to be
at
the
I wasn't
that
top of
me.
After
graduating
School.
At
military
deferments.
the
didn't
that was recruiting
Well it
here. I
in
Vietnam
Please start by telling
back
\"Lookto your
the
short
these nine
How far
of
half.\" Most
championships
trading
a starting
with
than all the other
money
the
I was acceptedto
Schwartz,
in the
public.
a degree
of fame through
however, has attained
entries
repeated
U.S. Trading Championships,run by Norm Zadeh, a Stanford
His performance
in these contests has been nothing
professor.
University
259
Marty Schwartz
time,
Business
was accepted to the Columbia
had
ended
just
graduate school
government
and combat in
at Columbia
I was unhappy
in 1967,1
the
Since
appeal to
me, I joined a U.S.Marine
Corps
reserve
unit
officers.
You have to be somewhat crazy to be in the Marines; it is a very
unusual organization. Theypush you to the edge and then rebuild
you in
a
for
that
their own mold. However, I have
developed
great respect
been
Marine
the
because
Corpshistory,
they've
bureaucracy,
throughout
have
As a second lieutenant
consistent in their training
you
procedure.
be
well
skilled.
so
must
They
put
you
forty-six lives under your control,
cut the mustard, you didn't
you under a lot of pressure.If you couldn't
rate that I believe
approached 50
get the bars. We had an attrition
percent.
I was
at
that
home;
Jewish
time.
that
Candidate
School in Quantico
the only reservist in Officers
There were 199 regularswho went to Vietnam, but I came
I was also the only
I was recruited.
was the deal I made when
person
there, and
they
weren't
disposed toward
on my
of
to knock
the crap out
him,
historic
of what it
significance
that
any kind of pressurepoint
I had to do wasscrubthe magic
too
favorably
Jews. One time, the platoon sergeant
forehead with a magic marker. I wanted
the
but I figured he didn't really know
I knew he was just trying
to find
meant.
would make me break. The hardest
thing
off my forehead. That's a bitch [helaughs].Anyway,
marker
drew
the
Star
of David
Ipersevered
Marty Schwartz
260
of the
successfully. I consider that a
as time passes, and you
it through
made
and
achievement.The
fine
really
improves
feeling
At
No,
Marine training
me the confidence to believe
gave
that
I could
Just as
perform at levels beyond my previous
expectations.
Amherst had strengthened my mind, the Marines
strengthened
my body.
if I
The two experiences
convinced
me that I coulddo almost
anything
and provided
for my successful
worked hard enough
the groundwork
trading. That's not to say it worked right away, because it didn't.
After
out of the Marines, I returned
to Columbia
and held
getting
rigorous
some boring part-time
I completed my M.B.A. My first
at Kuhn
Loeb. I specialized
while
jobs
time job was as a securitiesanalyst
health and retail field, and I stayed
years. I found
for two
there
full-
to recruit
trying
on
that,
you.
I left for XYZ in 1972.1 want to leave out the firm's name and other
particulars for reasons that will soon become obvious. This provedto be
one of the most difficult
in my life and career. XYZ
had thirty
periods
divided
analysts,
want
directordidn't
reviewthe
work
would be
I had
to being
written
by the
critiqued
other analysts
a bearish
told
a client about my
in progress.
What
stocks began plummeting
started
spreading rumors
report
It
New
was
York
you.\"
but
should
which
beenset up.The
found
official
rotten,
bitter
go
was
night
on a flight
report. He even
did
utility
circulated
he have
among
to send
the
a copy
him
out
stocks,
other
my
I told the
realized I had
because an exchange
together. It was a
I shut the door of my
sour.
the drive, the desire to
for me, and
experience
I was very
working. I lost the
spark,
succeed.
What
were
I was
still
at that time?
you doing
but I didn't have my heart in it. Besides that
it was early 1973, and I felt the market was
negative
experience,
I
in technical
had
become
interested
out.
very
analysis. At the
topping
a
line
had
formed
the
advance/decline
time,
major
top many months
I was covering were going to go
earlier. I felt that the market and the
stocks
reports,
doing
whole
down. Still, peoplewanted
to know
how many widgets a company was
I
the
to write bullish reports, because
spirit
sellingand at what price. lost
if stockpricesare going down, who cares how many widgets are being
sold.I was
fifty
times
stocks, which in those
It was all so ridiculous!
growth
covering
earnings.
sold at forty
days
or
ever
you
from
discouraged
happened
to the
writing
bearish report
bearish reports? Also, what
that
was
leaked?
Nobody
wrote bearish reportson Wall Street at that time. I was allowed
the bearish report on the hospital
management
industry, but
ever intended to publish
it. Of course,
after it was
believe
they
they were forced to rush it to the printer to save their scalps.
to complete
from
home
sent
the exchange
exonerated;
drug
analyst
eventually confessed
it all
out what happened by piecing
and stopped
office
be all right if
would
everything
of return.
rate
of
work?
the
The
prior
report's release, becausethe client
a negative
that
report was about to be issued.
a bitter experience. I had to testify
for six hours before the
Stock Exchange. My company's counseltold me, \"We will
represent you,
inform
right
one
to a
but I assumed that
I did. I was totally
I didn't,
truth,
Were
on hospital management
report
know what had happened?
the
within
sent out.
one of whom got drunk
analysts,
California
and
research
the
one of the senior analysts of each group
The policywas that our research reports
the industry would eventually
of the normal
routine, the draft
part
Because
often.
subgroups
that
saying
As
three
circulatedand
prior
subgroups
into
to work, he had
of the analysts.
did you
time,
the
in
Wall Street, the best way to receive a pay increasewas to change
jobs.
The company you work for never wants to pay you as much as a
company
the
the real pain
forget
experience.
The
261
Schwartz
Marty
I don't
leaked,
to the
our interests
diverge at
any
point,
we will
What
eventually
I lost my job in
That was a very
happened?
the bear
interesting
market and was out
period,
because
of
work
I believe
for four
you
learn
months.
the most
262
Schwartz
Marty
in those days was a lot of
adversity. I had about $20,000, which
a real lunatic who had developed
and I was going to trade. I found
money,
At the time, he had to rent
commodities.
for trading
computerprograms
through
that today you could do on
monster machine to run programs
I put
that sort of thing.
different
was
averages,
moving
using
any
some of my money in with him, and I lost most of it\342\200\224along with my
dreams of glory.
my capital, I decided I had to go back to work. I
dissipated
Having
was in for a shock. Although I had been totally honest and forthright, I
It didn't
was tainted. \"Oh, aren't you the guy who wrote that report?\"
want
don't
matter that I had been totally ethical and exonerated.People
of your own
with any controversy, even if it wasn't
to get involved
time
on a
PC. He
& Hanly, which,
helped me get a job at Edwards
who
a
of
had
firm,
analysts
group
although
Imet
Bob Zoellner, the managing partner
real stars. It was there that
became
of the firm. He was a great, great trader.Healmost single-handedly
kept
the firm afloat in 1974 by shorting stocks and making money in the firm's
side. He
capital account, while they were losing money on the operating
started his own hedge fund in 1976 and went on to become an
A
it was
a retail-oriented
extraordinary success.
I always had
me in good stead.
went out to lunch,
interviewing
for
another
a good noseas
When
began
I noticed
going
job. So,
I had another job lined up
when
at Loeb
a securities
that the
out to
the
lunch
firm
analyst,
and
it
has
head of research,who
regularly,
stood
never
I started
went bankrupt
in
fall
1975,
Rhoades.
and she had a profound effect on me.
In 1976,1 met my wife-to-be
it was the
She made me realize that
my life was not a dress rehearsal;
I had steadily earned
real thing and I had been screwing it up. Although
I
lost money
because
I
almost
broke
was
still
consistently
salaries,
good
in the
market.
1978.
We got married in March
By that time, I was
married
made
on business
Hutton.
E.
F.
trips harder
going
Being
workingat
from
friends
are twenty-five,
and harder. When
college in
seeing
you
but
when
is
different
cities around the country
you get in
very exciting,
the
had
to
me
out
it gets real stale. My wife literally
push
your thirties,
door when I had to go on these trips.
like
your
appointments
in
fly to
Houston,
that night to
I wanted
financially.
out.
San
Antonio
for
dinner,
be ready for breakfastthe
to have
a family,
I had resisted getting
I
But, at that point,
but
next
I felt
and then
fly
morning.
I got
that I
because
married
to
later
Dallas
sick of it.
wasn't able to
it
handle
I was afraid of being
it had been a
wondered
whether
seem
to
know
to handle failure
how
People
because
It almost becomes a negativecause and
they can produce it themselves.
tapped
self-fulfilling prophecy.
effect
cycle,
wallow
had
whereby
in it.
they produce
it,
they
know
By mid-1978,1 had been a security
analyst
intolerable. I knew I had to do something
of mine
friend
263
I resented what I calledthe \"tap dances,\"
which made you feel
a piece of meat. You meet with portfolio managers to
give them
views on the stocks you follow,
so that they will give commission
business to your
firm. On a typical trip, you might have five
they
making.
Schwartz
Marty
become
how to handle
for eight
different.
it,
and
years and
it
I always
knew I wanted
to work for myself, have no clients,and
answer
to no one.
That, to me, was the ultimate
goal. I had been brooding for years,\"Why
I doing well when
wasn't
I was groomed
to be successful?\"
I decided
it
was now time to be successful.
When
a brokerage
firm wants to hire you,
they'll
give you
Once
are
anything.
there, they are far less responsive. So, when
you
I was
I asked for a quote machine
being romanced by Hutton,
in my office. I
was the only securities analyst that had a quotemachine.
During
my last
I started closing the door
to my office so that
year at Hutton,
I could
watch the market. I talked
to my friend Bob Zoellner severaltimes
a day,
and he taught
me how to analyze market action.For
when
the
example,
gets good newsand goes down, it means the market
is very weak;
bad news and goes up, it means
the market is healthy.
that year, I started taking
trial
During
to a lot of
subscriptions
market
when
it gets
myself a synthesizer;I didn't
methodology, but I took a number of different
and molded them into my own
methodologies
approach.
I found
a guy, Terry
and had an
Laundry, who lived in Nantucket
unorthodox
called the Magic T Forecast.He was
approach
an MIT
with a math background, and that
engineering
graduate
to me.
appealed
His basic theory
was that the market spent the same
amount
of time going
as going
down. Only the amplitude was different.
up
different
newsletters.
necessarily create
a new
I consider
264
In my experience, markets comedown
Doesn't that contradict the theory?
The market
the
a lot
fact,
properties
For the
and it has
I learned,
that
go
they
up.
the price high. That,
had different
theory
been extremelyhelpful
record, what is the name of
Did you
He
newsletters.
But
to me.
book?
Laundry's
book. He just extolledhis theory
some pamphlets. Actually,
his various
through
also had
it was
kind of
to earn
there are
occasionally
determining mathematicalprobabilities. Although
situations where the market
goes three standard deviations instead of
98 percent
of the moves will stop at
based on the likelihood that
two,
two standard deviations, I'll take that bet any day of the week.
And, if I
control
and stop myself out X dollars
I am going to use risk
am wrong,
away. That is the most critical element.
subscribedto all these letters, developed a
like crazy. By mid-1979,1hadrun
$5,000
up to $140,000
Anyway, I
traded
two
just
years.
from
turn
a loser
to a
it came
when
able to
I was
more
upsetting
happen.
I figured
winner,
I said,
the
philosophy
painful
separate my ego
Before,
accept being wrong.
than losing the money.
I used to try to will things to
it
can't
be
it out, therefore
wrong. When I becamea
it out,
\"I figured
because I want
from making money.
I was wrong
admitting
to save
that
to take a
but
if I'm
wrong,
I'm
go on to the next
winners are always in front
my money and
my
getting
loss. If I make
a mistake,
so what!
the
trade.\"
of me, it
wife
my
is that
time
response.
I
rich as a technician.
me, \"Go out
said to
on
own.
your
wanted to work for yourself. The
'11 go back to doing what
you were doing
always
you
was
as being
brave, courageous, and strong,
the chance, I was scaredout of my mind.
about
was tied up in tax deals and
$30,000
take
for a
$20,000
seat on the American
on
when I went
Stock
which
in-laws,
Exchange.
as a market
gave me $70,000 of
the floor
capital.
working
off losing
I started
in Mesa
involved
in
first
my
two days
the
in
I got
business.
options because Zoellner,whom
Petroleum
I
I called him
undervalued.
they were significantly
from
the
I must have
\"Are
sure
are
day
floor,
you
you
right?\"
had a grand
total
of ten options. I was down
and dying. I was
$1,800
petrified because,in my mind, I was down almost 10 percent, since
didn't
consider
my in-laws' money part of my own working capital. The
thought
profoundly
respected,
the
second
I
day,
Mesa
After
the
think
options
first four
You
talking
to a
started going up and
months, I was ahead
never
1981,1
in a
can make $40,000a month
day without a problem.
were
doing
very well
I never
looked back.
The next year
by $100,000.
earned
good friend of mine
anybody
do that
out,
to
$50,000 from my
I borrowed
maker.
remember
When
hell
But
I had $140,000, of which
$92,500 was used to pay
That left me with about
winner?
needs
a rich
fundamental analysis as an analyst?
you've
I earned $600,000.After
able to
I was
When
and got
years
met
nonsensical
I always picturedmyself
but
third
When did you
and
can happen
say, \"I'venever
before.\"
After
funny.
a salary.
thirty-four
that
worst
nine
were still doing
you
Yes,
for his
him in a Barron's
article, he got a lot of inquiries
\"I
don't
have
eccentric.
His
is
a
He
little
response was,
any
pamphlets.
have
them and made somemoney.
printed
copies available.\" He should
of indicators
that I used to
I developed
and synthesized a number
determinewhen the market was at a lower-riskentry point. I focused on
in
to technical
fundamental
from
transition
laugh at people who
It is such an arrogant,
I always
technician.\" I love that!
used fundamentals for
I mentioned
and
methodology,
make a complete
Absolutely.
You're
There is no
265
analysis?
which
precedes
high, but an oscillator high,
his
work. The
is a major cornerstone of
price
than
quicker
Schwartz
Marty
it goes down may be a distributive
process.
element
is not
you use to measure the time
before
movement
them M-tops. The point
I call
in
Schwartz
Marty
in
less
1979
trading
on the floor. Why
seven
I
figures.
and saying, \"I don't
Now I can
options.\"
than
you
leave?
years. I
used to
did
By living
is
not
so
It was
very slow during
upstairs office to eat my
lunchtime
lunch.
While
in those
I was at my
go
to an
desk eating a sandwich,
266
Marty
Schwartz
I came to realize that
I would do my charts and look for different
ideas.
than
I could
see much more sitting
at the desk, looking at a machine,
being at a post, trading an option. On the floor, the specialists chose the
because they paid
machines,
they wanted to keep on the quote
symbols
to find what you
the rent on them. So you always had to run around
wanted to see. I felt much more comfortable upstairs.
a year and a half later, after I started earning
a lot of money,
About
the floor wasn't big enough.
There
was a much bigger arena to play in.
Another reason for my move was the fact that, in 1981, a changein the
than
tax laws made it more
lucrative
to trade futures
stocks and options.
In my futures
I didn't try to make two
one year,
four the
trading,
more in my futures
next, eight the next, etc. I didn't earn significantly
I used my profits to invest in
in 1987 than I did in 1982,
because
trading
to enhance
the quality of my life.
real estate
and other things
I was brokein the 1970s, and I never wanted to be brokeagain. My
bad is
was that if you make money every month,
nothing
philosophy
won't
be
the
richest
You'll
never
to
to
person.
happen you. So,you
going
does it make? I'm proud
be the richest person anyway.
What
difference
of my futures trading, because I took $40,000and ran it up to about $20
with
drawdown.
million
never more than a 3 percent
Did
Yes,
you continue
but
with
time horizon.
of
Will
stock
you
No, I find
Because
No,
it is
I traded stocksfrom
a different mentality.
I don'tfeelthe
same
pressure
a little
when I own
longer
stocks
it harder
as readily
normal
from the
short
side
as the
long side?
get out'/\302\253lower.
their daughters
just easier to
amount
disproportionately
large
the
short
the
S&P,
the
group
of money
because
specialist
you
So,
%, they
the
marry
mentality, which
It helps as long
as I maintain
in long.
again. Why?
at the
short
relative to
you get so much more bang
to
they are always trying
on specialists:
who make a
their
skills.
Never in
Having
to have
intellectual
I have
time, was
the
it, and
about
thought
on October
Because
16, the
I
would
fell
market
point decline
one-day
biggest
October 19 stock
of the
week
in
do the same
thing
108 points, which,
the history
of the
stock exchange.It looked climactic to me, and I thought
that was a buying
was that it was a Friday.
opportunity. The only problem
a down
Usually
Friday is followed by a down Monday.
I don't think Monday
would have been nearly
as bad as it was, if
Treasury SecretaryJames Bakerhad not started verbally bludgeoning
the
Germans
about
interest rates over the weekend. He was
so
Once
I heard Baker, I knew
I was dead.
belligerent.
Yes. Also, Marty
side.
system;
my view
of people
an
friends
Ihaveame-against-them
more
trader.
aggressive
bias in my work and
be a better,
experience during the
crash?
came
institutions.
helps me
tell my
management.
What was your
I
established
I believe
in money
discipline
advantage one could ever askfor. In
can always define their risk. If they have a
can buy the stock, knowing
can always
they
are protected. I always
son of a specialist.
they
Ican't standmost
the
my
risk
in
one
day.
What
Zweig,
were in
who
is a
the
made him
of
friend
about
evening, talking
next day, and he saidhe
thought
market.
Of course, he didn't
the weekend?
over
trouble
on Friday
Week\"
of the uptick rule?
buck. Also, I hate
con you to death. I'll give
have I met a lesstalented
extraordinary
the specialists
bid for 20,000down
Marty
for the
most
the
markets,
So, you knew that you
stocks from
to trade
book is
267
100,000 shares
I own 100 S&Ps.
as when
trade
trading stocks during this period?
Schwartz
Marty
mine,
was on
a possible
there
know
was
it was
\"Wall
Street
depression. I called
another
500 points
going to
happen
in
so bearishat the time?
life
the specialist
I
think
his
monetary
bonds were
sinking
indicators
rapidly
were terribly
time.
at the
negative.
Remember,
the
268
Schwartz
Marty
What
that Monday?
happened
did
When
Marty
get out?
you
The high in the S&P on Monday was 269.1liquidated
my long position
it is very hard to pull the
of that because
at 267'a. I was real proud
I think I was long 40 contracts
on a loser. I just dumped everything.
trigger
lost
and
I
into
that
$315,000.
day,
coming
of the most suicidal tilings
One
you can do in trading is to keep
that
I could have lost $5 million
done
I
a
Had
that,
losing position.
adding to
It was
day.
bit
and
painful,
I was
bleeding,
but
I honored
my risk points and
bullet.
the
came into play.
another example wheremy Marine
training
They teach you never to freeze when you are under attack. One of the
is either
in the Marine Corps officer'smanual
tactics
go forward or
out
of you. Even
hell
beat
the
are
sit
there
if
backward. Don't
getting
just
you
It is the
are
still
is
because
offensive,
something.
doing
you
retreating
is to keep enough
The most important
same thing in the market.
thing
I did real well after October19.In fact,
powder to make your comeback.
most
was my
1987
profitable year.
That's
You
your
liquidated
think
about
I thought
long position
actually going
very wellon October19.Did
you
short?
not the time to
is
I said to myself, \"Now
worry
it is the time to worry about keeping what
you
I try to play
made.\" Whenever there is a really
have
period,
rough
in protecting
what you have.
defense, defense, defense.I believe
The day of the crash, 1 got out of most of my positions and protected
to
the Dow down 275 points, I went
Then at 1:30 P.M., with
family.
my
I
went
to
hour
Half
an
out.
box
took
later,
and
my
gold
my safe deposit
I
started
cash
out.
checks
to
another bank and started writing
get my
I had never seen
bills and preparing for the worst.
Treasury
buying
about
anything
it, but
about
making
like
money;
what
was going
on.
You were seriouslyworriedabout
Why not?
operations side
The storiesI heard,
of the
the
subsequently,
business would have
going under?
banks
from
stopped
the
people
hearts
on the
of the
public if
Schwartz
269
what
was going on. The banks weren't meeting
they had known
any of
the calls at the brokerage
firms. On Tuesday morning, we were within
hours
of the whole thing
So my caution was well
totally
collapsing.
advised.
I think
of a depressionis related
to my father
graduating
talk to people who got out of college at that time,
their
lives. There was
ten-year
period is missing from
my fear
college in 1929.
it is as though
If you
a
substantial
just nothing
going on in this country.
it so much. I think
that
me, because I feared
don't try to increase my earnings
geometrically.
when I looked at my son in his crib, I thought,
ask me, \"Dad, why didn't you do everything
When did you
start
trading
That
stuck with
always
of the reasons why I
On the day of the crash,
I don't
want him ever to
have done?\"
you could
is one
again?
because
I started out trading
Wednesday of that week. It was funny
only
one or two S&P contractsat a time. The S&P was
in
full
point
trading
increments [equivalent to $500percontract,
to $25 for a
compared
minimum tick],
and I didn't know how to handicap what
was going
on. From
but
past experiences,I knew we were in some sort of opportunity
period,
were
the
rule
book.
attitude
is:
risk
Never
they
rewriting
My
your
need
family's security. I didn't
On Wednesday,the market got
be shorted. I ended Wednesday
me was a miniscule position.
to make
any
up to an area
short
twelve
more
money
where I thought
at that point.
S&P contracts,
it should
which
for
That
Bob Prechter
Wave Theorist,
a
[editor of the Elliott
night,
widely followed advisory letter]put out a negative hotline message. The
next
the market was under tremendous pressure,partially
morning,
because
of that recommendation,
but mainly
because
one of the biggest
fund
in
the
was
to
a
monster long
managers
country
trying
liquidate
position. It has been stated that
he lost $800 million during
that period.
I called the S&P pit just before the opening
that morning, and my
clerk said, \"Decembersare offered at 230, offered at 220, offeredat 210,
at 200 even.\"I yelled,\"Cover!\"
I made a quarter of a million
trading
dollars on twelve
contracts! It was one of the most memorable trades of my
life.
Marty Schwartz
270
What are
for
it. There
I hate
program
become
used to
[See Appendix 1
trading?
program
accomplices.
Some people
say that
all
this
to it
and
nonsense.
information,
(b)
are
them
people.
very intelligent
I can
idiots.
are
prove to any
one
of them
that
are
they
idiots.
Let
closesnear
the
high
or
to. During the last two
the high or low of the
talk about
about
unethical
they
floor
don't
stocks
program
have
the
want
for fear
to explain to
alongside
about
day
20
they
me
principal
more frequently
has closed within
percent of the time.
is impossibleby
than
it used
of
2 percent
relative
of their
What is
paying
of
a case of trading
on inside
an outright trade. It is not a
is (a)
and (c)
an example.Let'ssay
when
signals
to futures,
and
they
stocks
are
clients because their transaction
to themselves.
there
trading
If that
program
has a
are overpriced or unnot doing any customer
a trading
firm
costs
are
lower\342\200\224they're
not
is their
to separate
these
is no frontrunning
their
own
things out.
Let's take an example
or customer business\342\200\224just
to take out an arbitrage profit.
money, trying
methodology,
why is
it
any
worse
than
your
methodology?
to
also have the other side of the equation
wall in investment banking, where
Chinese
the arbitrageurs and investment
talk to each other. Well,
might
state
the
commissions
where
immoral.
when
a
about
information
example,
you an example first. If these brokerage firms need an 80to take off a customerprogram,
own
they will take off their
at a 50-cent discount. They have
the edge and can run
in front
position
somebody
it is
time.
discount
I keep trying
chance.
against futures?
traders
so-called
The market
to investigate.
the market
program trading as if
trading
Becausethe
do. You
years,
of distribution
that type
Mathematically,
You
like the regulators
low of the day much
I would
is something
a firm has
For
me give
cent
There
which
frontrunning,
business\342\200\224
prove it?
How do you
gave
computer program that
derpriced
No, they
just
frontrunning,
Let me give you
trade.
No, someof
in which
situations
swap a day ahead of
debt/equity
New Jersey sold $2 billion
worth
The exampleyou
are idiots.
Well, they
of
element
of stock and moved it into the bonds,
this firm knew about it the day before. Since they knew they were going
to be selling$2 billion
worth
of stock the next day, from 4:00 to 4:15,
to set up the trade. That stinks.
contracts
they sold thousands of futures
trading isa bunch
of program
criticism
Your example introducesan
obscures the basic question.What
I am trying
to get at is: What
is
immoral
about buying stock and selling futures
the reverse
(or
trade) because prices in the two markets are out of line?
BecauseI've seen
simply
it.
I hate
But
271
wield
the market, and the locals have
not just paranoid, becauseI've adjusted
I'm
but
market,
to move
power
been successful.
ebb and flow in the
firms doing program trading
a natural
be
it. Those
killed
trading
extraordinary
of
about
thoughts
your
definition.]
Marty Schwartz
bankers on the
I would
how they can allow agency program
own account.
traders for the firm's
like the
same
SEC
traders sitting
a dumb game. Anybody
who
puts on a basket of stocksto
above
the
T-bill
is
an idiot! They are the same
points
yield
idiots I tried to get away
from
when I left security analysis. Who
the hell
needs to earn 80 basispoints
over
The
bills?
Treasury
brokerage firms
sell them
this bill of goods becauseit is a way of creating more order
which
on Wall Street today has becomethe ultimate
flow,
power.
Because
earn
it is
80 basis
Marty Schwartz
272
Are you saying programtrading
is not trading customer money?
I grew
up
something
a security
being
value.
for
that
entity
and buying
things
analyzing
analyst,
and
in
futures,
out,
serves no useful purpose.
273
like an imbecile,I sold
more
with the S&P locked at the 500-pointlimit
less than an hour left in the trading
session.
who
was
with
me
at
the
was out that day.
wife,
time,
My
working
The next day she came into work, and every ten minutes she would say,
\"Get
smaller,
losses,
get smaller.\" I kept taking
just getting out of the
me and
against
stocks against stock index
Trading
some
even for
is wrong,
Schwartz
Marty
position.
you get hit, you are very upset emotionally. Mosttraders
it back immediately; they try to play bigger. Whenever you
Whenever
They are buying
the
and
selling,
you are buying and selling.What's
and
difference?
try
to make
try
to get
I am
to earn
trying
when I trade.
that style any more right than
the market?
makes
What
infinity
to arbitrage
the style which
is trying
all your losses back at once,
in everything\342\200\224investments,
from the crap table
never to have any
most often doomed to fail.
I learned
trading,
gambling.
at Las Vegas to keep only X dollars in my pocket and
because
the worst thing
can do is to send
credit,
you
good money
bad.
true
is
That
after
premises,
can see things
is their constitutional
right and they are able to do it, but there
I scream at the kids who
a
abusesas
some
incredible
are
consequence.
no ethics!
no integrity,
\"You
have
SOBs
firms:
work for these brokerage
kill
Now
are
to
the
You
You know what will happen?
they
game.\"
going
at me. When they stopped
are swearing
program
doing proprietary
I said, \"No, it is not
wish!\"
said, \"Are you happy? You got your
trading they
which comes when
the
tell
them
I
didn't
finished
conclusion,
yet.\"
quite
I guessit
earning $300,000
no longer
they
are
what
they are really
a job for
$50,000.
Let's
Then
of circles,
Speaking
on.
go
What
when
worth;
come full
we seem to
be
moving
out as your
and they
a year,
they are hitting
it will have
stands
or more
the
bricks
find
and can't
smaller
>
time was
gut-wrenching
net worth then, and I took a
most
What
in
in a
same
can physically removeyourself
thing
whole different
in futures
flat, you
perspective.
loss, I always play very small and try to get
black ink, black ink. It's not how much money I make,
but just getting
my rhythm and confidence back. I shrink
my size totally\342\200\224to a fifth or
a tenth of the position
that I trade normally. And
I think I ended
it works.
a $600,000
hit
up
losing
only $57,000 in November 1982, after taking
on November
Is thereany
get
that
4.
that you
mistake
trading
Election
could isolate as responsiblefor
1982, loss?
Day,
circle.
in one
on this
Adding
subject.
you
and
to shorts
when the
the cash
market looks like it
1982.
$600,000lossin
one
I had
a
much
day.
happened?
When
you look
I think
because
is 200
Do you
still
say,
\"Why
I had huge gains the month
biggest setbacksafter
trading
did much better than expected
Election Day, and the Republicans
at that
ran up 43 points, which
in the congressional races. The market
and
I
was
in
advances
the
short,
time was one of
history.
largest
point
back, do you
make
principles
my
trading
biggest
victories.
points higher
did I
do
stupid.
it?\"
I've
before.
is pretty
always
had my
I was careless.
mistakes? By that,
you consider
locked-limit against
is already
market
futures
most dramatic trading
November
trading
the
from
as getting
a devastating
After
out
experience?
The
If you
which is the
you are
valid\342\200\224not
I mean deviations
from
trades.
losing
It was
You always make trading
I was short the
mistake.
mistakes.
I made
S&P and short
the
one just
bonds,
recently\342\200\224a
and I got
terrible
nervous be-
276
Why the
I
Schwartz
Marty
C. Fields: I have
boxeswith
if I
that
Yes.
especially
than
screw up
in
one
I'll always
place,
safe deposit
of?
the
with
so relieved
I was
unchanged.
my position. That
collapsed.
increase
What
When
your
your
was very
market was
get out
I could
without
aren't realized,you
strong
were
the
S&P
should
probably
trader,
deal.
my losses
take
can
You
try
put
always
the
quickly. That is probably the key to my
trade
back on, but if you go flat,
you
see
things differently.
Greater clarity?
Much
that is
position
because
clarity
greater
not
of money
working
money,
managed
trading on your
with
bothering
you are
the pressure you feel when
puts you in a catatonic state.
I wonder,
own,
managing
what
after years of
in
a
making
motive could
possible
other people's
money?
Over
based
My philosophy has always been to
I even try to be profitableevery
downside.
success.
you have for
I felt
that
I was
Also,
challenge.
and this presents a wholenew
stale,
risk can't be
1987,1 realized that downside
an
to get more personal leverageis with
way
getting a little
after
October
adequately measured.The
outside
pool of money.
to be
profitable every single
And I've had some
runs\342\200\224over 90 percent
of my months have been profitable.
extraordinary
in virtually
I'm
proud of the fact that,
particularly
every year, I didn't
havea losingmonth before April. I probably don't makeas much money
as I could because of that,
but I'm more concerned about controlling the
month.
No, I always
plenty
my
on month-end data, my biggest
3 percent. I had my worst two months
was
around
the birth
because I was worriedabout
whether
I was going to
two children,
ball in the right
in Lamaze class.
tennis
place
as a full-time
in January?
quickly
I covered
worst drawdown percentagewise?
a money management
is greater.
attention
my
more
losses
Getting back to
just evaluated for
that
the
virtually
a loss,
that day,
later
little
on
position.
entire career
drawdown
worst fears
stock
the
was a mistake. A
has been your
records
that
market
poor.
and
better price
when the market
trades, you're usually better
For
the
other day I was short the
position.
example,
bond
1, I'm
January?
It is just
necessarily.
slate?
a clean
January
smaller in
Do you trade
Do you take your
possible
nervous becausethe
session. The next morning,
night
thought
My
have a life
every year with
That's my philosophy:
Not
and got
S&P
I'm
event.
and a few
accounts
extremely well diversified.
rules you can think
thought
you
of my
get the
of some cataclysmic
bank
several
If you're ever very nervous
about a position overnight,
a weekend,
and you're able to get out at a much
over
off staying
My
to my fears
else.
preserver
someplace
Any other
You start off
area?
cash. I'm
and
gold
is
process
relates
all
it
think
like W.
this
in
difficulty
277
Schwartz
Marty
single
day.
How much
money
are
I don'twant
to be
specific
or two
large pools
investors, even
went
with
of
you going to
money.
about
the
I don't
be managing?
amount,
but I'm
want to deal
I'm certain I couldraisea great
though
a public underwriting.
only
with
deal
taking
on
one
multiple
more
money
if I
278
Schwartz
Marty
headaches.
people you have involved, the morepotential
when I met a large fund manager,
he asked me how many
When
employees I had. I told him, \"None.\" He told me he had seventy.
he wants to quit,
it will be more difficult
because
he'll have their lives
in his hands.
I don't want
that kind of pressure.
The more
For example,
rather isolatedhere.Do
You seem
like
you
alone?
working
the year and in New York the other half.
My kids think all fathers work at home.
took
to
a downtown
and
passed
a dozen peopleI talk
to a number of them,
significantly. Now, I have half
the phone daily. I've taught
my methodologies
own.
they have methodologies of their
diminished
to
a better
Leam to
take
the
of
mistake
tried training people to
you ever
I hired
four
but nobody
people,
tried to clone
myself
methodologies,
but
can't teach them
most traders
Because
they
out
when
hell
with
I always
business
for
try
themselves.
the
freedom
can go on
vacation
in
out
even
getting
trader
making money is more
you
seek
people that
to encourage
I tell
them,
admit
trader
I became a winning
tell people who
successfulthan
I have
of a
even.\" Why is
my ego,
do you
What
lose money than
rationalization
I'm
part
I
all
my
of it.
You
your
so important?
I was able
when
advice?
that
of going
you
might
because that's what
I always wanted, both
financially
at any moment. I live in Westhampton
ever
dreamt,
Because it
to say, \"To
important.\"
are thinking
\"Think
wrong. What
position? \"I'll get
they're
a losing
into this
become more
happened
and
in making
Also, don't increase
have doubledor tripled
your
capital.
increasing their bets as soonas they
to
trying
money is not
your
position
Most people
start
making
make
money.
wiped out.
to get
attempts
encourage those whose initial
Here is a trader who was unsuccessful
a ten-year
over
period, managing to lose enough money to keep himself
was
near broke,
despite consistently earning good salaries.Yet, Schwartz
the
world's
of
best
rum
around
and
become
one
able
to
eventually
things
Schwartz's
to me.\"
I
structurally.
Beach half of
story
have met
should
with
failure.
do it?
There
traders.
elements. First, he
Throughout his losing years,
his trades.It was not
fundamental
to
determine
Schwartz
used
analysis
he became
until
he immersed himself in technical
that
analysis
successful.
The point here is not that technical
analysis is better than
that
fundamental
but rather that technical analysis was the methodology
analysis,
was right for him. Some of the other traders interviewed in this book,
been
such as James Rogers, have
using fundamental
very successful
The key lesson
exclusion
of
technical
to
the
complete
analysis.
analysis
is that each trader must find his or her own best approach.
to success
was a
The second element behind Schwartz'stransition
when
successful
his
he
describes
he
became
in
attitude.
As
it,
change
over his desire to be right.
desire to win took precedence
Risk
control
is an essential elementof Schwartz's
style, as
trading
attested to by his incredibly
low drawdowns. He achievesthis risk
How did he
a methodology
found
losemoney?
would rather
the ego.
protects
intimidated.
them
guy
on
stomach.
your
ultimate
became
I taught
side is only
lifestyle.
and
for you?
working
work.
the intellectual
learning
Why do
is the
lasted. They all
didn't
it
and
traders
thing
important
get out of hand.
That is a quick way
Marty
be
wonderful
can give to the ordinary
The most
losses.
your
I have a
trader?
losses
size until you
at trading
Have
best advice you
is the
What
become
letting
years to be able to accept working alone. I used to go
office because a lot of my friends
were there. But, as time
fewer of those people were still there,
the
attraction
me several
It
279
Schwartz
Marty
control
by
always
approach
extended
rationalefor
of
knowing
sharply
worked
that
his
reducing
\"uncle
were
two essential
for him.
point\"
on any
position size after
trade. No
doubt,
large losses,as
his
well
to his success. The
winning streaks, contributes heavily
size
after
a
position
destabilizingloss is apparent.
reducing
as
Marty Schwartz
280
However,
deserves
his
experienced
for
the
the
reason
biggest
Most
losses after his
leads to sloppy trading.
cite similar rules
traders
reasons for their
action after
explains
it,
biggest gains.I
Winning streaks
of traders.
majority
complacency
for taking the same
As Schwartz
elaboration.
further
lead to
a winning
streak
has always
this is true
suspect
he
complacency,
(such as disciplineand
hard
A Little
work)
it is always a treat when a top
with
and rings true. I was fascinated
Schwartz's
a position
that you are
observation
about maintaining
worried about,
when the market action doesn't justify
fears. The
your
is
that
if
off
hook
the market is letting
the
concept
you
easily on a
implicit
for which
there was a basis for fear (such as a fundamental
position
in the
to the position or a technical
adverse
breakout
development
forces in favor of the
there must be strong
direction),
opposite
underlying
as the
trader provides
direction
of the
a rule
success.
that
Therefore,
is unique
original position.
Part III
and
Bit of Everything
James B. Rogers, Jr.
Buying
Jim Rogersbegan
In 1973, he formed
trading
the
the stock
Quantum
and
Value
market
with
Selling
a paltry
Hysteria
$600 in 1968.
George Soros.The
Fund with partner
Quantum
proved to be one of the best-performing
hedge funds, and
in 1980,
a
small
retired.
\"Retired\" is the
amassed
fortune,
Rogers
having
of his personal portfolio,
word
uses to describe the management
Rogers
an endeavor
that requires considerable ongoing research. His retirement
includes
also
teaching investment courses at the Columbia
University
Graduate School of Business.
I was eagerto interview
because of his stellar reputation
as
Rogers
one of the shrewdest investorsof our time and because his comments on
interview
shows
television financial
and in the print
media
always
with rare clarity. Since I did
seemed to strike a note of common
sense
I sent him a letter requesting an interview,
not
know
Rogers,
explaining
that I was working
on a book on great traders. I includeda copy of my
book on the futures
which I inscribed with a quotation
markets,
previous
from Voltaire that I deemed particularly appropriate: \"Common senseis
Fund
not
so common.\"
Rogers
indicate
his
called a few days
willingness
the
probably
person
many years. Furthermore,
I never get in at the right
not
later
to participate.
to thank
\"However,\"
me for
he
the
book
cautioned,
and to
\"I am
hold
for
you want to interview. I often
positions
one
of
the
world's
worst
traders.
I'mprobably
I had
time.\"
He was referring to the distinction
James B.Rogers,
284
in my letter,
made
interested
in
great
traders
rather
the term, a \"trader\"
be primarily
would
concerned with
the stock market washeading,
while
an \"investor\" would
I use
As
I was
B. Rogers,
James
direction
concentrate on selectingstockswith the best chance of outperforming
the
market
In other words, the investor
overall.
was always long, while
the trader might
be long or short. I explained
use of these terms to
my
Rogers and stressedthat he was indeed the type of person I wished to
What made you
Thebull market
Germany
had
high
in
crumbled
meantime,
at Rogers'
arrived
on a fall-likespring
reminiscentof
City. In fact, if
home, a
baronial,
furnished
eclectically
The atmosphere
than
a home
afternoon.
manor
a comfortable
seemed more
English
was that afternoon's
exposure to New York
City
in
his
with its
room,
Rogers
antique-filled sitting
only
my
note on
is the
As I told you
broker,
didn't
\"I
which
the
following
interview
begins.
when
a trader.
phone conversation, I don't consider
myself
to buy German stocks in 1982,1
said to the
who
you to buy me X, Y, and Z stocks.\"The
broker,
want
I went
know me, asked,\"What
the
do I
you some research?\"I said,
do next?\"
He asked,
confirmations.\"
\"Please
don't
do
I said,\"You
\"Do you
that.\"
He
buy
want
asked,
the stocks
me
to send
\"Do you
you opinions?\" I said, \"No, no, don't.\" He asked, \"Do
want
me
call
to
with
I said, \"No, don't
even give me
you
you
prices?\"
if
because
I
once
see
that
these
stocks have doubled and
prices,
you do,
be tempted
to sell them. I plan to own German stocks for
tripled, I might
at least
three years, because I think
bull
you are about to have the biggest
market you've had in two or three generations.\" Needless to say, the
broker
was dumbfounded;
he thought
I was a madman.
Now I don't consider
that
it was determining that there was
trading;
about to be a major
in
a
market
and
a position.
change
taking
By the way,
I got that one right. I bought the German stocks at the end of 1982 and
sold them out in late 1985 and early 1986.
me
to send
not
had
started
here in August
kind of bull
1982. More important,
all-time
the previous
since
market
had
market
1961,
twenty-one
years earlier. The German
In
the
then.
since
and
had
in 1962
essentially gone sideways
value
basic
was
So
there
had
boomed.
the German economy
lose much
try
But you could have
money
is very good value,
even if I'm wrong.
ten years
market
that
bought
to make
If there
first.
money
any
not going to
probably
something, I always
or sell
I buy
to lose
going
sure I'm
then
I'm
earlier on the same
theory.
That's
absolutely
thosereasonsand
right. You
need
in
could have
German
watched
bull market
a major
always
in our
and send me
want
on Germany
in New York
conversation with
I would conclude that New York City was
pleasant views of the Hudson,
an eminentiy peaceful place to live. After greeting me, Rogers
\"I still think you have the wrong
stated,
man.\"
Once again, he
immediately
was referring to the fact that he did not consider
himself
to be a trader.
I remember
bullish
not had any
Whenever
townhouse,
This
at that time?
so
there.
interview.
I
28S
Jr.
investors.
than great
which
that
indicating
Jr.
the
U.S.
But this
a catalyst to make big things
1971 for
exactly
we had
while
years,
it in
bought
stocks sit for ten
time there was a catalyst.
happen.
At the
You
time, the catalyst
were going
German
elections. I figured the Socialists
was the upcoming
Christian
the
the opposition
and I knew that
to be thrown
party,
out,
investment.
to encourage
Democrats, had a platform
designed
Christian
conservative
if the
was
that
assessment
basic
My
after having been out of power for so many
Democrats won the election
years, they were going to make major changes.I also knew that many
in capital
from investing
back
German companies were holding
of
a
conservative
in
in
1982
and
victory.
equipment
anticipation
expansion
real
would
be
a
did
there
win,
explosion
Therefore,if the conservatives
of
pent-up
capital
Was the election
Not
investment.
a toss-upat the
time?
in my mind.
I mean in
terms
I guessso,because
tot same day.
of the
when
polls.
the conservatives
did
win,
the
market
exploded
286
B. Rogers,
James
What if they
had
I still didn't
think
lost?
James B.Rogers,
have
lost
any
and that
Yes.
there was going
last for two, three,
will
every anticipation
the bull market
that
would
years.
trade.
there
I don't bother
do; otherwise,
can learn about
anybody
unless
when
conviction
is to
investing
is something to
most people\342\200\224always
you
have
doing
it. One
do nothing,
do. Most people\342\200\224not
of the
I'm
to be
Do you
give
wait
always
ever say, \"I
it a shot\"?
What
until
there
you
described
just
for a
this
situation to line up in your favor?
Don't
market is probably going to go up, so I'll
is a
very fast way
to the
poorhouse.
I just
wait
I have to do is go over
Even people who lose
my money, now I have to do
You should sit there until
you find
is money lying
in the corner, and all
in the meantime.
and pick it up. I do nothing
in the
to make
market
say, \"I just
it back.\" No, you
lost
don't.
Trade as little
all the
talking about
tell you
can't
I'm
I don't think
of myself
as a trader. I think
for
waits
something to come along.I wait
fish in a barrel.\"
proverbial\"shooting
is why
someonewho
like the
of myself
for
pick the time
In the
midst of
move,
for
it
all,
example,
No, I don'tknow
1980,
the
you
gold
gold
the hysteria?
go against
or do
you wait
a reversal day?
reversal
in
gaps.
for
some
sign of
an end to the
days.
example of hysteria. In late 1979-early
an incredible accelerated advance.
witnessed
a classic
market
go short
to
starts moving
about
That brings to mind
That was
That
was
a group of traders, one of whom
\"I really
I
he
had
said,
soybeans.
bought
why
all I know is that
all the bullish arguments are wrong;
with
dinner
the market
until
they had gone straight
is because that same
reasons
why
How do you
I wait
after
soybeans
it so vividly
hysteria.\"
shorting
Yes, I sold
as possible.
examples?
yearsago, I went short
The reason I remember
I went to
evening,
Did
something.
of any
to $9.60.
nothing,
better than
to be doing
a big
there
money
something
think
way.
think
Yes. Two
up
absolutely
that
rules
best
have
playing; they always
I
and
am
something.They
smart, I just tripled
play
say, \"Boy,
Then
rush
out
and
have to do something
else with that
my money.\"
they
money. They can't just sit there and wait for something new to develop.
make
you
other
the
put on a
Can you
I usually
Yes,
a great dealof
oriented?
fundamentally
Occasionally,
going
like you have
It sounds
trades
charts
however, the Commodity ResearchBureau
show
an
market
will
for
a
the
chart
Sometimes
a
catalyst.
provide
in
the
charts.
see
You
will
or
down.
either
incredible spike
hysteria
up
be
like to take a look to see if I shouldn't
When I see hysteria, I usually
for the
money
meaningful
I had
before.
287
Jr.
Are all your
I would
reasons I mentioned
to be a major
change,
or four
Jr.
that market?
at $675.
almost $200 too
early!
as
a situation
that is
I told
only
you I'm not a good trader. I'm
about four days before the top.
nearly
always
too early,
but
it
was
James B. Rogers,Jr.
288
I didn't say
been a pretty
way off
When
were
you
timewise, but pricewise
you do a trade like that,
ride.
scary
it must
isn't
have
there
James B.Rogers,
The reason
I asked is that
between
and
Yes,
Yes,
gold
where you have secondthoughts?
a point
it goes to
when
But you
$676 [he laughs].
that
in
last. It was
the
Was that a
final
market's
gold
of
matter
Both.Gold was
panic,
The panic,the
to
see
case of
the
in and
hysteria,
on. It
is going
what
early
bearish for gold. Volcker
Chairman a
months
few
and I knew
because
you
mean
that
if oil
thought
believe
was\342\200\224I
like
in
that
it was
not true.
will
we
a view
of
the
it?
do anything.
the world
me look
In the
as
well.
and oil should move together, or
the world believed that?
world
believed
the relationship
that.
was true?
was
break
the
going
to
down
anyway
of time,
period
gold and oil
do a trade based on a
make
any sense, simply becauseyou
really
sometimes
look
at
I think
what
is
thought Volcker meant
of
The
fact
inflation.
back
that I
was just
the
the
fact,
it when
that oil
the truth.
he said
The
he was
was ready to
go
kicker.
when the Fed
the decisive step came in October
1979,
rates
interest
to controlling
from
its
controlling
policy
changed
market
Yet
the
gold
apparently didn't believe
moneysupplygrowth.
In
that
after
months
it
went
for
several
point.
it, because
up
in
their
to pay
situations like
hysteria
that, are the markets too wound up
fundamentals?
attention to changing
Actually,
that was
the Federal Reserve
were going to beat inflation.
be bearish on oil at the time,
gold
rest of
like to
main item then
It is amazing how
Absolutely.
the market
sometimessomething
will keep going
important
will
I am
Now,
experienced
despite
something doesn't mean that
sees it. A lot of peopleare going to keep buying or sellingjust
everyone
becausethat has been the thing to do.
happen,
and
enough to know
that
the
So,just because
the
October
such
as
isn't
important.
present
just
market
because
that.
I see
doesn't
1979 change
itself.
to some important news,
doesn't mean that it
policy,
respond
in
Fed
better. If the market
keeps
going
if it is a hysterical blowoff, then
All the
especially
that
short
of the world believesit?
the rest
I usually
Rarely.
its
go against
you
to make
a catalyst
I also happened
to
went down, gold would go down
the
relationship
your
go against
I'm going to
become
just
market in
out.
of itself is only
earlier and said that
time, everybody
But, did you
I knew
had
because you thought
Was that
that
it
he meant it.
I believed
At
it
gold market, I had
1980
For one very
doesn't
know
that
think
being overpriced?
automatically
doesn't
of a
Just about every time
you can stick
you see panic, do you
So when
of gold
of hysteria.
be right if
will
you
the fingerprint
but basically
overpriced,
terminology\342\200\224the
\"fingerprint\"
couldn't
that
the
that
dying gasp.
recognizing
it a matter
or was
blowoff,
chaos. It was something
mean you
that
Does
it was
because
case,
felt
always
together.
relationship
you
Yes,
I have
a coincidental correlation.
oil was
all it was.
was
that
moved
the trade?
with
stayed
289
Jr.
the way it shouldn't go,
know an opportunity
you
will
James B. Rogers,Jr.
290
Can you
more recent
of a
think
Yes,October
end
birthday,
by the way. At the
had
we
that
would
have
beginning
predicted
one more big move up in the stock market and then witness the worst
1937. But I didn't know it was going to happen on my
bear market
since
It
was
the
best birthday
I ever had.
birthday.
present
of 1987,1
the
Did you have any
interviewed me in January
told him,
1987,1
in one
300 points
way, the market is going to go down
I were a madman. I envisionedthat
at me as though
the
the
\"Somewherealong
looked
He
day.\"
would be
In 1929, the
one
12 percent
down
one
in
a big move, given the kind
had already seena number
market
The
So I
said,
day?\" Little did
I know
days.
300 points would
and
3,000,
went
market
then.
having
around
was not such
day
percent
was?
John Train
When
Dow
could be as largeas it
the break
that
idea
the
can't
\"Why
market
be 508
it would
be
only
day.
10 percent.
Ten percent
of markets
of
3,
in
we were
Why
pick 1937 as
you
stock market
the atmosphere.
market
in
year.
So, I went
Were
you
I was
short
1937,
was
to
horrible
in
a
for a
prediction
your
say
the Dow
six
months.
were going to have a major,
collapse, as opposedto say 1973-1974,
but it took two years.
Why did you
use 1937as an analogy
Because 1929-1930went
going to have a bear market
not
went down 49 percentin
was that we
convinced
between
way
we were
a financial and
on
to be
caused
as
opposed
market
deep,
went
to 1929-1930?
a major depression.I knew
we were
by a major financial collapse. I was
going to have
a depression.
I was
economic collapse.
a market, you
near
are
puts?
calls. I don'tbuy
poorhouse.
options
Buying
options.
Someone did a study
the SEC
for
discovered that 90 percent of all options expire as losses.Well, I
out that if 90 percent of all long option positions lose money, that
make money. If I want
that 90 percent of all short
option
positions
options to be bearish,I sellcalls.
is
and
figured
meant
to use
did
When
you
cover
the
everybody
week
thought
you
cover
your positions?
19. If
of October
that
the financial
then because
you
remember,
by
structure of America
that
time,
was over.
we had hysteria going the other way?
What I
fast,
when the
or long
and short
to the
points.
50 percent,
down
stocks
dollars a
a million
half
positioned for a collapse.
the summer
stocks
you
had
that in
see
Every stock
all these stories of
world.
the
all-time high. You
out of school,making
4, and 5
go down 300 points
a comparisonin
years
into
short
another fast
Money was flooding
reality. Whenever
is not
That
a top.
Did
trying
three
guys,
young
collapse?
was at an
world
the
collapse?
Becausein
expecting a financial
It was
During
did
291
Jr.
Why were you
example?
19 is my
October
1987.
and
of 1986
B. Rogers,
James
differentiating
right. That week was a textbook
if you are still solvent,
it.
to be
that
was going
and go against
Maybe
of the world, and I would have been wipedout
That
is exactly
those kind
time
when
you go against
that
kind
money.
BetweenOctober1987and
of the few times
or
shorts. Whether I am bullish
That
and
was one
short
positions\342\200\224just
in case
the
But 95
too.
of hysteria,
January
of hysteria. Under
to step in there
have
you
one time it was the end
case
of conditions,
you are going to make
1988,1
in my whole life
I always
bearish,
I'm wrong.
percent of the
didn't have
that
try
Even in
any
shorts.
have any
to have
both long
the best of times,
I didn't
JamesB.Rogers,
292
there
is always
there
is somebody
somebody
you
even in the worst
and
of times,
doing well.
Are you implying
couldn't find any stocks
short?
I was
already short! I calledSingaporethat
shorts. [Singaporeopensearlier
we do.]
than
So all those guys who came in on Monday to sell had very, very good
reasons
to sell, and there were no buyers around. Therewere no buyers,
there was no reason for people to buy. Even the buyers were
because
in a panic\342\200\224and I was
if I
that
were
knew, fundamentally,
I started
were
a couple
putting
money on one
comfortable
the world
was going to
everything
away,
and
right
coming
the
up\342\200\224including
stocks
those
apart at the seams. In January
I
back on, and even though
I
am happy to do it because
of shorts
of those shorts,
having
go
wasn't coming to an end right
protection
1
of some
short
that I
[ 1988],
am losing
feel more
There were a lot
the
tight,
trading.
The
market.
Politicians
19, but
no
people
I remember
before
October
financial
why
I became
even more
19. The weekbefore, [Federal
bearish on
Reserve
the
weekend
Chairman]
Alan
much
better
Greenspan announced that the balance of trade was getting
of
the
trade
balance
and things were under control. Two
later,
days
of
in
the
world.
the
worst
the
were
came
and
out,
history
they
figures
have
I said, \"This guy is either a fool or a liar. He doesn't
Right
away
on
weekend
before
October
Then
the
19,you
any idea what is going on.\"
we were going to stick
the world
had
Secretary] Baker telling
[Treasury
weren't
the dollar
it to the Germans
go, because the Germans
by letting
It looked
loosening monetary and fiscal policy as Bakerhad demanded.
like the trade wars of the 1930sall over again.
while
quietly
and
to be
you
money was
had
a market
going through
roof.
the
faded hysteria and lost?
greatest lessons
bear markets. In
happenedin
1970,
January
my
a time
very
the
days and
early
when I
day
still
much\342\200\224and
the market
bought
hit
my puts.
My plan
sell short
the
enough
then
market
know what I
One of the stocks
In those days, I
I didn't
puts
rallied,
Needless to say, two
months
was
for
the
so that
doing.
I had
shorted was Memorex.
didn't have
the
staying
I soldMemorex
at
power\342\200\224psychologically,
I ended
and, most important, financially.
shorts at 72. Memorexeventually
went
to about 96 and
down to 2.
emotionally,
going
market
to rally and this time to
I would make money faster.Sure
and I took everything
I had and went short.
later, I was completely wiped out because
to wait
was
instead of buying
taught
bought
I had tripled my money. I was a genius! \"I'm
the next Bernard Baruch,\"
I said to myself.
I sold
bottom,
48.
were
S&P
I took all the money I had\342\200\224which wasn't
In May 1970, the market
caved in, and
options,
and
of trade,
six weeks
any times you
of my
about
the fact that
Baker,
balance
the
Baker?
and
Greenspan
earlier. If you check, you will see
the S&P and the Dow were going up, the rest
eroding
away. In December 1986,1 shorted
even
throughout 1987,1 didn't lose any money,
the Dow and the
one
Yes,
me
of
to 2,700
stocks,
there
Were
puts.
buyers.
1987,
market was
though
the
who blame it on that do not understand
look
for
and people who lose money
always
and
on
short
sellers
the
In
blamed
crash
1929,
margin
they
scapegoats.
There were lots of goodreasonswhy the stock market went
requirements.
down. What they should focus on is why there were sellers on October
Absolutely.
the
was causedby
of causes:Greenspan,
worsening
steady
during
of the
program
Monday.
Are you saying the crash
that,
of people blame the October1987breakon
Do you consider that scapegoatism?
that
bearish
that had spiked up
positions.
A lot
to add to my
night
scaredand
I thought
293
James B. Rogers,Jr.
Sunday
the collapse, you
after
that
to be
wanted
up,
fouling
Jr.
up covering my
then
went
straight
294
B. Rogers,
James
right to short that
out. The market
wiped
completely
that I now
dead right. That is one of the reasons
I was dead right,
absolutely,
at 48.1 just ended up getting
stock
didn't care that
Jr.
I was
flat-out,
perfectly
know about hysteria.
did
What
learn
you
from
that
than
market is going to go higher
to think
I think
it will. I had a tendency
everybodyknew it. I would just read things
any
I think
in the
What I now know is
information.
inside
lower than
something,
I didn't have
it can and
that if I knew
That the
that
So
if the
even
see the
paper;
don't
they
know what
one
I know. Most peopledon't have the foresight to look six months,
me
that anything
taught
experience
year, or two years out. The Memorex
can happen in the stock market, because there are a lot of people in the
what is going on.
market who don't understand
we
have
for
seen?
Yes, eventually
I expect
Do you expect
now
Right
[April
However,
the
pronounced bear market
a very
looking
already
a very
deep
1988],
I'm
recession
break the
looking
mainly
politicians
turn
The
trade
beyondwhat
low.
1987
October
a financial
for a financial
example
dollar
has
before.
keeps
happened
I don't
getting
collapsewithout
lots of
expect
actually
times. That is why
the
weaker\342\200\224which
American economy
will
do
do
will start
figures
another
you
collapse.
having
a very
serious
economy
is what
well\342\200\224steel,
I
1937 as an
because as the
I used
to collapse
expect\342\200\224many
agriculture,
the financial
collapse?
worse
getting
and this
again,
will
eventually
dollar crisis.
see as the
main cause of
deficit?
trade
the
The budget deficit, by and large, causes the trade deficit. You
going to get rid of the trade deficit until you get rid of the budget
the magnitude
can
be done
The
basic
of the
deficit
is there
problem,
anything
are
not
deficit.
that
at this point?
an economic
it into
recession?
Sure.It
to trigger
is going
What
textiles,
parts
of the
mining.
it is
problem
in the world today is that
saving. You
need to do everything
America
is consuming
more
can to
encourage saving
and investment:
Eliminate
of savings, the capital
taxation
gains tax, and
dual taxation
of dividends;
the
back
more
incentives for
attractive
bring
IRAs, Keoghs,and 401Ks. At the same time, you need to do everything
can to discourage
to utilize
you
consumption. Change our tax structure
a value added tax, which taxes consumption
rather than saving and
Cut
there
are lots of
investing.
government
spending dramatically\342\200\224and
than
we get
it up.
There are lots of things
the
tariffs, protectionism.
can
do
to
it
foul
I'm
and
sure
have.
politicians
up,
will\342\200\224they always
they
I know we will have a financial crisis. And, if the politicians get it wrong,
we may get an economic collapseas well.
collapse.
Can
foul
politicians
as well?
may foul it up and
the
taxes,
Raising
Given
still
low, you can still
October
below
well?
doing
Absolutely. Unless the
What
the market to
stock market falls
economy
precipitate
Are you
295
By doing what?
experience?
particular
James B. Rogers,Jr.
ways of doing it
without
hurting
you
the economy
too badly.We
would
have
James B. Rogers,Jr.
296
problems,but
the
be nearly as bad as when they are
then we are going to have a
would not
problems
we don't bite
on us. If
forced
the
bullet,
1930s-type
collapse.
answer
Your
there are relatively painlessways
\"dramatically.\" Could you provide
spending
examples?
government
specific
two
governmentspends
$5 billion
some
can
for 8 centsa pound
off if the government
told every sugar grower, \"We'll
you
give
and a Porsche
$100,000 a year for the rest of your life, a condominium,
if you just get out of the sugar business.\" We would savebillionsof
would
be better off because we would
dollars a year,
and the whole country
be better
If
it costs us
what
know
you
this
our troops to
us $150
costs
to you
that if we
troops
home,
is: Do you
guns
billion a
fifty
American
dollars.
the
when
are doing
year
to
keep
stop spendingthat
the Europeans would
know
they would
who
from us,
because they
what our
billion dollars. Do
troops stationed
American
defend
their
have
don't
send
sitting around,
said that we
has
GAO
war in Europe. Yet
I would submit
there.
guys
those
a year and bring
billion
themselves.
And the kicker
guns from? They would buy
a very
about
I
those
those
understand
are very
unlikely
good defenseindustry
No politicians
actions.
are even
going to happen.
With
the present
The politicians
cast of jerksin
are
It
is going
going
to foul
it is
Washington,
things
up.
They
to be
the
next
be more
election.
I suspect
What
extreme.
an
we eventually face a
got to bite
\"We've
will
At that point, the
to start to inflate
their
hurt.
is to
just
somewhere
money!
print
and end up
a recession
with
off
with
very
inflation.
high
Right,
but
real
very
we
have wild
could
is
possibility
three years forward
What
first
inflation
will
we
that
deflation.
have exchange
and then
eventually
make
have to
I don't
Fortunately,
By
really
scenario, we start
In that
that
yet\342\200\224is
the politicians will say,
through this. This is goodfor us;
our
system.\"
People are going to buy that for a
to start to hurt.
Then
it is really going to start
to
are going to give up, and they
are going
politicians
way out of it. But the only way to inflate
your
way
help clean out
while. Then it is going
point
I am
happen\342\200\224and
and suffer
bullet
the
it will
that
choicebetween
deep recession?
or a
speculating, I don't have to make this decision
along the line a recessionwill develop.
Initially,
my
decisions
investment
Another
controls.
for two
or
now.
right
kind of exchange controls?
exchange
controls
What happens
that?
talking
solutions.
that.
to
That is
into solving our problems.Then it
are forced
act, do
don't
inflation
go to Europe, you
out of the country
establishment.
But
high
those
$150
buy
ago! Most people
but
there
nothing
troops were
was made to
decision
fat, and chasing girls. The
getting
to fight even a thirty-day
bullets
enough
don't have
their
keep
beer,
drinking
it
and
are going
to be done. They
their votes and winning
has
what
keeping
politicians
you know
forty-three years
even born
They
Europe.
If the
out at
do
billion
fifty
of occupation
army
weren't
country
each year to
and
hundred
One
Europe?
sent there as an
in
sugar.
really want to save a big number,
of trade deficit is? Onehundred
you
balance
annual
in
less for
be paying
all
about
very
examples;
Americans
that
to do
going
concerned
cut
to
I could give you a dozen. The U.S.
a year to support the domestic
price of sugar so
when
22
it is selling
cents
a
wholesale,
pound
pay
would
in the world market. Five billion dollars!We
I'll give you
not
297
going to continue until we
is going to be a disaster.
that
implies
James B. Rogers,Jr.
I mean
can't
take
to the
The dollardisappears.
What
are
dollar
weaker
$1,000. You can't ship money
government's
values
relative
not
getting
on
more than
the
without
flows. If
limitations
would
and weaker.
bring
capital
you
to
want
approval.
of currencies
on exchange
The politicianswould
in
a situation
like
controls is the
then
try to
bring
JamesB.Rogers,
298
exchange controls,
in Draconian
would
which
just
make
the
Jr.
situation
James B.Rogers,
299
Jr.
or later,
But, sooner
market
bond
the
collapses.
worse.
When
you say
like the
don't
talk
You
it happen? Remember
couldn't
damn
about
a greenbackdollar.\"
a
give
becamea debtor nation for the first
than
our foreign debtswere greater
Argentina,and
Rio Grande
the rest.
all
put
War
Civil
world. In 1985,we
time since 1914.By
all of
the foreign
the
end of
debts of
Mexico,
Brazil,
together:
expression,
an inevitability.
it's
in the
nation
creditor
largest
of the
the
of the dollaras if
the collapse
about
south
becoming
1987,
Sooner or later, we repeat the English experience of not
bond market. But I don't know when sooner or later
be three years; it could be ten.
Absolutely.
a long-term
having
is.
Why
In 1983, we were the
nation
the dollar
about
talking
peso?
Argentine
Why not?
\"I
disappear, are you
It could
did Britishbonds
How far
About
70
What
kind of things
you are
situation
referring to?
percent.
do you
at in
look
deciding which scenario
will
or inflation?
deflation
first:
happen
in the
fall
every
Peru,
Moneysupply,
trade deficits, inflation
the
deficits,
government
figures,
markets, and government policy.I look at all those things for
the
U.S.
and key foreign countries as well. It is one big,
three-dimensional
if you had a three-dimensional puzzle, you
However,
puzzle.
could
it
is not one in which
eventually
put
together. But this puzzle
you
can spread out the pieces on a great big table and put them all together.
The picture is always
changing.
Every day some pieces get taken
away
financial
of events you imply as follows:Nothing
The
situation.
change the budgetdeficit
that
the
trade
deficit
will
deficit
guarantee
budget
that
bad or even gets worse. That, in turn,
guarantees
Can I paraphrasethe
meaningful
continued
situation
stays
sooner or
will
chain
be done to
later, the dollar will
Absolutely. That's why
I'm
come
extreme
under
pressure.
and others
not long
market
bond
fit into this
scenario?
You
the
and
some
might start out
by having
bullet
start printing
with
lower
rates first if
a recession.
money.
But
then,
the
they
politicians
for
outlook
into this
are going to stop putting
money
point,
foreigners
the
American
That
means
the
dollar.
of
because
weakening
country
savings
public will have to finance the debt. We have only a 3 to 4 percent
would
that
interest
rates
to
finance
rate. To getthe American
debt,
public
have to be very high. If the Federal Reserve tries to avoid high rates by
then the dollar just disappearsand the Fed loses
more
money,
printing
and 25
control completely. That is the case where you get hyperinflation
to
have high rates.
we are going
to 30 percent interest rates. Either
way,
At
thrown
we are on
While
How doesthe
get
in.
the dollar.
decide
will eventually
to bite
give up
In 1934,
they
set
declined every
because
down
the topic of
during
revolution.Demand
was
of gold
the price
year
between
there was no
forty-five-year period,
especially
have a
do you
scenarios,
long-term
gold?
the
going down. You
$35
1935 and
1970s, when
have
had
gold.
of gold
consumption
and bigger,
would
and gold production
1980. Productionkept going
an ounce
incentive to lookfor
the
1960s and
got bigger
at
we
while
had
at the
a great
bull
what.
Even if inflation was at
1970s, no matter
would have had a big bull market
in gold during
demand.
and
supply
During
that whole
kept going up,
the electronic
same time, the supply
in gold in the
market
zero
percent,
you still
the
1970s,
because
of
300
B. Rogers,
James
Jr.
has changed
entirely in the 1980s. There is nothing
from
of
the
the
$35 to $875 to make peoplego into
price
gold
taking
1980.
Just
year since
gold business. Gold production has gone up every
for mine openings and expansions,gold
based on known projections
The
situation
like
time, there
same
to go
is scheduled
production
until at least 1995. At the
in the recovery
advances
year
every
up
have beenmajor
technological
In short, there is much more gold available
than there
gold.
be, and that trend will continue at least into the mid-1990s.
I own some gold as an insurance
is
but I don't think
gold
policy,
of
the
in
inflation
1990s
that
it
was
the
to
be
the
1970s,
hedge
going
great
I don't
know what the
because supply and demand is so different.
to decide
of the 1990s will be yet, but fortunately, I don't have
inflationhedge
processesfor
used to
James B.Rogers,
301
Jr.
situation like that, I would
In a
sharply,because
of
the
the price of gold would
to disruptions in mine
think
related
panic
go up
production.
is going on,
While
the revolution
will go
down. Themove
will
ask,
buy
after
also
bring
\"Why is the price
that move down,
the
go up, but after that, it
confuse everybody. They
down?\"
But you will want to
of the revolution will
euphoria
will
price
will completely
down
of goldmoving
because
the
chaos.
We have
talked about
and
bonds,currencies,
your
long-term
gold.
Any
for the stock
about oil?
views
thoughts
market,
today.
The supply/demand
negative. But if
you
your own words,
picture
that together
put
\"the
are
you
dollar
painting
a
with
disappears,\"
for gold is obviously
in which, using
situation
such an event
wouldn't
swamp the internal supply/demandbalanceof
gold may keep
but it's not going
Certainly,
do worse,
In
other
words,
its
gold was
power.
purchasing
to be
gold?
It may
Yes, when
price
mind saying
$11 or $7
at
do better, it
may
the best market.
the
always fight the
last bull market. The
of value is
last
idea that
absurd. Therehave
lost purchasing
I should
been
add
else
something
talking
gold
has
times in history
many
when
gold
gold.
where
Remember
tomorrow
dump all
has
three-
that
there are always
pieces
Don't forget South Africa in that puzzle.
and added.
beingremoved
is more complicatedbecauseof the South African situation. I fully
that the
Africa to eventually blow up, becauseI think
expect South
governmenthas
Gold
itself too far into a corner. If there were a revolution
painted
whites would
African
and the blacks took over, the South
their
gold.
So the
price would
guy
can
can put
that
day\342\200\224the
in writing;
interview.]
scenario
do to
you are talking
about\342\200\224the
going down, etc.\342\200\224isthere
stock
anything
market
that the
protect himself?
European
and Far
Eastern currencies;
buy
Treasury
bills;
buy farm
land.
How did you
first
get interested
in trading?
decades.
about
about,
general
You
hedge.
managers always invest in
always been the great store
Portfolio
for
power\342\200\224sometimes
puzzle I was
dimensional
war.
of this
it will some
I guarantee
I don't
is going to go under $12. Whether
is
that
of
oil
was
[The
price
approximately $16
down.
It certainly
going down, the dollar
Buy
Generals
hits\342\200\224and
or $3,1don'tknow.
Given the
average
yesterday's inflation
that.
time
the
recession
the
is going to go way
of oil
actually
go
down
a lot.
Investing. I stumbled
onto
Wall Street. In 1964,1 had just finished
on
to
going
graduate school. I got a summer job through a
I
who
met,
guy
happened to work for a Wall Street firm. I didn't know
about
Wall Street at the time. I didn't know
the difference
anything
between
stocks
and bonds. I didn't even know
that there was a difference
betweenstocksand bonds. All I knew about Wall Streetwas that it was
somewhere in New York and something unpleasant had happenedthere
college and
in
1929.
was
James B. Rogers,Jr.
302
that
After
I went to
summer,
Americans I knew
more interested in reading
all the
Were you trading
I was
lightly.
Very
at
Oxford
you
were
an odd lotter.The
in
politics,
I was
investing
the
in
market
I came into
money
some
took
If I
So
actually
you
had lost
the
the
all
started making
in
of those
either
moneyright off
two
years\342\200\224
right
at the
figured
out
I figured it
money
I had and
bought
was
I still
going
had
to be
a
mentioned earlier, I
May, I had tripled my
As I
out.
By
puts.
top. But
it
shorting stocks, and by September, I was wiped
from
being a genius to a
years were great: I went
I started
two
to ground
back
were
1,1968,
1970,1
January
know how
out. Those first
fool.
Soyou
bat?
the
in
I don't
money. In July,
much money
on August
market
left, and
money
bear market.
Not exactly deeppockets.
laughs]
in anything.
Successfully?
was my scholarship money at Oxford.I would
get my scholarship
at the beginning
of the year and invest
as long as I could.
[He
stocks you were covering?
in the
investing
you
I invested
at Oxford?
money
Were
I was
Times.
the Financial
while
Whereas
1964-1966.
during
were interested
Oxford
303
James B. Rogers,Jr.
zero in September 1970.What
happened
then?
Yes, I
was making
I left
the
time
but
I had
in
was the
That
money.
Oxford
the
summer
of 1964-1965.
market
bull
of 1966,
the
bear
market
already paid off my bills. I was lucky.If I had
during 1965-1967,1
probablywould
What happened after
have
gotten
gone
By
had started,
to Oxford
wiped out.
I saved
about
spirit
personified.
and plow everything
back into the market.
Oxford?
the army for a coupleof years, and since I didn't have any money,
follow the market.
In 1968, the day I got out of the army, I
went
to work on Wall Street. I invested
I could. My first wife
everything
used to say, \"We need a TV.\" I said, \"What
do we need a TV for? Let's
the money
in the market, and wecouldhave ten TVs.\" She said, \"We
put
need
a sofa.\" I said, \"We
could
have ten sofas if we just put the money
in the market for a little while.\"
I was in
Were you
it
back
just
trading
into
stocks
the market.
into
back
sofa. The wife got rid
Just like those guys
or a
a TV
and put
I had
everything
of me.
who
I was the
build
their stores,
I didn't care
entrepreneurial
up great retail
I was plowing
chains,
everything
at this time?
I couldn't
Bonds,stocks,currencies,
I traded all
from
What
kind
of job
did you
get
on Wall
Street?
Junior analyst.
day
Machine
what
then
one.
advertising
agencies.
almost
Currencies
different
markets?
the very beginning. Bonds and stocks
I kept
too. When I was at Oxford,
early
fairly
were
as I could, because I knew they
going to
from
and it did\342\200\224a
year
coming,
Even then, I had a strong
after
currencies.
in commodities
1960s, I also got involved
by buying
for a
I
remember
in
the
In
business,
interviewing
gold. my early years
in
Wall
Street
Jourread
the
do
fellow
asked
\"What
me,
you
job. The
In the late
stocks?
tools and
of them
these
as much money in dollars
devalue sterling
any day. I knew it was
I left. Once again, I was a little early.
awarenessof
Covering
get involved in
did you
When
commodities.
304
B. Rogers,
James
nalT I said, \"One
of the
guy was stunned,
were commodities.
because
first things I read is the
commodity
he did too. This wasbackbefore
He offered me a job, and
he almost strangled me. This job interview
already
The
zero in
from ground
pickingup tradingwise
to
September
when
I turned him down,
was in 1970, and I was
1970,
up to
build
did you start
where
your ultimate
Did
trading success?
a lot. Sincethen\342\200\224Idon't like to
say this kind
mistakes. I learned quickly
not to do
anything unless you know what you are doing. I learned
that it is better
to do nothing
and wait until you
get a conceptso right, and a price so
that even if you are
it is not
nght,
wrong,
to hurt
very few
made
thing\342\200\224Ihave
going
and George
you
No.If you
the
Did
you have
a losingyear after
that
did
sort
Yes,
What
Fund
was the
in
a percentageof
kind
understand
long
and
and
the
We
partner.
junior
if you
trader
and I
was
shorting the dollar,and
disagreed on a market?
if we
disagreed,
both had
you
we just did
nothing.
to agree on a trade to doit?
do the trade
no rules. Sometimes we would disagreeand
were
anyway, because one of us felt more strongly. But that type of scenario
and once weworked
in agreement,
rarely came up, sincewe were usually
or wrong.
either
was
the
trade
it
clear
that
was
right
pretty
things
through,
I hate to
formed.
was
a
consensus
When we thought
something
through,
is a disaster,
but we almost
use that word, because consensusinvesting
one secretary.
for him
at
Arnhold
and
trading
profits.
had
to
We left
S. Bleichroeder.
regulations did not
We could have
stayed,
you to get
but we couldn't
allow
left
We
leave\342\200\224fortunately.
stocks,
currencies, how did you
short\342\200\224all over
determine
what
such
your
as commodities
and
allocation was?
and
to the hilt. When
of money, we were always
leveraged
would
look
at the
we
of
ran
out
and
money,
something
bought
item
to
the
least
attractive
out
whatever
be
and
appeared
push
portfolio
to buy corn and ran out of
at that point. For example, if you wanted
we
ran out
we
the Quantum
differently
bonds,
together.
you were trading leveragedproducts
When
Until
did you do for
was managed
come
Fund?
from
the
As I
typical
fund.
or sell something else. It was
corn
you either had to stop buying
out this
know
how
amoebas
You
an amoebic
grow\342\200\224they grow
process.
the
other
way. It was
way, then they run into pressure so they grow out
money,
in
of labor,he was the
of.
always seemedto
new brokerage firm
of trading
it, that fund
We invested
and I was the
one junior partner,
partner,
partner,
have managed money. So we
started our own firm.
What
get started?
George Soros?
to work
because
1973
senior
senior
How did you know
In 1970,1went
the division
There
the Quantum
one
decisions?
point?
So,
George Soros
started off with
down
broke
you.
No.
How did
make independent trading
you come up with the idea, for example,
the timing of when to doit?
he decide
Usually
Did
305
analyst.
taught me
losses
early
My
of
James B. Rogers,Jr.
commodities
commodities.
trading
Going
page.\"
Jr.
currencies,
the world.
commodities,
everything\342\200\224
a very
amoebic
portfolio.
James B. Rogers,Jr.
306
you
Right. We
would
in the
positions
It
like
a very
unique
probably
we
what
markets.
bonds,
and I still
have a full
in
still
don't
least
markets. People
even keep up
are retired?You
it
do
say to
amusing
are
I don'tseehow
short
when
can invest
you
in
you say you
in American
palm
Malaysian
a big, three-dimensionalpuzzle
How do you
find
itself
reading
not do it
\"You're
retired?
all these
We
do
are retired.
and people
say,
steel without
understanding
I explainedbefore, it
is all
anybody,
question.
is going on
part of
me,
markets. What
stocks all over the world!\"
with
retirement, I'm more active than
you follow all these things?\"
the same
I have
enough
seems
time to
to be
oil. As
that
is always
changing.
spend on all thosemarkets?Just
a monumental
chore.
as I usedto. Over the years, I have spent
a
lot
of stuff into my head. I have developed
pouring
deal of perspective
on many markets. When
I teach,
students are
always astonished by the range of historical markets that I am familiar
with. I know
about
these
markets because I have pored over
many
I do
a great
a great
deal
nearly
of time
I knew about
example,
from
cotton went
when
\\
cent
the
so many
great
times,
bull
market
for so
many years.
in cotton
in
1861,
to $1.05.
about a marketlikethat?
How do you find out
know
in my
\"How
what
were the
unconventional fund. Backthen,
of its investment strategy.
terms
and can't
staff
admit, I find
I must
I
unique.
all these
do
you mean you
Now
thought
anybody who trades all the
all the currencies,
commodities,
By all the markets, I mean
and stocks\342\200\224long and short\342\200\224alloverthe world. I am retired now,
was
certainly
the
on
an
As
stock books
and
bond,
commodity,
307
Jr.
portfolio.
sounds
it was
imagine
one
in
cut back
always
Even today, that
I
just
might
portfolio,
attractive
of your positions on an individual
market
and had to reduce your
as easily cut back in another
market?
you lost money
So, if
basis?
the risk
evaluated
never
You
B. Rogers,
James
as actively
I
start
caused
you
finding
by
When I
learn
the anomalous
seea picture
that? Why did
an enormous
one of
years
in
1861 cotton
like
the
that
happen?\"
Then
a long-term
historical
market, I ask myself,
I try to
figure
it out.
chart.
\"What
From that,
amount.
I teach at Columbia,
which the kids call
find
a
each
student
to
Bears,\" requires
major historical market
or whether the move was up or
It doesn't matter which
move.
market,
known
to tell me what one couldhave
down. My instructions are for them
at the time to see the big move
coming. When rubber was at 2 cents
ever go up?\" Yet it went up twelvefold.
can rubber
everyone said, \"How
ask them,
\"What could you have seen at the
Somebodysawit. I always
time?\" I always nail them. They will say, \"I knew the market would go
up becausethere was going to be a war.\" But I will make them tell me
how
could have known at the time that there was a war coming.The
they
of
them historical perspective across a broad spectrum
course
gives
markets
and teaches them how to analyze.
I have lived through or studied hundreds, possibly even thousands,
it is IBM or oats,
whether
of bull and bear markets. In everybull
market,
seem to come up with reasons why it must go on, and
the
bulls
always
of times,
\"We are going to run
on, and on. I remember hearing hundreds
\"Oil has to sell at
out of supply.\" \"This time is going to be different.\"
\"Gold
is different
\"Oil
is
a
a
barrel.\"
not
$100
commodity [he laughs].\"
for
from every other commodity.\"
5,000 years it has not
Well,
damn,
There
have been some
other
been different from every
commodity.
and other periods when it has
periodswhen gold has been very bullish,
about it. Sure, it
mystical
gone down for many years. There is nothing
a store of value, but so has wheat, corn, copper\342\200\224everything.
has been
of years.
Some are more
All these things have been around for thousands
have
valuable than others, but they are all commodities. They always
In fact,
\"Bulls
been,
the
courses
and
and they always
will
be.
308
James B. Rogers,Jr.
I guessthe
time is
1987
stock
market
going to be different\"
is a
prime recentexampleof
the
B. Rogers,
James
\"this
complacency.
Is there a
There was going to be a
of stocks
shortage
Wall Street houses published a
major
Right.
the
there was a
to keep going
great
shortageof stocksdeveloping,
for
up
at the
years\342\200\224right
learned
top. In
1987, you
While
editing
this
magazinestory
Exchange
current
of
comes
actually
The explosive growth
the boom could
go bust.
worries
[he
for a
ask
The
up slightly later
in a
this
Time
Stock
of the
interview.
some Western
financial
who fear
experts,
manner.\"
attribute
the
companies
high
are
groundless,
price-earnings
to understate
earnings
argue analysts
ratios
in
to keep
part
in
Tokyo.
to accounting
their taxes
The Japanese
rules
lower. Another
that
rise.
market
some
low, there comesa
is very
a market
cycle. When
become undervalued. The
it is a
because
look good. In the next stage,
it has
buy
up and more people buy
sound
fundamentally
thing to do or becausethe charts
calls me up
people buy because it has been the thing to do. My mother
the stock
\"Because
and says, \"Buy me XYZ stock.\" I ask her, \"Why?\"
has tripled,\"
she answers.
stage: People
Finally, there comes the magical
is going to go
are hysterical to buy, because
they know that the market
economic
logical
up forever, and prices exceed any kind of rational,
when
peope
to go
starts
market
because
it
value.
The whole processthen
gets
overpriced
tremendously
becausethe
and
more peoplesell.Next,
knows
thing to do. Everybody
Then
That's
you
the
market
reaches
when you can buy
have to wait
usually
sold a
1\\
acre
plot
poor. As
people
it is
years and let
a few
the
markets, I recently
for $450 million
in Tokyo
famous
economics
deteriorate,
because
it
has
going to go to nothing,
$250,000 twenty-five
ago.
years
[During 1634-1636, a speculative frenzy
causing such an enormousriseand collapse
is still
the
sell just
Is Japan
the event
downside. The market
down. More peoplesell
to go
starts
been
so they
the
sell.
the hysteria stage and gets very
underpriced.
it for a pop. But for a long-term investment,
about extreme bull
Talking
it
are turning
fundamentals
on the
itself
repeats
the
in
base.
market
Australia
that
read
that
bought
they
of our
tulipmania
swept
tulips
in tulip
for
day?
Holland,
bulb prices that
today.]
allow
factor
up prices is so-calledcross-holding
of stock.
Because many
companies hold large blocks of other companies' stock, which out Japanese
of
traditionare seldom
traded, fewer shares are available
for purchase
so their prices
propping
cases of
different
between
similarity
more and
If that
happened, investors with heavy losses in
Tokyo could be forcedto pull money out of other
markets,
another
triggering
crash. Japanese stocksare
at astronomical prices in
already
trading
with
the profits of the
comparison
that issued the shares, at least
companies
by
American standards. On the New York Stock
such
Exchange,
price-earnings
ratios run about 15 to 1, while in
Tokyo the multiples
are often four times as
high.
& Telephone trades at 158 times
Nippon
Telegraph
its earnings.
\"Japanese authorities
have
allowed
a speculative bubble
to grow,\"
warns
George Soros, manager
of the New York
City-based Quantum
\"At no
Fund,
time in the past has a bubble
of this magnitude
been deflated in an orderly
Such worries
of
the same
always
better
subject
in
begins
of money\342\200\224
Tokyo
It's
time
everybody
item
following
bull market on the
p. 29). One could hardly
\"this time is
going to be different.\"
Japanese stockmarket
that
across the
the incredible
8, 1988,
(August
example
I came
chapter,
about
market had
started
in all
lot
hysteria?
on why
thesis
again: \"There is a shortageof stocks,
because
this stock.\" At the bottom of the bear
buying
market
a laugh that builds
there is going to be a
steadily]
shortage
I assure
you\342\200\224with a gigantic
surplus of stocks.
is
1968, one of
again. In
why the bull
and
all over
hearing it
309
Jr.
I guaranteethat
collapse\342\200\224possibly
the
Japanese
the
within
going to go down 80 to
are going to go down
90
80
stock market is going to
next year or two. Many
in the bear market.
percent
to 90
percent.
have a major
of
A lot
our
stocks
are
more of theirs
310
JamesB.Rogers,
Is there
any
way
Short Japanese
Japanese
puts.
You
them.
the
U.S. trader
average
can take advantage
stocks, short Japanese
indexes,
A lot of Japanesestockstrade
can short
the
of that?
short Japanese
here
and you
Japanese
index, which trades in
brokerscan do it for you. There
Jr.
Singapore
short
and
I didn't
very clear exampleof hysteria,
it that long [he snaps
about
fingers].The reason I didn't
go short was because I knew when the market caved in, they would create
rules so that I would never
get my money out. Of course,the market
eventually
collapsed. If I had gone short
would
have blamed it on
they
me and said I causedthe damn
thing by shorting. People were even
blamingme for the October crash last year,
because
I said it was going to
claim I caused oil pricesto
happen. Some
people
because
I said
collapse,
the price of oil was going
to go down. I wish I were that
influential
or
Although
short it. I thought
was a
market
that
powerful.
To get back to
a few Japanese shorts, and I'm
going
when
the crisis comes,
Japan, I know
I don't want to be around near the bottom, because the
Japanese are going
to protect themselves.And whatever
do
to
they
protect themselves,it
ain't
I guarantee
going to be good for Jim Rogers.
that.
to have
more. But
You may not
of
I do in
whatever
be ableto get your
could freezethe
currency. God knows
Yes, they
I have
Japan,
money
Wouldn't
you
traded
on an
American exchange likethe
out?
they create
Suppose
side of the
can't
trade
what
they
They could
will do.
have three
different
that
CBOE?
two
of currencies
levels
meet his
and
the
guy
on the
other
obligation.
The clearinghouseis responsible.
to hear it.
That's the
I've had in a long
If
the
to be careful.
stock
time. Still, whatever I do, I'm going
Japanese
or 20,000 that's fine. But you better
market goes from 30,000to 24,000
out of it before the last bit if it goes to 12,000. If you
think about getting
that long, you may get your
wait
out, but it is going to be very
profits
OK,
fine,
I'm
happy
best
news
painful.
Why
I
did you
want
didn't
leave the Quantum
to do
the same thing
for
Fund?
wanted
of my life. I always
came to New York in 1968,1 was
than I knew
had made moremoney
the rest
When I
more than one career.
a poor boy from Alabama.
By 1979,1
existed in the world. Also, we were getting
big. We had started with
very
to know
wanted
and by 1979, we had fifteen people.They
three
people,
in any
interested
when they could go on vacation, get raises,etc.I wasn't
of that; I was interested in investing. I didn't want to get bigger.
In September 1979,1 decidedit would be my last year. But then,
in the stock
in October, there was a big collapse
market, which we sailed
on one more year.
to
so
fun
that
I
decided
It
was
much
stay
right
through.
to have
I left in
1980.
start of your
Was
1980 the
Yes,
in 1980,1 just
Is that the point you
currency.
were short a Japanesemarket
if you
be protected
calls, buy
can just
Most American
are at least five
major Japanese corporations which
have
traded on the Chicago
options
Board
Options Exchange. Although
I think
a collapse is coming, you
have
to be very careful about
going short Japan, because they might
change the rules on you at any time.
I don't know if you remember the Kuwaiti
stock
market
of 19801981. In that market, you could buy stocks with a
check.
You
postdated
could buy $ 10 million worth of stockswith a
postdated
check; you could
$100
million
worth of stock that way. It didn't matter.
buy
Everybody
was doing it. In the end, there was a passportclerkwho owned $10
billion worth
of stocks! All of it on
checks.
postdated
Osaka.
311
James B. Rogers,Jr.
\"retirement\"?
cashed in
became
my
chips
an independent
tiers
The term
I really
prefer is
and retired.
\"unemployed.\"
trader?
312
Well, you teach at
That's
I did
it was
could
a part-time
as
not
the love of
I thought
for
that,
But
so.
think
I was\342\200\224I'm still
I take it,
Oh, it's
many
I thought
here and
yes.
are
And
about
worth
into
October
best.
bonds
skyrocketed.
kept
me
pestering
of
I wanted to learn in my retirement
a deal with the Dean to teach one
for lifetime
a great
access to
deal, but
he
was
the
smarter
than
really
enjoy
night,
gold standard. I didn't
on my
motorcycle,
having read the papers.
20 percent, and the
down
That
went
U.S.
on
both
Japan and short
that he was taking
were
We
long
announced
Nixon
without
evenknow it had happened. I had
and I came in Monday
morning
week the Japanese stock market
stock market went up. We were
sides.
liquidate your
You can't liquidate
at
a time
like that.
off the
right
positions
Who can you
bat?
to in
sell
Japan?
Who could you buy from in the U.S.? If you covered
your shorts, you
made things worse. In a situation like that, you have to figure out whether
was
going to be a major fundamental
you are right or wrong. If there
loss. But if fundamentally you
the
best
is
first
loss
the
forever,
change
do
then
are basicallycorrect,
nothing but sit there and let the market
you
you.
hysteria wash around
Columbia
Did
it.
is terrific.
analysis,
trading
with
So, you really
and the
\"Bulls and Bears\"course
experiences,
do any
stand out as
your
positions?
Thereis no
What
was
such
had to ride out
thing
the analysis
as a
a rather
paper loss. A
treacherous
paper
that gave you the
loss
paper loss.
is a very
confidenceto
stay
real loss.
with
your
positions?
19 birthday present that I talked about earlier was
1982 is another. I put a gigantic
part of my net
August
throughout
you stay
Yes.
before.
Of the multitude of your
particularly dramatic?
My
one Sunday
and
off the
Did you have to
you teaching?
Security analysis,investment
probablythe
Dean
the
exciting time.
teaching.
good fun,
we talked
a very
so you
think people should go to business
people, business school was a waste
I got
was
losingheavily
\"I don't
one thing
at this point, you
courses
What
I didn't even
started teaching
You actually
was how to play squash. So I made
course
per semester for free, in return
He agreed.
dramatic experiences?
been off somewhere
teaching.
is right
him,
313
Jr.
1971
August
America
facetious?
being
I still
Columbia
gym.
so that
1983
in
starting
squash?
play
school.\"
Lots.
thing
America,
I'm dead serious.Columbia
to teach a course.I told
time.
it
developed into much more. But when I started out,
to teach. I just wanted to learn how to
play squash.
You're
James B.Rogers,
Any negative
squash.
I thought
want
Jr.
Columbia.
unemployed.
I couldplay
It has
B. Rogers,
James
1981 and 1982, and
in
August
1982,
they
Our analysis was that
simply taken a short-term
long-termproblems.
this
was
step,
not the
and it was
end of the
not
going
world.
to solve
America
had
our country's
314
B. Rogers,
James
Did that position
actually turn
out
to be
OK?
Jr.
$
James B.Rogers,
But
actually,
trend
It
The Nixon announcement was just another step in the
of the Bretton Woods Agreement
[a 1944 international
pact
established
otherthings,
guidelines for foreign exchangerate
and the decline of America.America
was
in its
rallying
dissolution
among
stabilization]
own bear market.
That
a cosmetic move
saw it as
you
trend, and
stayed
you
with your
that
wasn't
to change
going
the
position.
of
kind
have to
Is
What trading
to
implemented
principle:
When
you should
a trend,
counteract
measures
government
sell the
rally
are
after
action?
government
say,
\"I
investing
down as an axiom that you always
the central banks. When the central
banks try to prop
the
other
go
way.
Absolutely.
invest
against
currency,
What is the
It
way
world
the
live
the
public
What
is always
market
regarding
fallacy
up
a
right.
The
market
is nearly always wrong.
I
conventional
wisdom
in the
market. You have to
markets. You have to learn how to think for
see
the emperor has no clothes.Mostpeople
can'tdo it. Most people want to follow a trend. \"The trend is your friend.\"
that is valid for a few minutes
in Chicago,
Maybe
but for the most part,
is rarely
a way to get rich. You
following what everyone else is doing
make
that way for a while, but keeping
it is very hard.
may
money
go
counter
the
examined
Be awareof
So
anything.
but don't
situation.
change.
many
Also,
Buy
people
\"I could never buy utilities,\"
of stock,\"
and alert
commodities.\" You should be flexible
to
anything.
If you
the average investor,
were counseling
Don't do anything
market behavior?
else?
leam to
way,
opposite
to the
yourself; to be able to
that
what
would
you tell
doing.
If you
make 50
him?
of that.
Never, ever, follow
go the
be written
should
biggest
can assureyou
it just
by?
is always changing.
to buy or sell
willing
until
you
know what
you
are
in the
you
two years in a row and then
year,
actually be worse off than if you just put your money in a money
Wait for something to come along that you know is right.
fund.
market
Then take your profit, put it back in the money market fund, and just wait
You will come out way ahead of everybody else.
again.
lose
percent
That
and
following,\"
buy that kind
never play
in
different.
early,
buy
to go on for years. By \"trend
it goes up and selling
because
if you shouldn't
until you have fully
never
could
\"I could
justified\342\200\224is
change early,
balance
to see
You should be
change.
the
rules do you
hysteria
go the opposite
remember that
a general
that
is economically
down.
it goes
Look for
Right.
that
trend\342\200\224atrend
see the supply/demand
are going
markets
that
only buy
I meant buying a market
just
You
because
So,
years.
involves
staying with a
your whole style of trading
So isn't what you are saying contradictory?
out fine.
turned
that,
for
315
Jr.
50 percent
third
would
Are you ever wrong on a major position play? That is, are one of
or are they so well selected that
your almost sure shotsever wrong,
they
just
invariably
go?
like I don'tknow how to lose
has
most
I know how to lose money better than
people\342\200\224but there
money\342\200\224because
that
to
remember
have
But
not been a major mistake in a long time.
you
I don't trade that often. It is not as though I'm making three decisions a
I don't want
to make
it sound
316
James
month. I may
I'll
a year, or five
decisions
three
make
Jr.
and
a year,
decisions
What
market, one
all the
until
Very few investors
or traders areassuccessful
time. What
you
I don't
play. I just
don't
I
pieces
as you
have been
over
play.
Yes,I look
variables.
the
all
do anything
until
see American
you
happens in the
American
buy.
have
farmers
marginal
so what?
The
buy
worst
it
right.
As an
is
agriculture
hit
out,
that
it has
deteriorate,
deteriorate,
I look
to go up. You just watch
and then you
deteriorate,
In my case, usually
a little bit early. But,
early
that happens is you bought
it too early. Who cares?
sets
you
totally
everything. I have
Singapore dollars or shorting
I pursue
Motors.
flexible.
no more
Malaysian
I am
compunction
palm
are very selectivethat
What
know
about
buying
will
to see
on in the world by
what
looking
see what
has
happened.
happen?
They give me facts,but
used earlier, reversal?\342\200\224there
a reversal is.
market.
bull
term you
reversal
and
speculating
I do about
is going
knowledge,
has happened. If you don't know what has
what is going to happen. The charts
say
know
even
A
open to everything,
oil than
a lot about what
for
ever lookat chartsand say, \"I've seen this type of
and it usually means the market is topping.\"
at charts to
Not what
is that
apart?
I have no boundaries.I am
General
the fact that you
besides
I use them
can't
or late.
else
every week.
at them
before
runaway
Is thereanything
who
example,
world
the
been washed
agriculture
You may
you've got
a low, then no matter what
is going to stop eating\342\200\224you
now so competitive, and so many
agriculture
world\342\200\224unless
American
go wrong.
you know
course, technicians
of money.
you don't
But
until
don't do anything
charts.
pattern
Just don't
time. I
chart reading?
services and make a lot
on. I learn
is going
at
all the
use charts yourself?
Do you
understand that. But still, very few people can analyze the same
fundamentals
at and so consistentlybe correctin
you are looking
happens
technician. Excluding, of
a rich
met
haven't
It
opinion about
is your
What
different?
I can
assessing
for
one
currencies,
and not everything
market,
fit.
sell their technical
makes
bond
the
for
do anything.
I won't
Then
difference between making
a trade
and deciding to buy
bonds
in 1981. I've owned bonds since1981,
but
I sell around the
position. I make
trades, but basically I own them. I went short the dollar at
the end of 1984.Now,
I have made a fair amount of trades in currencies
since the end of 1984,but it is
a lot of trades
basically one trade with
around it.
is a
there
Well,
one scenario for
you have
when
happens
meshes?
do you make a trade?
How often
317
James B. Rogers,Jr.
the stock
them.
with
stay
B. Rogers,
what
tell me.
It might
and I don't want
that there is a
it. I don't say\342\200\224what
reversal here. I don't
to me
that's
is a
is\342\200\224
simply
in
Don't
happened, you'll never
mess
to know.
up my
mind. I don't know
about
those
things,
James B. Rogers,Jr.
318
Dothe markets
is being
behave
managed
so much
now because
differently
any
by trend-oriented
systems?
always have been
on a computer,
money
Jim
No. They
may
have been
systems.I guarantee
and not
market
of
not
system,
always
back 100 years in the
decade
where
there
hasn't been somekind
single
of new formula developed to play the markets.
a
find
kind
some
there
but
that
can go
you
319
James B. Rogers,Jr.
but
of his
many
Hisbasic
principles
trading
to emulate
difficult
are of
in its
entirety,
great relevance to all traders.
are:
concepts
1. Buy value.
may be
approach
unique
Rogers'
If
buy
you
value,
you will not
lose
even
much
if your
timing is wrong.
1970s, 1960s, and
The
same
markets
basicallythe sameas the
today are
markets
So the
1950s.
in the
markets
2.
Wait
for very long
Bottoming markets can go nowhere
in
a
dead
market, wait
up your money
tying
direction.
a catalyst to change the market
a catalyst.
for
periods of time. To avoid
markets in the nineteenth
and
down. Theyhave not
go up
as the
century.
changed
The same things
the rules of supply
until
make
is
there
and
3. Sell hysteria.
demand.
This principleis sound,
easy. Rogers'methodology
have any goals at this point?
Do you
I'm
the
a wonderful
There are
markets.
years
twenty-two
two
it is hard to
that
pastime
I was
I'd like to
adventure.
for
looking
more from
when
hysteria,
old.
be able to
wean
First,
problems.
more and
myself
is such
investing
give up. I haven't
changed
I always wanted to
read and
from
know
that was going on and figure out
the future.
The second
is
problem what do I do with my funds if I just stop? If I turn it over to
I would
be broke in five years, and then I
my friendly broker at XYZ,
would have to go backto work.
last words?
whether
validated,
but
be sure
is far from
as follows: Wait
for
its application
be paraphrased
is
the market
wrong, go against the
you are right,
then
and
hold
The
on tight.
tricky parts are the last two steps. Very few traders have
the maze
skills
and intuitive insights to wade through
Rogers' analytical
of facts and statistics in the \"three-dimensional
puzzle\" of world markets
and arrive
correct
high
projections with uncanny
the
to
sit
could
be a
of
ability
accuracy,
tight
type
accuracy.
trends
economic
lethal
virtue.
And, even if you can predict long-term
the problem of
there still remains
of accuracy,
with a sufficient
degree
the
steamroller
of
when
financial
able
to
sit
tight, particularly
being
to
is
counter
market hysteria
position.
your
running
would have been able to sell
traders
I doubt
For example,
many
short
while it surged to $875 in only four days, and
gold at $675, stay
the
at
Without
everything
Any
to see
examine
hysteria if fundamentally
can
long-term
this
the position
long-term
collapse,
through the subsequent
if
have
the
steel
nerves
Even
profit.
you
large
eventually liquidating
lack
the
resources to
this
financial
to
feat,
you
probably
duplicate
necessary
market
or
the
same
of
this
of
high degree
accuracy in
outstay
type
should
this
comewith a
shots.
Perhaps
particular concept
picking your
then
hold
at a
Good investing
few peoplehave
same scenario,
Ninety
percent
investor\342\200\224or
trader,
get away
is really
the
exact
sense\342\200\224how
your
many
facts and
focus on the
same
of them will
to use
sense. But
just common
common
term\342\200\224will
from conventional
not
same
see
wisdomis not
it is
astonishing
how
people can look at the exact
see what is going to happen.
thing,
something
very
but the
good
else. The
common.
ability
caution
to
label
to apply
attached:
the
method
Warning!
described
Any attempts by the unskilled
herein can lead to financial
practitioner
ruin.
320
James
4. Bevery selective.
Wait for the right
for trading's sake.Have the patience
probability
sets up
trade
exactly
trade
B. Rogers,
Jr.
along. Never trade
until the high
money
to come
to sit on
your
right.
Weinstein
Mark
Biases against certain markets
of trades limit your
ortypes
field of opportunity.
A trader
who says, \"I will never go short,\" has a
distinct
to the trader who is willing to go short
disadvantage
compared
5.
as
Be flexible.
well
markets
as long. The trader who
has
a distinct advantage
is open to examining
over someonewho
a broad
is willing
High-PercentageTrader
range of
to par-
ticiggjB4H-\302\253nly-\302\251Hejiiarket.
^^.
conventional wisdom,.Veepthis principle
in mind and
the Dow has already moved
yoiTwillJxJess likely to buy stockj^after
from
to 2,600 and everyone is convincedthat
there
is a shortage
1,000
of stocks.
Never follow
a brief
After
as a
period
His
trader.
full-time
his money away.After
7. Know
when
to hold
and
when
to
liquidate
a losing
position. If you
is going against you because your original
analysis
was flawed (such as when
you realize
you overlooked an important
fundamental
then as Rogers states: \"The
first
loss is the best loss.\"
factor),
if the market is going against you, but you are convinced
However,
your
then
sit out the hysteria. As a cautionary
original analysis was right,
word, this latter condition should be applied only by traders who fully
understand
the risks involved.
believe
the market
the markets
seriously
study
of one disastrous
from
that
trading
point on.
broker,
stocks,
commodities.
Although
Weinstein
experience,
He has intensively
traded
Weinstein
became a
was a successfultrader
a wide
variety of markets,
options, stock indexfutures, currencies, and
he is reluctant to divulge specific details, it is clear
profited handsomelyin
I met
Mark
stock
including
that he has
real estate
that he virtually
threw
start in trading was so naive
to
that early failure, Weinstein withdrew
stake.
With the exception
and earn another trading
Mark
Weinstein
very intrigued by
reluctant to tell his story.
project,
conversation
the
the
all
these trading arenas.
a mutual friend. Although
through
his desire
for
anonymity
made
he
was
him
He would call me and say, \"OK, I will do it, let's
the interview.\" Then the next day he would call and say, \"I
schedule
This pattern was repeated
the publicity.\"
changed
my mind. I don't want
with each decision accompanied by lengthy
several
times,
phone
the interview.
the merits and drawbacks of doing
conversations
regarding
have done three
we could
Finally, in exasperation, I said, \"Mark,
it.\" That was our last
about
interviews in the time we have spent talking
regarding
impressed by
book,
the
Weinstein
Weinstein
caliber
matter
of traders
later when,
about two months
who had agreed to participatein this
until
decided to do the interview.
met me at my office one summer
evening.
Because
the
Mark Weinstein
322
off the air-conditioning after 5:00 P.M.,we were forced
corner lobby, which,
warm, was at least less stifling.
although
The interview
was conducted over a dinner
and soda.
of deli sandwiches
our phone
I knew Weinstein had a strong
conversations,
Through
to go off in many
in any conversation\342\200\224that's
directions
how
tendency
his mind works, one topic leadshim
to think
of five others and their
various
interrelations.
Dreading a mammoth editing task, I stressedto
Weinstein
the need for remaining focused on the specific
I
questions.
could tell that Weinstein
was making an extra effort to heed this advice.
This fact notwithstanding, the interview
lasted five hours and yielded a
turns
building
out
into a
200-pagetranscript.
Did your
did
market
had been
I went
long.
get involved
in
trading?
in 1972, when
Didyour
friend
get you
interested
in
the
who
was
markets?
It sounds to
one of
was
I remember
line
I knew
have
Didn't
it
friend
let you put on
I was
occur
that
the
about
of my
a position that
was
principles.
management
money
any
idea of the
the chances
that
what
know
your
with
schemes.
the markets at
If I
any
then was
time and
a bad
flipped through
test patterns to me.
of TV
collection
some
even
anything
nothing.
Absolutely
realize
I didn't
What
those get-rich-quick
know
a chart
the time?
book, it looked
like a
risk involved?
winning
were
very
slim because
I didn't
doing.
to you
that you should
learn something beforeyou
started?
strategies.
No, because
Do you
like
me
out of
Did you
take much to get me interested because my father's
hobby was
and I used to watch him at
gambling. He was very good at percentages,
the crap tables.In a sense,I think being a trader is in my genes. Also,
and science
trading fascinated me because of my mathematics
and because I had a commodity
friend who was
broker
background in college
computer
me,
a
It didn't
into
have
on
turned
Did you
I was a real estate broker, I had a friend
broker.
He
and
I had gone to school together.
commodity
Back
you to follow the analyst's
was alreadyoverbought
when
reaction. I just got in on the move too
going. Also, my
enough
margin to keep the position
and I didn't want
to put up any more money.
for
rising
wasn't
It
late. I didn't
guts
followed it.
he also
and
Yes,
clearly
you first
advise
friend
broker
recommendation?
It
How
323
Mark Weinstein
remember your first trade?
estate
Was
it exactly.
I opened
based on
up
a commodity
account
and I went long corn
a recommendationmade
grain analyst. Three days later, I was out $7,800.
with $8,400,
by the firm's
the money that you
at the
It
I was desperate for
a change;
I didn't
like being
a real
broker.
was
invested a substantial part of
time?
all the
money I had.
your
savings
Weinstein
Mark
324
did you get
When
enough money
the markets?
back into
come
to
me
took
approximately
week and
sold a few
as many
rented
have a method
Did you
seven days a
six or seven months.
I worked
apartments as I could get my hands on. I also
took out
$24,000.1
co-ops.
By that time, I had savedup about
to open an account.
$20,000
$4,000 to live on, and used the remaining
It
make
effort
any
to learn
interim?
would be after two
All
Yes.I studied
learned how to chart, and became familiar
that
of overbought and oversold markets.I figured
the
gold
the concept
with
bought a
two
the economy. That
left myself enough
lose unless something
drastic
in
a trending
you are
market,
in
going to
get killed.
It worked
What
But
for severalyears
a lot
I guess
ignorancewas
bliss.
trading results the secondtime
were your
I did well
fortune.
market.
in that
of
was
that
that
after
due
around?
and managed to
friends
to the
So this was really
anything
more orderly.
have all beenluck.What
were
build
Did you
a small
technical
analysis
technical
about
at a
a break by
time
when
and right.
I probably
I sat in a studio
looked like
a
endeavor.
a full-time
wake
sometimes
up with
a feeling that
market was going higher or anything
you
doing
right when you
nothing
extension of what
it to
to what
I got
wall.
Not only an endeavor\342\200\224it was an obsession! I slept with it; I dreamt about
it. Sometimes I would
about
what I would do
stay up all night thinking
If
the
next
I didn't need sleep, I would
have
done it twenty-four
day.
hours a day. At that point, it wasn't the money
that was motivating me.
I was hooked on the game: on the challenge of trying to figure out the
sleep
like
knew
you
the gold
that?
analysis
learning
it was
then,
very
days,
do
with the
doing during
up exploring
the
day.
It was
market.
take so much
I would
I had
unconsciously what
just an
of
been doing
day.
that
Very few people
markets were much
Did
you have any
goals when you set out?
now.
so the
could about
pretty well.
as much
working
I was doing
seemed
commodities
little
direction of the
to do
I was
I ended
that
consciously that
knew
left
plastered on every
I had left.
to luck.
I know now, there was
I
had
I
think
just
good markets.In those
right.
a lot better than they
to follow chart patterns
relation
hours.
market.
were making money?
In
about
trading?
night. I was losing friends
with charts
No, it had
It couldn't
and gut reaction.
them. Sometimes
it
if I
money for
happened
and all
day
madman
method.
use that approach
if you
But
was my
and
market
I couldn't
calls,
all day
\302\253
system
after two
sometimes
days;
spending
apartment
market,
severelyoversold
margin
risk?
controlling
in the
markets
the
about
anything
for
onmy nervous
No, and I still don't. I depended
I coveredpositionswhen I did not feel right
Were you
Did you
325
Weinstein
Mark
as I
Well,
the
great
was particularly
dream until
American
true
I started
dream is to make
in those
vacationing
a million
days. I never really
and
traveling
dollars,
had
in Europe.
and
that
a materialistic
Mark
326
this?
was
When
It was
the
in
Had you
How many
years after
I had
been trading
mid-1970s.
for
started
three or four
years.
point?
Yes,and I had made enough money to be able to relax, start
about things I wanted to buy. At that point, I was feeling
and think
vacationing,
confident enough to know that I could replace the money I spent with
was to start
profits. I figured the next logical step
my
in
I was making. I saw a castle the south of France that I
the money
appreciating
that the castle had a moat around
I was particularly
wanted.
impressed
to me. It was on the market for
there
appealed
it, and the idea of living
about $50,000 a year to keep
take
it
would
I
and
$350,000,
figured
only
trading
it up.
sound likea lot of
Today
to make
wanted
you didn't
it cost.
have
You already
The target
being
the $350,000 you
I know
Soyou
didn't
people
and won't
take
No, I camebackand
the
money
the castle;
to buy
this
I still
business
at it in
looked
who have
terms of how
$17 million
In other words,your
Exactly.
out of
I wanted
determined not by market analysis,but rather
wanted to make on the trade.
Did you trade
you were trying to make money for a specific
by
purpose?
consider
I didn't
Yes,
any type
the
risk
the
of rational
market
session,
and took
went
up again
on too large a position.I was
I was
judgment.
the
next
not
being guided by my material
but collapsed suddenly
day,
locking limit-down.
Did you get stuckwith
your
position
at limit-down?
decided
next
office
$350,000
come
would
off
The next day I showedup at
opened offered limit-down. I waited
of locked limit-down, but it didn't.
out.
the brokerage
day to
all
see if
it
that
you
would
have liquidated your
position if
you
could
have.
money out of the
that making
the market
and
I take
buy a new car.
your
Yes, I couldn't get
much
in their
account to
buy
the money was going
the
castle.
to be
my
goal.
castle.
because
differently
it
the money,
in
had
it.
make
to
I had
though
trading account
money.
The
week.
mistake.
understand.
I don't
The market
on my
trade.
the
late in
I came back to the U.S., I
$5 million. When
castle
almost immediately. That
the money to pay for the
was a tremendous
Even
On my next trade, I put on a large long position in soybeans.
closed up the first day, and I had about a 25 percent
profit
I was planning
to get out of the position
at the end of the
I made was having
a specific
biggest mistake
target of what
desires.The
a castle.
worth
is probably
it
for
money
327
happened?
using
That doesn't
Weinstein
What
trading?
about
dollar mark by that
million
the
passed
you
Mark
Weinstein
in profits
was going to go for
the
If
the
market
had traded,
Do you remember your
I was in
a state of shockand
whatsoever.
I couldn't
market would
office
about
I would have
sold out
emotions at the
at any
time?
had no
decision-making
fall asleep, and found
myself
somehow
trade the next day. On the
a half an hour
price.
before the opening,and
capability left
almost
third
they
praying
the
day, I called the
told me it didn't
like there
look
face
couldn't
getting a big
was
the
of my
were
situation.
down
There werea few
to make
developed,
of their not
the
they
other
of money
kind
were
traders in the
professional
almost
office who werenever
When
been making.
It seemed to justify
I had
relieved.
you
They overconsoled me and then
to see me come in and
wanted
to
the
it?
about
fall apart.
think they relished your
deficient as traders?
less
seem
salary
my
I stopped
coming
went
beyond
just enjoy
that. I
there
think
lose
others
watching
Once you stopped
going into
predicament becauseit
lot of peoplein
this
that
Before
made
them
business
who
with
other
brokerage
Why didn't you just
call your
houses,
own
I was
too embarrassed,
Your
own broker
I didn't
what
trying
did you do
to get
during the
know
hostile
because
what
nothing
account. So I
trading
the
each
trade
like I
I felt
The
was wounded
lost over $600,000.On
a girl
with
in a
the
fifth
in
and
a trench
five days
limit-down
went
market
day, I remember
I had
picked up,
state. I thought
a
in a
sitting
crying
literally
in
on her
out of
was
everybody
I had made
telling me was true\342\200\224maybe it was just luck that
money all those
I
worried
that
if
I
continued
I
could
years.
wind
it all,
trading,
up losing
and being forcedto go back to some job I didn't like.
business
the
psychotic
I started to
altogether.
think
that
about
getting
what
was
more
going
the large monetary loss,or your
devastating,
from success to failure?
derision.
was kidding you?
of him. I was starting to get paranoid
could be done. I went to a competing firm
to think
bleed
and I
Which
take the
in my
level prior to
price quotes.
broker?
want to
$1.5 million
of my equity
percent
to death.
park holding hands
It
I didn't
10
I was devastated.
feelings about
and
I had nearly
lap. I was practically
day?
I checked
trade,
day.
money.
office,
of
relative to your account size?
loss in perspective
that
put
myself
watching
are a
the
$15,000.1
was losing nearly
row,
It
thousand a day. This was at a time when the average annual
was not born rich, and I couldn't stop thinking
loss in those terms.
$ 125
was
back. They
it behind my
That is why
office.
Do you
About
Could you
about
laughed
were you losing each day?
years
did. They were really heartless. The
taking
positions
was
and, frankly, that was
broker,
was
who
my
really upset
only
person
account.
the
afraid
of
losing
probably becausehe was
like I
Did the other traders kid
329
again.
How much
this situation
all those
Weinstein
spoke to their grains analyst. I was looking for someoneto hold my hand.
He told me I would
be OK, because
the fundamentals were still strong
and there would be a tremendous
demand
for soybeans if the market went
down
another
Of
on
the
fourth
course,
day.
day, the market locked limit-
I
because
is that?
Why
able
in the
people
thrill out
even bother going in
that
I
office. was certain
they
I didn't
hope.
any
Mark
Weinstein
Mark
328
and
the money
and
My exact thoughts
American to go short,
not
and
was
being
able
the
were:
to get
and
out
limit
situation,
and the
fact that
I am, a person who
what I found out was really
Here
of a
position.
thought
I couldn't
it was
un-American
act.
unwas
Mark Weinstein
330
So
felt cheated
you
I definitely
felt
limit
with
price
not
by
being
from
moves.
with
public
were
that
limits
work
actually
getting out of their
created to
supposedly
against them
by
be totally
did you
When
of restraints.
free
After
a few
amazingly
slow.
about putting
I could
think
markets as a way
from
the
pan
frying
Now,
Absolutely.
can at
and finds
least get
out
that
the average
out
at some
he can't
investor knows that
price. Imagine if this
even get
out
of the
if he
guy
In other
idea of
words, you
limits
are
really
saying
that
wants to get out,
calls his broker
expounding the
matters worsefor
the
of
small
sophisticated
is a
law that is
being proposedfor
the
benefit
of
earlier
trade,
I never
the
went
short.
the
I felt it
I didn't
stocks.
into
trading
a friend
lose?
never
I came
When
you
the soybean
was un-American. After
of
in
was
the
was
I
height
capitalism,
trade, I realized that
and it really made no difference what side of the market you were on.
made
money
was that the people who were short
about
All I could think
and I lost money.
Yes.
it
my experiences
Was he upsetthat
investors.
comment implied that, prior to the soybean
side of the markets. Is that
the
right?
traded
long
always
Your
markets.
commodity
support myself
I ran
but I found
stocks,
felt extremely hostile,but I didn't want to show it
I was so upset that I walked
promised me any results.
out
office
and didn't come back for two
He
tried
days.
reaching me
that
time, but I didn't return
his calls. Finally,
he got a message
a mutual friend.
through
me
to
institutional
AMEX
of the
$40,000.1
he
because
during
absolute lunacy.It
successfully
that time,
How much did you
investor.
It is
again?
market.
those who are
going to make
begin trading
about
him
About
are
chart
to do
who is a great options trader.
and he suggestedthat I join him. In my
first
week
at his office he told me to
calls right before
buy
Teledyne
because
he was sure they
were
expiration
going up. I followed his advice,
and
the calls
completely collapsed.
I told
of
fire?
into the
he
on stock
actually be jumping
that
Would
reducingvolatility.
limits
in my
everything
last?
experience
anymore. I rippedevery
house that had anything
commodities
months, I started trading
I missed the leverage
Around
There is talk
trade
this
commodities.
people
preventing
losing positions?
the market should
I think
Yes.
Months. I didn't want to
off my walls. I tore up
wrong
is something
there
331
did the emotional impact of
How long
get out?
I think
To this day,
cheated.
Are you implying that price
protect the
able to
Weinstein
Mark
opposite
trade
lose
really
i
That
had
he
back to
in another
the
bad advice?
given you
he told
office,
and
account,
that
me
the
that
he
had
exact
So I didn't
done the
was mine.
trade
any money.
sounds
like an
odd
awfully
type
of practical
joke.
business
It
a practical
wasn't
trust
in
joke. He
anyone\342\200\224even
of self-reliance
in being
him.
was trying
It was
a good
his
way
trader.
to teach
me not to
me the
of teaching
place blind
importance
Weinstein
Mark
332
do after
How
did you
I did
pretty well. My
I know you
point?
about it?
was a phenomenal options
and I learneda tremendous
market
the
about
everything
that
Weinstein
Mark
friend
333
once entered an optionstrading
from
amount
It
was
contest.Each trader
with
technical
own
my
he
believe
he didn't
Hasthe fact
that
in
trader
technical
was a
tape reader.
extraordinarily successful as a 100
his mind about technical analysis?
have been
you
percent
it. He
changed
for me, and the
He thinks technical analysis is just a crutch
we
was a point at which
There
I make money is experience.
real reason
to my office one day and watched
for a few years. He came
separated
made it.\"
finally
me like a father and said, \"You
at all.
Not
me trade. Heembraced
I told him
that
not
had I
only
just about everything
certain
It
things
has
there
gained a lot
was
created myself.
to do with technical
I had
nothing
but I had
of experience,
about technical
analysis,
He said,
\"You
analysis.
never
You are
learned
including
give
up, do you?
that
trading
up $5,000
put
account
a $100,000
opened
on the
traders
CBOE floor. They got
in a winner-take-all
with
same
the
clearing
Three
months.
What
were your
results?
I turned the $100,000 into over $900,000 without
profits to increase leverage].
That's a ratherphenomenal
but the
Yes,
at that
good
you went out
when
trade
[using
pyramiding
performance.
markets were very
What did you
any
time.
on your own
1980?
in
way
everything. I continued to trade stockoptions.When
stock
index
trading began in the early 1980s, that became a primary
market
me. I also traded the commodity
In fact,
markets.
the last two
I traded
of experience.\"
because
two
whom
How long was the contest for?
analysis.
Your friend didn't use technicalanalysis?
No,
of
firm.
you?
taught
by
originally
organized
traders
together, each
47
Yes, combined
me
trader. Heknew
him.
Did you trade options based onthe methodologies
you tell
Can
contest.
futures
Why did you
and your option trading friend eventually
conflict in our trading
an occasionallarge
to
take
willing
There
than
run.
for
take
was a
styles. He
loss,
up for it with large gains
I was uncomfortable
However,
make
profits and
the same type
small
trying
and come out
trading
to eradicate
of risk. Also, my
whereas he was basically
go off on my own. We
a tape
got
together
reader.
during
years, my
was a great
because
trader
he knew
way
for
separate?
who
shifted
has
was
he would more
ahead
trading
in the long
way. I preferred trading
to
I wasn't willing
trades.
losing
technical,
was
purely
approach
Do you
remember
your
to nearly
90 percentcommodities.
trade after the debaclein
first soybean
the
1970s?
that
Anyway, in 1980,1
again years later.
decided
to
For a long
trading the
time, I avoided
commodity
soybeans.
markets
eventually get back the
money
But,
as I
effortlessly, I knew
I lost in
began to find
deep
down
myself
that I would
soybeans. I never forgot
about
it.
Mark
334
were looking for
like you
sounds
It
Weinstein
Weinstein
Mark
it. Either
revenge.
Where did you
the
buy
Around $6.18.
didn't
the
have
You mentioned earlier that one of the reasons you split with your
former
was
trading partner was that your own trading style
geared
to extremely low risk. Since1980,what
was
the worst percentage
drawdown you have experienced?
I loseso
beans?
[Thiswas shortly
before
I got
out
caused prices
was
get out?
of some at
$9.92.
[The
high of
the
had
Yes. Of
on that
make
The
way
you
talk
my
about
back in spades.
money
it,
it
sounds
like
that trade
I
catharsis.
was a greatrelief
that
in the
worst
single trading
month since
single
every
1980!
I could
have made
is the
I trade.
way
a
more
lot
if I
money
wasn't so
I realized
that there was a reasonwhy
remember your worst losing week?
had
any
is an
losing
weeks
that
during
statement.
incredible
time,
but I
have had some
I had
a few
about
How can you be sure that you are
weeks when you lost money
trading?
the
first
place.
reason?
The
reason
have
had
I am
three
believe anyone ever getswipedout
some other reason for
is always
market because of bad luck; there
inexperienced.
I don't
because
of my
my
quote
position.
sure is that
losing days
trades I made during
BecauseI was
your
months.
in
not simply forgetting
J
What was the
made money
course,
haven't
That
it was a total
the
lost
money in
was
What
losing days.
you.
Yes,
of
trade?
Do you
Let's just say I made
way:
any losing
but
cautious,
did you
type
move
$10.46.]
How much
it this
put
You have
$7.25, and the rest at
of that
month?
I haven't
did you
Where
let's
Well,
the 1988 drought
really keep track
I don't
that
infrequently
number.
skyrocket.]
for
you did the trade, or you
a mistake involved.
off when
is always
There
exactly.
Yes,
to
were
you
experience.
chart book, my eyes
Every time I lookedat a commodity
I would
over to the soybean chart, then
quickly flip the page.
would
edge
When
for years beforedoing
anything.
the market
I watched
peripherally
were near a low, but I didn't
they
soybeans went down to $4.75,1 knew
want to buy them until I was sure I couldn't loseon the trade. I was like
for
a Sicilianwhose wife had been murdered ten years earlier, waiting
convinced
technical
When
for
analysis
the perfect moment
my
revenge.
in on the long side.
me that the market had bottomed for real, I jumped
335
that
machine
all my losses.
I remember
in
time,
the
I had
17 losers,but
was down, and
For example,I
years. Out of the
last two
when
that
nine
thousands
of them
happens
of
were
I just get
out
Mark Weinstein
336
Mark Weinstein
of their trades,
on 50 percent
be happy winning
are
be
would
y
et
you
spectacular,
percent
99
of
the
in
is
somewhere
win
ratio
that
vicinity
your
implying
hard to believe.
percent\342\200\224thatis really
would
traders
Most
and a win
of 75
ratio
intensive real-time
the
few
past
I told
Leigh.
him about
Stevens is a mutual
years. [Leigh
trades during
me
who introduced
of my
hundreds
Wave
Elliott
an
friend
to Weinstein.]
OK reader,I know
you
are saying: '\"No
sound
I could
preposterous.
not
of the
confidentiality
adamantly
was
Weinstein
in the
multiplied
winning
option
a $
willing,
were nearly
successful
account
The only
participating.
was
his
me
show
to
able,
independent
which
contest,
trading
and
interview
or
were
In fact,
public.
from
Weinstein
dissuading
as
trading activity
a number of his partners
partnership's
open to the
opposed to this
not
by examining
in maintaining the
it is a private
vigorous
100,000 account ninefold
in
did indeed
three
months
confirm
statement
entry
he
that
with 100
in
I spoke to
Leigh, who
has
for
Weinstein
known
tradeshe had
personally
told him
about
remember
only
one that
literally,
on the
not
winning
percentage
witnessed
phone (right after
was a loser.
as
Even
put
helpful.
it in
he put
of
rate
is somewhat
perspective,
Weinstein
employs
I thought
monitor
own
some
than
he
I still
implies,
response
further
to
this
query
elaboration
believe
follows,
would be
own custom-designed state-of-the-art
technical indicators designed to
constantly
Rather than use the standard
momentum.
his
computersystems
in market
measure changes
values for these indicators,Weinstein
to
lower
uses
his own
when
Only
is virtually
timing
nearly
perfect does
he
He passes up many trades that he believes have a high
of working, but for which
he lacks
the same degree of near
probability
absolute
confidence.
Because of the combination
of a lifetime devotion
to studying
the markets,
intensive real-time analysis, innate
market
sense
and incredibly rigorous trade selection,virtually
all of Weinstein's
trades
at some
minutes
of
point within
twenty
a breakeven or better
result.
that Weinstein
usually plays for quick profits
and covershis trades
within
hours
or even minutes. Even on position
will
take some profits quickly
trades,Weinstein
to assure
a net
usually
profitable outcome.He also trades markets in rotation, quickly
shifting
his profits from market to market,
the profit potential
always
seeking
with
the lowest
Weinstein
the support of
perceived risk. Finally,
enjoys
a floor network
that often puts him on the right
side of the bid-asked
profitable
entry. That is all Weinstein
It helps to understand
to assure
needs
comments
but that
page,
their
like boasting on the
be a much closer
would
sound
may
tone\342\200\224naivete
talks about trades, his commentsare peppered
as, \"It's obviousthe market is going lower,\" \"This
is clear he has no
conception of how difficult
trading
Weinstein
description.
When
phrases such
is so easy.\" It
the
belies
written
with
market
is for
of us.
rest
(I mean
memory
faulty
feels the
could
on), he
them
if because
Weinstein
more
hundred
a euphemism for dishonesty), Weinstein'sactual
his win/lossratio is incredibly high.
How can he do it? Weinstein's
but to
and several
and he
one
this
incorporating
retracements,
last essential
spread.
percent
Leigh
years and has spentmany days watching him trade. I have known
him as honest, low-keyed,
describe
for three years and can confidently
of about 100 of Weinstein's
that
and levelheaded.Leigh confirmed
this
uncanny
Weinstein's
unsatisfied,
Finally, add to
sense of market timing.
up right
analysis
Fibonacci
cycles,
a trade.
on
put
trades.
Still
chart
analysis.
are at leastmarginally
claims
his
are
had
I've
Weinstein's
I admit
verify
account statements becausehis partners
trading firm,
losing weeks,but
days.' Giveme abreak.\"Frankly,
some losing
statements
what
lines
everything
with comprehensive
analysis
of methodologies,including
a variety
and
market conditions. Hecombinesthis
for changing
adjusts
quently
ingredient:
You can checkwith
337
values,
which
he
fre-
How do you explain your
time?
Because I have
traders
are
trading
of market
combination
of
a real
ones
has forced
markets
am
the
properly,
conditions
experience
ability
fear of
the
to win
markets.
such a high
of the
me to hone my timing
it is like a pool player
with
is not
markets.
that
the
greatest
My fear of the
great precision. When I
racks. If my gut feel
is a
My timing
running
right, I don't trade.
and my nervous
found
I have
are most afraid
who
of the
percentage
system. If my
nervous
system
tells
Mark Weinstein
338
the market action triggers
is because
and
experience that I have seen before.
knowledge
something
I also don't losemuch on my trades, because I wait for the exact
to
itself
right moment. Mostpeoplewill not wait for the environment tip
until
I
wait
still
while
it
is
when
forest
into
the
dark,
off. They will walk
in
the
and
animal
world
is
the
fastest
the
cheetah
it gets light. Although
sure
it
is
until
it
wait
will
on the plains,
absolutely
can catch any animal
for just
catch its prey. It may hide in the bush for a week, waiting
it can
the right moment. It will wait for a baby antelope, and not just any baby
when
then,
one that is also sick or lame. Only
antelope, but preferably
That, to me, is the
there is no chance it can lose its prey, does it attack.
me
out of the
to get
position, it
in my
trading.
of professional
epitome
at
but that is why a pigeon
a pigeon gets at one time,
it is just too fast.
never be able to shoot a sparrow,
trade. For
the
before
S&P
example,there
is going up,
it tops.
The
common
will
I day
I am sure
times
a sparrow
like
and
no
when
to use
How do you
that
correctly?
the
denominator
eats.
The
cheetah
is your analogy
is your analogy for day
is that both animals wait for
sparrow
for
trading.
can't-Iose
circumstances.
Exactly.
your
You have
time.
I use all forms of technicalanalysis,but
feel.
I do not believe in mathematical systems
interpret
through
gut
that
markets in the same way. Using myselfas the
always
approach
to achieve
the same output\342\200\224profit!
\"system,\" I constantly
change the input
feel.
them
Is
there
anything
to put
deciding
I am
they
for a
market that
as
the
element
most important
is losing
momentum,
and
then
go
way.
Having traded
say
you can single out
on a trade?
looking
always
the other
the
both
behave
stock
markets, would you
and commodity
differently?
Absolutely. In contrast
rarely gives you the
Why
trades?
Wave and
Elliott
charts,
different
I use many
types of technical input:
sentiment,
Fibonacci
averages,
moving
numbers,
Gann analysis,
cycles,
is
unreliable
technical
that
think
oscillators.
analysis
and various
People
because they tend to pick the one thing they are comfortable with. The
commodity markets,
to enjoy a meaningful
they
they scale in
action and is the
lose every
win
scale
as the
reason
time they
consistently
specialists sell out,
out as the market
goes
and
institutions
buy,
But you
doing
to the
opportunity
the
stock
market
very
trend.
is that?
Because when
one price level,
price
know
pick
works all the
that?
do
experience and gut
It is
they
How do you
technical approach
each method.
single
I don't
Am I paraphrasingyou
positiontrading
is a pigeon.You
That is the way
during the day when
and I am out
try to pick the bottom,
is greatest.
the
momentum
where
mid-range
are
but
I just take the
That, to me, is trading
is that
to know
I often
home,
them
339
problem
in
in my garden.
watch the sparrows
a
at
time and fly
a
little
take
When I feed
bread,
piece
just
they
of bread.
bits
small
and
on
back
forth, taking
flying
They keep
away.
to
bread
of
at
a
stabs
have to make a hundred
get what
piece
may
They
When I trade
Weinstein
Mark
go
they
don't
sell out at
up. Similarly, when
goes down. This leads to choppier
many good commodity traders that
the stock market.
market
why
into
in the
stock market,
as well.What
are
I
you
differently?
I don't try to figure out where the market
is going before the action;
I let
the market tell me where it is going. Also, there is such a variety
of
technical input
in the stock market (divergence,advance/decline,
sentiment,
Mark Weinstein
340
put/call ratios, and so on), that you will almost always get a signalbefore
is about to do something.
the market
Weinstein
Mark
profits. The media owesit to the public to report that
down not only on profit taking, but on a lot of loss taking
method
market
than
analysis therefore
of technical
the
in
different in
the
individual
I look
stocks; they all have uieir own
Motors
will usually rally
example, IBM and General
The besttraders
personalities. For
a major
before
another
a major market top.
market bottom and fail to rally before
I have never seena real good rally without the utilities
leading
example,
to come
me market. The utilities
go up when interest rates are expected
managers
jump into
portfolio
down, and when interest rates comedown,
done
because
well trading the indexes,
become a very experienced
I had
is not
going
is the
think
public's
biggest misconception
are always
who trade
to reverse
direction because ofa newsitem\342\200\224even
a dramatic
place
under
the category
of misconceptions
being down. They
reports me reasonsfor me market
that the market is down because of profit
the media
saying
I would
taking.
I think
was always taking
if everybody
But, the
be wonderful
profits.
and the reason markets go down is
truth is, most people losemoney,
I
know
educated
meir
losses.
take
because
people who watch the news
they
when
lost
the
hell
wonder
everyone else is taking
and
they
money
why
it would
Your
limitations.
by?
you forsake risk
arrogant,
control.
humble.
has
Everyone
Think against
person.
an opportunity
until
the
limitations\342\200\224even
the
time.
They
say, \"Damn,
best
work
Don't
get too complacentonce you
thing
in the
have
attained
to be in
and
the
them.
the
keep
the same
behave
didn't
market
the
time.
to stay
when
Knowing
when
it? Life
should
Why
don't
that
itself.
mistake
it would.\"
I thought
presents
must lose in
as they
herd,
be flexible enough to changewhen
most people make is they
has to
The
the
important as knowing
is as
markets
strategy
way
7.
Another item
way
6.
about the
one.
is the
out of the
strategy all
traders that have
floor
the markets gamble.I know
that
can't
call
You
made money for twenty
gambling.
straight
years.
is
that
Another
expect the
always
people
major misconception
was
market to reactto news. For example, when John F. Kennedy
but
then
broke
the
market
quickly
assassinated,
very sharply,
initially
baffled
rebounded to new highs. This priceaction
many people.
the market reverse blamed the
to watch
sold on the news only
Investorswho
failed to realize is
for pushing the market higher. What
institutions
they
and technically
that is fundamentally
a market
that
poised to move higher
people
own
Don't trade
5.
before
trader of
markets?
That
4. Be your
options.
do you
goes
traders.
environmentchanges.
stocksand
What
extremely
index futures,
get
you
the most
are
3. Understand your
As
stocks. I have
market
as well.
homework.
be arrogant. When
Don't
2.
I ever traded
do your
1. Always
at the
live
the
stock
markets?
commodity
rules you
are the trading
What
Is your
341
markets
the
just
way.
world is
a goal,
on
holding
you
then
have
made
profits.
The toughest
to profits. That is becauseonce you
set a second goal that
is usually
the
same as the first one: to make more money.Consequently,
for many
people, attainment of that second
goal is not as rewarding. Theymay
to question
what they really want from trading and trigger a
begin
self-destructprocessin
which
final
advice
you have
You
have
to leam
how to lose; it
you
will
instead
think
you
develop
losing.
is more important
than learning how to
are
be
to
a
when
winner,
you
always going
you lose,
of
and
end
the market
feelings
hostility
up blaming
to leam why you lost.
Limit losses quickly. To paraphrase
of trying
Operator,
most
traders
hold
on to
their
from
losses
Reminiscences
too long
because
of a
they
Stock
hope
not get larger.They take profits too soon, because they fear
will
diminish. Instead, traders should feara larger
loss and hope
profit
the loss will
the
wind up
for the beginning trader?
Any
win. If
they
for a largerprofit.
Mark
342
Weinstein's
material
goal
most
traumatic
trading
with his
interfere
trading.
experience
This
is a
occurred when he let a
common theme that has
to be a mistake to
interviews. It invariably
seems
or
loss
of
a
trade
material
into
potential
profit
The cornerstone of Weinstein's
trading
approach
surfaced
in other
translate the
trades
in which
odds of winning
expect
appears
everything
seem
to remotely
overwhelming.
about
is sound
lined
up
Even though
terms.
is to wait
waiting
advice
that
for only those
is echoed
by
for
most ofus can
in
the
those
and the
right,
exactly
approach Weinstein's confidence
selects, the conceptof
confident
to be
Weinstein
never
trades
trades onefeels most
a number of traders
he
in this
book.
Although viewing markets as nonrandom
long believed that
price
movements)
very
were
run, I have
(i.e., intraday
largely random. Weinsteinhas shaken this belief.
short-term
market
over
the long
fluctuations
Part
The
View
from
the
Floor
W
Gelber
Brian
Turned
Trader
a major
brokerage
Broker
began his careerasa broker,
managing
on the floor of the
firm's financial futures
operations
Brian Gelber
Trade.
for
After
account. In
the dual distinction
his own
enjoyed
on the
brokers
prominent
In January
days of T-bond
one of the
early
of being
floor and one of the
are
involved
and
in clearing,
Gelber
brokerage,
and
Gelber
trading,
(if not the
local traders.
to include
to his own
and futures
Gelber Group,GelberManagement,
companies
largest
of traders in both cash
and othermarkets. He is the presidentof
securities
most
In addition
accounts.
a group
supervises
futures
1986, Gelberexpandedhis trading
management of customer
Gelber
the
of
Board
clients, he begantrading
institutional
advising
successfully
Chicago
the direct
trading,
in
a group
Securities.
money
most)
government
of companies:
These
management.
seemed almost out of place with his
the
level
of someone
Instead
of
of intensity
high
expected
profession.
in multimillion
who trades and supervisestrading
dollar bond positions
daily, I found a man who talks about his work as if he were describing
a pleasant
vacation.
our meeting took place during
hours, Gelber did
Although
trading
to be overly concerned with
not
seem
the bond market. In fact, he seemed
Gelber's
relaxed personality
relaxed,
despite
conduct our
interview.
quite
leaving
\"I'll
the
trading
probably
desk
for his
do better by
private office to
staying
here,\"
he
346
Brian Gelber
remarked, obviously
what
reflecting
at the
market
low-opportunity
be a
he perceived to
read
bold
the
describing Saliba's
headline
October 19,1987,stockmarket
Million
in
Seventy-Two
million
in
twenty
cover?\"
It
was
summarize
specifically
maintain relatively
of jobs?
kind
What
time.
In response to a query regarding other tradersI was
I
interviewing,
mentioned that one, TonySaliba,had made the cover of the current
issue
of Success magazine. Gelber askedme if I had a
copy. I pulled out the
from my attache case and handed it to him. He smiled as he
magazine
of the
347
Brian Gelber
experienceduring
crash:
Hours.\" Jokingly,
He Made
\"Victory!
Gelber asked, \"I
on that day; how come I'm
to be boastful.It did,however,
a basic truth about great traders: Many,
low profiles and are thereforevirtually
minutes
not
not meant
made
on
week
the
$4
a magazine
But you
I had
to the
public.
be
knew
mine.
at all
nothing
virtually
about markets
read a couple of books,and I knew something
I worked for.
for the first fellow
at that
time.
about
charts\342\200\224having
too many
around at that
them
kept
most,
unknown
I openedwould
$4
very
if not
Unloading railroad cars. Thenone day I walked into a Thomson McKinnon office and said, \"Hey, I have a broker's license.\"The fellow there
of money
a large amount
said he would
pay me $800 a month. That was
for me at the time. All I had to do was go in and cold call; any accounts
What books did you
read?
There
weren't
time.
How did you
The book
get
in this
started
industry?
by Robert
Street,
After
graduating
In Salt
from
college
Lake City, I answered
in 1976,1 backpacked around
the country.
an ad for a commodity broker
position.I
but I figured it was something
was,
like a
have
any idea what it
stockbroker. I got my license
while working
a boiler room operation.
basically
running
didn't
You really started out
When
stock
the
office.
was
side of the business.
in, there was a guy seated
at the back end of a penny
He spent his days on the phone trying to convince people
or $10,000 to speculate onhis charting
$5,000
It was
system.
fly-by-night
to
and quit.
temporary jobs to
Boston,
What other
MA).
books would you
recommend
to people?
Lefevre's
of
account
The first book we have our traders read is Edwin
in 1985
Jesse Livermore, Reminiscencesof a StockOperator
[Reprinted
SC]
1923 edition by Trader Press, Inc.,Greenville,
from the original
a
dozentimes.
at
least
I've read it
the
McKinnon,
the time that I started at Thomson
around
Anyway,
McKinnon
Thomson
was just coming into its own.
Ginnie Mae market
I
them
to run a Ginnie Mae desk. I told
had just hired a trading
group
more about the Ginnie Mae market.
was interested in learning
Why
were
you attracted
to that market?
operation.
keeping his charts for him, while
\"This guy is pretty
much
of
myself,
Then
I bummed
around for another
I was
saying
wrong
who
I walked
to give him
a real
on
for a guy
I learned the most from was Technical Analysis of Stock Trends
and John Magee (John Magee, Inc., 109State
D. Edwards
pay
the rent.
getting
I kept
I got my license
months,
just working
a crook.\"
few
registered.
the
than
market and seemed more manageable
more
I figured my business would
steadily if I
grow
in Ginnie
trades
of
number
I
a
had
made
that
market.
on
focused
Also,
wereall
losers.
ones
but
the
a
Maes. The first trade was winner,
following
It
was
a new
conventional
commodities.
348
Brian
magnetic; I felt
It was
I could
make money there,
to learn more about it.
me want
made
that
I kept
but
Gelber
and
losing,
349
Gelber
Brian
those trades for?
Who were
Just accounts
It soundslike you
had
Yes,becauseI had
failed.
a minor
to pursue it.
compulsion
I had
understand
that
opened
they
could
who
really didn't
by cold calling\342\200\224people
were
lost, they
always
lose, and when
they
upset.
desk
the traders at the Ginnie Mae
Anyway,
I went out and opened almost
every
mortgage
a few
me
things, and
account in Salt Lake.
taught
banker
Did you
I first started
When
Ginnie
the
understand
Mae market
opening accounts,I didn't
at that
understand
anything
about
did you
I snowballedthem
they
asked
they
were
people
at first,
me.
Initially,
confused
equally
And with that
Right.
Using
chart
meetings. ThenI really
but I
by
what
I was
futures as an
pretty
from the
I learned
what
they
trying to
sell them.
all
pure
hedging
in commissions.
Was this all in
At
that
commodity
point,
markets
the
brokers
Newer
Did your
customers lose becausethe researchwas
No. They
lost because
research
was longer
time
their
horizon
wrong?
was mostly day to day, while
term.
So there was a mismatch?
brokers
that is a basic problembetweenmost
to
information
market
to
It
is
almost
customers.
impossible get
it.
to
acton
customer
for
the
customer
enough
quickly
I think
Exactly.
through
my first
few
good at it.
What
accounts. By May 1977,1
was making $2,000 a
That was a tremendousamount
of money
for me.
Ginnie
McKinnon analysts,
definitely tend to rely on
of Thomson
research
research.
firm's
market
Yes,
analysis?
Believe it or not, more off the
and secondarily off my charts.
the
Were these hedging accounts?
month
suggestions?
trading
questions
were doing, and
instrument.
limited knowledge,I bumbled
got
them
on yourself?
listened and
I was confused by
you understood
least
At
much.
their
sell
giving
Pretty
time?
it.
How then
Were you
Mae market?
yes. Previously, I had donesomebrokeragein
such as wheat, hogs, and pork bellies.
other
and their
your
beat
the
is that even if a broker can actually
that
to the customer.
he
translate
can't
short
term,
trading
you
are
Insurmountable
saying
odds, becauseyou
trigger, and the
information
So, one of
the
points
trade with
a longer-term
Yes, you have
to.
have
changes
who have to pull the
so quickly.
of advice you
perspective?
two people
would give to
speculatorsis to
350
Gelber
Brian
Let's
talk about
floor
broker
I think
floor trading.I know,
of people would
a lot
sellorderat the
time
same
handle it?
how do you
long position,
I never
at one point, you were both a
T-bond futures market.Thequestion
ask
is: If you receive a large customer
own
you're thinking of closing out your
in the
trader
and
market.
against
ways.
one.
easy
But what if
all your customer orders were going one
way
own position? Did you ever end up trapped
in a position
had to execute all the customer orders first?
breaking,and
your
against
because you
did a good
of
total
measured against the
That was
about half a dozen times, and it probably
cost
a half million dollars over a number
of years. But
amount
of money I was making, it didn't
kill me.
get up
it probably
but
there is no
do it again. This
experience, I really
be a great brokerand a great
off my life.
I
trader.
took years
the
floor
just traders,
is the
only
or
customers?
either brokersor traders
now.
That
to go;
way
it.
about
doubt
the
when
exhausted
and
day
a great
the significant sizetraderson
all are
They
the next
it was
biggest broker in
totally
true of most floors, or just the
T-bond
floor?
to me
happened
me a grand
job,
most of
Is that
Yes,that
just
and the
and was
hours
three years, and while
it. You can't
have
done
shouldn't
do somealsohandle
some important newswas
trader
biggest
long
for
on
Are
OK,that'san
home. Then I would
I went
idea of being long and having a large customer
me 2 or 3ticksnever
made
any difference.
customers
that they were often going opposite
so the
scalped,
time. I was the
I worked very
a wild
was
same
went
order movethe market
Besides, I had so many
were.
But you
It
351
Gelber
Brian
the costof
business?
doing
the T-bond
Primarily,
some of
Given
the
today's
of dual
confidence
Right.
own
be a gut-wrenching
get out, but not being
It must
situation
to act
able
though,
you want to
knowing
because of a conflict
customer
with
It
big brokers
account]
floor.In the S&P and in the New York markets,
are also big traders.
increased
trading
to
likely
are people who violate the
orders and tradingone's
customer
[handling
get caught?
scrutiny,
create a flawlessaudit
very difficult to
is still
trail
in an
open
outcry
market.
orders.
too busy
Usually, you
to sell 1,000lots; how
the order, you might
are
get out
Is there
can
acting as a broker and thinking,
I do it best?\" Then, when
you
say to
yourself,
\"Oh
damn,
I'm
\"OK,
I have
are done
still long;
with
I have to
this thing.\"
of
a built-in
a trader; if
As
you
bonds
explain
disadvantage
customerorders?
Absolutely.
are trading at 95.00and the market gets hit with some
for
of orders
bearish news. The broker executesa largeamount
from
95.00
customers
and his own account, and the market goesstraight
to 94.00. His Alls are 94.31, 94.30, 94.29 and all his customersget
How does he
or lower. [Bond prices trade in 32nds.]
fills
at 94.27
Say
I tell
are a
for
a floor
his
way
out of that
one?
trader who also handles
He could give
the people I hire, \"If you are a broker,
trader, you are not a broker.\"
you are not
his
order
he could fill both orders
order. There are always
crooks
will always
or his
and
ways
be difficult
customers' orders to another
put another broker's number
to get
to catch.
around extra
scrutiny.
broker.
Or
his
own
on
The
smart
352
Brian Gelber
Is the temptation
dual
in
too great?
trading
It's odd you
No. After
been
having
the
it, I
through
would
but it is
marketplace,
say that dual trading is good
too heavy a burden for the
to disallowdual
rules
be changed
is a difficult
question. What
the
Should
integrity of
or the
that dual
money
the
important, the efficiency of the
There is no doubt
in my mind
is more
individual?
in
tremendous
adds
trading
did you start
involved in
T-bond
the
market?
trading
for
your
own
account
on the floor?
In 1979.
you
to give up your floor
on trading?
tempted
Actually,
it was
and from
1979
just the
be an
through
good
did
you
trading
Do you
suited
it
trading?
because
some of my
I
remember your first
higher echelon.
customers said, \"You
you just trade?\" I resistedat
started trading. From there it
don't
out,
an even
at
I
my personality.
get into
market so well, why
months of holding
$50,000 more.SinceI was
my attitude was
the
little
brokerage so that
feeling
you
could
that
at all.
first,
just
know
the
but after
six
evolved.
trades?
problemwas
that
Why were you
customers
making
I basically
So, I cut my
more actively.
example,I was
about $50,000 per
broke even that month.
I was
bullish all
the
way
bear
market
broker,
didn't like
trading
a
of 1979. The
down.
bullish?
kept
couldn't
go much higher.* For
for CitiBank and Citicorpand they
that
These were renowned people saying
telling me that
the orders
handling
buying all the way down.
an opinion and backing
had
they
were
the
as a
But I
down and started
size
position
This happenedduring
month
it
rates
up
with
deeds.
opposite. I had
started
out as a customer's man,
built a massive customerbase.We were
a powerful
force in the market at that time. Probably the saddest
thing I
ever did was to becamea trader too. I was a great broker in my twenties,
and if I had parlayed that for ten years, I probably would
have
ended up
where I am now without enduring all the pains of trading.
I consider
trading to
I started
My
concentrate
why
and
at it,
My first
In September 1977,1moved
to Chicago
and became a broker on the Tbond floor. I was just twenty-five
and I got lucky. I went
to New York
in November 1977 and met with
seven of
eight
big-name
companies,
whom
I was at the right place at the right time.
accounts.
opened
When
successful than
trade was a long position,and I made some money. Then I put
like being
was
almost
on a long bond/short Ginnie Mae spread,which
I
I
had
lost
all
the
and
The
market
went
made,
down,
plus
money
long.
business.
this
did you first get
When
far more
been
have
as a broker I was
is that
point
my
guess
So,
trading?
and that is
liquidity to the system,
than
the fact that a small percentage of dual
probably more important
traders
were
may cheat. Besides, even if dual trading
the stealers
banned,
would still find a way to steal. That is their perception
of how to make
Were
I
was really
individual.
market
say that, because you
most traders.
for efficiencyin
That
353
Gelber
Brian
1981,1
unrewarding, unglamorous
game.
*Bondprices fall when interest rates rise.This is a basic concept that is sometimes
confusing to the novice. Thereason that bond prices decline if rates increase can be explained
as follows: If rates rise, itmeans that all existinglower-yieldinginstruments are lessattractive
their prices must
bonds,
to investors. To induce an investor to purchase these lower-coupon
so that the return is equivalent to the return on the higher-coupon bond
fall sufficiently
purchased at face value.
Brian Gelber
354
What would you
Bank. Back
of various
that
told
What
not to
you
all
money
away
opinion\342\200\224a sound
by intelligent
opinion
based
money
losing
people
on someone
was
that
else's
absolutely
just
wrong.
then.
back
pay much
So, you don't
to
attention
those
I don't read the
in passing.
them
to
listen
portfolio managers
it does much for any
anymore.
did much
never
It
of
interviews
Barron's
for me, and I don'tthink
trader.
words, the problem wasn'tthe fact
read the
tape
such
in bonds
back
to other
people, but that
to decide
how
know
were
you
the right
were
which
to the wrong
listening
a naive kid saying, \"Here is a major
market
should go up.\"
accountthat
big
players
myself\342\200\224that
the
or
people.
I was
people.
wrong
a lot
is buying
of stuff;
Could
I would
back then. I
had
losing
done it
that
I could
But
prophecy.
fulfilling
then\342\200\224we,
to do it
much
you have
hope
good instincts. We
developed
my
meaning
stop
any
and
the market.
was
points.
It
a streak
of
days.
the
without
there
think
were
customers
resistance
creating
I hardly
when
and
we picked to trade could virtually
some of the support and
spots
We were actually
didn't take that
you were listening
that
from?
coming
I learned how to
months
In other
successes
of opinions
types
anymore?
I didn't
thrown
listen to your customersthen?
of
The 1979experience
Where were your
I
would have
in 1979,1
done
Citi-
take
Let's
institutions.
Now, if Citibuying because they were buying.
I might
Bank was buying,
conclude that they were just reallocating
their
assets or changing
the duration
of their portfolio. Today, I have
little
the
for
views
of
because
their
outlook tends
regard
portfolio
managers,
to cover a much
time perspective
than mine. I didn'tunderstand
longer
I was
then,
355
Gelber
customers as I had
over again.
same situation?
in the
today
the characteristics
I know
Now,
do
Brian
commercial
accounts?
have done it without them;
if it was, fine. I don't know.
that it wasn't
a self-
the
When
You
the
shootingfrom
strategy, no plan, no system.
had no
really
You
were
hip.
From
I did
That's
money.
As
over
Then
right.
to saying,
opposed
it in the market,\"
time,
I started to get a
have
\"I
I started asking, \"How
an opinion
do I make
grip
on
how
and I want
money
out
I had
learned
learned by that
that
an
opinion
isn't worth
listen
to the market. I became a
opinionated trader.
they were
of my
customers
bearish on bonds from
end?
a trading
standpoint,
in
struggle
I never had a losingyear
during the
1985
mid-stages of the
until
1986,
market
bull
although
in bonds.
to express
of all
Was your trading
successa matter
of being
able to
read the tape?
this?\"
I was
attentive
and had good instincts.
point?
to
In 1980,one
that streak
to make
Yes.
What had you
did
just
that
reactive
much.
trader
It is
more
important
as opposed
to an
was Solomon Brothers.At the time,
65 to 80. If I had listened to my
big
It soundslike you
are
are
not.
traderor
you
saying
Well, to a certain extent, that
have to be, but it helps.
that
may
either you are
be true.
born to be a good
My feeling
is that
you
don't
Brian Getber
356
Is it
Your
Yes.
a sixth senseabout the market?
of having
a matter
often tells you
gut
who don't
Are people
have the
Or can almost
their time?
Beingon the floor
in, day out. Doesit
to do.
what
natural
anybody
for trading wasting
if he or she works
be successful
instincts
at it hard enough?
has nothing to do with it. About two weeks ago, a very
who works forme said,\"This is a very frustrating business.
fellow
bright
I make
how hard I work;
it has no bearing on whether
matter
It doesn't
You
know
to
have
to
that
not.\"
and
or
yourself
knowledge
put
money
hard
Working
in
That
sounds
I'll
the
example. I
working for me
and
desk
the
do
try
mean
you
a good
I'm
think
I could
is better.
who
by
\"know
yourself\"?
trader,
but
there
and
go
to outdo him, or I can
make whatever he can, and I'll
This is my view of a year
months you are hot. You are so
out
out
is a guy
beat my head
be myself. Let him
just
make whatever I can.
in the life of a trader:Four
out of twelve
that
excited
you
can't
The net
too much about
need to
why you
don't,
when
just around
after
earth. Or,
might
because
happen
end
in
the
know
a big
then
there.
yourself\342\200\224to
opposite
corner,
sleep, becauseyou
It is
trading.
success,
the
up jumping
I know
you never
is that
result
situation,
how
That's
right.
are
when
you
need to
interact
are
did
with
consistently
I leave the
people
you
good
of every
as well, and
rebound
don't
you
have
performance.
to a
get
age and no
certain
were\342\200\224
like that.
It's exactly
100 people who go to the floor to become traders,
at least a million dollars within
five years?
how
make
will
five or less.
Maybe
Howmany
end
will
up losing
everything they came in with?
half.
least
That
is
If you
prepared
back
and
that
doesn't
attribute
I have
to your opinion;
For example, if
the
when
he
market
has been
to
What does that
If it
the
is
in
market
line
What
traders.
is
that
a great
I'm
want
only
they
and
truly
one of the
to tell
listen to
major
you
what
locals
their
they
don't
calls me
up
listen
I am different
opinion.
say and
how
three
has rallied, and he is asking me what
selling and is not sure of his position.
with
do you
listener. I
twenty-five traders each day. Mosttraders
tell
will
so consistent
been
to about
probably talk
most
to?
success
your
The reason
that
losing, you
floor? Again,
been more successfulthan
You have
because I honestly
constantly
an all-consuming thing.
moderate
your emotions.
out of a window. Why
myself. I
are
high as a kite. You are not
the market suddenly brings you
you
your
your
at night. You
sleep
of the
thinking
matter
At
older, you
maintain
day
from the physicaland
pretty well
rebound
can
are in
older fellows. When you
like professional sports.You
It sounds
there
get to
to
wait
harder to
many
work the next day; you're just rolling. Two months
are cold. You are so cold, you are miserable.You
you
year,
You
can't figure out where the next trade is going
at
can't
night.
sleep
The
six
months out of the year, you make and lose,
other
from.
to come
You
can't
to figure
out how
lose.
make and
sleep, because you are trying
to
make
are going
money.
you
can't
to push
Out
like a cliche.What
give you an
against
mental
and thirties, you
stress. As you get
twenties
in the
be doing
to
thing
you down?
grind
physically
intense
a very
like
sounds
Absolutely. You can seethat
market.
work
357
Brian Gelber
they
say
it.
in a row
think, I know
days
I
you?
traders I talk
go higher.
what the other
probably
to
are doing,
it tells
me
358
Brian
of them
So if you talk to twenty-five people, and twenty
about the market going higher becauseimplicitly
they
does that tell you that you should be trading on the long
are nervous
Brian Gelber
Getber
are
By \"trying
plus. I listen
large
of
number
I go
to them.
the
with
in the
people
and
industry
who are hot.
people
Sure, I can
opinion,
Doesn't
it
confusing
get
and ten
bullish
are
fifteen
that
but
talk to twenty-five
are bearish?
when you
and
people
trading
Sowhen
the
but
Sometimes,
to read
been
I've
people very
well,
doing this
even
though no
one thinks
I have one trader here who is cold as ice right
listen to him. Last night, he told me he wanted
was going to be long.
as he
long
You
can't
say
a lot
you for
so long
weeks,
and we
of money away.
there, you just
low?
fairly
lay
off the
for coming
motivation
floor, sinceyou
were
so
there?
successful
able
been
aren't
For example,
I listen.
I have to
now.
All
to be
short. I
knew
do is
that
I
I felt that the
skills wereno
the
skills
needed.
longer
\"How can
tick?\"
next
had developed to the point where my brokerage
All anyone wanted to know was: \"Where's
industry
was
I move size?\"
The
to be
price
paid for my
too low.
is cold?
time he gets hot, fine. When the guy is cold, he iscold.
to a trader, \"You're cold, you can't trade.\" You have to
in
talking
of customer
terms
Customerbusinessand
that my style
course.
their
run
other traders a key componentof
Is reading
your
business?
Yes, I'm pliable.
I don't want to
hear
I only
want
What
other things are
to talk
these people,
important to your trading
to read
know
them.
him.
The
you
that
don't
when
you
do well.
don't
care,
was
volume
market from
trading
market
The
was
the next tick
worthless.
had gotten
It got to
instead of the
next
so
the
voluminous
point
where
I
8 ticks.
Because
the
too big;
same game?
capitalization was too
big.
I couldn't
read the
floor.
there were
too many
players?
success?
In the early days of T-bond futures
the depth was low
trading,
and you could read when people were overextendedlong or short. You
couldn't do that anymore.
Exactly.
realization
to read
trying
trading.
Why couldn't you play the
how
so I understand
I don't
what Jack Schwager says,because
well.
to people I know
very
I know
of swing
trading
personal
right now?
too hard,
tradedwell in
thrown
having
with
here
I've
was just
The
not
in
misunderstand me. I'm not that good at that, but I have gotten
over the last couple of
gotten older. I've learned that lesson
years.After Richard Dennis left the floor, he said:\"The first year I left
the
floor
was the most painful
for me, and I have paid the
experience
tuition
I ever have.\" It was the same with me.
largest
as
You are
let them
trade?
the one
and
Right,
is no
there
Don't
better
particular
As
reasons
I'm sitting
The markets haven't
opportunities
What was the
since 1976.I've always
mean pressing when
form
I do in
is not
the
hours.
are proud of ourselvesfor
is a big
the
what makes me do the things
market. Sometimes,Iknow my opinion is right, and I'll go with it.
I'm
Sometimes, I know
somebody else is hot, and I'll go with their opinion.
if
matter
It
doesn't
not picky about how I make
my
opinion
my money.
I make
is right or wrong. All that matters is whether
money.
my own
do you
hard,\"
Pressing is one of
side?
that
too
short,
during
Yes. I know a
359
you do well, and
when
you try
Brian Gelber
360
decreasing;did
Did your performance start
wall?
the
on
handwriting
Is that
see the
you
trading for the first time and I
In 1985,1 made under
trader,
I had always been a very consistent
knew something was wrong.
that
found
and
my
results
at
looked
my
each year. I
more
money
making
were
losses
and
greater.
4
ticks,
my
were smaller, meaning 3 and
profits
active pit trader. I found
more
was to become a much
dollars
a million
reaction
first
My
and
I was taking on tremendous positions
that
convinced
I
became
when
was
That
that
insane.
Were you just
period on any
all I
was doing
trading,
and
here
was
is
a couple
as I worked
that
in place.
running
to make a
hard
really
doing as well
as
I don't like to
in previous
at
hard
work
to
each
direction.
trend
this system
gives
good
you
we do
signals,
would you have
floor,
day. That was a very
you
not
blindly
the trades.
For an
annual return?
of average
terms
would you consider
what
system,
computerized
automated,
good resultsin
to 50
40
About
Off the
environment.
very stimulating
force yourself to be motivated
clues to
that
system
interesting
and
we have
to volatility. Our belief is that
we've found through
Although
related
myself.
exhausting
years,
tools. One particularly
quirks
use technicalindicators
We only
traders.\"
\"discretionary
offers
real
trade
following.
systems?
as trading
volatility
percent,
maximum
with
under 10
drawdowns
equity
percent.
But
pit is a
The
No, we are
backtesting
stayed in the pit?
Yes.
use trading
Do you
developed is based on
that
during
I can still countertrend
better.
No, it has changed. I've gotten
well, but I found
you can also make a lot of money trend
systems
change.
of times, but I had some good
I found that
harder and harder,
just mentally and physically
I was
had been
If you
I had
true?
still
follow
hard
pretty
The point
too.
winners
hit
get hit
was
risk/reward
trade?
particular
I did get
Actually,
you didn't
that
lucky
the
361
Brian Gelber
have larger maximum
will always
systems
than
drawdowns
that.
have
That is why
difficult
we
haven't
directly
traded money on them.
transition.
Is
it harder
Not
in the
to trade
Do you
off the floor?
long run. My
in
profitability
1987
and 1988
I haven't
has been pretty
good.
You
any
system
seenone yet,
can compete
although
Therearesometraderswho
mentioned
Was the main
as you
Yes,
think
did
that
that your first year off
problem
on the
was
because
you
were
the
still trying
was
very
difficult.
the number
during
my style
one reason.
the
1986
was not
The secondreason
was
that
I was bound
runaway bull market.
trends.
on following
based
What
is it
Most
traders
to trade the market
floor?
transition occurred
to lose
that
floor
the
that keeps
who
their
are
can't
one somewhere.
may be
the
trader?
skills, but who
don't succeed.
them from becomingsuccessful?
are
large egos and
willing
admit it later
worried about losing.
career
too
have
fail have
wrong. Even thosewho
there
a good
with
to admit
on. Also,
admit
can't
that
they
that they
are wrong
some traders fail
are
early
becausethey
in
362
In other
losses, but
That
Gelber
Brian
words, successful trading
not being afraid of them.
is a
good way to
afraid to lose,
Is the
Yes.
you're
put
to avoid
of trying
It sounds
on treating
not afraid to
lose. When
you
start
being
Right.
market
lossesa characteristicof
Tom Baldwin is a good example.He only
a winning
the
trades
the
trader?
market;
he
to himself,
doesn't trade size or equity.
By that I mean, he doesn't say
I have
to sell
\"I am long 2,000 contracts.Oh my God, that is too many,
some.\"He never looks at it that way. He will sell either when he thinks
his position is
that
has gone up too far, or when he thinks
the market
wrong.
day,
trade
particular
that stands
like part
the
long
bond was
being corneredby
the
Japanese,
92.00.
I was
from
because
limit
I did
$1 million,
bid. I had
things
and
the
market
never lost so much
differently
than
only a few ticks away
so fast, and it was
was
money,
money-management
bit more up
a little
I sold
with
concerned
only
at the
covering.
highs, and
I waited
gradually
at first
that big early
and then play with
trade
What did you
in
the
the
when you
earlier
mean
by the
market
that. I
like
couldn't
said the Japanesecornered
the
market?
the Japanese
share. This was
buy
their big thing
is market
buy something,
the U.S. got a good feel of how the Japanese
them all.
to
want
first
the
time
buy
securities\342\200\224they
move that
That's
us to
drove
the highs
in
the
bond
market?
So,
right.
the Japanese
apparently,
low for all the
I
don't
think
they
whether prices
would
buy,
risk
look at
prices
weren't as fazed by the
long bond position.
yield
being
so
in a
implied
of yield. Rather, they view things as
if they are, they buy. Every time
they
would go up, and they would
buy some more.
are going
their positionin
the
point
and
patiently,
started coming back down. I ended
up losing
only $400,000 for
not all that bad considering where I was earlier.
But that trade
it
in terms
up,
and
The bond market has collapsedagainsincethen;
don't
from that
do.
I normally
What specifically?
I usually
is based
philosophy
independently.
there
the
was a big, emotional rally on a Monday morning. I had thought
over 91.00. So I
and here it was trading
at 90.00,
was too high
market
down
backed
above that level. The market
sold1,100contracts
scale-up
that I had this
Just as I was thinking
and was offered 1,000lots at 91.00.
reversed
and soared to
trade nailed, in less than five minutes the market
down
your
year
Anyway,
Was this the
In 1986,when
of
had a big emotional impact on me.I was flabbergasted
I had forgotten
action.
that markets could run away
believehow wrong I had been.
When
In your trading experience,is thereone
out as the most dramatic?
363
each
I was
on,
finished.
to accept
ability
it. I'm
isa matter
Gelber
Brian
year.
money
make money
made.
I like to
I have
Sure.
who
did
they
get out
of
time?
Do you know who bought
the most at the highs? The U.S.dealers
needed
to
cover
becausethey had sold on the way up.
desperately
Brian Gelber
Brian Gelber
364
Are the Japanese smarttraders then?
No,
all go
they
told
of mine
\"Why
futures]
about
just
go one
They
of the
every long
going out?\" Naively, the Japanese
had gone way up, while futures didn't
every
bought
didn't
They
bond
very
it above
1987 as
T-bond
is the
What
much.
Never add to
its trading range. I wanted
I
spread,
just couldn'tpull the
a $30,000
above
rule you
live
by?
a loser.
the
does
What
did much
same
in 1986.
in bonds
did
they
the
in the
thing
U.S. equity
They practicallytook
in
market
control
do wrong?
trader
average
He overtrades
How do you
Also,
right.
we
knew
U.S. stocks. Having
capitalization
the trade was
the bond market,
the Japanese
already
were buying
learned
the
When
you
didn't
spread
$19,000
between
you do
the S&P and
on a four-day vacation, and
stock market had pushed the
the
in
just
spread
a few
days, Japanese
to $30,000.
basis.
buying
I went
in
and sometimes
clean and start
I just take a break.Itisa good
fresh.
bad, but still have somegoodpositions
them
as
well?
liquidate
are bound
They
the
found
subjects
market
with
Brian
into
the
Gelber.
art
the
Henoted
to
turn
against
a tendency
losses,
even
trading
and
the most
interesting
These subjects,
of trading.
for short-term trading.
trading
of dual
among
caveats providedby
was trading
contractvalue
the slate
you are going
Absolutely.
I
contract
T-bond
on a one-to-one
wipe
on,
do
too.
you
in
even more obvious.
it?
and $25,000
smaller
trade
to
T-bond
why
streak?
a losing
handle
I instinctively
high-
their buying style
for tips.
begs
in
Was the reasoning that the bond market had already run way up,
were out
Did you just believe the two markets
while stocks hadn't?
of line valuewise?
That's
and
of it,
habit
between
key trading
cash
that
higher.
buying because prices kept going
stocks and selling bonds
F11 never forgive myself for not buying
in 1987.
trade
one
That was going to be my number
1987.
The
$26,000. At
had
trigger.
My friend
Of
course, the
bond available.
the
impact of
really understand
go up
spread to break out
for the
waiting
to buy
you
trading.
The Japanese
Then
since
asked,
had noticed
trader
I was
way,
shops
Japanese
minutes later he
fifteen
told him, \"Well, you just
is going to go out.\"
basis
their
traders.
at one
called back and
screen.
T-bondsand
betweencash
is the basis [the price spread
About
the
prices
friend
A
spread before the vacation,
buy the
you
the idea?
style. They are cannonball
together.
me about a Japanese trader who bought
and
on
just have a
they
didn't
Why
365
the Japanese
however, did not
On a more
practical note,
the misuse
Gelber
concerned
for the
broker and clientto
This
misapplication
when the
use
impact on the U.S.
conversation
of my
portions
provide
one
any insights
of the primary
of brokerageresearch.
longer-term
of information often
research is right.
research
leads to
Brian
366
Clearly,
Gelber's
flexibility
success.
It
opinion....
make money.\"
and
Referring
suppression
to hot traders,
doesn't matter if
I'm
right.
of ego
Gelber
are key elements of
he notes, \"I'llgo with
All
that
matters
is
whether
their
I
Gelber's reaction to losing streaksis one cited by a
fresh.
the slate clean and starting
He advises wiping
number of traders.
achieve
to
the
trader
allows
greater clarity.
of everything
Getting out
can
still
attractive,
always be
appear
Liquidated positions, if they
confidence.
his
the trader has regained
once
reentered
Finally,
Tom
Baldwin
TheFearlessPit
The
trading
of traders
top of
Trader
market
is an imposing place. Scores
pit of an active futures
over each other, while shouting
push
buy and sell orders at the
miraculous
that this
efficiently as a processfor
In the frenzied world of futures
orders.
executing
pits, the T-bond ring, with
over
500 traders, stands out as the unchallenged
giant. The pit is so large
that
one side of the ring often does not know what
is happening
on the
other side.
their
institutionalized
trader
lungs.
To the
bedlam
uninitiated,
actually
it
seems
functions
By most accounts,Tom Baldwin
in the T-bond pit. His trading
size
is the
puts
single largest individual
him in the same leagueas
Single trades as large as 2,000 contracts
are not unusual for him. On a typical
($200 million face value
T-bonds)
he may trade over 20,000 contracts
of $2 billion in
(the equivalent
day,
face
value T-bonds). Baldwin is in his early thirties, having begun
a scant six years ago.
trading T-bonds
Baldwin'sentry into the world of floor trading sounds more like a
than
In 1982, with no prior trading experience,
success.
recipe for failure
Baldwin left his job as a product
for a meat-packing firm to
manager
lease a seat on the Chicago Board of Trade. Hisstakewas only $25,000.
Out of this skimpy capitalbase,he had to pay over $2,000 per month
to
lease the seat, and at least another
for living
$1,000 per month
expenses.
As if this were not enough, his wife was pregnant
at the time.
the
primary
institutional
players.
TomBaldwin
368
profit
and
up
extent
of
is one
posture
taking
is not
Baldwin
Obviously,
the
one to play it
key
He wasa millionaire
he
back. Although
$30 million appearsto
winnings,
risk-
aggressive
success. He turned
his first
before
from the beginning.
has never looked
of his
His
safe.
of his
elements
a
The true figure could be significantly higher.
with Baldwin essential to this project,
I consideredan interview
floor trader in the
successful
of his prominence as the most
because
to be
was
not
market.
however,
eager
futures
Baldwin,
world's
largest
interviewed.
he
Although
done some interviews
had
to do
reluctant
obviously grown
generous intervention\342\200\224the
any
the
in
past,
Brian
Without
more.
he had
Gelber's
and admire eachother's
taken place.
have
would
never
interview
trading abilities\342\200\224this
be either abrasive or
could
Gelberhad warned me that Baldwin
an
As
former.
example, Gelber said that
gracious, but to be prepared for the
of
how he first got involved
would probably answer the question
Baldwin
in trading with the curt response: \"I went down to the floor and began
of his answer.
was very close to the spirit
As it turned out, this
trading.\"
office several minutes after the end of the
I arrived at Baldwin's
arrived
a few minutes later. Sincehe had just
Baldwin
day's trading.
had not yet been delivered, the
furniture
and
the
offices
to new
moved
sill.
on
a
window
was conducted
interview
sitting
nor
attitude was neither abrasive
gracious;aloof might
Baldwin's
that the minute
it. I had the distinct
be the best way to describe
impression
two
are friends
question, Baldwin would be gone.It was
each time
was intensified
St. Patrick's
Day, and this impression
at a local
Baldwin
meet
would
or
she
that
he
office
the
left
someone
saying
to
I
decided
them.
to
was
anxious
Tom
that
sense
join
bar. I could
I hesitatedin
conduct
the
the next
asking
interview
completely
impromptu,
off
shooting
a new
question
the prior one. Often his responseswere
the second he finished
answering
a rare bird; one false step
I felt like a photographerstalking
short.
quite
and
the
bird
I knew
immediate
fly
question.
glanced
quickly
Unfortunately,
upon, and
though
I
Howdid
I would
not
be able
to
think
of
I had
going and
to get
excused
get interested
first
in
trading?
taken some classesin commodities
in graduate school. I wanted to
trade, but I didn't have the money to buy a seat. In 1982,1 found out I
could lease a seat, and that's
when I began.
I had
Did you always want
of trading?
to trade
as a
local as opposedto
any
other
type
Yes.
Howdid
you
One lot at
a time.
to trade?
learn
I always had an
developed an opinion.As
if I
even
reinforced,
from
standing
was right.
I
Are you
opinion. All
to see
I came
didn't make
that
trade.
the
day
Then
there six hours a day, every day,
would see the same scenariosdevelop
market
about
talking
patterns
I stood there and
was right, I was
long
opinion
my
traded, I knew
of the time I
when I
most
that
and over
over
or traders
again.
doing certain
things?
Both. Market
players
patterns
do the
would
would
over and over
occur
same thing
and over
over
again, or
again, and
you
just
market
trade
it.
an
your first
few
months
like? Were you
profitable
initially?
into the
This happened about forty minutes
down at my index cards, searchingfor a
my eyes focused on a question
tried to ask it from a different
said he had
over. Baldwin
was
you
What were
off.
that, at some point,
follow-up
interview. I
lead.
would
late. The game
himself.
the
estimate.
be a conservative
369
year was
to discuss
declines
Tom Baldwin
already touched
perspective,
it
was
too
I think
the most
out profitably.
I was ever
down
was
19 ticks,
so I pretty
much
started
370
Tom
to the pits with
of
an edgeto be
enough
no
Coming
on the
right
was
what
background,
it
that
TomBaldwin
Baldwin
you
gave
But you
smarter
need
it. You
a day, all day, every
dumber
are.
you
to do it. The
more you know, the worse it
The
trade,
type
are
what
is,
trading\342\200\224that
can get
put
on a
or just
1 tick
you
scalping\342\200\224when
Yes. I
of
out
taken
it. I've
full
points
You just never know. You have to watch the market,
you are in the right position, just go with it.
though, your
Yes. I probably
get
use
No.
charts
Bar
average
trades will
4-tick
profits
out
net
at a
few ticks?
you
same basic trading style yon
technical
input?
intraday
charts,
since you are
the past
covering
trading short term?
six months.
on big positions.
I assumeyour
holding
time
is probably
Not necessarily.
very, very short.
Is the
Are we talking
about
my mind,
fact
that
I would start with
I would adjust.
you started
a key element behindyour
it short.
to make
charts and say, \"I'm basically
scalp from the long side?
look at the
primarily
change
Yes, or
still using the
it, and if
for
average,
I try
10 percent.
use charts.
Do you
If
On
versus scalp?
for?
looking
you
as I
a trade.
a feel
of
are
are position
Right.
Do you use any
To get as much
of
you
trades
with.
out
started
at all
education
well below
percentage,
Basicallythen,
to fall back on.
don't need any
small
day.
you.
For your
out
six hours
any experience
are, the
you
is for
have
didn't
don't
You
there
percentage of your
now, what
Right
market?
A
I workedhard. I stood
371
off with
your
Have
you always
Well,
I evolved
is less
risk. The
Were
object is always:
there periods when you
a chart-influenced
were unsuccessful,
or did
consistent?
Consistent.
been a scalp-typetrader?
Didn't you have any
from a pure
but if I saw something
to
trading
bias
winning?
risk.
Minimize
do you
Yes.
minutes?
seconds. Just becausethat
speculator.
an opinion,
bullish,\"
scalper to a
combination
of
scalper
losing
and
Yes, I had
one or two.
months?
you
remain
Tom
372
But not two
Baldwin
Tom
Baldwin
Is that a
together?
the
373
characteristic of
winning
They have
traders:
less fear
than
losers?
No, never.
Yes.
What
come to
of those who
percentage
after five years, versuslosing
around
trade on the floor
their
and dropping
stake
still
are
out?
Can you size
makeit
Less than
less than
What
20
rule
are successful to
a couple
of
the point of
and
making
keeping
It is
Do you
What kind
million?
small
like any other
of traders.
fraction
How
industry.
many
people
get to be president
Motors?
of things would tip you
have an opinion about what
separates
the 1
you
a lot
mean
as
long
as you like the
position,
No. Paying attention
or gold. Watching
you
have
disregard
stay
for
with
and
with
Exactly. Mostpeopledo.
Right.
another
way
of saying
it
is you
have to
other markets
to what
the
traders
are doing, suchas the
Dow
in the pit.
Patterns?
Yes.
In other words,
have almost no fear.
they
are
not paying
enough attention.
a trade hereand
standing
that
is
absorbing everything
going on.
there
trying to pick
there,
but
They
are
they are not
are usually
too high. They can't stand
way
to
it
Because
it is like any job, if
long enough
pick up.
stand
there
have
it
It
to
you
long enough, you
up. is just a matter of
pick
can
afford
how long you
to stand there before you do.
Right.
guess
a loser?
to love
\"I'm
That you can't think,
$1 million on this trade,
losing
You
can't
I could have bought a great house.\"
$1 million
real terms.
translate it into
it?
I
that
percent from the
You
of hard work, for one. It's perseverance.
have
a
to
total
in
have
our
to do it. Also,
business,
you
money. You can't trade for money.
Do
off
fundamentals?
mean
Jones
It is
he is
is going to
losers
don't work hard enough. Mostpeoplewalk
in and
there
think
is a 50/50chance
on any trade. They don't think
there
is
to it than that.
don't concentrate.
anything more
They
They don't watch the
factors
that affect the market. You can seeit in their eyes; it is almost as
if there
is a wall in front
of their face.
By factors, do you
other 99 percent?
Yes.
tell
Mostimportant,
words, a very
General
if he
and
and it's probably
of thumb,
percent.
Right.
up a new trader on the floor
not?
Yes.
percentage
In other
of
the
that.
at least
One
That is really
percent.
or
there
Also,
their
and hack it
expenses
Tom Baldwin
374
Do you really believe that?
but if he stands
trader,
the average
guy might not be a million-dollar
have
to pick it up. It is just like a job. You
there for five years,he would
don't start any job and feel comfortable in the first six months.
You did.
start as
Yes, but I did
becauseI had
At
what
successful
at
a one-lottrader.
to make
money.
I
only
I wasn't
And
had
$25,000
really comfortable,
to my name.
confident that you were going
were you
point
to be
are probably ahead after their first five trades.
like free money.\"
then they forget that
But
They think,
the reason
made
on
their
trades
was because they
they
money
early
waited
a long time. They said, \"I bet this is a good spot to buy it because
I've seen the market
act this way a lot of times.\"
And
they made money.
But all of a sudden,they are doing a trade every day.
The
next
lose
on a few trades, and
thing that happens is they
don't
know how to take a loss.They
made
to start, and
invariably
money
before they know it, they are even. Now they hesitate.
\"Where
do I get
are never really
You
question.
confident
in
They
this
you can always be wipedout pretty quickly. The way
I trade is: Live by the sword, die by the sword. There is always the
with
a big position in a fluke move with the
I could get caught
potentialthat
me.
On the other hand, there is no doubt
limit
the
market going
against
I
walk
into
could
in my mind that
any market in the world and make
Now,
because
business,
is great,
\"This
are
interesting
most people
I bet
Right,
out?\"
it?
That is an
for the right spot?
Waiting
Well,
375
Baldwin
Tom
just keeps going. Now they
they hesitate, the market
and
\"If
I
sell
I'm going to lose $1,000.\"
it
here,
losing money
they
say,
don't
like to lose $1,000, when
they're
getting
paid $500 a week.
all of a sudden, they
are thinking
about the money.
The
minute
Once you
think
Yes.That
is what
the money, you
about
happens to
usually
the
are dead?
public.
money.
What
of your
percentage
One day
out
Has that
Get
a long period of
From
your
public
trader\342\200\224do
They
trade too
When they
they end
an
perspective,
important
see
up
time?
If I
what does the
average
can. My
point
is that
losing trade, I wait
Then I try and reverse.
is a
trader\342\200\224that
is,
I have
for
what
a lot
of patience
I think
and I wait.
is the optimum
time
If I know
it
to bail
out.
wrong?
the market
trait
out.
Quickly?
time.
much. They don't pick
forcing
of handling losses?
is your own way
What
losers?
often.
percentage changed over
is over
That
days are
the
many
their
enough.
spots selectively
to be in on the action.
So,
moving, they want
trade rather than waiting
people don't have.
patiently.
Patience
So, if you realize you don't
but you'll pick your
time?
is
Right,
but I
will
get
out.
likethe trade anymore,
you'll
get
out,
Tom Baldwin
376
Let's say you
It
at some
point you just
start
bailing
have a feel for
But you usually
Those
it in.
throw
You just
a year.
times
gone against you. If
when
it's
you a long
against
Yes, you
way,
days happen maybe three
or
out.
is the
to
thing
do?
has
it
happened
Well,
or buy
on strength,
on
can trade
you
How about
weakness,
in a
behind
in your
instead
trade, you are
and try
direction
of just
to
trying
better
It
to sell
it in
dump
a hurry?
market
can
you
move the
market
subtle
in
and
of buying
method
changing
bond
the
bigger size. Now
ways.
since you got
trade
usually
as much.
in?
a couple
of
a thousand lots?
on the liquidity
depends
seen in
tick. It doesn't
at each
before.
But normally, if you are just a bit
if you let the market movea little
off
is continually
market
changes have you
hundred
Yes, because
You need to changeyour
to adapt.
have
selling, becausethe
What
that
377
Your trading size has obviously
since you
grown
quite dramatically
first got into the business. Has that made it harder to trade?
that on a day when the marketisa one-way
do
point
you just have to cough it up?
doing
far it has
how
depends
four
are
At what
street.
Baldwin
Tom
is amazing how much
On average, if you
move the market?
at the
time. Lots of
there
liquidity
times
you
can get out. It
you
want
a thousand, how
to dump
had
is when
out.
to get
much
would
that
Right.
Dependingon
Is that
a key
Yes. Never
give up
will just get
discipline.
element to your
Great.
out
on
a trade.
trading
style?
some patienceand
said,
of getting out here at 7,
minute, I can sellat 10.\"
of day and
the
1 or
2 ticks.
liquidity is that
good?
liquidity,
maybe
Not much at all?
Many traders who
because
they were taught
Those traders will always be
time
the
that
are in
you
have
a losing
trade
to have
around. But if they just had
but instead
\"Yes, it is going to be a losing trade,
maybe if I wait and just sweat it out for another
No, not
an impediment at
size been
Has
Yes,it
the
much.
floor
is harder.
knows
all
if the
Generally, when you get into a big position, the rest of
about it because they stood there and watched you. At
when
they think they know. They all put their hands down and wait
think
are
It
is
natural
for
a
trader
to
be
they
you
wrong.
skeptical.
least
Is it
were
a matter
if they
of just wanting
to get out to stop the pain? And
the pain a little longer,
they would be better
willing to stand
off. Is that
a fair
way of
putting
it?
I would
success,
Yes.
might
They give up too quickly.
a five-yard
be able to turn
In most cases, if you don't give up,
loss into a two-yard loss.
you
Lots of
think
almost
they
times
When you
would
that
that because you have
more often coattail you.
is true, and
go to offer them,
that
they
also
it harder to get in
offering too.
makes
are all
a long-term record of
and
out.
378
You
have
come
in
Does it
to pick your spot.
and then go for it.
You
to wait
have
for
the
order to
paper
big
fundamentals?
use
Whenever
the pit
fundamentals indirectly, that
market respondsto
the
you are selling when you
that
Yes,sometimes.
But
you can't trade big
generally,
size
when
Yes,
are
you
or
doing that.
long and want to
So, frequently, if you are
for the bid to come in?
liquidate, you just
also
but
the other,
You want
wait
and I usually
off
to trade
going to do if
how the
before the
fundamental
new
the
comes out
a number
one way
to be first.
the opportunity
have
there
to get
one
first
what I am
by seeing
is,
them.
I use
out,
information?
new
the
by being
I know
information.
come
numbers
fundamental
important
any
Do you use the
want
game, where you sometimes
are really buying?
a chess
like
become
thinking
Do you
handle those situations?
do you
How
379
Tom Baldwin
Baldwin
Tom
crowd does.Are
normally
you
right
on that type of trade?
Yes.
Right.
of things
kinds
What
do you look for
Key points such as the high
and consolidation areas.
Do you
charts
use
and low
in
for
the
done
tens of thousands of trades. Doesany
as
out
particularly emotional?
You've
a chart?
the halfway
week,
backpoint,
or long-term perspective?
for short-term
kind
What
stand
was a milestone.
was that for
of jump
to go
tend
You
term.
Short
I did. It
100-lot
first
The
trade
single
you?
from one lot to five lots to
ten
lots to
twenty lots to fifty
lots.
term
Short
I guess
short
as
as possible.
that a lot
noticed
week highs or lows
action
seems
almost
pattern
Yes.
It
case meaning?
and minimize
possible,
I've
in your
in
the
always
bond
by
You
in a
trade, make money
as fast
as
risk.
your
of times, bonds will
a few
like a
take
ticks and then pull
trap for
market?
has been.
get
So, you
the
breakout
out
one- and
two-
back. The price
players.
Is that
probably went from
50to 100?Do
you
that trade?
remember
at 64.25 and a
was
trading
bigger risk. The market
a
size
on
he
brokerbid 25 for 100 lots. But he didn't put
it,
just bid 25.
So I said, \"Sold.\" He thought I was being funny and said, \"I'll buy the
I had never traded that big before.
I'll
So I said, \"Well,
100,\"
knowing
sell you 100.\" The market
went
to 24 offered instantly.
Yes,
it
was
a much
a
It
almost
sounds
Well, almost. But
like you did
I
wasn't
your first
a very
100-lot
as a
good trader
then.
dare?
I
immediately
Tom Baldwin
380
I was trying
By the time I got
offered.
to 22
ten more.
then
ten,
bought
because I didn't know
how
But the trade worked
out
out,
at 23, and the
to bid
ten different
100 lots.
I had
to cover
market went
in the
people
trade,
Are you always
this
small trader had
to the
clearing
done
that
been trading at
stand
out?
You
have to
firm after
A
couple.
say that
time?
that
about
any day
you lose a couple of
dollars.
million
long had you
there days when you have lost
I've lost control.
days when
were
Any
close.
How
or are
control,
you?
Oh yes. Well, actually, the word got out that
a 100-lot.SoI had to go up to the office to talk
the
in
control?
There
for
381
Baldwin
Tom
those
Were
days one-way
street markets?
Six months.
Yes,
early on.I assume
That was pretty
to
inadequate
Right.
Even
I had
was really
you
made $100,000 by then.
probably
at $100,000,
capitalization
your
100 lots?
handle
that
you for
cover
wouldn't
Maybenot
that.
even
much of a move.
only
1 point.
How long was it
Two
before
you
100 lots
traded
again?
I'm
What
was
position
your
maker,
I take
the other side
at the
October 1987low
in
bonds?
long.
When
did
you
start
getting long?
Five points higher.
Five full
You
points!
mean
81?
days.
Yes. The day
You
I'm a market
Because
for 50 ticks, I can guarantee
So, if the market goes one way
and
at
some
the
wrong way,
point, it is going to be a loss.
going
trend.
I was
[In bonds, 1 point equals 32 ticks (the smallest
price
I
told
it was a great trade at the
them, \"Look,I just thought
movement).]
do it again.\"
never
time, and I'll probably
Yes,
streets.
one-way
of the
just never
No, if a guy
\"Sold.\"
bids 25 for
Is thereany
better be
thought
element
careful that
That came later.
about
the
risk side
100, and I think
that
in your mindset
I'm always in the
of it?
it is
traders
I just say
a great trade,
as a trader that
game?
says:
it broke
below 77,1
were also heavily
That was the
day
was long thousands of contracts.
long.
we gapped
sharply lower.
The commercials just
kept selling.
Didyou
thoughts?
I had
Yes.
have
second
Who
was
selling?
Other
382
you think if
Did
Baldwin
Tom
the market went down to
it could
maybe
76,
70?
No.At
that
you had to say
point,
it
all over
was
go to
383
Baldwin
Tom
initial
being patient in picking
trade was wrong?
spot to
your
you
ever use any
No. They
Do you
trading systems for
wouldn't be there if they
think
Sure.Why
do
they
are a
systems
trading
weren't
you
traders
what
are
they
anything
Trading is like any
and make your own
winner.
months,
occurred,
other
luck.
to do
job.
own ability. If
millions.
Why
you
would
you
sell it
You work hard,
that
the
why
developing
was I
and
will
influenced
are
by because you
respect
approach.
trading
he
is on
a roll,
For example, if
and you
are
thinking
selling\342\200\224
he does,
then
you
But if he
is buying?
Then
hesitate.
know
you
Maybe
you're
right.
you don't get into
traders who can't
the
trade.
succeedbecausetheir
is too
big to
do your own
thing?
ego
ever be influenced?
put
first
time and effort,
100-lot I sold was a
in the
lucky? BecauseI stood there all
honing market feeling. When
I didn't hesitate.
But
you
indicators.
a really
had
with trading?
I was lucky
you
So, that is actually part of your
trader X is a goodtrader,and
Are there
Doesluck have
that
wrong.
of
lasted a year,
you have
is if
doing?
Oh, yes. They are
losing game?
in their
could make
The rule of thumb
are not
hard.
Are there
And
system,
it is
but
who
floor
anything?
You tell me.
good trading
for $29.95?
make it,
exist?
Becausepeoplearen'tconfident
for long.
not
No,
of your
of the
right side
and experience.
Right.
Do
because
ahead
Was that an example
get out, even when the
luck.
good traders, but are way
a
to
do
coupleof big trades on the
they just happened
market?
Can anybody
really get by just on luck?
peopleon the
Are there
analysis
the
get
Right.
and done.
Why?
Technical
pay your dues to
You have to
day for
the
over six
Yes.
Is part
of the success
a willingnessto
not
always
opportunity
Right.
You
have
to adapt to
your
success.
If you
make a lot
of money,
384
Tom Baldwin
a suddenyou start to think you are infallible.You forget the reason
were
of all those little factors
was because
that you followed.
you
right
As soon as you think, \"I'm the guy who is going to lead the way,\"
you
all of
could a floor
seconds,
it
make
doesn't
really
a difference whether it is your idea or
losing is all that counts. Where the idea
best
the
Actually,
have a big enough
yourself.
to swallowyour
After you get
money
to be
egomaniac
a good trader?
traders have no ego. To bea great
trader,
you have to
in
only in the sense that you have confidence
let ego get in the way of a trade that is a loser; you have
ego
cannot
You
an
and get
pride
doesn't
mean
thought
that
a temptation to say, the extra
anymore, maybe I shouldcashin the
anything
chips?
I
never
money to support my
dollars. I said, \"Hey,
You
passed
I started,
I needed to make
way. Obviously, when
I
but
never had a goal to make a million
family,
this
is great,
that a very
long time
maybe I can make
ago.
$100,000.\"
have any other
Do you
You
just
Yes. And
Baldwin's
do what
you do
I hope it
lasts.
book.
this
to
enjoy
it?
trading achievements madehim an ideal interview
I did not really expect his comments
However,
or
other
off-the-floor traders. After all, what
myself
incredible
candidate for
to be pertinent
because you
assume
in
and
minutes
for weeks
positions
tend to
you
think
frame
planned
originally
of gains
of mind
to risk
up
and
that
to
only
$5,000
$2,000. If, at this point,
terms
of
of
the
trade
in
start
to
think
money (for example,\"the extra
you
can pay for my vacation\,")you might well liquidate the position,
$3,000
to get out
still believed in the trade. It is one thing
even though
you
trade, and quickly
because
no longer
you
on
liquidate
impulse
find
like
the
simply
yourself
position,
because
down by
but it
you
is quite
have
another
translated
matter
to
the risk
into
terms.
interesting point made by Baldwin is an unconventional
wait and choose
out
of a losing trade too hastily;
instead,
of
most
advice.
in
face
to
the
time.
This
advice
seems
trading
fly
your
After all, isn't one of the basic
tenets of trading success to cut your
contradicts the
I don't think
statement
Baldwin's
lossesquickly?
However,
time to bail out of a
rule. I believe
he is saying that often the worst
Another
one:
Don't
get
price move against you. Baldwin's point is that
be able to find
a more
just a little longer, you
may
pain
by bearing
this
for
Of
favorable circumstance
course,
philosophy should
liquidating.
the
be appliedonly by disciplined
traders: those with
ability to maintain
position
is during
a violent
a risk controlstrategy.
No.
traders
monetary implications\342\200\224a
of making trading
decisions.
the
goals?
most
contrast,
in the way
For example,
tangible
is there
ahead,
way
out.
hold
of their
terms
lossesin
be somewhat of
measured
the interview
surprise,
keepingscore.By
on a
have to
time horizon is
to traders who
yielded some relevant insights.
made
important point
by Baldwin washis emphasison not
in
of
terms
trading
money.To him, money is only a means of
viewing
Right.
you
relevant
was
most
Perhaps the
gets
Do
say
To my
or
somebody else's. Winning
came from isn't important?
whose
trader,
that
or months?
get slammed.
So,
385
Tom Baldwin
Tony
Saliba
\"One-Lot\" Triumphs*
Tony
came
Saliba
m 1978.After
own. He found
favorable
a half-year
another
start,
disaster by
to the
nearly
altering
his
floor of the
Board
Options Exchange
of clerking, Saliba was ready
to try it on his
to back him for $50,000, and after a
trader
self-destructed.
trading
Chicago
He pulled back from the brink of
and has been successful
ever
techniques,
since.
as trying
to do a little
better
style can be described
to
water
while
take
in,
out,
being positioned
treading
day
day
of the rare spectacular trading
His fortune has been
advantage
opportunity.
of
a
handful
such
events.
Two of these
built
largely
only
by exploiting
and
situations\342\200\224the
the
October
1987 stock
Teledyne
price explosion
in the interview.
market collapse\342\200\224are discussed
The impressiveaspect of Saliba's
achievements
is not the
trading
few spectacular
gains he has registeredin his career. Rather, it is that
a trading approach exemplified
these
gains have been achieved by using
control.
In
incrediblerisk
at
one
fact,
by
point, Saliba managedto string
months
consecutive
of
together
profits exceeding $100,000.
seventy
a
few
have
become
multimillionaires
traders
several
Quite
by scoring
hits.
A
much
smaller
number
have
to
hold
on
to
their
big
managed
gains.
occasional
dramatic
gains and
Only the rare trader can boast both
Saliba's
trading
than
consistent
trading
profits.
\342\231\246Readers
unfamiliar
understand
the trading-related
with options may wish to
references in this chapter.
first
read
Appendix 2 in
order to
Tony Saliba
388
is
homework
required for Saliba's successfultrading
into a wide range of
nonetheless managedto diversify
other
real estate investments, a software
ventures,
including
company,
and a restaurant chain. Overall,his extracurricular
endeavors
business
have proven only modestly
but they have indulged his
profitable,
the
Although
he has
extensive,
for
appetite
variety.
During the
a
form
a
generation
of
were
conducted,
being
Saliba was
business venture of his life: negotiating
French bank to back him with several hundred million dollars to
and train a
major trading company. His goal is to discover
involved in
with
time theseinterviews
most
the
successful
Saliba is a
important
traders.
likable person who
makes
you
feel like
you're one of
best friends within five minutes of meeting. He is a person
who
genuinely likes people\342\200\224and it shows.
On the evening before our scheduled
Saliba had a minor
meeting,
on
the
in the Chicago
club
marble
floor
at
the
health
accident,
slipping
BoardOptions
scheduled
As
I
at
showed
the
time,
Exchange
building.
up
his aide told me that Tony would not be in that morning due to the
accident. I left a message. Saliba called later
that
day, and to spare me the
inconvenience
of missing my flight that evening, or making
another
trip
to Chicago, he arrangedto meet me several hours later.
We
talked
at the LaSalle Club bar, which
was
sufficiently
empty
to not cause a major distraction. Initially,
I was too intensely focused on
to pay
directing the interview
any attention at all to the largemovie screen
at the front of the bar. Later on, however,
I glanced at the
as I relaxed,
screen
as Saliba was answering one of my questions.
I instantly
recognized the
train scene from the movie Risky
in which the
Business
sensuous Rebecca
Tom
Cruise.
seduces
DeMornay
I have a bad habit of severely overschedulingmy appointments,
and as Saliba was my third interview
to feel
of the day, I was beginning
the strain. My first thought
was, \"Keep your eyes off the screen,
you are
his
having a hard enough
second thought was,
attention to
Tony,
time
\"It
especially
inconvenienceof
having
would
your mind focusedas it is.\"
incredibly rude not to pay full
keeping
be
after he literally
to reschedule
hobbled
our
interview.\"
over
to spare
My
third
was, \"Thank
led
What
I was
thought
for some
of mine
he meant
said,\"Yes.
this
asked me if
the
same
got there, I found
I was
out
he
\"None,\"
school.
high
In
be a broker.I thought
caddied for. So, I
he answered. I said, \"What
as the
I had
guys
\"Indianapolis,\"
of: \"Hello
in
like to
I would
thing
Indianapolis?\"
impression
I was
when
traders
grain
Where?\"
Great!
is in
exchange
I had
doing
screen.\"
a trader?
to become
you
a friend
college,
that
the one facing the
I'm
God
a caddy
\"you do
said,
New York,
sell.\" When
Chicago,
buy;
the phone.\"
on
it
I
a salesman.
I asked the guys in the office, \"Who makes all
business?\"
money
They saidyou have to be on the floor. Right
there
I decided to go to the Chicago Board Options
On the
Exchange.
floor, I met one of the traders I had caddied for years ago, and he
a few
After
months,
in this
the
me with $50,000.
grubstaked
Isn't that unusual,
to a
$50,000
giving
to caddy for
kid who used
you?
It was,
because
for
only
except
of his
he
that
going to
What
made him
heard
and he basically
What
very wealthy and needed to
He owned a seat that
pressure.
and just
I was
He had
was
blood
high
$10,000,
account.
My
me the
389
Tony Saliba
think
some
took
needed the
help him
you
rumors
do
could
to trade
ability
get off the
he
in a
floor
had bought
customer
that.
make
it as
around the floor
on me.
a trader?
that
I was
a hotshot
clerk,
a chance
happened?
from $50,000 to about $75,000in the first two weeks. I had put
all these volatility spreads [an option position that
will
gain if the
market becomesmore volatile]
and they were getting
pumped
up.
I went
on
Tony Saliba
390
Did you
this is
\"Boy,
think,
Didyou
easy\"?
I mean, I wasa genius.But what I was really doing
were
the opposite
side of positions the other brokers
was taking
I was left
their
while
them
out
of
the
market
with
profits,
liquidating, letting
were
and
volatilities
This
1979
the
was
implied
very
spring
bag.
holding
1978 was a very
volatile
because
year. Well, the market went
high
six
and the volatility and option premiums collapsed.Within
nowhere,
The
I had lost almost everything.
weeks
$50,000 was down to
original
I thought,
only
is it!\"
\"This
about
was feeling
$15,000.1
DC 10 crash at
O'Hare
was when
bottom.
I hit
in May
suicidal. Do you
1979,
Tony Saliba
when
all
those
the big
remember
people
died? That
feel
better
great, I've
a stop on your
You had
Exactly, exactly.I had
give
more
one
it
grand in my account.\"
fifteen
got
so to
life
a stop
still
a cushion?
speak?
on my career.
So, I decidedto
go
back
and
shot.
Did the fellow who
ever say
you had
because
\"This is
I said,
Yes.
391
staked you
know
how
much
you had
lost? Didhe
anything?
question, Jack. Hecalledme every night. I' ve grubstaked many
then, and three or four of them have lost more than fifty grand
guys
each. This man was a multimillionaire,
and he acted as if this
was
the
end of the world.
Oh, good
Was that a
metaphor for
your
mood?
Yes. I would have exchangedplaceswith
I thought,
bad.
plane on that day. I felt that
life.\"
Did you feel
you had lost
because
guilty
since
one
of those
\"This is
it;
people
I've
in
that
ruined
my
someone else's money?
Did he ever ask you
No, he just moaned
about
much
Yes,and
I felt
like a
do with
failure.
plug.\"
Had you
started
out
confident?
on my
because
before I started trading
Initially, I was very confident
and picked his brain
own, I had clerked for a broker for four months
clean.
And
now you
thought
the
game
was over?
to the
find another job. I went
dad
for
that my
built
of restaurants
time
them. They said, \"Any
you want a job, you can run one of our
I am going to give it one more
line.
restaurants.\"
So, I said, \"Hold that
Yes. In June 1979,1decidedthat
Levy brothers, who owned a chain
month,\"
I better
and
inheritance
his
So,
for
and
money
the
rest of the
groaned.
he made
in
money back?
He had
another
option trading. He had bought
life. He told me, \"If you lose
I spent
the next few
become
wealthy
through
He really didn't know
seat to have something
business.
weeks winding
the
$5,000
down
to
we'll
more,
pull the
my positions.
During that time, I sought advice from the more experienced
brokers on the floor.
They said, \"You have to be disciplinedand
you
have to do your
homework.
If you do those two
things,
you can make
money down here. You might not get rich, but you can make $300 a day,
and at the end of the year that's $75,000.You have to look at it that
way.\"
It was like a light bulb went on. I realized that this
chipping
away
was what I should be
approach
doing,not putting myself at a big risk, trying
to collect
a ton of dough.
At
the time I was in
which was a very
volatile
Teledyne
options,
market.
So, I switched to Boeing,which
was a very tight, narrow
range
to make a quarter or an
type of market. I becamea spreadscalper
trying
of a point on a trade.
eighth
I stuck strictly to my goal of trying to average $300 a day and it
was
working.
This period
taught
me
to be
regimented and disciplined.
392
Tony
day, I live by the credo of
To this
I teach
Anyway,
in
position
and discipline.
homework,
work,
same
this
at
time, I still had the remnants of a big spread
of liquidating. It was a
in the
process
market. One day after I had been
a rising
Teledyne
that would lose in
for about five weeks, Teledynestarted
moving
up sharply. I
trading Boeing
into the Teledyne
was not going to let it get me again.I rushed
pit to take
and all
off. I was hearing floor brokerscomein with orders,
position
of a suddenI found myself
technique I had learned in
or a quarter,
scalpingfor an eighth
scalping
words, you were
did
On the
and
you get
bids
someone
do 99
just a nuisance.
come, first
for just one, you
it's first
first
with the number
but if he
Did
you take
Oh,
did
who
two
does,he's breaking
The brokersnever
did,
you mean
for
\"one-lot\"
was
time
virtually
me
right
the longest
trader
the best
time. The
individual
He had
a legend in his own time. He started
from the beginning. He mademy life
in
crowd.
the
miserable.
ego get
dented by
these
traders
successful
really
railing
guy.
the
The broker
have 100 to sell
his one before you
If you
served.
have
Oh, yes.And,
but the
brokers
to do
could ignore you
if he
wants,
rules.
market makers on the
almost a year,
to pick up
tempted
day
in, day
your trading a little
out.
bit?
I
started turning
it around,
he told me to increasemy size. He said, \"Tony,
a banker makeshis first loan and he is very careful, but as he gets more
comfortable, hemakeshis loansbigger.You need to increase your size.\"
How did the
floor
did.
and
the
makers are
the two
exchange,
harassment
they introduced
you
puts
were taking
in June
1980, the
me the hardest time, hated them. He said they
and he didn't want to trade them. I seized that
what
would mean to us, and I wasone of
puts
order fillers?
are the order
on for
it went
I did, but not for that reason.
My backer, who had given me such a hard
time when I was down,
was the prod. Although he didn't know
that much
about trading, he did give me one pieceof very useful advice. Once
fillers,
the locals who trade for themselves.On the options
are separate.
floor
was
and
millions
trading
Actually,
The
hardest
leaning on me and ribbing
start
Yes.
called me
me the
W\302\253reyou
you ignored?
By brokers,
yes.
a lot of ribbing?
I! They
gave
made
When
Were
in Teledyne?
you?
someone to take one lot?
floor,
options
trader
one-lot
only
For the most part,
Did your
at the time?
Exactly.
How
you the
Were
lot at
one
in their
In other
I was
a time. The guys didn't like me because I was
orders.
way. They wanted to do ten- or twenty-lot
I was doing
getting
the same
I was adapting
except instead of
for halves and dollars.
to them.
responding
to Teledyne,
Boeing
you trading
were
size
What
393
that I was
position
my
Saliba
Tony
that.
guys
my
hard
Saliba
on the floor finally
end?
lead trader, who had given
were
bad for the business
opportunity
the
to really
first market
study
makers to
puts.
it opens up
a whole range of
new
strategies.
market
Oh, unbelievable.
they
had
These other guys were set in their ways, even though
couple of years.Soonerthan you might think,
only been there a
394
Tony
Saltba
one trader befriended me and suggested that we work
on advanced
We started working
strategies, getting real
number
this
together.
you working these out
Were
No, we did everything
Didn't
395
By buying
butterflies,
the wings [that is, the
you
hand.
by
still have to
Writing
out all these
\"what-ifs.\"
be guessingright on priceand volatility
could.If I chained
to
have to
would
market
peg
guess
right
on
volatility.
because we
direction,
However,
were setting
up
we didn't
have
a
overvalued because
spreads
that had
be highly
might
big edge. For example,one option
firms.
the
member
it was
among
popular
I felt I was doing more of the work, while this top trader
Eventually,
the market. He would
to muscle
in the
was
counting on his ability
pit
also stray from the strategies we had worked out and even started doing
are you doing?\" He would
to try to hurt me. I would
say, \"What
things
just answer,\"I
my mind.\"
changed
I started
working on my own.\"
interest
rates went through the roof in 1981
taking on more size. When
and I started making a
well
and early 1982, my strategies workedreally
had days when I was
Then in the bull market in 1982,1
lot
of money.
I just said,
Finally,
$200,000
making
the
mean you were
long the
strike
or long
middle
options]?
price
Long the wings. Your risk is limited, and if the market does not move
time decay works in your favor. [Barring a favorable
widely,
pricemove
or an increase
in volatility, the value of an option
erodes
steadily over
time. In a relatively
flat market,
the premium erosion in options
with a
strike price near the market
in butterfly
price\342\200\224\"middle\"
spread\342\200\224will
be greater
than that of options further
removed
from the strike price\342\200\224
in spread.] Of course, I tried
to buy the butterflies as
\"wings\"
cheapas I
a computer?
on
direction?
You
do you
higher and lower
abstract.
and
creative
Saliba
Tony
sheets;
there
\"Forget
it, I'm
in my clearinghouse
a day. The guys
was just tons of paper.
couldn't believe
month.
do
What
you
That's basically
of them
enough
I would
Then
wide.
fairly
by the term
mean
together, my
in
be
would
zone
profit
do an explosionposition
a more
distant
\"explosionposition\"?
own term. An explosion positionis an
option
risk and open-ended potential, which
will profit from
a large price move
or an increase
in volatility. For example,a position
of
consisting
long out-of-the-money calls and long out-of-the-money
would
be an explosion position.
puts
my
has limited
position that
It soundslikethe basicunifying
that
as
option
market
the
position given
a one-unit
in your
increases
underlying
market]
feature
moves, the delta
of the
explosion position
[the expectedpricechange
change
in the
favor. So, you
is
in the
price of the
are
really
betting
on
volatility.
What
kind
were you doing?
of trades
Exactly.
I was doing
I consider
everything.
myself a matrix
trader.
I trade
else. My basic strategy,
at one strike
short
or
was buying butterflies [a long
however,
position
in
and
strike
lower
higher
position
price balanced by an opposite
IBM
140 calls,
two
options\342\200\224forexample,
long one IBM 135 call, short
that with an explosion
and long one IBM145call]and offsetting
everything
position.
on the
screen as
it
interrelates
to everything
In effect,
this
Yes. I put
on
me,
and the
complement
that
position.
is the
opposite of what you
the butterfly
in the
front
month,
do with
where
the
butterfly.
time is
working
for
explosion positionin the mid- or back-month. Then I
with scalping to help pay for the time
decay in the explosion
396
Saliba
Tony
words, the explosionpositionis your
In other
big move,
is paying the bills, that
while
your
of the
explosion position.
cost
decay
bet
money
scalping
of a
in case
is, the
Saliba
Tony
What
One of
Well, I was
one position
offsetting
always
other
In
another?
with
was
[An option position in which
words, were you always delta neutraP.
total equity will remain roughly unchanged for small pricechanges
either
it. I
How far
About
but once
a while
in
was your first really
take a significant
I would
net
off the
was never going to
and
would
This
went
stock
want
buy them. \"You
ten
on for over
trading
at
had gone
The
9:20
Yes.
made
five
down from
know
comeback to
floor.
the
months
didn't
160to
138,
and then
it was going to
think
inched
go up
because
Teledyne
stopped trading
comes across the tape: \"TeledyneAnnounces
their
The stock
millions.
Vk,
Vu bid
I'm
for
at
own
$200
went
the $180
up
On
anymore.
of news
a Stock
calls. Overnight, I
to $300.
The next
going to
do?
I'd
in
stay
the business
somehow,
but
last?
retirement
months.
About four
bored?
I missed
So, in the
four
to
I missed
markets.
the
was the
money
beginning,
the excitement.
goal, but once you
got
it
there
became\342\200\224
secondary. Maybe if I had a wife and kids, or someone
I might not have gone back. But trading
was my life.
my
It made me feel like something;
it gave me a reason for
being.
Yes,
it became
specialin
life,
I understand
stock eventually
were great.
back
stock?
I owned
I thought
know.
How long did your
Yes.
way
were
you
fifty.\"
per Share.\"
was at $155, and
The
its
what
floor.
off the
work
Were you
in
Program
Buying back
them at
days.
they
news
Repurchase
to sell
Pacific Coast traders leaningonthe calls?
150.1 guess they
May 9
pending.
thirty
million.
$8-9
Did you
big trade?
The stock had
1984.
were these
up to
I was
were you up then?
I didn't really
The
when
retire
before
twenty-five. I had
I was thirty.
On
May 5, 1985, my thirtieth
floor
and said good-bye to everybody and that
I was
before
position.
and I was building up
dropped sharply
the stock started
in the out-of-the-money Octobercalls.Well,
a position
where
Pacific
from
the
Coast
but
back
these
Exchange,
guys
inching
up,
were
on
list
also
just
kept
leaning my longs. They
Teledyne,
they
of shying away, I steppedup
Instead
on the close every night.
batteringthem
in
Teledyne
Why
a millionaire
direction.]
Usually,
What
was to becomea millionaire
I walked
birthday,
you
in life
goals
my
retire.
decided to
Exactly.
Were
after that?
happened
time
and
in
397
October
I
was
one
expecting
So, I started
a big
building
best trading periods was the weekof
crash. Tell me about it.
of your
1987 stock
move,
the
but
same
I didn't
know if it would
type position
that
I had
be up
the
or down.
in Teledyne.
398
The
spread combined
butterfly
the
with
Yes.
But you said you
What was the
in this
position
explosion
Yes,but
market was going to
it in the
feel
could
wild
a big
have
Still, you
story
move?
I
Actually,
it was
thought
going to attack
were
When did you
Thursday,
have
must
was
highs
Yes,if
I
At first,
upside.
the
that
At
end of
Yes,and
there
is a
thought
been
way
awfully
A trader
once told
off first until
hand
I always have
I am;
confident
following
Do you
I'm on the
trading,
wrote
They
it that
way
floor. But
the
that
fell
the
apart.
least
on the
was
the
cover
you knew the
that
is completely
article
floor
They make it sound
That's not the story.
firm. One guy
my clearing
wasn't
closing, and I had to
that day.
the
way
magazine
wrote it up,
but
that's
what
not
as
as
dramatic
really happened.
it had
Didn't you also sellyour
on a Friday
the
confident
I
action
insurance.
market
to
like
sounds
concerned about the positionsheld by
had a huge position, which
he
a
spend great deal of time on the phone. Now, that's
betweenthe
sSze of
it
me,
your
sell magazines.
to
in particular
Moniday\342\200\224at
of the
inkling
1988],
[April
I was
hit
and
that
one.
market
seat
have beenreally
down to sella seat.
that
was going
day?
You must
seat before the market opened.I figured
if I didn't hit the
I had seven seats; I
seat, someone else would.Anyway
just
bid
sold
opening.
Was
Did you have any
magazine
planned and plotted to avoidthe
like I
again.
the week?
the next
on
follow-through
I'm
misleading.
the market
have been confused.But instead,
I
down.
we
were
was
sure
point,
going
high correlation
Success
in
for the
thought
stealing
some insurance.
you never take your
second,
time?
before the crash, the market
back, but kind of churned.Now, if
then I would
cracked on Friday.
Becauseit
old
bounce
didn't
Friday,
be on the
going to
the
that
week
the
of
it
be on the downsideby
change your mind?
On Wednesday
the
down?
market would collapse. It saysyou even deliberately
chose to go to
the
office
instead
of the floor to avoid beinginfluenced
out of your
position by all the confusion on the floor. Isn't that highly
unusual
for you to go to the office insteadof the floor on a
trading day?
late
were occurring by
that
gyrations
the move to
expect
you
on
to have
wanted
other hand is on second.\"That's the
September.
rallied
was going
market
calls that
out-of-the-money
going sharply lower on Monday morning.According
What told you the
we
I just
\"Saliba,in
decay.
Did
the
thought
bought
case?
In this case, it was formed by buying out-of-the-money
puts and out-ofI
the-money calls in the back months. To counterbalance this position,
time
from
had butterfly spreads in the front month, which would profit
You
399
back to about unchanged.I actually
Friday for protection.
position.
explosion
Saliba
Tony
Saliba
Tony
the impendingmove
on
the
a
exactly
this
liquid
the first
time you traded
a seat?I mean
seats
aren't
market.
Monday?
know
what
the market
thought was going to happen Monday?
lower,
open
go down sharply, and then bounce
I really
would
I
Yes,
it
was
time I did it like that: trading the seat round
I have traded seatsbefore. I trade them depending
the first
one day. But
turn
in
on my
400
in the
mood
in
Saliba
Tony
our
market. Onbalancethough,
seats. I believe
I want
to be long
like a
good trade?
Saliba
Tony
401
But everybody
wanted volatility.
That's when
register
industry.
But in that
I figured,
circumstance,
a lot of exposurein
I have
\"Hey,
take
worth\342\200\224Ibetter
the morning and
bought
seem
did
it
some protection.\" I sold that seat
it back the next afternoon for
dollars
million
seats\342\200\224afew
for $452,000
the
did
you
only
It was
ringing.
the day
that
the
zinc ointment, and
needed
sun
I was
Let's take the
$275,000.
in
fence:
of the
side
other
did
What
the
who got
traders
do wrong?
October
that Monday?
make
That has causedmea lot
really started
in
buried
How much
the
close to the earth that everybody
guy that had some left.
was so
I would
of headaches.
not
rather
say.
puts.
your big money wasmadein the out-of-the-money
did you keep as of Monday'sclose?
What percentage of that position
Obviously,
would be a normal day. They
started
They took for granted that Monday
out long, thinking the market was just correcting
and
was due for a
bounce.Then they bought on the way down; they bought every dip.
Did sometraders just freeze?
95
About
percent.
You kept
temptingto
just
most of it! But
the
were so
profits
huge. Wasn't
cover
The reason I didn't
up enough. They all went
at
the-money weretrading
any
almost
time
entirely
value
was
I felt my long
because
The puts
to parity.
$30. In
of intrinsic
that
puts
hadn't
gone
points
thirty
in-
other words, the option premiums
value; the
market
Given the enormous market
premium.
were
wasn't
volatility,
Yes, and do
insurance
wait
what
know
you
at the
would
close on
best
thing
what they wanted
wanted calls.
I did
the
next
I thought
I could
more of: Half
more
I walk
hundreds
of my
world
The next day they
them
looking for something
all the
in and
But
today?\"
to do,
annual
earner.
Jack, what do you think?
stood there. He didn'tsay
kept going over his sheets,
what
to do. So he missed
say, \"Hey,
he just
He lookedshellshocked.
Hejust
to me.
but not
knowing
opportunity.
Why
responded to the marketso different
friend
your
responded?
was the way you
He wasn't
more
short calls.
volatility.
have done.
the
day.
to hedge myself? I bought
Monday. I covered
You were basicallybuying
It was the
till
to get
going
you
a word
way
you
figured
have one friend, who is a million-dollar
giving them
that was crazy.
So,you
did. I
On Tuesday morning,
Are
consisted
some
Sure,
it
take it?
didn't
know
sure
his position risk was. I always
define
my risk, and
about it. I walk
into the pit every day with
a clean
can take advantage of what
is going
on.
to worry
slate, so
that
I
A clean
slate soundslikeyou
obviously
hold
come
positions
in with
a flat position
overnight.
wanted puts, and half the world
I mean that
I'm
the
what
I don't have
but you
from
always
hedged,
and I'm always prepared.
every day,
402
always know the
Do you
Do you
Yes.
in between.
loss
is always
limited.
so many
traders
Why do
position that you hold?
your worst case is?
The
could happen?
But no matter
what
in a
risk
maximum
what
know
always
Now,
something
My
Saliba
Tony
market
what
I
happens,
How do you
How do you
If it's a bad
that
lose
Yes.I either
problem with
they are bigger
think
they
they lose
and
marketplace,
ethic. Those are
the
floor really work
hard.
the
is
What
sight
traders
some
than
the
of
their
and the hard work
the public
misconception
biggest
They
discipline
who get blown out. But
traders
floor is
don't fear the
that come on the
market.
It is either bad day
money?
is the
that
position
period?
problem,
trading
or a
you
should
then
do?
most
the
on
guys
has about the
liquidate
it or
a boat
to let the water out.
are in
you
do
then
because
it,
a leak,
springs
lossesare due
What if your trading
What
neutralize
that
to
your
has to go up for them to make money. You can
With
in
if you use the right
kind
of market
make
strategies.
money
any
there
are
and
the
markets,
futures, options,
enough tools
underlying
availableto
Yes, it
never
set
game plan for
up a
words, the
In other
is the
I like
stuff
public hastoo much
way: The market
about program trading
bull market. Once the
trading
started
market
a major
became
of a
bullish
to go up. The
we were in
when
going
down, all
concern, and they
set
to stay
Take a
theory
out
in the
out of my
go
sun
head.
trading?
focused, and extreme discipline.Discipline
and stick with it. But you
also have to be
been proven
bias?
has
ability
one:
number
to lay
open-minded enough to switch tracks if you feel that your theory has
You have to be able to say, \"My method worked for
wrong.
this
of
but
we are not in that type of market anymore.\"
market,
type
situation.
any
American
said anything
program
of good
elements
the
Clear thinking,
is
bad decisions?
making
Take a day off. If I get myself all wound
up,
and bake for a while
and let all the strenuous
What are
hole
another
drill
do then?
you
the market
that
idea
back afloat.
you are
you don't
marketplace?
The
losing position.
just get out of
it.
When
the biggest
a losing
handle
losing
everything?
I think
403
Is that what you
the floor end up
come to
who
or
know my worst case.
it explodes,
sits,
Tony Saliba
government
Trading
rules
a three-year
of a sudden,
up commissions
I scalein and
I don'tliketo
you live
scale
do
by.
out of my positions,
all of a large order right
so that
up
I can
spread out my
risk.
front.
galore.
For the average person,
biggest misconception is that
make
money,
and when
it from
a more neutral
in this
category and
because
it
is infinite.\"
it
goes
the
like my mom or dad and their relatives,
market
think
the
when
goesup, you
they
down,
standpoint
short
in
this
you lose.
People need to
approach
say, \"I'm going to be a little
my short-side
category, but limit
and
What
respect
Always
long
risk
else?
your homework.
the
Recap
wrong. That
do I want
projective.What
you
did
marketplace.
the
day.
Never take anything
Figure out what you
is one part of the homework;
to happen tomorrow?What
for
did
the other
happens
granted.
right
Do
and what
part is
opposite
if the
404
Tony
occurs?
What happens if
nothing
and plan,
rather
ifs.\" Anticipate
your first few
limit your worst casepossibility?
to
after
real estate, stores,exchangeseats,
market
I didn't
of
million
dollars
later, I used
the
money
and
things
your trading
first time you felt the
seemedto be saying
do with
nothing to
style issofocused
need for
a safety
a catastrophe
that
on
it away
19,1
so I took a couple
Then, a few weeks
limiting
losses, the
net was when the
could occur and have
the
needy,
You
it was
thought
shut
they
if you
down the
set
be fun.
company
a monetary
I did
I was thirty.
so much
to make
all numbers,
a software
do you
money in the world
time.
And
to be honest, money is important
because
it is influential.
See that guy standing over there? I don't know him from Adam. But say
he came over to talk to us. If he made a really bad first impression on
me, I might not have much respect for him. But if you then told me that
is worth $50 million, and he made
it on his own, that
would
guy
of
him.
That
not
be
but
that's the
completely
fair,
change
my opinion
may
way
it is.
How does
trading affect
in your
trading
account,
but
standpoint
it clobbers
and friends that
but
do somethings
For example, I'm currently
and
all the
market
game?
I want to
Now,
How
were
is that
your
personal
from
a business
life?
Unless it
is about
Are
always
they
it
well
me. It doesn't
require.
business,
People
like
this
but
standpoint,
allow me to
give
a social
to women
from
the time
like to just sit and talk sometimes.
you, I'm out of here.
with
goals?
a millionaire
before
I decidedI wanted
goals
have $10 million
I set goalson
Until recently,
the
at one
I know
you.
happens
How do you
All
YesI did.
I'm able to handle
Yes. What
I
feel like I'm a success. really
I feel like I've
don't.
and I've been successfulat this one area in my life.
but I don't have that
fulfillment.
How do you
family
judge success?I don'tknow.
isn't the answer.
new capital. Then
into other investments:
the
like that. Then when
October
405
success,but I don't
madea lot of money,
\"what-
I needed
and
hate to use that term\342\200\224onMonday,
of cash anywhere,
have a big chunk
T-bills.
out of the flow and bought
to buy an annuity.
money
because
I guess
the
sock some of
crashed\342\200\224I
that
realized
all
I help
did you
million,
My trading strategies were growing
I made
some more, I started putting
No.
through
react.
than
you made
When
Think
happens?
Tony Saliba
Saliba
numbers
the
that
company. I
it
a
level. First, I wanted to become
I was twenty-five. Then
before
I did that. Originally,
and
year,
are not
working
also want
aren't
so important
in your
it
would
A lot
Yes.Most
people
and
TV?\"
watch
that conscious
aren't.
of time?
They say, \"Well,
don't
you
ever
just
sit home
anymore.
only profitable, but will also
on setting up a trading
to do the family-type thing.
Do you?
judge success?
I used to judge success as being the best
Springsteenin rock music. In my industry,
of life.
wise. Now, I think it is more quality
you
field, like Bruce
to be dollar-
have
of people think
I'm
a
have
the TV on, but my head is always on trading.
Well, I might
Last
a dinner
date at midnight. I was tired and wanted
night I came back from
to go to bed, but I was up until 2:00 A.M. figuring
out trades.
It's an
addiction.
I used
to be much worse. I got lots of grief from former
I would take my work with
because
me on dates. I don't do
girlfriends
that
but
I'm
still
about
more,
any
always
thinking
trading.
406
What
Saliba
Tony
Tony Saliba
you different?
makes
daily
it
I think
I can do anything, and
I'm
not afraid of hard
work.
Right now,
for example, I'm working
on a deal with a French bank
to put together
a trading
I can't wait until
this venture
starts up, so that I can
company.
start working with these kids, training them to be traders.I don'tknow
how much the bank is going to give me,but I could have hundreds
exactly
of millions to work with. I love that type of challenge.
to realize that many of the great traders interviewed in this
not immediately successful. Saliba's initial
trading
was so disastrous
that it brought him to a near suicidalstate of
experience
mind.
However, what these traders share is a senseof self-confidence
and persistence.
In the case of early failure, these traits
are enough
to
lead to eventual success.Besidesallowing
him to make a comeback from
his
into
early poor start, Saliba's persistence also came
play at other
points in his trading career. For example, many others faced with the
type of constant ridiculethat Saliba was subjected to in the Teledyne
pit
It
is important
book
were
might have
abandonedtheir
same
This
of
characteristic
control,
the
also illustrates
another
the maintenance
trader:
superior
in difficult
even
strategy.
Teledyne example
circumstances.
It
been very
have
must
important
of rigid
risk
for
tempting
a larger position
in the Teledyne pit when
size
he was
he maintained
his discipline and
Instead,
being derided as \"one-lot.\"
continued
to trade small until his capital had grown
to allow him
sufficiently
to increase his position size.
Saliba
to trade
and
hard
Working
is preparedfor
By anticipating all
such
as the October
events. For many
the
19 stockslide,instead
of someone
image
out of markets with
to hard
many of
night,
not
the
very
allowing
concept
success.
agility
great
majority
of cases,
work and preparation. In
successful
leisure
traders
or other
sixth
moving
sense.
The
fact, similar
their
business from
to
an
and
owe their
Tony
\"homework\"
interfering
in
reality is far
exceptional traders
will do
by such
conjuresup
approach,
and a near
of situations
immobilized
of being
of a great trader
a shoot-from-the-hip
using
less glamorous.In the
success
the
people,
take advantage
he can
\"what-ifs,\"
he
so that
scenarios
examining many different
is a critical elementof Saliba's
all contingencies
Saliba,
every
with
their
regimen
usually
to a
on a
ends
407
of market
analysis. When
up costing
recently missed trade
business
can add up.\"
trip,
\"It cost
they
stray
from
that discipline,
them money.In Saliba'sown words, referring
due to his failure to have his orders in while
me ten
grand,
and
all those
little
ten
grands
PartV
TkgPsyc^ogy
of
Trading
Dr.
Van
The
Dr.
the
Van
of Oklahoma,
spent his career
how
studying
of Trading
his Ph.D. from
received
Health Sciences Center, in 1975. He has
stress
affects human performance. His
the psychology of winning\342\200\224especially
as
his Investment
markets. In 1982, Dr. Tharp
developed
and
a test that measures winning
traits.
losing
Inventory,
is in
interest
strongest
winning
Psychology
is a research psychologistwho
K. Tharp
University
K. Tharp
to the
applies
Psychology
Thousands of investors and speculators\342\200\224myself
included\342\200\224have
taken
and a ten-minute phone
this test, which includes a written
evaluation
Dr. Tharp has written Five books on successful
which
consultation.
investing
his
is
a
the
core
investment
course.
He
editor
for
of
contributing
provide
has also written
Technical Analysis of Stocksand Commodities
and
numerous articlesfor other financial publications. Dr. Tharp is a frequent
on Financial television and radio programs,and has spoken at many
guest
investment conferences.
Dr.Tharp
success.
trading
and
top
studying
basic theory is
specific trading
performance
of
full
time
to counseling
traders
and continuing his research on
A recent focus of this
research
has been interviewing
a model
for success. His
traders
so that he could create
less
California,
Glendale,
that by
traders (not
dramatically improve the
traders and investors. In his most recent
turn his most successful clients into \"super-
teaching
methodologies),
successful
project,he is attempting
himself
devotes
currently
from his office in
to
the
winning
he can
traits
of the top
422
Dr.
traders\" by extending his
normal program of two
K.
Van
Tharp
into
sessions
two-day
an ongoing semiannual process.
After
I interviewed
Dr. Tharp, he askedwhether
he could do a video
of me as part of his
research.
SinceI
tape interview
such
ongoing
thought
an interview might be helpful
in improving
my own trading
performance,
I eagerly agreed. The interview
for over four hours. Dr. Tharp
lasted
has
a particularly
After an initial response to a
probing questioning
style.
question,he would ask, \"What else?\" and repeat this process
several
times. When I could no longer think
of any additional
responses, he
would have me shift
of these
(One
insights.
I would
think
that this
I felt
overlooked.
to facilitate
intended
was
instruction
and sure enough
of my gaze
direction
the
interview
(he later explainedthis
accessing different
yielded
of my brain),
parts
I
had
somehow
point
some important
personal
is briefly
discussed
in the next
chapter.)
I
have
liked
to provide
impression of Dr.
basic course, which includes five books and
four
tapes.
although I reviewedthe material
briefly as background for this
would
Tharp's
However,
my personal
of simultaneously working
at a full-time
job
book did not leave me with
writing
time (or energy) to
enough
give the course the serious attention it calls for\342\200\224a
I plan
personal
project
for later. I can, however,
attest
to the fact that
one of the traders
interviewed
in this book served as a subjectin Dr.
Tharp's
project on
combination
the
chapter,
and
this
success
modeling
and
successful
was duly impressed
with
his
and insight
intellect
into
trading.
market, I had to conclude that the losses had something to do with me.
in a class in prosperity at
that same time period,I enrolled
During
taught in
of Religious Science. One of the principles
Church
local
the
I had read a
that class is that what happens to you reflects your mindset.
of trading, and while I considered most of that
lot on the psychology
to test it out. I decided to do so by
to be \"folklore,\" I wanted
information
a test to measure
Investment Psychology Inventory,
my
developing
investment
and
psychology
I
psychology,
research.
the
connection
affect
spent
For
research interest after graduate school was how various
the country are still
Battery that police throughout
doing that, I also learned how to lose money trading
lost money so fast and so consistently that when I
While
using.
options.
finally
got
creativeproject for that
to R. E. McMaster,the
so I sent it
class.
editor
would take it,
in the class
McMaster took it and then
I was subscribing.
newsletter to which
to a thousand
close
offered it to his subscribers. Overall, I received
as
a career.
responses and that really roused my interest in this area
What
did
there
any
major
I was
In fact, I
out of
the
extra
test? Were
one\342\200\224intuition.
What
are
the eleven
Well,
the
psychological
lack of
Test
the responses to your
in analyzing
surprises?
learn
you
I had severalmeasuresof success built into the test, so I could rank the
literature
according to \"success level.\"The investment
responses
I designed
As
a
result,
be
areas
that
ten different
important.
might
suggested
of
statistical
number
a
I
did
areas.
of
those
each
to measure
questions
betweeneach
correlation
a
significant
analyses of the data and found
that
those ten areas
success. In addition, I found
and
investment
area
I
the
label
into three major clusters, which
could be grouped
and discipline factor, and the
the management
psychological
factor,
I've since refined the test, I still use the same
Although
decisionmaking factor.
the ten original areas, and
three major clusters. In addition, I still keep
rounded
human
performance. After
receiving
my Ph.D. in
about eight years doing fairly
standard
psychological
I helped standardize the current
Field Sobriety
example,
as a
weaknesses,
No one
between
trading?
My primary
drugs
get interested in
and
strengths
I've added an
How did you first
413
K. Tharp
of a
of another
self-realizations
Dr. Van
is
not
significantly
has five
attitude,
areas. These include
the motivation
for results. Motivation
and responsibility
with success, but I keep
correlated
of such
There are three
a solid
factor
personal life, a positive
conflict,
lack
because
areas you measure?
knowledge
motivation plus
factors
in the
of technical
making sound decisions without
high
conflict
is very
decision-making
factors in
common
the
biases,
a well-
to make money,
to make money
it in the test
significant.
area. These include
market,
and the
an aptitude for
ability
to think
414
Dr.
K.
Van
Tharp
Incidentally, knowledge of technical
factors
has little
relationship to success basedon the test scores.
Also, there are three management-discipline
factors.
One needs risk
control and the ability to be patient. In addition, I also include
intuition
in this category.
I have not found
Although
between
any
relationship
intuition
and trading
success, I keep the factor
in the test because it is
Dr. Van
independently.
to me.
interesting
the
are
what
of the losing
characteristics
trader?
of a losing trader would be someonewho is
has little protection from
has a negative outlook
stress,
on life and expects the worst, has a lot of conflict
in his/her
personality,
and blames others when things go
not have
wrong. Such a personwould
a set of rules to guide their
behavior
and would be more
to be a
likely
The
profile
composite
and
highlystressed
in
your
your
I designed
believethat
it's
crowd follower. In addition,
losing traders
impatient. They want action
the composite profile would
now.
suggest.
tend
to be
disorganized and
traders are not as
just have part of the
Most losing
They
bad
just
as
with
many
traders.
How did you
get started in
that?
I started
the test regularly,
using
people began to ask me what to
their particular problems. Since investment
is a
psychology
rather unique
area
of study, I found I didn't know
how
to respond to
As a result, I decided to write
many of their questions.
a pamphlet
on
each of the ten areas\342\200\224both to learn about the areas
myselfand to provide
investors with a source of help.The first
turned into a book. I
pamphlet
decided
at that point to cover the
matter in five workbooks which
subject
would
constitute
a course in the psychology
of investing/trading. After
I
finished
the second workbook, I started
in
training
do about
and
I was
(NLP). NLP is really a science
able to incorporate a number
of
course. The development
service.
consulting
they
were
early
anyone
a matter
I
so.
of learning how.
they hold, yet they
get stuck by the beliefs
people
in
old
contrast, are constantly
those
beliefs.
to
beliefs,
continue to cling
My
to their utility.
them
value
and I think it's becauseI
according
evolving,
are
I'm willing to admit most of my beliefs
probably wrong. For
Thus,
example,there may be people who could not be successfulin trading
even if they were committed to doing so. But right now, it's most useful
for me to believethat anyone can win. When I hold that belief, I am much
become winners.
more effectiveat helping
people
Could you provide somespecific
succeeded
wanted
consult
Programming
what
and who couldn't.
Now,
to predict who could win
can win if they are committed to do
Primarily,
test
the
or
of the
course naturally
Neuro-Linguistic
of how to duplicate
those
techniques
led to a private
case
into my
me
examples
of people who
in consultation?
failed
One trader who came to
You now
success,
concepts changedfrom
losing
profile.
After
ideas and
research?
Too many
those areas,
Given
Have
415
K. Tharp
to get
him
me
hadn't
trading
before
been able to trade for over a year.He
As a
he did the full consultation.
morning for about forty-five minutes. I
he had a
and
made an educated guess that
gathered some information
conflict problem. He then went through an exercise that took about ten
the results
of that
minutes. It took him two weeks to mentally integrate
a
lot
of
He'd
was
he
that
but
after
money
spent
trading
again.
exercise,
and none of it had worked.
and donea lot of things to correct the problem
the
weeks of integrating
and
two
exercise
ten-minute
it
took
a
Yet,
only
result, I had
results
him
drop
to solve his
by one
problem.
person who was unable to afford my
didn't work. His
fee, for whom a simple exercise of that nature
consulting
he was in his
problemhad nothing to do with his investing. Although
late forties, he was still a little boy in that he couldn't acceptadult
responsibilities. He still lived with his mother, and his wholelifestyle
supported
to
able
trade
to
be
was
to
reason
he
wanted
The
a
child.
only
being
without
a
him
that
I
have
I
doubt
could
major
that
continue
helped
lifestyle.
he
which
was
his
to
his
on
commitment
unwilling
lifestyle,
change
part
to give.
I tried
that
with
another
416
Dr. Van
K. Tharp
client made minor
after two days of
adjustments
to do the follow-up
because
he thought it would
be superfluous. But he eventually
probably
decided
to do it. I spent
two days listening
another
to him talk and then we did a simpleexercise
At the end of that
he was a totally
together.
exercise,
changed
person
it
took
him
a
week
to integrate the effects
(although
of that
probably
He
called
me two months later and said he had made
exercise).
over
in
$650,000 trading
the markets.
Another
reluctant
was
He
consulting.
case of a trader who uses a nonquantifiable
approach (for
\"I buy or sell whenever I
example,
about
the market's
get a feeling
direction
from the chart patterns\,") how do
impending
you
distinguish
whether
are related to lack of skill or
trading
problems
psychological impediments to success?
to
a client, I need to know that they have some
they think works. I determinewhat
evidence
on as
that
Can they, for example, convince me? Have
they have of that.
tested
they
that methodology? Does their testing
amount
to a hindsight
evaluation,
or is it based on actual trading
that one can follow. I also am
signals
time
day
At
in a
short
help
them
or trading
wants me to
who
anyone
successfully.
same
the
time,
I think
test
their
that
lack
of skill
is,
in
itself,
a
People don't developa systematic
of poor judgment, lack of
because
to trading.
psychological
impediment
or don't
am skepticalabout
so I
frame,
trade
difficult to make money day trading
it is
that
convinced
approach
approach
goals,
etc. So, perhaps the area they need
help in is overcoming
resistance to developing a systematic
to the market. If
approach
somebodycame to me and said that was the problem they wanted help
I would
have no problem at all accepting
with,
that person as a client.
internal
conflict,
internal
What
are
the
peoplefrom
primary
being
psychological
winning
impediments that keep most
How can
traders?
they
deal
with
Van K.
each of
those problems?
but a few decide that they need a system to trade
leaving the markets,
more effectively.Those peoplewho do adopt a systems approach
from dealing with the market
end up transferring their
problems
usually just
to dealingwith their system of trading.
with
One of the basic problems that most traders face is dealing
successful
rules
to
risk. For example, two
trading
speculative
primary
are:
Cut
deal
with
typically
bring
their
to act
out those
is to
is that
problems
problems,but
when
with
not
approach
The markets
people
them.
to solve
the markets,
are a natural
them. Most
they
place
people end up
short
and
let your
profits
Most
run.
example, if making
most people who play investment
two
those
rules. For
The secondmajorproblem
really takes two
Our brains have
mind
space,
forms:
a limited
is preoccupied
and you
have
people
worry
and the
money
cannot
people
is important to
you
games\342\200\224then
with worry,
is dealing
biological
for processing
capacity
that
worry
don't have enoughcapacity
will
takes
left
their
focus.
the
fight/flight
is
with
fight/flight
stress.
Stress
response.
information. If your
up most of the decision
to perform effectively.
that
it causes
people
to
response
to
earlier
revert
well-practicedresponse
They
make under stress is
a common decision that people
For example,
patterns.
did when they were a beginner.They
not
to decide.
they
They do what
do anything simple. Simple
do what their broker advises. In short,
they
One aspect of
happens
personal
your losses
small
losses. As a result, small losses turn
probably have trouble taking
to take. Finally, the moderate
which
are
harder
into moderate
even
losses,
it
are
forced
to take\342\200\224allbecause
losses turn into big losses, which you
a
have
when
to take a small loss. Similarly,
was so hard
profit,
people
want to take it right
away.
They think, \"I'd better take this now
they
it is to
the profit becomes, the harder
it gets away.\"
The
before
bigger
is that most people
to take it now. The simple truth
resist the temptation
are risk-aversivein the realm of profits\342\200\224they prefer a sure, smaller gain
in the realm
a larger gain\342\200\224and risk-seeking
for
to a wise gamble
of losses\342\200\224they prefer an unwise gamble to a sureloss.As a result, most
cut
of what is required for success.They
people tend to do the opposite
run.
losses
their profits short and let their
is not
a mistake
If you think of trading
as a game and that
much easier to follow these
it becomes
the rules of the game, then
following
at the beginning of the day and
rules
You should review your
two
rules.
If you followed your
at the end of the
review your trading
rules,
day.
even if you lost money, pat yourselfon the back. If you didn't follow
then mentally rehearse what
rules,
you did and give yourself more
your
in
choices
the
future.
appropriate
narrow
What
417
Tharp
you\342\200\224asit
In the
BeforeI take someone
sort of methodology
Dr.
418
Dr. Van
are rarely correct.
solutions
be crowd
to
are stressed, they also tend to
of others providesa simpleexample
When
people
behavior
followers don't have to make decisions,but
sure way to lose money in the markets.
A second important
effect
of the fight/flight
response
Crowd
follow.
following
The
followers.
Dr.
K. Tharp
people to
expend moreenergy.When
people give more effort
keep on doing
what
the few
to
were
with
faced
alternatives
they
do
I find
is
it
that
stressful
events,
consider.
They
do it
harder. Putting
more
energy into trading decisions doesnot help you make more
money.
Instead you will tend to make quick, irrational
which
use up
choices,
some of that excess energy. You probably
more
into
a losing
put
energy
positionby actively
it out. The result is a biggerloss.
resisting
closing
In
they
the fight/flight
to narrow
your
summary,
causing you
doing\342\200\224only
they
response will decrease
your performance
by
choices and concentrate more energy
on the
alternatives.
remaining
The solution for dealingwith
stress
is to
work on the causes and to
I would
develop stressprotectors.
recommend
that people with
this
problem
go into a stress management
Also, it is important
to
program.
understand
that many stressful events are such because
of the way you
them. Change those perceptionsand
perceive
you will change the event
itself.For example,winners
differ
from
losers in their attitude
typically
about losses. Most people becomeanxious
about
losses,
yet successful
speculators have learned that an essential ingredient to winning
is to
make it OK to lose. Sincemost
in our culture are taught
people
that only
winning is acceptable, most investorsmust
their beliefs about
change
losses to become successful.
major problem that people have is dealingwith
conflict.
have different parts of themselves,each of which
has a positive
For example,
someone might have a part to make
money, a
him from failure, a part to make him feel
protect
about
third
The
People
intention.
to
part
good
which
himself,
a part
you
establish
What
carry
their
I'm not
helping
just
parts, you usually
is the parts
happens
allow
family, etc. Now,
to operate
once
them
new behaviors
to
continually
adopt
those new behaviors can produce
Sometimes,
This model of conflict is one of
my most useful beliefs.
that
saying
people
have to
of the
welfare
intentions.
conflicts.
major
the
these
subconsciously.
out
looks after
people
solve their
make
them
actually
trading
aware
have parts,
problems
of their
but
for me
parts and
then
it is
very useful
to believe
conduct
negotiation between the parts so that each part is satisfied. If possible,
so that they join together.
also want to integrate the parts
you
crowd
is a
causes
419
K. Tharp
Van
that.
in
You
a formal
the
other a
each
with
of people having different parts in conflict
Could you provide an
difficult
to conceptualize.
concept
little
example?
I worked
was
good model for him,
not a
he developed
a result,
He couldmake
than
trader whose father
a floor
with
about
that, this
in to
successful.He was the one
after we had completedthe
Are you implying
level
subconscious
that
because
he
like his father.
made any more
not become too
being
if he
but
make sure that
who made
would
$650,000
in
two
about
months
negotiation.
parts
some
from
trading,
actually
people
it fulfills
want to lose
some other positive
on a
How
intention?
is that?
common
Halfthe
per year
$75,000
father
he was an alcoholic.As
in that
however,
His
successful.
fairly
a part to protecthimself
kicked
part
was
I work with
traders
have problems
of this
I think
nature.
it's very
common.
So far,
to
peoplehave
A fourth
control
cited
you've
impediments
trading
with
the
major
problem
poor risk attitudes,
success. Are there
conflict
as
problems
markets?
is that many
people allow their
In fact, most trading
trading.
in
some
manner. I know
control
their
emotional
stress, and
any other major
problems
appear
emotions
to
to involve
of at least ten methods
easy method that people
of helping
can adopt
states.
people control their mental
and
muscle
tension.
right away is simply to controlposture,breathing,
find that you change your
If you change those factors, you will probably
An
emotional
state.
there
decisions.
Although
Finally, the last major problemis making
are many facets to decision-makingproblems,what most people do is
the markets.
normal
method of making decisionsto trading
their
bring
in order to buy a new car.
For example, think about what you go through
to think about the model,
You
have
make, deal, service, cost, accessories,
420
Van K.
Dr.
Tharp
etc. And it probably takes you a weekor more to evaluate those factors
and make a decision.Most people
bring that same method of making
decisions
to trading and it just doesn't
work. It takes too much
time.
So,
the solution is to adopt a trading
that
to
act. But
system
gives you signals
people with a trading
of making decisions to the
And, of course, that doesn't
most
dealing
with
them
circuit
long,
work.
learn to eliminate
problems. I think
that negative
are just
they
cases, I don't believe
produce
it's
success\342\200\224you
manner.
effective
trading
system.
found of
The best
method
The
even
simply
teaching
of the
short
too
is a little
process
if they
traders
the
basic
of
cause
problem.
trading
In most
necessary to solve specificproblemsto
to teach people to do things
in an
have
process, however, involves
with
working
that.
people think, and most trainers do not emphasize
I
Right now, I consider myself to be an expert modeler. By that,
mean that if someone can do something
then I can figure out how
well,
else. I'm concentrating on
they do it and teach those skillsto anyone
and investment
excellence.
So naturally,
I believe
that
modeling trading
I can teach anyone who is committed
to being a successfultrader
to be
one of the best.
how
you can
duplicatetheir
superior
because
they
traders
have
better because of
better
emotional
keener
analytical
or
skills,
son
was
(who
but
I think
So
does it take to
what
There
mental
are
three
states,
tradersuse those
primary factors involved in duplicating
and mental strategies. If you duplicate
three
factors
for every
aspect of the
success\342\200\224beliefs,
the
trading
way the
task,
best
then
most
experts
which
well,
is that
they
means
they do them
are
unconsciously
about
think
factor: beliefs.How
talk about the first
to trading success?
Let's
Let me give
you
were then
able
skills of the
two
a
training
to develop
are
from another modeling
an example
the rifle
modeled
best
beliefs
project.The
in the
sharpshooters
for Army
class
four to
important
recruits
Army
U.S. They
in
which
reduced the training
increasing
days,
the qualification rate from 80 to 100 percent. In addition, they were able
to help the top shooters
to use the same knowledge
improve their skills.
time
they
The information
they
gathered
from
while
two
about shooting
beliefs was particularly
revealing.
two top
shooters, for example,believed:
\342\200\242
well
\342\200\242
is fun.
is important for my
is important to
rehearsal
miss a shot,
it
has
something
survival.
successful performance.
to do
with
my
performance.
when they were in competition together,
the two in
won.
And you could tell the difference
between
always
believed that it
accordance with
their beliefs. For example, the best shooter
the prior evening,
to rehearse an entire 1,000-round match
was important
whereas the second best shooter only believed that mental rehearsal was
to
important. In addition, the best shooter believed that it was important
One of
duplicate successfultrading?
behind
power
at driving
are unconsciouslycompetent
who
do
it.
someone
it
when
When
even
you
she
what
he
or
is
doing to
competent tries to explain
someone else, much of what is important is left out. Thus, my focus is
and help people install
those
to discover the missing
pieces.
pieces
\342\200\242
If I
overemphasized.
time) how to do it. That's the
at the
a car. You don't
is unconsciously
\342\200\242
Mental
are
martial
most people
example,
Shooting
of those factors
ten
What happens with
They do things
competent.
control?
that both
nontrading example, most
modeling.
Hunting
Better emotionalcontrol,
As a
results.
believe that it takes years of practice to break a board with
experts
someone
for about fifteen minutes
bare hand. I was able to observe
your
and then break two k-inch pine boards with my hand. I even showed my
arts
The
Are
421
K. Tharp
Van
For
automatically.
emotions are
a symptom
I've
that
problems is to
most people can be successful
negative emotions?
assumes
that
Well,
method
that
believe
you
normal
called anchoring.That
involved to explainhere.
Do
their
their
decision-making
a process
through
given
signals
ineffective
to apply
to them by
continue
system
Dr.
the
two
top shooters,
Dr. Van
422
center of the
hit the
eye on each shot (even though
whereas
the second best shooter
bull's
extra points for that),
was only important to hit the bull's
eye. Can
was better than the other just from their beliefs?
Now, contrast the beliefs of top shooters
recruitscoming
into the Army. The latter
might
\342\200\242
Guns
they kill people.
shoot this weapon too many
they
miss the target,
\342\200\242
If
they
on beliefs
just
shooters
were so much
Now, let me
traders. You
interviews
Trading
one
why
You mentioned
that
start.
I can
beneficial
of new
winning trader,
be reversedfor
on skis,
expert
slope
might
expert
trader
The
top
game before they
won the
they've
easily seehow suchconfidence
Although
the established
week
first
know
winners
for
trait actually
I find
the
novice
be
would
of this
impact
For example, in your
the
might
trader?
confidence about your ability to go down the
not be such a great quality.
How
does the less
justified and
between
distinguish
most
lot of money, and
misplaced confidence?
the
other
is important for
before
you
five
makes
success.
critical
Most people
of the
have
think
beliefs,
I
reasons
primary
they
five
these
think
a
to make
approach trading
lose. Because
trouble taking losses and letting
profits
of trading as a game
and play by certain
much easier to
the little
follow those two
and
rehearsal
all the
know
extensive
trial and
they
rules.
golden
error
in
planning,
their
are going to
setbacks much
easier to
deal
win
mind
in
with.
the
As
major differences betweenjustified
confidence. First of all, justified confidence
of beliefs, such as the one I just described.
comesfrom a constellation
If a trader has confidence
in a lot of
and nothing else, he is probably
trouble. Second, justified
confidence
comes
from extensive testing
of
some sort of model of trading.
If you don't have a model that
have
you
I believethat
there
are three
and misplaced
is probably misplaced. Third,
extensive
commitment
to being
justified
successful
as a trader. Most people who want
to be traders
are not
think they are. There is a poemby W. N. Murray, of
committed\342\200\224theyjust
the
Scottish
the moment
that one
Himalayan
expedition, that says: \"That
commits
then Providence moves too.\"
oneself,
definitely
tested,
then
If you
have an
really
at
understanding
probably even understand
losses. If
probably
but
saying,
events
you
confidence
with an
then not only are you certain that you
committed,
but
somehow
events just seemto occur to help
right
thing,
are really
to being a trader,
committed
then
you probably
are
are doing the
you. If you
your
comes
confidence
start.
they
of how to
wanted
do
to
they
extensivelyuntil
win. At this point, they had both the
developed
would
with an
models
commitment necessary to producesuccess.In
had the entire constellation of beliefsI just described.
also
they
a result,
confidence
believe:
top traders
they
careers
refined
and the
properly
In addition, because of mental
traders
have alreadygone through
top
before they begin. As a result, they
that
top
markets.
the game
they
when
it becomes
long run, and
with
addition,
working
that
their
began
and
what
rehearsed
the belief
confidence
important.
important.
is one
that
money is soimportant,
In contrast,
top
recruits.
in
markets. They
of the
had
they
the
worked with
that I've
traders
extensivestudy
trade. Theymentally
why
beliefs confirmedin
that
deaf.
is misaligned.
to understand
begin
the raw
might go
they
of my findings
a lot more than
there are
times,
game.
won
They've
can
of these
some
rehearsal
\342\200\242
rules, then
it
believe:
the gun
means
some
lose in
is a
\342\200\242
Mental
run.
than
find
OK to
\342\200\242
the
better
is NOT
Money
are among
you
book. Generally,
\342\200\242
\342\200\242
It is
it
alone,
explain
might
in your
Although
believed that
the beliefs
with
get
423
K. Tharp
Van
are evil;
\342\200\242
If
I think,
didn't
you
understand
you
Dr.
K. Tharp
are
that
not committed,
\"I don't
certainly
some
level of
those
on
what
events
the
other
I'm
talking
that help
hand,
you
You
about.
might
then you
be big
are
understand what Tharp is saying. I'm committed,
have not been helping me.\"
Dr. Van
424
you mentioned
Earlier,
If you
of
ask
two
to list
people
blaming
consist of blaming
or locals,blaming
floor traders
their
broker, or blaming
system
other
tendency to blame something
Society
promotes it. For example,the
insider
for what
implies
virtually
trading
problems, they are
and mental state control
own
don't
they don't own
Problems
second critical factor
you mean by that?
or investment
trading
they
types\342\200\224problems
problems.
what
explain
you
their
as the
states\"
\"mental
in modeling success.Could
K. Tharp
goes wrong.
than
We
for
media
coverage
lost
who
markets,
blaming
have
ourselves
recent
that investors
trading,
the
what
money
their
a natural
425
K. Tharp
notice how other people walk. Duplicatea dozen
or so walks for
yourself and
notice how your mental state changeswith
each
one.
I'm not saying
that controlling
your mental state is the magic
solution to trading
success. It's just part of the answer. But when
you admit
that the answer is within
come a long way. The
yourself,
you've
realization
that you are responsible for the results
you get is the key to
think
their
losers
results;
not.
are
they
are responsiblefor
know they
Winners
successful
investing.
happens.
of program
in the stock
rather than because of any fault
so because of this activity,
own. Yet, when
you
something other than yourself,
you blame
it was the result of something
because
can continue to repeat the mistake
give a practicalexampleof
mental state?
Can you
their
can control
someone
how
did
market
of their
beyond
control.
your
thing an investor cando, when things go wrong, is to
I don't
mean that you
determine how
he or she produced those results.Now,
that
I
at some
mean
mistakes
either.
should
blame yourself for your
point
those results.
in time, for any situation,
you made a choice that produced
to
Determine what that choice point was and give yourselfother options
in the future. Change the
a similar choice point
take when you encounter
the
and you will change
decision
at similar choice points in the future
can
make
it
so
results you get. And by imagining
now,
easy
doing
you
in the future.
to select those alternatives
When people own their own problems,
they discover that their
Common examples
sort
mental
state.
of
results
usually stem from some
The best
are:
\342\200\242
I'm
at the
get angry
\342\200\242
I'm
\342\200\242
I'm
sort of
use
mental
at the
afraid
body
about
a few examplesof
state problem,
problem is within
posture,
state. To
try
markets.
your
you
will
mental
control.
chair. Noticeyour
imagine
feet
like
and then
to change. Get up out of the
look at how you looked in that
your facial expressions.Then
your breathing,
would
if
look
had
the sort of mental state you
you
you
When you can see that clearly,
sit down in the chair again
the position that you just imagined.
That exercise works for
situation
as it involves several important
like.
assume
almost any
posture,
posture,
principles\342\200\224changing
your
body
and
I
call discipline.
people
how
would
and
would
you
chair. Walk away about four
a more
imagining
seeing yourself from
state.
a more
objective
viewpoint,
element
you cited
resourceful
Please elaborate on mental
earlier as critical to duplicating
third
strategies\342\200\224the
Could
success.
problems.
do something
I've already
strategies,
you have to understand
same modalities as their five
understand
you provide
about
Once
it
some
senses,
this
mentioned how one
one's
breathing, and muscle controlto manipulate
and
mall
into
a
out for yourself, go
this
shopping
elements,
strategy
but
the
is really
Rather
beyond the
than
scope
way
the
in which
sequence
explain
of this
the
elements
in which
some
for
and
you
are put
think.
people
that is,
images, sounds, feelings,
people,
smells. Those five modalities
are to mental strategies as the
to a great novel, or as musical
notes
are to a great symphony.
you
because
how
in the
think
of visual
happen.
state
are
you
state that
a mental
in
People
what
can
are
most
what
that they can use right
For
procedure
away.
at your desk and you become
aware that you
simple
suppose
example,
is
manipulation
teach peoplea very
To
time.
wrong
state
mental
Well,
examples?
markets.
too optimistic
These are just
identify a mental
with the
too impatient
\342\200\242
I
can
Dr. Van
together.
terms
in
tastes and
is
alphabet
It's
A
not the
mental
think.
a complex topic in
interview, let me give
detail,
you
which
I think is
two examples.
First,
Dr. Van
426
that
K. Tharp
Dr.
that
you specific signals.
gives
or
as
a
Since most signals
visual,
particular chart pattern
that
on your computer, imagine
certain signals
system gives you visual
your
signals.Now, try on the following strategy:
imagine
a trading
have
you
\342\200\242
See
the signal.
\342\200\242
that
Recognize
\342\200\242
Tell
yourself
\342\200\242
Feel
bad
Could
you
the signal?
effectively
Probably not! What
go wrong
if you
that
using that strategy? Would you even take
if you used the following strategy?
familiar.
The intuitive
that signal? Probably. So even
though
similar,
they lead to very different results
Two of the top traders that
completely
while
Could you contrast
First,
fact,
similarities
developed
you
used
different
a simple strategy
in your
trading
in
two
of
terms
like
the
research in modeling
styles. One is very
approach.
similarities?
because
they are extensive. In
similarities between two excellenttraders
those
can begin to assume that
you
similarities,
so different, then
for example,
Both
are essential to successful trading.
traders,
research
did
extensive
and
markets
work
the
for
how
models
test
those
so at
in contrast,
that
believes
also
it is
test
his models
that point,
decision making
his
from
the
has developed a model of how
a model of how to trade
are constantly
markets
keep
developing
by
than
rather
more important to
that
trades
Although their ideas are very different, I think the
some
sort of model is probably very
of developing and testing
process
I
important. In addition, both traders share all the same beliefs that
traders
are
both
as common to successful traders.Third,
mentioned earlier
to
He
successfully.
visualizations.
more
intuitive
uses a much
their differencesand comparetheir
the other
let me talk about their
you find extensive
when
seem
who
the
trader,
markets operate,
thinks
from
does everything,
for him.
is easy
strategies are quite
trading. If you are trading a system, you need
last one in order to use it effectively.
mechanical,
The computer
picture.
it is
427
in life and as a trader.
believe
very aware of their purpose
They
they are
and they just go with
the flow.
picture\"
part of a \"bigger
The mechanical trader is very logical. He constructs
his models
in his language and
visually in his imagination. He is very precise
tend to focus on his concept of how to trade
models
thinking. His
and of how the economy works.Hedoes
not believe
that his models
successfully
are adequate
until
can
be
converted
into
for the
they
algorithms
his
own
that
a
match
mental
As
result
of
this
belief, he
computer
processes.
has computerizedhis models,modifying
both
his constructed
image and
his computer output,
until
both models match\342\200\224in his words, \"until they
both look right.\"
This
is a very slow and laboriousprocess.I think
it
hinders
his decision making on everyday
and he tends to agree
events,
with
but it helps him in the long run. When his mental image and
me,
the
model match, he virtually
himself
takes
out of the trading
computer
about it.
good
trade
success have
take it.
the signal.
Recognize
\342\200\242
Feel
you
familiar.
what might
\342\200\242
Could
it is
about it.
trade
\342\200\242
See
system
such
are
K. Tharp
Van
with
up
changes
an algorithm
to
he
evolving and
market than to
computerize them. He
in the
of what
the markets
will do, which
expectations
But I think
that he tends to convert his visualizations
are
into
are a mode of thinking,
but they are difficult
or to computerize.As a result, he believes that
exercises
such as computerizing a trading
are a waste of time.
system
Rememberthat his main emphasis is to explain how markets
work
(rather
than how to trade), and he believes
that
the markets
are constantly
a result, he has difficulty
how he trades to anyone
evolving.As
explaining
else. He just calls it intuitive.
At the same time, he makes day-to-day
decisions
contrast
to the mechanical trader who is
easily\342\200\224adistinct
Feelings
feelings.
to communicate
uncomfortable
until
What
are the
I
there
actually
to others
he has
proven his work
most difficult
by
it.
computerizing
to solve?
problems
models.
think
to trading.
two
are
not
People
are only
difficult
going
problems.
to do
One
what I tell
are committed to becominga good trader,
so I
is lack
them
of commitment
to do
unless
don't see many
they
noncom-
Dr. Van
428
traders. It's
mitted
that
consultation,
to remain
wanted
of accomplishing
of
a little
boy,
was
that,
gets
sort
I do
although,
problems,
don't own\342\200\224even my
me,
The man
use trading
trader
to repeat
continue
they
or reduced-rate
as
example. I don't make the
source. Once again, I usually
When people come to
a free
of problem.
was trying to
and
a classic
This personcan
at the
this
with
traders too often.
difficult situation is the
most
second
The
his problems.
he never
traders
noncommitted
seeing
when
occasionally,
only
I see
K. Tharp
realize
to some extent,
because
people.
own
their
everyonehas problems that
they
clients.
the people who come to see me, I think the most difficult
the
crave
compulsive gambler. Sincethese peopletypically
type
until
to
want
are
not
action of the markets,
they are
my help
likely
they
or
to
Gamblers
I
them
refer
into debt. At that point,
Anonymous
heavily
trader
I have had one compulsive
to some localsourceforhelp. However,
channeled
clients.
He's
now in my super-trader
his compulsiveness
from
the
markets
program. I've
into
working
into
born from thosethoughts.
Among
my
The
capableof
is the
among
with
together.
popping
429
In a sense, I felt that
him.
we had only started
working
more I thought about it, the more the question kept
my mind: \"What if we pushed this to the limits? What is he
So the idea of the super-trader
accomplishing?\"
was
program
working
mistake
see these
that they produce
K. Tharp
a means
who does not own
his problems
don't
who
Dr. Van
simply
on
I called
him up and suggested the idea to him.
he
all
for
was
it.
Naturally,
About four of my clients
have now graduated to the super-trader
It
means
I
that
continue
to work with these people on
program.
simply
a regular basis (usually
The idea is to stretch their
semiannually).
performance
to the limits.
for that, but I have
Many people aren't ready
who are. Who knows, in three or four years,
enough among
my clients
I might just have about fifty top traders that I work with on a continual
basis! Incidentally, I find that my best clients now make excellentmodels
to use
to study top traders.
I sometimeshave
direction.
Although
dreams
which
are rather
these
percentage of the time.Is this
involve
impending
infrequent,
they
market
a high
prove
right
me that
all the time,
and intuitive
unusual?
himself.
is always the answer
problems
correcting trading
would
a
on trading
class
to
one
For
teaching
approach
though.
example,
in the first session and a simple
be to give everyonethe fundamentals
the remaining
in the second. You could then
spend
trading
system
That would
that
their
with
sessions
system.
problems trading
dealing
could
conduct
other
On
the
class.
hand, you
probably be a very effective
Then
them the fundamentals.
the same class by giving
might
give
you
and mental strategies necessary to trade
them the beliefs, mental
states,
I'm willing to bet
the system.
the
Finally,
you might give them
system.
than
the first. At least
the second
method would be more effective
that
I'm heading.
that
is the direction
I'm
not sure that
I imagine
that it's
especially top traders.
direction
of your
super-trader
program.
Eve one
It all began on Christmas
told me that he had made $650,000
year, when that one trader called and
since I had finished
in the two months
For example,both
people tell
the
mechanical
about earlier expressed that they had dreams
amazingly accurate. But most traders say that
such dreamsare infrequent
so that they could not trade on them
enough
even
occur more frequently
regularly. This phenomenon
than
one
may
form. But most people do not bother
might imagine\342\200\224in symbolic
to
their
so they miss the symbolic
dreams,
interpret
predictions.
However, I
must admit that although
it interests me, I have not investigated this area
super-traders that
about
very
the
market
we
talked
that were
extensively.
I know of
lots of
people
comes
from
level who claim that some of
Michael Jackson claims he
doesn'twrite his songs\342\200\224they just come to him. Paul McCartneysaid
that
he heard
the song \"Yesterday\"
in a dream.
Einstein essentially
dreamedthe theory of relativity. I think there are probably a lot of famous
examples of this sort. It all boils down to what intuition
really is, but
their creativity
and
Talk about the origins,concepts,
because
common
quite
of genius
their
dreams.
don't ask me to explainit. I don'tunderstand
it\342\200\224YET!
Dr. Van
430
that the
I assume
perceive that
your
it
reason you have not
would
clients. Yet, given
all that
trading during the past five
to
temptation
try
it again.
tried
with your
interfere
you
years,
have
trading
in
with
dealing
about successful
there must be some
this conflict?
What
learned
I imagine
How do you
is that you
again
objectivity
K. Tharp
handle
do you envision as the long-termresolution?
There
about
two reasons
are
objectivity
I don't
conflicting positions,then
are doing.
trade.The
with clients. If
An equally
I may
important
I'm
first
helping
is the
Trade
The
reason
someone
mentioned
you
and I
trade
not be very objective about what
is that I am fully
however,
reason,
A Personal
have
Experience
they
other
to doing
what I am doing. I love helping
writing,
people,
a
is
also
that.
It
I'm
on.
and
so
sixty-hour
talks,
happy
doing
very
giving
then I would have to
I
trading,
per week job right now. If wanted to start
devote almost as much time to doing that, at least at the beginning.
Why
I love doing? Player
should I do that and give up what I already know
are not that effective at
coaches, in the history of most sports, usually
or
either coaching playing.
also assumes that I am committed to trade, and as a
Your
question
more
into
I find that as I get more and
there
is a conflict. Actually,
result
in
interest
trading
helping others become successful,I have less and less
committed
myself.
constantly
I'm investing
work
off forme.
in
myself
and
in my business
right
now.
at improving
my skills and knowledge, and that
I
that effort? Perhaps sometime
dilute
should
Why
I
is paying
in the
I can do, or perhaps I'll
that I have done everything
future,
to change
what I'm doing, or perhapsI'll just want a break. For
want
I might
with
three
to four years from now
fifty
just be working
example,
I'll
trade.
also
then
If
that
traders.
or more top quality
maybe
happens,
But for the near future, it doesn't seem very likely.
I will
In the
one of my
primary motives for the
self-discovery.Although
I had
extent
of my
as the
fact
length
I had
about
my
about
a probing
Ed Seykota.This
trips
winnings
my trading.
for this
were small
back-to-back
experience
and
over the
for
years
separate
Given the
trading,
anticipated
as well
major
potatoes comparedto
book, on one evening,
my trading by Dr. Van Tharp,
conversation
about my trading
to
was a quest
project
knowledge and experience about markets
that on numerous occasions I had
correctly
In one of
at
I came
book,
been a net profitable trader
a small initial
stake
on two
price moves, I felt that my
I should have made.
what
decide
this
entire
I have
multiplying
a definite sense of failure
(substantially
occasions),
the interviews for
of conducting
course
realize that
I was
interviewed
very next evening,
with
the very perceptive
caused me to focus intensely
what I perceived to be
reaching
and the
that had prevented me from
true potential
as a trader.
my
As
a result
of this self-examination, I came
to realize
that one of
errors had been failing
to exploit
great
moves
my
I had
that
major price
initial
correctly anticipated. Invariably,
would
be
far too
my
position
the potential
I perceived in such trades. This mistake was
small,
given
then
of the position.
compounded
by a highly premature liquidation
I
would
take profits on the first leg of the price move, with
Typically,
the intention
of reentering the position
on a correction. The problemwas
on
the flaws
The
432
that subsequent
corrections
refusing to chase
the
I ended
of my reentry points and,
the rest of the price
short
fell
usually
market,
up
The Trade
Trade
watching
I vowed to myself that the next
I was on the sidelines.
while
to
would
arise, I would make a concentratedeffort
time such a situation
of the trade.
come closer to realizing the true potential
I did not have to wait very long. Two weekslater, while on a plane
I was thinking about my
interviews,
to Chicago to conductsomefurther
I
the
review of the price charts
previous evening. recalledthat I had come
moveunfold
metal prices were ready
the foreign
currency markets appeared
though
to further
vulnerable
price erosion. Suddenly, the trade I should have made
becamecrystal clear. Given my combination of expectations,a trade of
would be particularly
currencies
foreign
long precious metals and short
in the same
move
direction, the
markets
these
attractive.
normally
(Since
in
less risk than an outright
long
position
combined positionimplied
this
on
trade
some
charts
note
to
made
a
mental
I
precious metals.)
generate
away with the distinct
to move higher, even
first
at my
opportunity.
a quote
machine capable
morning, I found
various
and sat down to evaluate
price relationships.
next
The
price charts
at
looked
and
the
silver/Swiss
to one
was
my
preferred
silver, gold, and
buy
among
of generating
First,
platinum
I
and
the metals. Then I
the various foreign currencies
currency.
appeared to be the weakest
I then reviewed charts of the
made these two determinations,
from
ten years
ratio for various time spectrums,ranging
franc
the
decided
Having
between
interrelationships
that silver
decided
reviewed
that precious
impression
between
interrelationships
that
the Swiss franc
month.
were at the brink of
Swiss franc.
the
of silver relative to
advance
a possible multiyear
me
I had intended
not to trade because my traveling
prevented
Although
of the trade seemed
to the markets, the potential
attention
from paying
I had to put on at least a base position. To be done
that
so dynamic
in
a ratio trade requires approximately equal dollar
positions
properly,
it
that
at
the
I
levels,
market.
calculated
each
prevailing price
quickly
balance
one
to
silver
three
contracts
would
long
require
approximately
short Swiss franc contract.
franc price ratio.
I lookedat a short-term chart of the silver/Swiss
in the directhe price ratio had already moved sharply
To my dismay,
This
analysis
led me to
the
conclusion
that we
433
trade since my realization
about it the previous
morning's opening, the trade could have been
implemented at much
more favorable price levels.As I was trying to decide
what
to do, the silver/Swiss franc ratio
continued
to move higher and
I decided that I had to act to prevent
the possibility
of missing
higher.
this
trade
I
called
in
an
order
the
altogether.
immediately
establishing
minimum position of long three silver contracts and short one Swiss
franc
contract.
No sooner had I placed the order
than the price ratio
intended
of my
tion
on that
morning.Even
seemed to reachits
further
during
implement
and began
peak
two days. As it
at the exact worst
the next
trade
the
inception of my
idea.
possible moment
in
the silver/Swiss franc
However,
few days later I was
and a
recovered,
quickly
retreating. The ratio pulledback
turned out, I had managed to
since the
time
price ratio
ahead.
well
At this point, I thought
about
my recent realization regarding
my
continued
failure to adequately profit
from
major price moves. I decided
to
maintain
up
doubling
followed
and, moreover,
position
my
the
position.
my game
plan.
My
timing
rebounded in my favor\342\200\224this time
my account size (approximately
silver/short two
would have
I normally
during the
two
following
for
point
$70,000 at
the time),
the long six
was about twice as large as the one
efforts
to correct my aforementioned
as the trade raced in my favor
off,
Within a month
of putting
on the trade,
position
held. My
to be
seemed
flaw
trading
franc
Swiss
selecteda reaction
came about a week later and I
proved
good, as the trade once again
with double the initial
Given
position.
correction
The
paying
weeks.
my account was up over 30 percent.
I now faced a dilemma:
On the one hand, my new-found
realizationsuggested
that I hang on to the trade
for the long run.
On the other
one
of
other
rules
is
if
that you are ever lucky enough to
hand,
my
realize a very
take it, because you will
large profit on a trade very quickly,
to reenter
the trade at considerably more
usually
get an opportunity
favorable
levels.
The second rule came to mind
when
the silver/Swiss
franc price ratio began falling.
examination of the
A cursory
to take
prudent
to
reach
a decision.
new job, while
little
the
necessary
partial
However,
at the
and energy
time
doing
at least
I should
profits.
the
same time
suggested it might be
have done more analysis
of having undertaken a
book, left me with
very
charts
price
combination
writing
this
to focus on other areas\342\200\224trading
work, I made a snap judgment
included.
to stay
Instead
with the
of
trade.
434
The
The trade
now moved
a week, I had
me, and within
against
swiftly
a significant portion of my earlier
gains.
a week earlier, I had rationalized
Although
of a comfort cushion
profits would give me enough
Trade
given
back
reaction,
the
my substantial
event of a
reaction had occurred,I found that I had seriously
I was concerned that I might
level. Suddenly,
back all my profits, and possibly even ride the trade into a loss. I
such a
that
now
misjudged
give
that
in
could not
comfort
my
whether
decide
to blow
out
of the
trade or
stay
with
it as
planned.
initially
That
but not
about
a dream.I was talking to a friend of mine, who is
for the analysis of futures
and options
markets,
We were
my dream, he had begun trading.
talking
night I had
a developer
software
of
a trader.
and
trading
In
my current
dilemma regarding
the
silver/Swiss
franc
position.
they
My friend commented on my
want
out of the markets.\"
predicament,
I replied,\"You
\"Everybody
sound
just
gets what
like Ed
he did
Seykota.\" This soundeda bit odd to me, since as far as I knew,
To
he
\"I
have
been
answered,
Seykota.
my
surprise,
for a while and I have been winning in my trading ever
talking to Ed Seykota
not even know
since.\"
Hehad
with
one of the columns indicating
equity. I glanced at the sheet and was
astounded
to see that the last figure
exceeded
$18 million. I exclaimed,
I hope you plan to take
\"Bert,
you have made $18 million in the market!
a few million
out for safekeeping.\"
\"No, I need all the money for
I said. \"Take $3 or $4 million
\"But that is crazy,\"
out,
trading,\" he replied.
and that way you will be sure then that no matter what
will
happens,
you
come out way ahead.\" \"I know what I am doing, and as long as I do my
homework
on the markets every day, I am not concerned,\"
he replied.
His answerhad implied,
do
quite correctly, that I did not diligently
unstated,
my homework on the markets
every day. His point, although
was quite clear: If I did my work on the markets every day,
I wouldn't
have any trouble understanding
he did not need to pull out several
why
million
dollars in profits from his accountto feel confident
that he would
not lose back all his profits in trading.
\"You
to do your work on
say you don't have enough time each day
the
markets.
You are too busy
with
and
new
book.
job
your
writing
your
letme
He
show
started
Here,
you
something.\"
citing assumptions regardhis
a sheet
month-to-month
in front
ending
of him,
The
435
Trade
sold, and the total hours I
scribbled various calculationson a
he
a final figure of $18.50 per hour.
\"Here,\"
his
voice
The
tone
of
on
book.\"
said, \"this is what you are making
your
in my
of dollars
implied that I was crazy to jeopardize tens of thousands
is
the $18.50 estimate
sum.
(Actually,
trading for such a paltry
sales of my book,
the book.
had spent writing
pad. He arrived at
yellow
ing the
probably
wildly
overinflated,
It was no
editing the
section
He then
but remember
coincidence that
of the
per copy
royalties
Marty
this
this
dream
Schwartz
was
a dream.)
occurred
interview
the
night
after
dealing with his
I realized that
to do
you have
diligence in doing his daily homework on the markets.
there are no shortcuts.If you want to be a good trader,
is not enough time, you
work
on the markets every day. If there
your
from
this daily discipline, in
for
The
costs
to make time.
have
straying
as
as well
terms
of lost profit opportunities
losses, can be very
out was: If you
substantial.
The message
my subconscious seemed to be crying
time
are going to be seriousabout
trading,
you have to reestablish your
priorities.
Postscript
Dreams and
The
may
In that
discussed.
of our
up Seykota's
interview
instance,
conversation in
sincethe
possibly
look
was another
There
chapter
found
have
nothing,\"
\"Absolutely
dreams
between
relationship
Readers
was
the
in
and trading
and Tharp's
is a
subject.
fascinating
commentson this
this topic
which
Trading
matter.
was prominently
for use
the trader decided to rescindhis approval
book. I was somewhat puzzled by his decision,
basically
so offensive
he replied.
out that he
complimentary.
as to back out
\"In
fact,
could
\"What
you
I asked.
completely?\"
you
made
me sound almost
was upset about his inclusion in a
and
that
he
was
book
to his appearance
adamantly
opposed
recently
published
failed
to change his decision.
in any
book. Even the offer of anonymity
I did,however,
to get his permission to use the dream-related
manage
in the following
of
the
interview.
(The name references
portion
It turned
human.\"
been
conversation have
In 1980, the
limit.
say,
now?\"
One
\"Hey
year
night
Jerry,
\"$4.07.\"
cents? Are
my entire
you
changed.)
when
corn set its
record high,
I was
I had the following dream. I'm talking
is corn going to?\" \"To $4.15.\"
where
long the
position
to myself
and I
\"Where is
corn
all that risk for an extra eight
mean you are taking
I woke up in a flash. I knew I had to get out of
crazy?\"
\"You
corn position
as soonas the
market
opened
the next
day.
438
Postscript
the market
morning,
moved
a little
opened up a little higher, and I started
higher, and I sold more heavily.
The
market
moved up some more.For a minute,
I thought
the floor broker
had executedmy order backwards.
He hadn't.
a few minutes
Anyway,
later, I'm completelyout of my position
and the phone rings. It's my friend Carl, another
good trader, who had
also been long corn. He says,\"Jerry,
is that you doing all the
I
selling?\"
tell him, \"Yes, I just got out of my entire
are you
position.\" \"What
where
is corn going to?\" \"About
doing?\" he shouts. I say, \"Carl,
$4.154.20,\" he replies. \"Where
is corn now?\" I ask him. I hear
an immediate
click over the phone.
He didn't even waste
time
any
next
The
selling.
market
The
saying
And was that
It might
have
it started falling,
the top of
gone
the
corn
good-bye.
market?
up another day, but that was just about
never have unloaded a position
I could
the
high.
of my
Once
size.
I found
this trader's
narration of his dream particularly
since
fascinating,
I have occasionally had similar
I have found
experiences.
that
Usually,
when you feel strongly
about a trade (either getting
in or getting
enough
out) to dream about it, the message
should be heeded. Of course,like
else, this does not work all the time,
anything
but I believe it places the
more
As
in your
I interpret
favor.
it, the
penetratesthe barriers we
of a market.
For example,
it is
dream is the
means
by which
sometimes erect in accepting
if I am bullish
and not in a
our subconscious
the true
that
market, I might
the
to
technical
time
the
everything
they typically hold a trade
styles of the traders are very
minutes
from
ranges
employed
purely
of
The length
methodologies
from
spectrum
in between.
entire
the
fundamental\342\200\224and
purely
The
success.
different,
many
to years. Although
denominators
common
were evident:
1. All
their
2.
had a
interviewed
those
traders\342\200\224in
analysis
prudent to wait for a reaction before entering
the
trade\342\200\224even if a realistic
assessment would suggest that such a
development
is unlikely.
This is because entering
the market
at a higher price is
a confirmation
to some extent, I have alreadyfailed
that,
is, by not
(that
sooner)\342\200\224a distasteful
In such a case, a dream
buying
acknowledgment.
that
the market was going to run
on the upside might
be the
away
subconscious'
of
mental
way
breaking through
impediments.
rationalize
by
holy grail to trading
\"market
wizards\" cover
is no
There
odds
Word
Final
cases,
many
successful
to become
significant obstacles to reach
overcoming
goal.
All reflected
confidence that
run. Almost invariably,
and safest investment
3. Each trader had
remained
amount
they
could
continue
their
take
to win
their own
considered
over
the long
as the
trading
best
money.
a methodology
that worked for
approach. It is significant
frequently
The top traders
substantial
they
for
found
to that
true
word most
4.
desire
driving
that
him and
discipline
was the
mentioned.
their
of their
trading
very seriously; most devote a
waking hours to market analysis and trading
strategy.
5.
Rigid risk
of virtually
control is one of the key
all those interviewed.
elements
in the
trading
strategy
440
6.
Final
In a variety of ways, many
having the patience to wait
present
7.
for
the traders
the right
stressed
trading
the
of
importance
opportunity
to
itself.
The importance
emphasized
8. All
of
Word
the
of acting
independent
of the
crowd was a frequently
point.
top
traders
9. They all love what
understand
they
that losing is
part
of
the game.
are doing.
1
Appendix
ProgramTradingand Portfolio
Insurance
One
that has
subject
received widespreadpublicity
program trading.
Perhaps
there been more criticism
understood.
I would
opposed
to
describe
encompassing
confusion
the
both
in the
a trading
history
of
financial
approach
that
was
less
a guess that less than one out of ten people
of the term. One
trading even know the definition
is used interchangeably
is that program trading
to
a
and
as
more
term
general
original
activity
venture
program
source of
never
about
years is
markets has
recent
in
various
computer-supported
trading
strategies
(for example,
insurance).
portfolio
trading represents
Program
market is bought
against
an equal
a classicarbitrage
short sale in
activity
a closely
one
market
in which
related
from short-lived
small, near risk-freeprofits,
resulting
between such markets. Program
price relationship
tradersbuy or sell an actual basket of stocksagainst an equal dollar value
the actual stocks to
position in stock index futures when they perceive
be underpricedor overpriced
to futures. In effect, program
relative
tends
to keep actual stock and stock index
futures
trading
prices in line.
Insofar as every program-related
is
sale of actual stocks
offsetby a
time and most program trades are first initiated
as long
purchase at another
in
of the uptick
stock/short futures
(because
positions
requirement
that program trading
is responsible
for
stocks),
shorting actual
arguments
stock market declinesare highly
tenuous.
Moreover, since the bulk of
in
order
to realize
distortions
in
the
442
Appendix 1
economic evidence
to reduce
tends
and program
that
indicates
volatility,
the
Once
exposure.
reduced,
full position
as the
underlying
portfolio
October
19,
insurance
question
presumes
that
huge
abrupt,
span
that
as defined
restrictions
avalanche
levels.
of sell
Although
market
orders
move
prices
portfolio
which
were
2
Appendix
move, the results of the
This occurred on
the
Options\342\200\224Understanding
Basics*
insurance
executed
portfolio insurance may
have
on October19,it could reasonably
be argued that
forces would have resultedin a similar price decline over
of days in the absence of
insurance.
This is a
portfolio
can never
be answered. (It is doubtful
that program
above, played much of a role in the crash of the week of
October 19, sincethe
tremendous
an
a
the decline
underlying
a greater
trading,
exposure is increasedbacktoward
index price increases. The theory
stock
differ substantially from the theory.
1987, when prices gapped beyondthreshold
accelerated
the
in order
declines
may
sell levels, triggering
far below the theoretical
markets
volatility
sale of stockindex
to reduce risk
the systematic
the net long
representative
smoothly. When prices witnessan
strategy
increased
at best.
Portfolio insurancerefers to
as the value of a stock
portfolio
futures
between
relationship
is questionable
trading
between related
arbitrage
confusion
regarding
severely impededthis
severely
delayed
openings
of
individual
related to prevailing price levels, and
the use of the automated
order
entry
activity.)
stocks,
exchange
systems
There are
of a
of options: calls and puts. The purchase
the
not
the
with
obligation\342\200\224
right\342\200\224but
buyer
provides
the underlying item at a specified
price,called the strike or
two
call option
to purchase
basic
types
the
exercise price, at any time
option provides the buyer
item at the
the underlying
up to
and
the
with
including
the
right\342\200\224but not
expiration
the
date. Aput
obligation\342\200\224to
sell
at any time prior to
expiration.
is a bearish trade, while selling a put
As an
The price of an option is calleda premium.
is a bullish
trade.)
130 call gives the purchaser the right
of an option, an IBM April
example
the life
to buy 100 shares of IBMat $130
per share at any time during
of the option.
The buyer of a call seeks to profit from an anticipated price rise by
locking in a specified purchase price. The call buyer'smaximum
of the premium
will be equal to the dollar amount
possible loss
paid for the
until
held
on
an
occur
loss would
This maximum
option
option.
market
expirationif the strike price was above the
price. For
prevailing
the 130 option expired, the
if IBM
was trading at $125 when
example,
of the underlywould expire worthless. If at expiration,the price
option
(Note,therefore,
*Adapted
Wiley
& Sons,
that
buying
strike
price
a put
from Jack D. Schwager, A CompleteGuide
New Yoik,NY, 1984).
to the
Futures Market (John
444
Appendix!
the strike price, the option would have somevalue
ing market was above
would hence be exercised. However,if the difference
between the
market price and the strike price was less than the premium paid for the
the net result of the trade would still be a loss. In order for a call
option,
to
realize
a net profit,
the difference
buyer
between the market price and
the strike
price would have to exceed the premium
paid when the call
was purchased (after adjusting
for commission
cost). The higher the
market
price, the greater the resulting
profit.
The buyer of a put seeks to profit from an
anticipated price decline
in a sales price. Like the
call buyer,
by locking
his maximum possible
loss is limited
to the dollar amount of the
for the option.
premium
paid
In the case of a put held until expiration,
the trade would show a net profit
if the strike price exceeded the market
price by an amount greater than
the premium
of the put at purchase
(after adjusting for commission cost).
Whereas
the buyer
of a call or put has limited risk and unlimited
potential gain, the reverse is true for the seller. The option seller (often
called the writer) receives the dollar value of the premium
in return for
the obligation
to assume an opposite position at the strike
undertaking
price if an option is exercised. For example, if a call is exercised, the
seller
must assume a short
in the underlying market at the strike
position
price (since by exercising the call, the buyer assumes a long position at
and
that
price).
The seller
of a call seeksto
sideways to
In such a situation, the
modestly decliningmarket.
premium earned by
a call provides the most attractive
selling
trading opportunity. However,
if the trader expected a large price decline,he would
be better
usually
off going
short
the
underlying
profit
from
market or buying
an anticipated
a put\342\200\224trades with
open-
the seller of a put seeks
potential. In a similar
fashion,
to
profit from an anticipated sidewaysto modestly
rising market.
Some novices have trouble understanding
a trader would not
why
always prefer the buy side of the option (call orput, depending
on market
opinion), since sucha trade has unlimited potential and limited risk.Such
confusion
reflects
the failure to take probability
into account.
Although
the option seller's theoreticalrisk is unlimited,
the price levels that have
the
of occurrence (i.e., prices in the vicinity
greatest
probability
of the
market price when the option trade occurs) would
in a net gain to
result
ended profit
the
option
probability
seller.
of a
Roughly
small loss in
speaking, the option buyer accepts a large
return
for a small probability
of a large gain,
445
2
Appendix
of a large loss in
the option seller accepts a small probability
efficient market,
In
an
a
small
of
for a large probability
gain.
exchange
the
nor
consistent
option seller should
the consistent option buyer
neither
the
run.
over
long
have any significant
advantage
value
intrinsic
two
of
consists
components:
The
premium
option
the
amount
is
value of a call option
by
plus time value. The intrinsic
market
price. (The intrinsic
which the current
price is above the strike
market price is
the current
value of a put option is the amount by which
value is that part of the
below the strike price.) In effect, the intrinsic
at the
were exercised
that could be realized if the option
whereas
premium
market
current
option.
if
Because
Why?
trader could
buy
market
resulting
value servesas a floor
The intrinsic
price.
the premium were lessthan
market
said
and puts
price
market
price
An
out-of-the-money
date.
that
calls with strike prices below
prices above the market price) are
no intrinsic value are called
have
(i.e.,
a strike price
with
which by
option,
still have some value
move
An in-the-money
value because
intrinsic
that the
closest to
the
are called at-the-moneyoptions.
value equal to zero, will
that the market price will
expiration
strike
with
Options
options.
out-of-the-money
offset the
costs).
value
in-the-money. Options
to be
value, a
intrinsic
the option and immediately
exercise
and
position, thereby realizing a net gain (assuming
trader covers at least transaction
that have intrinsic
Options
the
for an
price
the
the
beyond
option
a positionin
will
the
has
definition
an intrinsic
because of the possibility
strike price prior to the
a value
have
option
will
greater
the
than
be preferred to a
market. Why? Because both the option and the
price
market positionwill gain equally in the event of a favorable
of the
The
limited.
is
loss
maximum
portion
the
but
movement,
option's
value is called the time value.
intrinsic
the
that
exceeds
premium
an option's time
that influence
factors
The three most important
position
in
value
the underlying
are:
(1) Relationship
options
of-the-money
the market
expiration.
price
Deeply
will
between the
will have
move
in-the-money
and market
strike
little
to the
time
strike
options
value
little
time
that
unlikely
price\342\200\224or beyond\342\200\224prior
have
out-
price\342\200\224Deeply
since it is
value,
to
because
market\342\200\224both
the underlying
these options offerpositionsvery similarto
for all but an extremely adverse
amounts
lose
and
will
equivalent
gain
the fact
option,
pricemove. In other words, for a deeply in-the-money
446
that
far
Appendix
risk is
from
limited is not
the prevailing
(2) Time
the
very
much, because the
strike price isso
market price.
remaining
until expiration,
a longer
worth
2
greater
until
expiration\342\200\224The
the value
of
the
option.
more
This
time
remaining
is true because
of the intrinsic value
the probability
to
amount
increasing
prior
expiration.
by any specified
(3) Volatility\342\200\224Time value will vary directly with the estimated
of price variability] of the underlying
volatility [a measure of the degree
life
market
for the remaining
span of the option. This relationship is a
result
of the fact that greater volatility
the probability
of the
raises
intrinsic
value
increasing
by any specified amount prior to expiration. In other
words, the greater the volatility, the greater the probable
price range of
the
life
span
increases
market.
in the
is an extremely important
factor
it
should
the future
be
stressed
that
premium values,
of
known
until
the
a
market
is
never
after
fact. (In
volatility
precisely
the
until
the
time
and
between
contrast,
remaining
expiration
relationship
the
current
market
price and the strike price can be exactly specifiedat
Thus, volatility must always be estimatedon the basis of
any juncture.)
The future volatility estimate implied by market
historical volatility
data.
be higher or lower than
the
(i.e., option premiums), which
prices
may
historical
is
called
the
volatility.
volatility,
implied
Although
determination
volatility
of option